L&I Public Affairs

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May 2010 (Updated October 2010)

Facts about workers' compensation in Washington state

The Department of Labor & Industries (L&I) administers Washington’s workers’ compensation system, created in 1911. This system provides insurance coverage for employers and workers through either the State Fund or through self-insurance for some of the largest employers. The State Fund covers the vast majority of Washington State employers – about 171,000 – and approximately 2,570,000 workers.

State Fund employers pay premiums to L&I for their workers’ compensation insurance coverage. Their workers also pay a significant share of the premiums – about one-fourth. This coverage pays medical expenses for workers who suffer job-related injuries or illnesses and, when workers are unable to work due to these conditions, partially replaces their lost wages. Self-insured employers are responsible for the payment of benefits for their workers.

This no-fault system also protects employers from lawsuits that would otherwise result from job-related injuries and illnesses.

L&I will propose 2011 workers' comp rates after Nov. 2 election

Summary: On Sept. 15, L&I announced that it will propose workers' compensation rates for 2011 in November after the results of the fall election and the outcome of Initiative 1082. This initiative would allow private insurance carriers to write workers' compensation insurance in Washington. Read the full news release.

What does this announcement mean? Normally L&I proposes rates in September for the next year. This year we are waiting until after the election to avoid confusion.

What is confusing? Two features of Initiative 1082, if it were to pass, would become effective immediately. One feature would change Washington's workers' compensation system for determining how premium rates are calculated.

The current system calculates rates based on hours worked. If the initiative passes, it would require employers to pay premiums based on a rate for every $100 of payroll they pay workers. This change would be effective December 2, 2010.

Until the election results are known, L&I won't know which method to use to accurately calculate the rates for 2011. It would be confusing to employers and workers to propose rates based on one system, begin the rule-making and public hearing process, then change to a different system before the process is completed. More importantly, employers might rely on the proposed rate to estimate their business costs for the coming year, only to have it change.

Changing mid-stream is also inefficient – developing rules, conducting public hearings, notifying more than 170,000 employers of one potential premium rate – and then possibly beginning the process again based on the election outcome.

Isn't this a way for L&I to avoid announcing a high rate increase right before the election? No. If the initiative passes, the basis for calculating rates will change. It isn't fair to employers to propose one rate now and change it after the election if the initiative passes.

Why did L&I wait so long to announce a delay? In addition to considering how the initiative would impact proposed rates for employers, we have also continued to question and analyze how the economy has affected the workers' compensation program. For example, how does the significant drop in construction work and reported claims impact our costs overall? How does the reduced number of jobs influence return-to-work after an injury for employers, workers, and medical providers?

With regard to the initiative, we considered various options, the importance of our role as a public agency to not influence the election outcome, and discussions with our attorneys to make the decision we believe is the most appropriate.

Has L&I ever delayed a rate announcement before? We have not researched the history of past rate proposals. In recent years, L&I has announced rates in September, however, there is no statutory requirement to do so.

Have L&I's actuaries estimated what rates should be under the current system? No, not completely. This is what we generally refer to as the "indicated" rate, and our actuaries are still analyzing data that can affect the rate they estimate is needed to pay the cost of claims that occur in 2011. This indicated rate is one of several factors considered when we announce a "proposed" rate.

What would be the financial impact on employers if they were to calculate rates based on payroll dollars vs. hours worked? We're not sure yet. Our payroll data is very incomplete because employers do not consistently report it to us, although we ask for it with their quarterly reports for premiums. This is an issue we are currently analyzing so we can make the transition immediately should the initiative pass.

This is the time that businesses are working on their budgets and/or bidding on contracts for next year. How do they know what rate to expect for 2011? Until the election is final, and we know whether Washington employers will pay premiums based on a rate for each hour worked or for each $100 of payroll, we won't know what the proposed rates will be. After the election, L&I will file an emergency rule for the 2011 rates and let employers know immediately. This will be quickly followed by steps to adopt a permanent rule.

What is the second feature of Initiative 1082 that is effective immediately? Workers pay half the premiums for two of the three workers' compensation funds: the medical aid fund and the supplemental pension fund. The initiative, if passed, would eliminate the worker portion of the medical aid fund premium effective December 2, 2010 for workers who work for employers insured through L&I. (Workers employed by employers large enough to self-insure do not pay medical aid premiums.)

When will rate notices go out this year? Employers usually get them the second week in December.
The department will be doing everything possible to mail rate notices as early in December as possible.

Administrative costs

Q: How do L&I’s administrative costs compare to workers’ comp insurance carriers in other states?

A: L&I’s actual “paid” administrative expenses from 1999 to 2008 were 17.5% of the total benefits paid on claims. This compares with a national average of 68.2% from 1999 to 2008. This percentage was calculated using data from A.M. Best, a national authority on insurance company performance, and L&I’s cash flow statements.

Another way to look at this accounting information is on the basis of “incurred” administrative expenses – that is, claim expenses actually paid during a period of time plus the company’s estimated future administrative costs for all current claims. A.M. Best publishes incurred administrative expenses for workers’ comp insurers. Those costs from 1999 to 2008 as a percentage of total benefits incurred are:

  • U.S. workers’ compensation industry: 55.4 percent
  • L&I: 14.5 percent

Q: How much did L&I’s administrative costs increase last fiscal year?

A:  L&I made payments of $274 million on administrative costs this past fiscal year (2009), an increase of $18 million, or 7%, over the prior year, based on L&I’s cash-flow statements.

Investments/funds

Q. What is the State Fund’s contingency reserve?

A. The State Fund contingency reserve is the difference between its assets and liabilities. Assets include the value of investments that are being kept to pay claim expenses in the future. Liabilities are the amounts owed and expected to be paid out. The difference between assets and liabilities is similar to a “surplus” that all private insurance companies are required to keep.

As of June 30, 2009, the State Fund’s contingency reserve was 5.1% of its liabilities.  

Q: Has the contingency reserve dropped due to the recession? Were there other contributing factors?

A: Between June 30, 2008, and June 30, 2009, the contingency reserve decreased $1.052 billion. The factors that contributed to this decrease include:

  • Our fixed income and equities investments had realized and unrealized losses of $403 million.
  • Our estimated benefit liabilities for prior years increased $400 million, mostly due to higher than expected medical inflation and workers staying in our system longer as opportunities to return to work diminished. (Some of these liabilities are due to claim costs that will be paid out over the next 20 to 40 years.)

The Washington State Investment Board manages investments for the State Fund. In spite of the recent economic downturn, these investments performed much better than most other similar funds. As the recession ends, we expect the value of this high-quality portfolio to increase.

Q: Is the State Fund going to be insolvent soon?

A: No. A News Tribune editorial, “Workers comp audit should set off alarms,” (Jan. 5) left the mistaken impression that the workers’ compensation system may soon become insolvent. Read L&I director Judy Schurke’s response, “The facts about the financial health of workers' compensation in Washington state,” that was printed in the News Tribune on Jan. 8.

Q: Why did L&I borrow money for the Supplemental Pension Fund?

A: Job losses in this deep recession have caused a rapid drop in worker hours reported to L&I thereby reducing premiums paid into this fund. As a result, the Supplemental Pension Fund, a pay-as-you-go fund without reserves, experienced a temporary negative cash balance of $15 million. L&I anticipated this shortfall, and made a short-term, inter-fund transfer from the $3.2 billion Pension Fund.  The loan will be fully repaid within 45 days with interest. This action will ensure that all injured workers receive their full total disability payments without delay. For more information, see the Q&A, L&I makes Inter-fund transfer to Supplemental Pension Fund.

Length of time off work

Q: Does the average injured worker in Washington miss 274 days of work?

A: It is incorrect and misleading to say the average injured worker in Washington misses 274 days of work. Here are the facts:

  • 72 percent of injured workers receive no wage replacement for missed days of work and, instead, receive only medical coverage.
  • Of injured workers who receive wage-replacement benefits (also referred to as time-loss), about one-third receive only one payment (two weeks pay or less) and about half receive payment for 40 days or less.
  • L&I’s median time-loss duration is 40 days, which compares favorably to a national study (National Council on Compensation Insurance) of 37 states that shows a median time-loss duration of 45 days. (Median means that half of the time-loss claims are longer than 40 days and half are shorter.)

As for the specific number of 274, this number is not the average for all injured workers. It is an actuarial estimate for only a specific group of workers. It does not include the vast majority of workers who were injured but did not lose time from work.

It includes workers who were kept on salary by their employers, and it does not include workers who lose three days or less of work. The actuarial estimate measures only those time-loss claims in which the worker was out of work for more than three days. This group includes long-term claims, and those kinds of claims drive the system average up – 8% of claims represent 88% of the system’s total costs.

Pensions

Q: Is it correct that nearly half of injured workers in Washington never return to their jobs?

A: No, it’s not correct. Here are the facts for State Fund claims:

  • About 1.5% of all claims become pensions.
  • About 5.25% of claims involving wage-replacement benefits become pensions.
  • About 2 to 3% of all claims stay open three years, most having limited return-to-work options. For these three-year-old claims, there is a 50% chance they will eventually result in a pension.

Premium rates

Q: Why are Washington’s rates based on hours worked rather than a percentage of payroll, which is the basis for how all other states charge for workers’ compensation?

A: In Washington, premiums are based on the worker's exposure to risk (hours on the job), which employers and workers agreed to in the 1930s. The system has some advantages for employers and workers: premiums don't automatically go up each year as wages rise and it isn’t influenced by whether employers pay higher wages to their workers.

Q: How have Washington’s rates changed from year to year?

A:  Cumulatively over the past six years, State Fund rates have gone up 16.2% or an average of 2.7% per year on the basis of hours worked. For comparison with other states, this number calculated as a percentage of payroll was a cumulative 6.6% rate decrease. Plus in 2007, L&I returned $310 million to employers and workers in the form of a six-month rate holiday.

Year Rate adjustment Calculated as a percentage of payroll*
2010 7.7% 4.0%
2009 3.1% 1.7%
2008 3.4% 0%
2007 1.9% decrease 6.6% decrease, plus rate holiday that returned $310M to employers and workers
2006 0.5% decrease 5.7% decrease
2005 3.7% 0.2%
20052010 total 16.2% 6.6% decrease
2004 9.7% 9.0%
2003 28.8% 26%
19962002 total 16.5% decrease 40.2% decrease

*For comparison with other states

For two years – 2003 and 2004 – there were significant rate increases of 28.8% and 9.7% to bring premium rates closer to cost levels to maintain fund solvency. Before that, between 1996 and 2002, employers and workers benefited from over $1.8 billion in rate reductions and dividends because of very strong stock market investment returns that allowed L&I to charge rates below costs for seven years.

See L&I’s website for a history of rate changes.

Q: How has Oregon avoided workers’ comp rate increases for the past 19 years?

A: Oregon bases its rates on payroll, while Washington’s are based on hours of exposure (hours worked). This means Washington must increase the per-hour rates to keep up with inflation, even if all other factors that impact rates stay the same. For example, if average wages per hour increase by 2% in both Washington and Oregon, Washington would need a 2% rate increase while Oregon’s would remain unchanged in order to have the same percentage increase in premiums collected.

Because Oregon has not increased rates, the assumption is that employers in Oregon are paying significantly lower workers’ compensation premiums than employers in Washington. According to Oregon’s own study of workers’ comp rates, employers in both states have paid about $2 per $100 of payroll for their workers’ compensation insurance since 2003. Also, from 1992 to 2002, the data shows that Washington employers paid less than those in Oregon per $100 of payroll.

Premium Rate Ranking
Premiums per $100 of Payroll

See 2008 Oregon Workers’ Compensation Premium Rate Ranking Study for more information.

Q: Are workers’ comp premiums considered taxes?

A: Because L&I is a government agency and employers are required to pay premiums, they are legally considered “taxes.” However, L&I is actually running a non-profit public insurance fund, which offers insurance coverage to all Washington businesses regardless of their prior claims history. In other states, workers compensation premiums would not be considered “taxes” and they would solely be considered insurance premiums. Premiums, paid by both the employers and their workers, cover insurance benefits when there are injuries, similar to medical or auto insurance.

Q: What percent of the premium do employees pay?

A: The worker portion of the premium averages 27 percent for all industries.  However, this average varies somewhat from industry to industry and from year to year based on changes in the three different trust funds (accident, medical aid and supplemental pension funds) that make up the composite rate.

Some examples of the worker share of premiums for different risk classes are shown in the table below:

Risk class Business type Employee share through payroll deduction
0101 Excavation, Road Construction 18%
0510 Wood Framing 19%
1102 Trucking 17%
3402 Machine Shops 20%
3905 Restaurants, Taverns 20%
4904 Clerical Office 9%
4908 Colleges, Universities 20%
5301 Accounting, Law 10%
5302 Software Design, Engineer, ISP 6%
6305 Clothing and Shoe Sales 18%
6402 Supermarkets 21%
6406 Retail Stores N.O.C. 19%
6502 Banks 9%

Q: Is Washington’s workers’ comp system among the highest in benefits paid and insurance premium rates?

A: Washington’s total benefits per $100 of wages are in the top one-third in the country based on the 2007 National Academy of Social Insurance study, while its premium rates for employers insured by L&I – based on the Oregon Workers’ Compensation Premium Rate Ranking – were in the lowest third in the nation in 2008. This is possible because administrative costs at L&I are low and L&I is a non-profit, state-run insurance company.

Claims management

Q: What is L&I doing to resolve outstanding claims?

A: With a recent increase in the duration of claims, L&I has stepped up its efforts to improve efficiency in claims management in several ways. First, it is analyzing the vocational services process to quickly provide help to employers and workers and aid them in getting back to work.

Second, it is modernizing its systems to allow workers, employers and providers to file claims through the Internet and by phone so it can speed up treatment and benefits to workers and help employers keep them on the job. Studies have shown that when claims are filed quickly, they are less likely to become long-term cases.

Third, L&I is expanding its widely recognized program of working with medical providers in the community to intensively manage new claims in collaboration with employers and workers. Studies have shown that this program reduces costs by an average of $800 to $1,200 per claim and lost work time by an average of nine days.

Q: What is L&I doing to keep costs under control?

A: L&I has had an aggressive, and successful, effort over several years of controlling medical costs, with our cost growth historically below the national average.

We have expanded our efforts to prevent abuse of the workers’ comp system. For every dollar invested in fighting fraud and improving compliance in 2008, we brought in about $7.60.

According to AM Best, a worldwide insurance-rating agency, L&I spends less than half of what a comparable for-profit insurance company would spend on the administration of the workers’ compensation program.

Our Centers for Occupational Health and Education (COHE) use industry best practices that substantially reduce medical and time-loss costs while improving the quality of care. COHEs have substantially prevented long-term disability, reducing costs by an average of $800 to $1,200 per claim and lost work time by an average of nine days.

We have increased our online services and invested in technology, contributing to lower operating costs than many private insurers.

We are in a five-year Vocational Improvement Project to improve vocational choices for injured workers and reduce time-loss and costs to employers.

We piloted a successful program in early 2009 in which providers were given financial incentives to submit injured-workers’ claims quickly. Early analysis shows injured workers recovering and returning to their jobs more quickly, reducing costs for employers and the State Fund.

We offer employers a claim-free discount that can save them up to 40 percent on their premium costs.

We offer free workplace-safety consultations and a wide range of educational resources to help employers keep their workers safe and, as a result, their workers’ comp insurance rates as low as possible.

Need more information?

Contact Elaine Fischer, L&I’s Public Affair, at 360-902-5413 or Elaine.Fischer@Lni.wa.gov.

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