Comp in New York: Death Spiral Finally at an End?

January 25th, 2007 by

Workers comp seems to embody the worst of all possible worlds in New York state: the benefits are way too low; the premiums are way too high. The system is full of friction, with virtually every claim decision requiring the involvement of a judge. The system, forged in the cauldron of early 20th century labor-management conflicts, is in deep trouble.
New York has always been a high cost state. With California and Texas cutting costs through dramatic reforms, New York might be duking it out with Florida for the dubious title of Number One: highest comp costs in a major industrial state. The cost of comp has become a political issue, with newly elected Governor Elliot Spitzer weighing in. Spitzer concedes that the system fails everyone: “the employers who pay some of the highest premiums in the country…and the workers who receive some of the lowest benefits.”
The Payroll House of Cards
There is one aspect of the problem that fits readily into Spitzer’s comfort zone: rampant fraud. We read in the New York Times that premium fraud has reached an unprecedented magnitude in the Empire State. The Fiscal Policy Institute estimates that employers are avoiding payment of somewhere between $500 million and $1 billion in premiums – 15 percent to 20 percent of all premium in the state. (The premium avoided exceeds the premium paid in most states!)
The institute compared total employee payroll reported to the Labor and Tax departments – $389 billon – to the payrolls reported for workers comp. The comp payroll came in around $311 billion. That means that New York either has the largest concentration of independent contractors on the planet – or employers are under-reporting payroll to their comp carriers.
Interesting to note, we recently blogged the fraud charges against Cover-All, a huge contractor in California. Their scam was uncovered with the same simple methodology used in New York: payroll tax records compared to payrolls reported for comp. You would think in this age of the computer that such comparisons would become the norm.
As is usually the case in rampant fraud, it is the legitimate, law abiding companies in New York who are paying the price – in the form of very high costs (and mediocre benefits) for their mandated coverage. Injured workers are going to receive benefits, regardless of whether their employers paid all, part or none of the comp premiums. As the costs associated with premium avoidance are shifted to the fully insured employers, their cost of doing business keeps going up. That, in effect, is the comp death spiral.
In some respects, the solution to New York’s comp problem is simple : First, update the state’s comp law, procedures and benefits to bring them in line with the twenty first century. And second, establish a credible enforcement effort to crack down on wide-spread abuse. It won’t be easy, but as California and Texas have shown, it can be done in a relatively short time. All that is needed is a sense urgency – a sense that the current mess must not be allowed to continue. Given that the system is so unfair, inefficient and wasteful, reasonable people should be able to achieve the necessary reforms in the proverbial New York Minute.