s president of New Process Fibre in Greenwood, Hans Peters pays $200,000 a year in premiums to provide workers’ compensation insurance to his 55 employees.
While considering a possible expansion of his company and a move to Seaford last year, he learned that, in other states, the insurance costs far less. In Maryland, for example, he would pay $100,000 in workers’ comp premiums—half of what he pays now.
Peters had to stop and ask himself, Why continue to operate in Delaware? Why not move the company a few miles, to just over the state line?
“We’re a family business,” he says. “We’ve been here 80 years and would like to stay and keep our 55 employees working.”
So Peters will keep New Process Fibre here—for now. But the fact remains that an increase in premiums could force him to move his business across the state line.
Worse, the catastrophic injury of an employee could lead to a price hike that, in theory, could put a small company like his out of business.
Delaware is the only state in the 70-year history of workers’ comp that has never reformed its system. Local employers pay the third highest workers’ comp insurance rates in the country—we were No. 7 two years ago—and those rates are rising by an average of 4 percent a year. After a false start on reform in June, the issue will be at the top of the legislature’s priorities list when the General Assembly convenes this month.
“You came into the process thinking that a limited patch on your system was sufficient,” says Robert Aurbach, a workers’ comp consultant who worked with Delaware to reform the system last year. “When the analysis of Delaware law was done, you learned that it was very different than the law in the rest of the United States.”
The problem is, those involved in fixing it are the ones who broke it. They’ve made a lot of money that way. So why should they want reform?
Workers’ compensation ensures that those who are injured on the job receive money for medical bills and lost wages. Rest assured that, should you need benefits, you will receive them. That part of the system works just fine.
The real problem is the cost of insurance. In a state where 94 percent of all companies employ fewer than 50 people, small businesses like New Fibre are hit hard by high premiums. Will Robinson, president of George & Lynch, a Dover construction firm that employs 350 people, says he regularly loses bids on construction jobs because of workers’ comp costs.
“There are four gorillas that all have a piece of workers’ comp: business, the medical community, insurance companies and trial attorneys,” says Scott Kidner, Delaware director of the National Federation of Independent Business. And each has a financial stake.
First, there is no cap on what healthcare providers can charge for treatment, so they often bill more for injuries suffered on the job than similar injuries sustained otherwise. They also need to cover the additional cost of the manpower needed to process workers’ comp claims. According to Dr. Bruce Rudin, the workers’ comp spokesman for the Medical Society of Delaware, the Medical Group Managers Association found that managing the same injury in a workers’ comp patient is twice the work as managing other injuries.
Second, lawyers who represent injured workers are motivated to seek the maximum benefit for them. Their compensation is tied to the amount of cash settlements for catastrophic injury and permanent disability, which are also uncapped and unregulated. Moreover, lawyers are permitted to increase their pay by making deals with their clients—like taking a cut out of their clients’ comp checks—and insurance companies. Insurers are thus forced to cover all those costs—as well as the cost of insurance fraud—by passing them onto employers as high premiums.
So controlling the cost of premiums would seem to be a matter of containing medical costs and capping lawyers’ fees. Of course, it’s not that simple.
Last year Governor Ruth Ann Minner convened a Workers’ Compensation Advisory Committee, comprised of representatives from business, insurance, the medical community and trial attorneys, to address those issues. The committee helped draft legislation, Senate Bill 362, that would, among other things, set a cost schedule for healthcare expenses—determined by the state Department of Labor—establish an arbitration process for disputed comp claims and control attorneys’ fees by making them subject to approval by the Industrial Accident Board.
When the legislative session ended June 30, the bill had not passed. Lawyers, doctors and organized labor objected to the amount of control it gave the Department of Labor to determine fees.
“We were told to come up with a system that made us competitive with surrounding states,” says John Kirk, an administrator at the Department of Labor. “When you have such a huge difference, it’s impossible to write a package into a bill that would amend that statute and, yes, that left a lot of rulemaking to the Department of Labor.”
Additionally, doctors worry that such a bill would compromise the quality of medical care. “When rates get cut substantially, your premium providers say they don’t need the aggravation,” says Rudin. “You get people willing to work who tend not to be your premium providers. Asking doctors to work harder but earn less could mean that there will be fewer doctors willing to take care of injured workers.”
Though the Delaware Trial Lawyers Association was most vocal in its opposition to the bill, organization spokesman Joseph Rhoades would not comment for this story. Neither would Secretary of Labor Tom Sharp, who led the Workers’ Compensation Advisory Committee. As for insurers, they probably care less than anyone about reform, says Insurance Commissioner Matt Denn, “because they get paid either way. Companies base their rates on the cost of the system.”
In August an offshoot of Minner’s original Workers’ Compensation Advisory Committee, sans insurers, began work on new legislation. Based on SB 362, the new bill would create a medical fee schedule and clarify who is financially responsible for, say, the former bulldozer operator who now needs computer training in order to rejoin the workforce in another capacity. That process, called maximum medical improvement, means the worker has recovered as well as possible, thus should no longer be collecting disability checks. Doing so is an act of fraud that further strains the system.
To reach a consensus, the parties have to agree on amendments that could damage their bottom lines, but offer greater advantages to injured workers and employers.
Yet some insiders say Minner’s sense of urgency could lead to a quick fix that could eventually result in failure. Any bill might be better than no bill, as the state Chamber of Commerce has said. But a narrow one could bring Delaware back to square one in a few years: Companies could close or move out of state, and layoffs could be likely for those that survive. Also, under the new bill, the Department of Labor could control the way doctors and lawyers run their practices. And no one wants that.
The biggest fear among small business is that so-called reform leaders won’t take real action until Delaware is in crisis mode. From Minner’s point of view, we’re already there, says her chief of staff, Mark Brainard. If a reform bill eventually passes, it will take 10 years for all players to adjust their costs. Until then, many outside companies may be deterred from moving here.
So companies like Craft-Way Kitchens, an eight-person firm in Wilmington, won’t add new employees to the payroll; it will hire subcontractors. “We’ve never had any accidents, yet our comp rates don’t change,” says co-owner Michael Dougherty. “We can’t give bonuses or raise salaries because of workers’ comp. Explain that to your dedicated employees.”
Make no mistake: After reform, those who profit from the current system will continue to do so—but not as greatly.
Minner believes that the current system deters outside companies from moving here. She also thinks the legal battles that result from comp claims are out of control.
“The workers’ comp system was originally set up to get an injured worker treated and back to work,” says Brainard. “But then, the employer had the certainty of knowing the worker would come back without being involved in litigation. Delaware’s system has gotten away from that philosophy.”
“Other states have reformed and moved ahead of us,” says Judy McKinney-Cherry, director of the Delaware Economic Development Office. “Each year we wait our problems become exacerbated.”
In past years, various national studies ranked Delaware in the Top 10 in terms of business climate, McKinney-Cherry says. Delaware also has the nation’s third lowest property taxes. Our unemployment rate is tied for 14th lowest. And our job growth rate beats the national figures.
But without comp reform, all that could change.
“At Forbes, Delaware fell to 15th place last year because of the current system,” she says. “Workers’ comp is our Achilles’ heel.”