Workers compensation insurance rates are expected to drop again this year, a result of reform legislation passed in 2007.

Gov. David Paterson said Tuesday that state regulators expect workers compensation insurance rates to decline an average of 5 percent this year because of a new formula for calculating rates based on the direct cost of insurance claims, known as “lost costs.” It’s the second year in a row that rates are dropping.

How much the reform legislation has actually saved or will save New York’s private sector employers in the future is still nearly impossible to determine.

Last October, the New York State Insurance Department mandated a 20.5 percent cut in the average rate charged for workers compensation insurance by private insurance carriers, and former Gov. Eliot Spitzer was jubilant in bringing the news to state business leaders: “Observers said there was no way we could deliver on a promise both to raise benefits and to cut rates by 10 to 15 percent. They were right, we got … 20.5 percent to be exact. Here’s the best number, saving New York’s businesses $1.2 billion every year,” Spitzer said.

Paterson’s announcement Tuesday was more subdued, without a reference to any specific dollar figure expected to be saved by businesses.

“Last year’s historic agreement set the framework for workers compensation reform, but the savings are actually produced through the difficult work of developing and implementing the proposals,” he said.

The Workers’ Compensation Reform Act of March 2007 followed years of political gridlock over New York’s costly benefits program for injured workers. Spitzer, then riding high after his landslide election victory in 2006, was able to persuade business and labor leaders to compromise and allow legislators to vote for reform that capped at 10 years the time a worker with permanent partial disability can collect benefits. Under the old system, the benefit continued for life, making permanent partial disability cases the greatest cost driver in the system.

The reform also increased the maximum weekly benefit for an injured worker, from $400 to $550 this year; $600 in 2009; two-thirds of the statewide average weekly wage in 2010.

After Spitzer’s resignation in March in a prostitution scandal, workers compensation reform became the major component of his legacy. The sweeping legislation promised many changes, including billions of dollars in savings to businesses, medical guidelines and pharmaceutical fee schedules to reduce the costs of treating injured workers, an expedited claims case process dubbed the “rocket docket,” and increased penalties and prosecutions against employers who defraud the system. The impact of many of these reforms is only now becoming apparent.

Actual Savings

Spitzer’s figure of $1.2 billion in savings “year after year” was based on rough math, equating a 20.5 percent state mandated cut in the private workers compensation insurance market with an overall 20.5 percent cut in the estimated $5.5 billion in premiums paid to support the workers compensation system in 2006.

The workers compensation insurance market in New York is divided between three sectors: private insurance carriers, the state-sponsored New York State Insurance Fund (known as the SIF), and the large individual companies and group trusts that self-insure. Private carriers service 43 percent of the market; the SIF, although intended to serve at the “market of last resort,” is the largest single underwriter of workers compensation 22 percent; and the remaining 35 percent of the market is self-insured.

Prior to implementing the “lost cost” methodology this year, the state mandated a “manual rate book” for approximately 600 different job classifications, each with their own rate based on estimates of workplace danger. The state’s price controls over the private insurance sector allowed the state to use the reforms to force an immediate impact. The October 2007 average 20.5 percent cut was based on regulators’ estimates of future cost reductions from the reform.

The SIF is not controlled directly by the Department of Insurance, but it also cut rates by 20.5 percent last October. According to the SIF’s annual report, the cut kept total premiums collected flat year-over-year, at $1.7 billion. SIF officials said about $1.5 billion in total premiums was collected from June 2007 to June 2008, indicating the rate cut has probably saved its customers some money in 2008.

An official at the New York Compensation Insurance Rating Board, which tabulates private insurance company data for the state, said preliminary estimates for 2007 show the rate cut in the last quarter likely did not result in less money in premiums collected by private insurers for the year, in part because of growth in customers to that segment. Some of that growth undoubtedly came from a flight of companies from financially troubled self-insured group trusts.

Self-insurance turmoil

State officials say savings for the self-insured have not yet occurred and probably won’t until the reforms have more time to reduce costs.

Hampton Finer, deputy superintendant and chief economist of the State Insurance Department, said it usually takes about 18 months from the date of an injury to provide maximum “healing time” before the New York Workers Compensation Board will consider claims of permanent partial disability. He said only a small number of permanent partial disability cases have been approved by the Board using the new rules, which affect injuries occurring after July 2007.

Gregory Saxum, legal council for the New York Self Insurers Association, said the individual self-insured companies he represents pay workers compensation claims directly from company cash revenues. He said the individual self-insured are required to post letters of credit with the Workers Compensation Board based on the likely future costs of its claims, but that expense is minor compared to the actual claims which the individual self-insured pay continually out-of-pocket. He said it is still unknown how the Workers Compensation Board will apply the 10-year caps on permanent partial disability cases and how much savings there may be.

“There is still a great deal of confusion over how you would rate a permanent partial disability. There are not any guidelines as of yet. So that’s a mix; that’s a scramble,” he said.

Saxum said that the new, state-mandated fee schedule for pharmaceuticals used to treat injured workers has lowered the costs of medications. But those savings have been eaten up and surpassed by a dramatic spike in assessments required of the self-insured by the Workers Compensation Board this year, he said.

Workers Compensation Board increased quarterly assessments, which are like taxes, from the self-insured in 2008 to pay for the unfunded claims liabilities of 12 self-insured group trusts that dissolved over the past two years.

Eight of those dissolved trusts had operated with Bermuda-based Compensation Risk Managers Holdings as their third-party administrator. Earlier this year, CRM agreed to give up its New York license to administer self-insured group trusts after Workers Compensation Board charges of mismanagement; a 2007 state audit of CRM’s trusts drastically increased the value of the trusts’ liabilities.

CRM officials argue the state’s audits, converging with the lower insurance rates initiated by the Workers Compensation Reform, resulted in the voluntary dissolution of most of its trusts in the first quarter of 2008.

“It’s just a rule of nature in the insurance business that trusts are competitive when insurance rates are high and uncompetitive when the insurance rates are low. So that 20 percent decrease is very relevant to the situation the trusts are in right now,” said Eric Egeland a vice president with CRM. “As soon as those rates dropped it was a huge threat to the group trusts.”

Workers Compensation Board officials said the unfunded claims liabilities from CRM’s trusts forced the board to increase assessments against all of the self-insured in New York to raise money for the claims. The Board’s assessment to the self-insured jumped from about $9 million in 2006 to $20 million in 2007 to $66 million in 2008.

The rapid jump in assessments prompted First Cardinal LLC, the Latham-based third-party administrator of 14 self-insured group trusts, to sue the state, challenging its right to hold healthy self-insured entities responsible for the unfunded liabilities of dissolved group trusts.

State Supreme Court Justice Kimberly O’Connor ruled in July that the state did have the authority to levy the assessments against the self-insured community, but also ruled the state had not adequately proven that the dissolved self-insured group trusts had defaulted. The Workers Compensation Board has since pared back its assessment estimates for 2008 to $33 million and sued the members of the dissolved group trusts to recover money to pay for their liabilities.

Saxum said the individual self-insured lobbied the state this year to separate their interests from the self-insured group trusts, and failed. He said costs continue to rise for self-insured.

“I do not see any savings and I’ve seen and have heard only of increases,” Saxum said. “I think the so-called reform legislation of 2007 has so many tangled and loose ends at this point that I don’t know how anybody can accurately predict it’s going to save money now or in the future. It’s incomplete.”

Rocket Docket

One reform that’s nearly complete is the expedited hearing process. Workers Compensation Board spokesman Joe Cavalcante said in 2000 it took an average of 350 days for an injured workers’ compensation claim to work through the system to its resolution. Over the past year, the Board has implemented changes to its legal forms, computer software and hearings calender and instituted new training for judges to expedite the hearings process. By Oct. 1, the Workers Compensation Board is expected to formalize a mandate that all cases be processed through the system within 90 days.

“This is what is informally known as the “rocket docket,” Cavalcante said. “We’ve been able to reduce the time the cases are taking already — 88 percent of our controverted cases are being established in 90 days or less.”

But the process of obtaining a permanent partial disability classification is still slow and becoming more expensive for some workers.

Michael LaRow of Glenville said it took only a second to effectively end his more than 45-year career as a chef.

“I was lifting [a mixing bowl] and I ruptured two discs in my back,” he said. The accident occurred at the Glens Sanders Mansion in July of 2007 and since the injury, he’s been unable to return to work as a chef, he said.

“I was getting workers compensation [about two thirds of his salary] after the injury but then I had a dispute with my doctor. His opinion was I could go back to work with restrictions of lifting only 20 pounds. That’s not my job. To do my job you need to be able to lift a lot more and spend [up to 12 hours] on my feet.”

LaRow said the insurance company stopped paying him medical benefits and compensation payments, which would have dropped to 20 percent of his former salary if he had accepted the designation of a partial temporary disability.

“I couldn’t do anything else to bring myself back up to my former status. I’m pushing 60 years old. For me to have to get another profession at this point would be ridiculous,” he said.

For LaRow, the rocket docket won’t help pay his bills until sometime in 2009, after the 18 months of healing time the Board requires before considering his claim.

He’ll also have to bear the cost of fighting for his claim in Menands, since the Schenectady service center will be closed later this year.

Cavalcante said the Workers Compensation Board is closing 11 of its 41 hearing centers between this month and November 2009. The closings are not a part of the 2007 reform legislation but a response to Gov. Paterson’s recent mandate to reduce government costs. The closures are expected to eliminate $1.6 million in spending. Closing the Schenectady hearing center will save approximately $32,000 per year.

Increased enforcement

Under new powers granted by the 2007 reform, the Workers Compensation Board has issued 917 stop-work orders to businesses that don’t carry workers compensation insurance, and issued more than $5.4 million in penalties. Fraud investigations have also netted two arrests, one of them the president of Gloversville-based Tradition Leather, Michael DeMagistris, who was charged Aug. 18 with a felony count of failing to provide workers’ compensation insurance for employees at his tannery.

Under state law, any employer of more than five people commits a felony by failing to provide workers’ compensation insurance.

So far, 16 stop-work orders have been issued in the Capital Region, 10 in Albany County, three in Saratoga County, two in Schenectady County and one each in Fulton and Rensselaer counties.