We're Not in California Anymore, Toto
Part 1

by David J. DePaolo

The basis of this article series is a presentation that was given to the California Association of Rehabilitation and Reemployment Professionals at their annual conference in San Diego October 15, 2005. The presentation has also been adapted as a professional continuing education course at WorkCompSchool.com in a multi-media format including video, audio and supplementary reading materials, and has been approved for, or is pending approval for (depending on the accrediting agency) 2 hours of CE units.

DON'T JUST READ THIS ARTICLE, GET CONTINUING EDUCATION UNITS BY TAKING THE COURSE AT WORKCOMPSCHOOL.COM.

This article series is based on the hypothesis that what happened in California was not isolated to that state, and that in fact there were large, national, even international, influences that created a "crisis" which was and is not exclusive to California. While the industry and media focused on loss ratios, increasing medical, and fraud, we will see that in fact events occurred that, when they came together, produced the "perfect storm".

This article series is going to take a walk down recent history to a point in time when workers' compensation wasn't in the media, business owners just paid their premiums without question, and mostly everyone in the industry was making money. We will then take a look at the national reform agenda as it spread across the nation and why that happened. The series will end with a forecast on the future of the workers' compensation industry and the vested interests that serve it.

The Social Contract

Before we get any further with the recent history that led to a national workers' compensation reform agenda, it is important for us to take a look at the origins of compulsory workers' compensation laws, and the societal commitment made by the forging of government and private industry to form the largest privatized social benefit system in the world.

The first work comp law was passed in 1902 by Maryland. It was a rudimentary system at the time, applicable only to certain industries and had only a death benefit. Later declared unconstitutional, it was not until President Theodore Roosevelt urged congress in 1908 to cover federal employees that states started implementing compulsory work comp laws.

Roosevelt's vision was to relieve the federal government, as an employer, of potential civil liability by ensuring the government workers hurt on the job were immediately taken care of. State laws some followed modeling the federal system. But, most of these laws were challenged by the business community as being unconstitutional. Compulsory work comp systems were finally held constitutional by the US Supreme Court in 1917 in NY Central RR vs. White, 243 US 188. By 1921 all but six states and the territories of Alaska, Hawaii and Puerto Rico had work comp acts, the last state being Mississippi in 1949.

The social contract that was established by workers' compensation during the industrial revolution was very simple: restrict the liability of employers and in exchange, injured workers would receive, without regard as to fault, prompt, adequate medical treatment and compensation to stave off financial ruin. What started as a simple concept turned out, over the years, to be a very complex underpinning of the American economy.

The growth of work comp as an industry didn't start blossoming until the transformation of the economy from manufacturing to services. Benefits grew to include more than just compensation to a grieving family, and businesses enjoyed the application of the exclusive remedy expanded by both legislative fiat and judicial interpretation. Work comp grew to be the largest privatized social benefit system in the world. One state though, Texas, has consistently questioned whether workers' compensation should be compulsory. It remains the only state that does not mandate workers' compensation insurance. Employers in the state that do not elect in to the workers' compensation system are said to be "going bare" and are also referred to as "non-subscribers." Nearly 40% of all Texas businesses, covering nearly 60% of all of that state's employed population, elect out of work comp. Most of those businesses cover their risk with employer liability policies that provide for disability indemnity and group health coverage in the event of ANY disabling injury. At least in Texas, employer liability policies for non-subscribers have been heralded as wildly successful, boasting, better medical, lower disability, faster return to work, all at less cost to the employer.

Where Things Went Wacky - The Great Confluence and Perfect Storm

In the mid-1990s, when no one was really paying attention to workers' compensation, the brewing of the perfect financial storm started. Four financial elements came together, which taken alone, would have impacted the system negatively, but when combined, destroyed the underlying fundamentals of workers compensation finance. These four elements were the Unicover scandal, pricing deregulation in California, the stock market crash and the curiosity of risk loss transfer portfolios and manipulation of stated workers' compensation premiums sold. Each of these will be explored separately in the subsequent installments to this series.

Next: Unicover - Financial Principles

Article be David DePaolo. This article series is an adaptation of a continuing education course that starts with the hypothesis that the reform movement in California was the product of a national workers' compensation crisis, and that California was not alone in its reform agenda. This course also takes the hypothesis that the workers' compensation crisis that spawned reform had less to do with medical costs and utilization, and more to do with the confluence of a dubious reinsurance scheme, stock market losses, and blatant high end financial cheating. This course is pending 2 hours of continuing education units from various administrative agencies., and is available as an on line multi-media presentation at WorkCompSchool.com.

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