Is there any bad news in the workers' compensation system these days? Since the passage of the fabled 2003 reforms, employers' rates have been cut by more than half, including a statewide average 18.4 percent decrease that took effect in January. The largest one-year decrease in the state's history will save employers over $700 million and comes as one new company after another enters the market. How is this affecting the market? Case in point, in Tallahassee one workers' compensation insurer is advertising through billboards stationed around the city. And the National Council on Compensation Insurance reports that the number of their member companies has grown from 235 to over 270.
When a market is performing this well, invariably the question is, why? The 2003 reform bill came in at 202 pages and touched on every aspect of the system from injured workers' benefits, to health-care provider reimbursements, medical utilization, construction exemptions, and the litigation system. Insurers in other lines of business have not overlooked the success of those changes. Many of the features in the workers' comp system became part of the blueprint advanced by insurers during last year's failed attempt to reform the state's personal liability protection auto insurance program.
But given the magnitude of the trends that are positively affecting the workers' comp system; it is hard to calculate how any one specific law change has impacted the system's overall cost. This is especially true since the system is so integrated that any modification made in one part of the law reverberates throughout the entire system. Then there is the fact that any effort to measure the performance of the workers' compensation market is a two-way street. Beyond law changes, there are economic trends over which the market has little control, such as changes in wages, the demographics of the workforce, and the performance of the capital markets that affect investment income.
When the reforms were enacted in 2003, NCCI estimated that the laundry list of changes would result in roughly a 14-percent decrease, which Insurance Commissioner Kevin McCarty approved immediately after the new law took effect. In the public hearing on the most recent rate filing, NCCI officials stated that their estimate has been borne out by statistics and the resulting downward trend in rates has had more to do with a decade-long decline in claim frequency and severity than any specific law change. Even so, insurers have their own ways of measuring success and there was none more satisfying than the changes made in 2003 that overhauled the litigation system.
Litigation Equals Costs
Why? Because except for the fact that an on-the-job injury itself, from the perspective of many insurers, litigation is what drives medical utilization, inflates wage benefits, and forces higher lump-sum settlements to resolve cases and cut insurers' losses. That is why litigation was the top priority of employer/carriers and a cornerstone of the 2003 reforms.
At issue was the payment of hourly fees, which had its genesis in a 1990 court ruling that found that the state's statutory reimbursement schedule did not adequately compensate attorneys. Critics argued that the court's decision represented a case of judicial activism that overstepped the statutory intent of the law, which contained no reference to hourly fees. As a result, critics argued that the ruling created an environment that led to attorneys filing multiple petitions for benefits and prolonging cases to earn higher fees. A condition made worse by what some considered a low threshold for injured workers to qualify for permanent disability benefits.
During the 2003 reform debates, employers/carriers pushed to all-but-eliminate hourly fees on the basis it would reduce overall costs and speed the delivery of benefits to workers. For their part, claimant attorneys argued the changes were too restrictive and would penalize injured workers, especially in cases where the dollar amount of the benefits would preclude attorneys from taking their cases. Also, the attorneys said that by not imposing a similar statutory fee cap on defense attorneys, it created an unfair playing field where employers/carriers could force injured workers to settle for smaller settlements. Despite the opposing arguments, lawmakers agreed to a series of changes designed to curb fees.
Under the 2003 law, lawmakers retained the current statutory fee schedule, which calls for claimant attorneys to receive 20 percent of the first $5,000 in benefits, 15 percent of the following $5,000, and 10 percent of the remaining benefits awarded in the 10-year period following the date of accident. For any subsequent benefits, the attorney would collect five percent.
Two other important changes were also approved by lawmakers. First, claimant attorneys' fees were restricted to $150 per hour, up to a maximum of $1,500 for one medical claim per accident. As a means to further ensure that the fee provisions were followed, lawmakers also placed several prohibitions to prevent judges of compensation claims (JCCs) from approving fees higher than what was spelled out in the law. As noted in Chapter 440.34(1), Florida Statutes, "The judge of compensation claims shall not approve a compensation order, a joint stipulation for lump-sum settlement, a stipulation or agreement between a claimant and his or her attorney, or any other agreement related to benefits under this chapter that provides for an attorney's fee in excess of the amount permitted by this section."
New Cases Head Downward
Under the workers' compensation law, the Office of Judges of Compensation Claims is required to publish an annual report detailing the legal activity throughout the system. The office tracks the information on the state's fiscal year that runs between July 1 and June 30, with the most recent information gathered in fiscal year 2006-2007. By any measure, the changes made in 2003 have done much to reduce the overall level of litigation. As expected, the elimination of claimant attorneys' hourly fees, along with changes in medical and wage-loss benefits, have reduced the number of cases and the corresponding costs. However, after a drastic reduction in some categories in the years immediately after 2003, some trend levels are now starting to level off.
Take, for example, the number of new cases and petitions for benefits that have been brought forward. Workers' comp litigation is serial by nature. An injured worker initially comes forward with a case typically results in multiple petitions for benefits as the worker seeks various disputed medical treatments or wage-loss benefits. That is why Florida has open cases dating back into the mid-1950s.
In the years just prior to the reforms, the number of new cases increased substantially. Between fiscal year 2001-2002 and 2002-2003, the number of new cases increased by 67 percent for a total of roughly 57,000 cases. Some experts attribute much of that growth to claimant attorneys who sought to generate as many cases as possible before the law changes.
Under the litigation system, an injured worker's rights are tied to the law in effect at the time the accident takes place and are not subject to any future law changes. The data tends to support the view of claimant attorneys rushing forward with cases before the modifications in medical and indemnity benefits. After reaching 57,000 cases, in fiscal year 2003-2004, the number of new cases fell by 23 percent for a total of 44,000. Since then, the number of new cases has continued to decline, although at a slower rate with each passing year. In fiscal year 2006-2007, the number of new cases fell to 36,200.
The same pattern can be seen in the number of petitions for benefits filed with the courts. Just prior to the 2003 law changes, the number of petitions jumped by 30 percent to 151,000. For the next three years, the number of petitions fell at an average rate of around 15 percent annually. By 2006-2007, the number of petitions only reached 82,600. One fact that stands out is that the number of petitions filed with the court since 2003 equals 45 percent, which nearly mirrors the 40-percent drop in workers' compensation rates at the time.
Attorneys' Fees
In fiscal year 2006-2007, some $478.5 million was spent on claimant attorney and defense attorney expenses. Of that money, $191 million was reimbursed to claimant attorneys and $287 million to defense lawyers. Those figures, however, reflect fees from cases in different years and multiple petitions for benefits. For example, $500 in claimant attorney fees were applicable to a case that was open in 1957. According to the report, claimant attorneys were paid more than $7 million in cases dating from 1954 to 1987, which represents four percent of the total amount paid. The majority of the claimant attorneys' monies, some 77 percent, reflected payments on cases where a worker suffered an injury between Jan. 1, 2000, and Dec. 31, 2006.
It was not until 2002 that the OJCC started tracking the amount defense attorneys were paid. One of the arguments used by claimant attorneys in any field of insurance is that where litigation is concerned, it is an unfair playing field. Whereas claimants typically have limited resources and must depend on attorneys to take their cases on a contingency-fee basis, insurers have unlimited resources to fight claims. Since there is no credible data on defense attorney fees dating back too much past the reforms, it is impossible to measure the legal spending habits of insurers as compared to claimant attorneys' reimbursements. One thing is clear, however: Defense attorneys' fees have risen significantly in the post-reform era. In fiscal year 2002-2003, defense firms earned a total of $220 million, a number that increased to $300 million by fiscal year 2005-2006.
The OJCC does leave open a number of questions that in some cases will remain speculative. For example, how much of the reduction in litigation is due to the law changes and how much is attributable to Florida's double-digit decrease in claim frequency? Also, as the attorney fee changes continue to survive court challenges, will there be a point where fees on both parts of the aisle level off based on the certainty of the system? One thing is certainly clear, though: For now, it couldn't look much better for insurers.
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