Can workers’ compensation reforms keep Illinois competitive?

SPRINGFIELD - As a critical deadline for closing the regular legislative session on time has passed, Gov. Bruce Rauner and Speaker Michael Madigan are pointing fingers over the state's failure on Sunday to adopt a budget.

Rauner continues to insist that structural reforms in his "Turnaround Agenda" - a package that aims to increase jobs and boost the economy in Illinois - be included in any deal.

One of these reforms includes an overhaul of the state’s workers’ compensation system, a controversial move that Rauner says Illinois needs to stay competitive with other states, particularly neighbors like Indiana and Michigan.

He often cites the 2014 Oregon Workers’ Compensation Premium Rate Ranking Summary, which shows Illinois with the seventh highest workers’ compensation costs in the country.

According to the governor’s office, “These high structural costs drive jobs to other states, including Indiana, where workers’ compensations costs are more than 50 percent less.”
The Oregon study shows that Indiana and Michigan, respectively, have the 50th and 34th highest workers’ compensation premium rates. As for other states that border Illinois, Kentucky ranks 40th, Missouri ranks 21st, Iowa ranks 24th and Wisconsin ranks 23rd.

Victor Bongard, a lecturer in business law and ethics at Indiana University’s Kelley School of Business, explains that employers should care about workers’ compensation premium rates, since that’s how much they pay per worker for his or her insurance.

“Most employers pay an insurance company, and the insurance company pays the claims, and just like other insurance, claims history, the number of workers, and other actuarial things determine what the rates will be,” he said.

However, Bongard contends that premium rates are not the only factor employers consider when deciding where to do business. As an example, he points to California, which ranks first in the Oregon study for its high workers’ compensation costs and also tops other lists for its heavy business regulation.

Bongard explains that despite its less-than-business friendly reputation, California continues to experience great growth.

“If you poll employers, premium rates do matter, but they are not going to be the determining factor in why they move,” he said. “There are other things they put higher on the list.”

“People have stressed the differences in the character and makeup of Illinois and Indiana, and I think that becomes a very important point,” he added. “Illinois has a higher corporate tax rate, individual tax rate. Illinois has a state tax where Indiana doesn’t. There are a whole variety of reasons why Indiana differentiates itself.”

Two of Rauner’s proposed workers’ compensation reforms focus on the causation standard and American Medical Association guidelines.

Currently in Illinois, if an employee’s injury relates at all to his or her employment, the employee can receive compensation. This includes injuries that arise from pre-existing conditions that may have been aggravated or accelerated by employment.

Rauner proposes raising the state’s causation standard from an “any cause” standard to a “major contributing cause” standard to cut down workers’ compensation premium rates.

“The accident at work must be more than 50% responsible for the injury compared to all other causes,” according to the governor’s office. “This reform would bring Illinois in line with 29 other states that have higher causation standards and would reduce workers’ compensation premiums by eliminating compensation for non-work injuries.”

The governor’s office points out that several states, including neighboring Missouri, recently passed laws mandating that employees only receive compensation if their employment was the primary cause of their injuries.

Rauner also proposes allowing the Illinois Workers’ Compensation Commission to base permanent partial disability awards solely on the AMA Guidelines.

When Illinois last reformed its workers’ compensation law in 2011, the state added the guidelines as one of five factors in determining those awards. According to the governor’s office, since the guidelines are more conservative, the state hoped it would help the commission reduce its awards.

The governor’s office points out that Indiana requires mandatory use of the AMA Guidelines when determining permanent partial disability awards. As a result, the neighboring state sees lower awards.

Bongard contends that there is not always a strong correlation between insurance premium rates and workers’ compensation awards, despite the arguments of parties on both sides of the reform debate.

He cites a recent ProPublica study that shows the maximum amount each state pays for injuries to different body parts. In Illinois, even four years after the state reformed its workers’ compensation law, maximum awards for arms, legs, index fingers and all other body parts are at least twice the national average.

For example, an arm in Illinois is worth about $440,000. The national average is about $170,000.

However, Bongard adds, an arm in California is worth about $191,000, which is much lower than in Illinois, despite California’s No. 1 ranking in the Oregon premium rates study.

“California, when it comes to their payouts per injury, is actually closer to Indiana,” Bongard said. “Some people will speak about the injury compensation table as if it tells the whole story, but clearly it does not. If that’s the case, California should have much lower rates than they do.”

According to the ProPublica study, the workers’ compensation awards in Indiana are typically still higher than the national average. The awards are also higher than the national average in Michigan, Kentucky and Iowa, but mostly lower in Missouri. They vary in Wisconsin.

Bongard contends that another difference between Illinois and its neighboring states like Indiana is how they administer their workers’ compensation systems.

“Illinois has a reputation of perhaps being more worker-friendly than Indiana is in terms of the evaluation of claims and payouts of claims,” he said. “In 2011, the call for reform, in part, related to adjusting that to a more level playing field.”

Bongard also points out that Indiana employers can raise a more robust set of defenses in a disputed claim.

For example, he says, if an employee in Indiana knowingly ignores a conspicuous safety warning, his or her claim might be denied. However, in Illinois, the commission may determine that the safety warning was not enough and will compensate the employee.

“If you start off with a law that is broader in terms of the protections it has for employers, vis-à-vis the payment of claims, then the more likely you are going to have a smaller percentage of workplace injuries that result in payouts at all,” Bongard said.

In his “Turnaround Agenda,” Rauner also proposes narrowing the definition of a “traveling employee” in the state’s workers’ compensation law and reducing the current workers’ compensation medical fee schedule by 30 percent.

According to the governor’s office, even after the 2011 reforms, Illinois’ medical fees continue to be significantly larger than the median of other states.

Lawmakers will now move into overtime session, and face an even more daunting task - it will take three-fifths majority in each chamber to pass any legislation, including budget bills.