Rates, Reform, Relief

Many industries go through cycles of growth and decline, with the insurance industry — and the workers' compensation line of business, in particular — clearly falling into this pattern. Strong insurers, agents, and employers don't just live through these cycles; they look for the lessons inherent in any pattern and use them to prepare for the future.

For the past 30 years, the workers' compensation line has followed a 10 – 12-year growth and profit cycle, and at the bottom of each cycle, they all look bad. Moreover, it seems that cycles of the past never look as difficult as the one currently being experienced. Historically, each “down” is followed by an “up” that brings a new set of lessons and benefits to those willing to look and learn.

Workers' compensation cycles occur as medical and legal costs rise, new industries introduce new risk patterns, and court or administrative decisions broaden exposures and increase costs beyond what was expected when premium rates were originally set. Rising loss costs ultimately push rates upward until employers, who bear workers' compensation costs, band together to demand relief. Typically, the legislature reacts by enacting reforms, and rate relief occurs — until the next turn of the cycle.

Remember When

Here in Florida, we've seen several series of workers' compensation reforms — and the beginning of new cycles — in 1979, 1993 and most recently in 2003. Roughly once a decade, legislative reform brings rates down, which brings relief for employers. It is important to note that every reform has been a real effort to balance a fair benefit package for employees against an affordable cost system for employers. The cost drivers may appear different, but in their simplest form, they are claims and the price of settling them.

The plain truth is that medical costs — which, according to the National Safety Council, now account for almost 60 percent of workers' compensation claims costs — will continue to rise. New treatments cost more, better drugs carry higher price tags, and new medical training and treatments are expensive. Leading insurers look for ways to manage the cost of care for injured workers without sacrificing quality by monitoring the success of various treatments and then directing injured workers into programs with proven track records.

Successful insurers also understand that the best way to control costs is to prevent an injury in the first place, so they put significant effort into developing innovative safety programs and equipment. In fact, many of today's most effective safety measures are a direct result of programs and/or equipment developed in response to workplace accidents.

For example, OSHA provides a great service by tracking the changes in risk patterns. Each year they uncover new risks and develop stringent new safety requirements in an effort to prevent workplace accidents. These combined efforts are working, since the rate of workplace injuries and illnesses in private industry declined in 2007 for the fifth consecutive year.

Cycles Go Up, Cycles Go Down

Every cycle teaches us that we must control the costs that do not contribute directly to the quality of employee safety or care — such as excessive litigation. We're five years into the current cycle, which has been severely impacted by the widespread economic downturn. History has shown us that the economy will ultimately recover — we just have to survive and learn until then.

The underlying goal of the 2003 reform was to reduce the amount of money spent on litigation, with the hope this would bring Florida's sky-high workers' compensation rates back down to a competitive level. The drafters of the legislation were clearly right, because the cumulative rate change since the implementation of the 2003 reforms, (including the 18.6 percent decrease that took effect on Jan. 1), is a staggering decrease of 60.5 percent.

Before the 2003 reforms, Florida's workers' compensation system was one of the costliest, least efficient in the nation. We are now ranked in the top 30 for pricing — another positive change that came from learning from the last cycle correction. At the Florida Insurance Council's last tally, the 2003 reform was credited with saving Florida employers more than $3 billion. Much of that savings came because the reform attempted to rein in unnecessary claimant attorney costs by eliminating the hourly fee structure and imposing low, set rates.

In hindsight that may have been what guaranteed the next stage of the cycle. The legislation focused on halting claimant attorney fees that had been nationally recognized as exorbitant to the point of frivolity. Had the legislative hobbling of attorney fees been less drastic or limited the defense side of the fee system as well, the rate reforms might have played out more gradually. This, in turn, might have stretched our current cycle longer and would have helped Florida employers who naturally thrive on lower rates. But cycles are all about learning.

The Challenge That Worked

Then a loophole opened — the decision in Murray v. Mariner Health and Ace USA, SCO7-244 (Fla., Oct. 23, 2008) is proof positive that the cycle is alive and well in Florida.

The Murray case was the first serious legal challenge to the 2003 workers' compensation reforms. It was a long time in the making, because the trial bar spent considerable time searching for the right case to challenge the attorney fee limitations that were such a cornerstone of the 2003 reforms. Emma Murray, the plaintiff, filed a petition for benefits for injuries she said occurred on the job in 2003. She felt that her need for surgery was caused in part by her work duties, making her expenses compensable. Her employer challenged the claim but lost.

In an October 2008 decision, the Florida Supreme Court not only awarded Murray $3,244.21, they reinstated hourly attorney fees in workers' compensation cases and awarded her attorney five times that amount.

The rest is history.

The Supreme Court ruling in Murray happened because the Supreme Court found the law (SB50 section 440.34) to be ambiguous. Section (1) states that the claimant is entitled to a reasonable attorney fee, but does not define the fee in Section (3).

The Court used a 1968 case, Lee Engineering, 209 So.2d 454, 458 (Fla.1968) to define “reasonable,” including standards such as time and labor required, the skill and experience of the lawyer and the certainty of a fee. Murray was a ruling made on a statutory interpretation, which ensures that more litigation will follow.

The Beat Goes On

The 2003 reform was clearly on target in its belief that attorney fees were a major cost driver for workers' compensation. There is no arguing with the subsequent steady rate drop that slashed workers' compensation rates by more than 60 percent following the elimination of those fees. Now the cycle is ramping up again.

When the Florida Supreme Court reinstated the attorney fees for workers' compensation within the Murray decision, the National Council on Compensation Insurance (NCCI) reacted quickly. On November 4, 2008, they proposed an 18.6 percent increase in Florida workers' compensation rates, spread out over two years beginning in 2009. The first 8.9 percent increase will be effective in March 2009, pending approval from Florida's insurance commissioner. NCCI anticipates that it may take some time for claimant attorney firms to begin advertising, staffing and finding the cases to try, thus the staggered increase. Logic dictates that rates will continue to rise if attorney costs remain unchecked.

Employers may consider this coming rate hike as a nearly 19 percent “tax” to pay for predicted attorney fees. After all, nothing else is changing. Benefits and exemptions remain stable. But it's not over. NCCI's pre-reform data shows that when attorney fees weren't capped, Florida's average claim cost was nearly 40 percent higher than the national average. That's a significant increase in exposure that must be covered by rates.

Reinstating attorney fees has now thrown open the doors to Florida's workers' compensation revenue for attorneys. There is little doubt that with revenues back in play, the number of litigated cases will increase. Along with those fees come costly depositions, more expert testimonies and independent medical exams (IMEs). As the cost of increased litigation drives the cost of claims higher and higher, the rates to cover them will follow.

A Look Ahead

Look now for the barrage of cases that have been waiting in the wings to follow Murray. These yet-to-be-settled cases can cite Murray case law to command fees. Because these injuries were covered by the lower premiums collected over the past few years, any payouts will be subject to the much higher attorney fee rate. This is a glaring black hole of unfunded liability for insurers.

The Murray case law will stand until the Florida Legislature is persuaded to craft a response to stem the tide. They will have to create statutory guidelines for a “reasonable” fee structure, risking the fact that once a bill is revisited for any adjustment, it unleashes the potential for others to amend it even further. And with Florida already struggling to mend a broken economy, it may take several sessions for workers' compensation concerns to roll back to the top of the legislative docket. Much will depend on how long it takes employers to respond.

Florida employers are already lining up for the fight. Coalitions are forming and businesses are talking to each other. The Florida Chamber of Commerce is partnering with organizations such as the Workers' Compensation Coalition of Business & Insurance Industry. The Coalition represents thousands of businesses across the state, and unites Florida's business community through its association members such as the Florida Retail Federation, Associated Industries of Florida, Florida United Business Association and the National Federation of Independent Businesses. It also includes large employers and trade groups. Together, these and other Florida employers will explain to their legislators that competitive workers' compensation rates depend on controlling unreasonable costs.

Next year's insurance news will feature efforts to plug the hole that Murray has opened wide. More and stronger lobbies will urge the Legislature to act quickly to clarify the attorney fee statute to help employers control their workers' compensation costs. While that is happening, claims costs will continue to rise, and rates must go up to cover them.

The Strong Survive

A valuable, although sometimes harsh, part of the insurance business cycle includes winnowing out the players who cannot deliver. Companies that spring up for a quick profit when rates are low and promise incentives and dividends that are too good to be true will disappear as rates climb and they bleed capital due to claims costs that exceed inadequate reserves.

Today's market is tough, not just for workers' compensation, but for the insurance industry in general. There are fewer businesses and employees to insure due to the economic slowdown. Reinsurance is tougher to get, since providers are earning lower interest rates on their investments and are experiencing losses on investments previously deemed solid and secure. So they are looking closely for profit potential on all the accounts they underwrite.

Those that weather the cycles have learned from history, positioned themselves properly in a difficult environment, and will once again emerge from the trough of the cycle in a stronger position to provide their customers with competitive products and services for the long run. For now, it's business as usual — with a tighter belt.