2011 workers’ compensation reform
Part 3 of Illinois’ broken workers’ compensation system: the major components of the 2011 reform
For many Illinoisans, finding manufacturing work has become increasingly difficult.
A variety of policies have contributed to Illinois’ poor performance in the manufacturing sector. One such factor is the state’s costly workers’ compensation system, which ranks as the most expensive in the Midwest and which forces work across state lines and drives down wages for the production jobs that remain in Illinois.
The Illinois General Assembly passed a reform bill in 2011 to address the high costs of Illinois’ workers’ compensation system, and following is an analysis of that law and its effects.
What’s been done to reform Illinois’ workers’ compensation system?
In 2011, policymakers revisited the challenge of reforming Illinois’ workers’ compensation system, then the fourth-most-expensive in the nation. Only six years after a previous reform attempt had failed to control costs, the expansive new legislation produced only modest success. After reform, Illinois’ workers’ compensation system improved from fourth- to seventh-most expensive in the nation and remains the most expensive in the Midwest.
Analyzing the key provisions of the 2011 reform can help explain why this and previous efforts did not enjoy more success, and what policymakers can do in the next round of reforms to improve Illinois’ business climate. Not every reform sought to cut costs: Imposing fines for businesses making late payments, for example, would have achieved the opposite effect. Others, such as making it easier for employers to reject claims when the employee is too drunk to perform his job, would have had a positive but ultimately small effect. It is most productive, therefore, to focus on a less comprehensive selection of the bill’s major reform components.
30% reduction in fee schedules
In most states, the fees that a medical provider can charge through workers’ compensation are capped by a state-mandated fee schedule. A study by the nonprofit Workers’ Compensation Research Institute, or WCRI, found that prior to the reforms, the fees awarded in Illinois were among the highest in the nation. The 2011 reforms reduced those fees by 30 percent, although actual prices fell by only 24 percent, in part because some providers had already negotiated fees below those set by the state. Savings were also partially offset by doctors billing for more complex office visits, although the effect appears to be small.
While changes to the fee schedule did reduce costs, in many instances costs in other states were lower than those in Illinois by significantly more than 30 percent, and as such remain higher post-reform. This is not true of all fees: Prior to reform, visiting a doctor’s office cost 14 percent more in Illinois than the average of a representative sample of states. Since the reforms came into effect, those costs are now lower than in surrounding states with an as-yet undetermined effect on quality of care. For other procedures, however, Illinois prior to its 2011 reform was substantially more expensive than other states. According to WCRI, the price paid for major surgeries in Illinois in 2010 exceeded the price in Minnesota by 200 percent and in Michigan by 340 percent.
While it is likely that there would be some variation in costs across states, the magnitude of the difference implies further potential for cost savings. WCRI found that costs for many treatments under workers’ compensation were 200 to 300 percent higher than the cost of the same procedure under Medicare in Illinois, adding weight to the case for further potential cost savings.
Capping fees on drug dispensing
Within the workers’ compensation system, doctors are permitted to resell drugs directly to patients – commonly at mark-ups of 60 to 300 percent – and pass the cost on to employers. To limit this practice, the General Assembly imposed price controls that linked the maximum fee to the average wholesale price. Despite this measure, doctors have been able to circumvent the rules by prescribing existing drugs in slightly modified doses. Patients get the same drug, but doctors can call it a new drug and assign a new average wholesale price with the same mark-ups as before.
Reforms to the payment of disability benefits
Policymakers issued several changes to the way in which indemnity payments – compensation for injury and lost wages – are paid by employers. These reforms largely sought to reduce payments in excess of actual losses. Such measures included: reducing payment for lost wages after the employee would have retired and eliminating a provision that had forced employers to subsidize taxes and other expenses for employees able to perform light work, but not for employees who were fully disabled or for healthy employees. The law did not alter the maximum or minimum payments for disability, which remain higher on average in Illinois than in surrounding states.
The 2011 reforms also attempted to address the more complex issue of occupational diseases: medical conditions that may arise through the course of employment but not through an accident. The bill specifically addressed carpal tunnel syndrome, a numbness or tingling in the hand with many known causes including the use of vibrating power tools.
Like other occupational diseases, carpal tunnel syndrome does not occur immediately but is developed over time. The condition may develop over decades but manifest only a few weeks or months into a new job. The new employer then becomes responsible not only for medical bills but also making disability payments for the rest of the employee’s working life.
The reform bill sought to address this by capping payments only for carpal tunnel syndrome. Policymakers left open the wider problem of who should bear the cost of such diseases, which are becoming a larger component of workers’ compensation claims.
Reforms to improve the ability of employers to negotiate reduced costs
Following the reforms, for the first time Illinois employers were allowed to establish preferred provider networks, or PPNs, provided the plans are approved by the state. By using PPNs, employers gained some ability to negotiate better rates for health care, while employees gained a guarantee that their health costs would be billed directly to their employers.
Employees are guaranteed two choices of doctor within the network, not counting any referrals from either of those doctors. Employees may also opt out, although in doing so are limited to one choice of doctor and lose the benefits of being treated in-network. There are also provisions to ensure that patients receive adequate care if they choose to stay in the employer’s PPN.
Insurance experts believe PPNs can produce significant savings, although the benefits are lessened somewhat by the opt-out choice, an option not available in many other states including neighboring Indiana.
The introduction of a pilot scheme to reduce legal costs
Within the 2011 reforms, policymakers approved a limited pilot program allowing employers and unions to establish alternatives to Illinois’ expensive and cumbersome system for resolving disputes between workers and employers. Originally intended to reduce legal costs and ensure that workers received prompt relief for at-work injuries, the workers’ compensation system has become heavily bureaucratic, increasing cost and slowing payment for workers. Both unions and businesses have a vested interest in developing arbitration that is quicker and cheaper.
Under the pilot scheme passed in 2011 (similar to more developed systems in other states) businesses and unions would not need to wait on policymakers in Springfield to address the problem. Instead they could reach an agreement that may better serve the needs of their particular industries. While the pilot was restricted to the construction industry, it could potentially be expanded to other industries, opening the door to reduced costs and better worker care in the future. Despite those benefits, policymakers will need to consider possible adverse effects on competition when embracing solutions that only benefit some businesses in an industry.
The 2011 reforms introduced several key cost-saving measures, yet by an empirical measure have had limited success. In some cases the reforms were inadequate, such as with limits on physician dispensing of drugs, while in other cases reforms were simply incomplete. Occupational diseases and growing costs of litigation warrant further scrutiny by policymakers as possible future cost drivers. As the workers’ compensation system evolves to cope with 21st-century problems, innovative solutions also merit further discussion.