A rate increase is necessary to meet the expected costs of workers' compensation claims that will be incurred during 2009. Wages in Washington in 2007 were up an average of 5% from the previous year. We estimate workers' health-care costs will grow annually at about 5.5%. Those are L&I's 2 biggest expenses. Based on those numbers, L&I adopted a rate increase that takes into consideration both wage and medical inflation, 2 of the biggest factors in benefit costs.

The 3% rate increase is an average. From 1 year to the next, an individual employer's rates can go up or down, depending on a number of factors, including their recent claims history, the number of hours reported, and the frequency and cost of claims for their industry. Those changes also can increase or lower premiums paid by workers, given that workers in Washington pay a portion of the total premium. To see how your business classification is affected, see the 2009 base premium rates. Here are some examples in specific industries of the average yearly change per full-time worker next year to workers and to employers:

Washington's workers' compensation system is made up of 3 funds that provide benefits when workers are hurt on the job: Accident Fund, Medical Aid Fund, and Supplemental Pension Fund.

Workers contribute half of the Medical Aid and Supplemental Pension Fund premiums. Workers don't contribute to the Accident Fund. On average, workers will pay about 25.3% of total premiums in 2009 (before retro refunds to employers), a slight increase over last year. The actual percentage will depend on the classification of business and the experience factor assigned to the worker's firm. Washington is the only state where workers pay a significant portion of the premium.

The self-insured employers and their employees pay premiums into the Supplemental Pension Fund. The employees pay half of the hourly premium rate. The Supplemental Pension Fund rate has increased 7% to 8.36 cents per hour in 2009. Self-insured workers will also begin paying for a new self-insured employer overpayment reimbursement fund. The initial premium for this new fund will be a fraction of a cent per hour.

Regardless of the state of the economy, L&I still needs to collect premiums in order to pay for the costs of insurance claims from workplace injuries and illnesses that will take place in 2009. The workers' compensation premiums are based on our expectations of the cost of claims that will be incurred in 2009.

L&I does an effective job of controlling costs, especially in regard to medical costs, where Washington's cost growth historically has been below the national average. Medical cost growth continues to rise nationally and we are carefully monitoring our data as recent quarters show an increase in the growth rate in Washington state, as well.

In recent years, L&I has reorganized and dramatically increased its anti-fraud effort. Much of that is focused on finding employers who aren't registered and paying workers' comp premiums, and in bringing them into compliance. In some cases, that means prosecuting them. Often it means registering them and making them pay back premiums, penalties, and interest. Since 2002, L&I has more than doubled the dollars collected from delinquent employers.

Washington is the only state where premiums are based on hours worked rather than payroll. As a result, L&I's annual rate assessments need to consider increases in statewide average wages, as well as medical inflation. When rates are calculated as a percent of payroll, as found in all other states, the 2009 rate change was nearly a 1% decrease. In fact, the amount of premiums that Washington employers and workers pay into the system for every one hundred dollars of payroll has decreased an average of 28% since 1990. It's important to remember this distinction (hours vs. payroll) when comparing rate adjustments between Washington and other states.

Washington employers and workers agreed to the current system long ago. The system has two key advantages for employers and workers: Premiums don't automatically go up each year as wages rise and it doesn't influence whether employers pay higher wages to their workers. The premiums are based on the worker's exposure to risk (hours on the job).

As a percentage of payroll, premiums will have decreased 28% since 1990. That year, employers paid, on average, $2.96 per $100 of payroll. 2009 premiums average $2.12 per $100 of payroll. A widely respected national rate study (418 KB PDF / 1 min) (www4.cbs.state.or.us) also concludes that in 2006, 35 other states had higher weighted average rates compared to Washington, where the average is calculated on a similar mix of business.

To avoid large increases in future years, L&I needs to set rates annually that keep pace with inflation, allowing the agency to collect enough premiums in a given year to pay for the cost of claims that occur in that year. L&I invests that money, and just prior to 2007 it experienced higher-than-expected returns. Employers and workers also helped to contribute through their accident-prevention efforts. As a result, in 2006 L&I decided that it had more money than was needed to pay benefits on claims that occurred in past years. L&I had an obligation to give some of that money back. Now that L&I has distributed these gains, and given the recent uncertainty of the financial markets, we can't count on future high returns to pay the bills incurred in 2009.