Small Business and Workers Comp

In recent years a lot of states have enacted what they call workers compensation reform. They round up the usual suspects, have some hearings, and then figure out creative ways to reduce or limit the benefits that are paid to injured workers and healthcare providers. Now, it isn't a bad idea to try to prevent genuine fraud and profiteering in the matter of Workers Comp claims--far from it. It's vital, in fact, to prevent the crooks from crashing the system.

But something often gets overlooked in that process. What such reforms often forget is that, for most businesses, the cost of Workers Comp is really the cost of Workers Comp insurance. And while the cost of claims does ultimately drive the cost of insurance, there are other, purely insurance related factors, that can be the most damaging for small employers. And it is insurance reform that is usually the area that is left off the reform agenda.

A few years ago, when Illinois was having hearings on the subject of Workers Compensation reform, I offered this testimony. This input was, unsurprisingly, ignored.

At the time, I was a member of the Workers Compensation committee of the Illinois Chamber of Commerce. So I got to have a ring side seat for the Chamber's efforts to reform Workers Comp. and it was all focused on benefits paid to workers and medical costs. Try as I might, I was unsuccessful in getting much attention paid to the issue of insurance reform. I'm not that good a politician, I guess.

When we here at A.I.M. help keep a small business in business, as we periodically do, the crisis hasn't been brought about by benefits costs or medical fees--it's been because of abusive or careless actions by an insurance company.  Workers comp, in theory, is supposed to be well regulated. This is in recognition of the unique nature of this line of insurance. It's mandatory, for one thing, for all but the self employed.  And the protection of injured workers is viewed, rightly, as a high priority policy matter.

But in actual practice, regulatory oversight of Workers Compensation insurance has been slowly but surely eroded over time, so that insurers know they can often bend or break rules without much consequence. For a perhaps extreme example of this, one need only examine the lawsuits against AIG in recent years over how that major insurer apparently flouted rules in a systemic fashion.

Larger employers often have greater resources, in terms of legal and insurance advisors, to resist the excesses of Workers Comp insurers. Small employers, often insured through Assigned Risk programs, can be left with the equivalent of a "pay up or die" demand, when an audit for a huge and unexpected additional premium arrives. Sensible and reasonable insurance reform could provide some much needed protections for small employers, who are so important to our economy, yet who are always among the most vulnerable of our economic drivers.