FOR most working Americans, if they have job-related injuries or illness, workers' compensation kicks in.
But in one state after another, escalating medical costs and legal fees sent workers' compensation systems to the brink of collapse during the 1980s.
Since then, many states have, with varying degrees of success, tackled the problem. But nowhere has the turnaround been so dramatic as in Texas. A package of reforms has restored a deficit-ridden system to soundness and is being hailed by insurers as a national model.
Workers' compensation is becoming profitable for insurers, premiums for businesses have fallen, and workers are getting their money quicker now.
Workers' comp systems, which are state-regulated, are supposed to ensure quick, adequate payment of medical expenses and lost wages to workers. At the same time, the cost of workers' comp insurance to employers is supposed to be reasonable and predictable.
In 1991, the United States Chamber of Commerce reports, workers' comp systems protected 93.6 million people, or 87 percent of the national workforce. Their wages amounted to $2.3 trillion. Nationwide, workers' comp claims and expenses last year exceeded earned premiums by 9 percent, down from 21.5 percent in 1992. That's the biggest one-year improvement ever.
``It's on the right track,'' says Barry Llewellyn, senior vice president and actuary at the National Council on Compensation Insurance, which conducts research for workers' comp insurers.
During the previous 10 years, Mr. Llewellyn notes, insurers nationwide endured claims and expenses that exceeded premium income by 16 percent to 23 percent. Income from investments failed to offset that disparity.
Workers' comp woes
``Armageddon'' was the word often used to summarize the situation, says Fran Onofrio, a spokesman at the Travelers Insurance Companies, Hartford, Conn.
Soaring medical costs were the primary problem, observers agree. Legal fees and suspected fraud were also blamed.
``Almost every state has had one or more workers' comp crises in the last 15 years,'' says Birny Birnbaum, associate commissioner of the Texas Department of Insurance.
Missouri and New York still have problems, adds Maggie Sheehan, a spokeswoman for Boston-based Liberty Mutual Group, the nation's largest underwriter of workers' comp insurance since 1936. Massachusetts, Pennsylvania, Florida, California, and Texas were in deep trouble but have enacted reform legislation over the past several years.
Workers' comp reforms in Texas that took effect in 1991 and after are ``a benchmark for what a good reform law can do,'' Ms. Sheehan says. Reforms implemented in Arkansas drew upon the Texas law.
Before reform, ``rates were spiraling and coverage in the voluntary market was virtually nonexistent,'' says Texas Insurance Commissioner Robert Hunter. A $500 million deficit in the assigned risk pool, which insurers had to help cover according to their market share, was scaring insurers away or causing them to write little new business.
Injured workers faced long delays to receive benefits that were low relative to what companies paid for insurance.
The old system was a cash cow for lawyers, who received 25 percent of the award in contested cases, while their paralegals did most of the work, says June Karp, director for the Legislative Oversight Committee on Workers' Compensation.
Reforms to the rescue
Under the reforms contained in Texas Senate Bill 1, lawyers must now prove their hours and that of paralegals.
The bill also did away with a quirk in the old law that prevented juries in contested cases from seeing any evidence presented in prior hearings. ``The trial lawyers loved it because you could fabricate anything you wanted,'' Karp says. Now they can't go to court and ``bamboozle like they did.''
Workers now get more money faster, she says. As for insurers, claims were 113.6 percent of earned premiums in 1985, but only 63.7 percent last year. Businesses are paying 10 percent less in premiums than they were in 1991.
State regulators say insurers ought to cut the premiums by another 15 to 20 percentage points to match the decline in losses.
``Deregulation does not equal competition,'' Mr. Birnbaum notes. He attributes the premium reductions that have occurred to the creation of a state corporation that now underwrites 20 percent of the workers' comp market. ``It has led the way to competition because it was the most aggressive on rates. The other companies were forced to follow,'' he says.
Many insurers have recently announced double-digit price cuts. But some say they are hesitant to go too far because of the uncertainty hanging over the Texas reforms. The reforms are being challenged in the state supreme court.
``A repeal of Senate Bill 1 by the Supreme Court would be devastating to the turnaround and the momentum the legislation has produced,'' says David Kenepp, workers' compensation manager for Liberty Mutual.
Free enterprise approach
Some companies won't care how the court rules. For decades, Texas has allowed businesses to opt out of the state-regulated system. (Two other states offer this option.) Companies such as McDonald's and Wendy's are among 1,200 members (with 275,000 employees) of the Texas Association of Responsible Nonsubscribers (TXANS).
Steve Bent, the association's executive director, criticizes the workers' compensation concept as flawed because it shields employers from liability and gives them no incentive to make workplaces safer. Members of TXANS offer injury benefits that equal or exceed those in the state system. And they promote safety aggressively.
One business that took that route, the Adolphus hotel in Dallas, reduced lost time injuries by 70 percent. The cost of its plan was only $300,000, in contrast with $2 million for workers' comp insurance.
Statistics like that have caught attention elsewhere. Twenty-one states are considering allowing businesses to opt out of the state workers' comp system, Bent says.