Public Workforce

Crippling Injury

West Virginia's workers' compensation program is helping thousands of needy recipients. But it's also breaking the bank.
by | July 2004

People from all across the country used to come to McDowell County, in southern West Virginia, to dig for coal. The coal-field jobs are mostly gone now, but thousands of mine workers are still there, and unable to find work of even the most menial sort. Half the residents have not graduated from high school, and the median household income is less than $17,000--one of the lowest in the nation.

There's a new leading industry in McDowell: workers' compensation. Residents take in as much money from the state workers' comp fund as they do from all wages put together. For many of the poorest, in McDowell and elsewhere, the fund has been a lifeline. But for the state itself, workers' comp is a disaster. A system intended to help injured employees has morphed into a social welfare program that the treasury cannot afford.

Of the employees that receive workers' compensation in West Virginia, 25 percent are on "permanent total disability," compared with an average of 5 percent nationwide. Most PTD employees receive 67 percent of their salary tax free, and cost the state an average of $500,000 over their lifetimes. As a result, the West Virginia workers' comp fund currently is in debt more than $3 billion, which is the same amount that the entire state general fund spends in one year.

Most states, at some point, have had problems with their workers' compensation systems. But in West Virginia, nearly everything that could go wrong with worker's comp has gone wrong. Last year, after learning that the system was projected to go bankrupt in 2005, the legislature made significant changes. But the system is still bleeding money--albeit a $50 million loss this past fiscal year compared with $250 million the year before.

Whether the state can make workers' comp break even in the short term--and deal with the $3.3 billion debt in the long term--may determine the fiscal health not only of the system but of West Virginia itself. "It's not so much political as an economic preservation issue," says state Senator Brooks McCabe, the architect of the 2003 reform bill. "If we want to stay afloat as a state, we have to fix workers' comp."

Legislatures and commissions all over the country are tinkering with workers' comp these days, driven by unexpected costs and fears that higher fees to business may prove damaging to the economic climate. California made major changes earlier this year, reforming a system that had seen 15 percent increases in premiums every year for the past four years. Tennessee and Vermont passed reform legislation this year as well. No state, however, faces a dilemma like West Virginia's.

A STATE EXPENSE

Workers' comp is an entirely state-run program everywhere, but the rules differ radically from one place to another. In some states, the insurance coverage is provided by a combination of public and private sources; in others, the insurers are entirely private. Only five states run their systems the way West Virginia does, with the state itself as the exclusive insurer and bearer of risk. The method of funding is a major reason that workers' comp has run a deficit in West Virginia every year since the program was launched in 1913.

"Everyone has their fingerprints on this problem," says Greg Burton, director of the state's Workers' Compensation Commission. "Previous governors, the Supreme Court, the legislature, claimants, lenders, attorneys. You can't blame one more than the others."

Even so, a considerable amount of resentment has been directed toward former Governor Arch Moore, who announced in the mid-1980s that he was going to draw businesses to the state by cutting their premiums by one-third while keeping benefits at the same levels. West Virginia kept its benefit rates level, true to Moore's word, and the state treasury simply made up the difference--creating a bigger fiscal problem with each succeeding year.

Legislators and governors who came after Moore were politically unwilling either to raise premiums back to the levels needed to break even or to cut benefits to match the system's assets. Shoddy accounting obscured the extent of the deficit until recently, and there has been chronic mismanagement. Over a period of several years, employees of the workers' comp agency showed up for just 17 percent of claims appeals hearings, and a move to a "paperless" filing system was made before the computers were ready, permanently losing files in the process. Meanwhile, there was little effort to monitor fraud by claimants, employers or doctors.

All of this occurred as the state's coal industry continued to contract, drawing down the system's income even further. "West Virginia's system has been a basket case for a number of years," says John Burton, dean of the school of management and labor relations at Rutgers University and a leading expert on workers' compensation. "Once the coal industry got less and less viable, the whole system began collapsing."

The extent of the collapse became evident early last year. After the legislature's first attempt at reform legislation fell victim to a filibuster on the last day of the regular 2003 legislative session, Governor Bob Wise appointed a study commission to craft a reform bill. In the four months the group worked, the estimated unfunded liability of the system grew from $2.5 billion to $3.5 billion (largely because of accounting corrections).

By the time the reform bill was passed in June 2003, the system was projected to be two years away from bankruptcy, and the fund was paying out nearly $1 million per day more than it was taking in. The fund's managers had to sell off many of their stock market investments just to keep cash flowing, and didn't have enough money on hand to make settlements that would have saved them money in the long run.

For the short term, $225 million was transferred into the system in order to keep it solvent. The funding came from a variety of sources, including federal tax-relief money and aid earmarked for victims of black-lung disease. But the state's overburdened general fund also had to swallow some of the expense.

The Workers' Compensation Commission became a separate state agency with an independent Board of Managers, no longer replaceable at the whim of the governor. The commission was given new powers to crack down on fraud, with a fraud division twice the size of the previous one. And on the benefits side, the time period for temporary total disability was shortened from four years to two. Rehabilitation services, which previously had no time cutoff, were limited to 52 weeks.

The cuts in benefits--with no accompanying rate increases for businesses--are still a source of bitterness for labor groups, who feel that they are unfairly shouldering the burden. "We got a raw deal," says Jim Bowen, president of the state AFL-CIO. "It shouldn't be a total abuse of claimants. The legislature took it all out on the workers."

DANGEROUS WORK

Even if all the major players manage to adjust to the new rules, however, the fact remains that the state is facing a massive long-term debt. Lawmakers chose not to deal with the debt in the 2003 session, fearful that it would complicate the efforts at short-term reform. "We did not address the significant unfunded liability," McCabe says. "We didn't want to expend political capital until we fixed the underlying problem."

Unfortunately, the underlying problem carries a $4 billion price tag, and to say that there are no easy fixes is to understate the situation dramatically. Paying off the entire workers' comp debt today would require almost $1,900 for every man, woman and child in the state. The state might consider bonding the debt for a fresh start, but bond payments would likely be at least $200 million per year for 30 years; revenue would still need to be raised.

Additionally, the West Virginia Supreme Court is currently considering a lawsuit charging that all workers' comp benefits should apply to the date that an injury was suffered, not the date that a claim was awarded. If the plaintiffs win, an employee who was injured in June 2003, but whose claim was awarded in August, would receive the more generous benefits of the law before it was rewritten. According to some estimates, an adverse ruling in that case would mean an immediate hit of $120 million, with costs of more than $1 billion over 20 years. "If we lose that case," says Greg Burton, the workers' comp director, "the chances of us surviving are slim."

Ultimately, West Virginia may try to privatize the whole system. Currently, with $3.3 billion in debt, that's not an option. "If there's an agency out there that would offer to take us private, we ought to run from them," Burton says. "Who would want to take over our deficit?" Privatization is no panacea in any case. There are private or partially private systems with major troubles, such as those in Florida and California, and state-run systems, such as the one in Ohio, that work well. But privatization might shield the state from ever again facing the degree of fiscal trouble it faces now.

Meanwhile, it will be a struggle for West Virginia's workers' comp fund even to stem its cash flow problems under the 2003 reform law. Not everyone is convinced that is possible. "The best manager in the world couldn't fix it," insists economist Michael Hicks of Marshall University. "The best sea captain in the world couldn't fix the Titanic after it hit the iceberg."

For legislator Brooks McCabe, on the other hand, there is simply no choice. "The ultimate deadline," he says, "is the survival of the fund. Bankruptcy cannot be allowed to happen."

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Anya Sostek  |  Former Correspondent
asostek@gmail.com

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