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Submitted by Paul D. Buffone, Louisiana Workers' Compensation Corporation
Are you concerned about the rising cost of Longshore premiums and claims? How about your yearly Special Fund assessment? Are you getting back from the Special Fund anything close to what you are paying into it? Maybe a look back to the creation of Special Fund and how it has evolved over time (or devolved depending on your point of view) will help provide answers to these questions.
History of the Special Fund
In 1927, in response to a growing need to provide protection to workers injured while working on or near navigable waters, Congress enacted the Longshore and Harbor Workers' Compensation Act (Longshore Act). The Longshore Act was patterned in large part after the state of New York's Workers' Compensation Act as it then existed. The Act contained provisions creating the "Special Fund" – its purpose to discourage employer discrimination against handicapped workers by limiting an employer's obligation to pay permanent total indemnity benefits to that portion of the disability due solely to the subsequent or second injury.
At inception, the Special Fund was funded by an employer assessment of $1000 as compensation for the death of an employee where there were no survivors entitled to compensation under the Act, along with penalties and fines collected under the Act. Benefits paid by the Special Fund were limited to that portion of an injured employee's disability that pre-dated the occurrence of a second or subsequent injury. Some maintenance expenses were also paid to injured workers undergoing vocational rehabilitation. An employer was therefore discouraged from discriminating against a handicapped worker since the Special Fund sought to compensate the employer for the additional risk and cost associated with the hiring.
The 1972 and 1984 amendments to Longshore Act dramatically broadened the scope of the Special Fund. The 1972 amendments made the Fund responsible for: (A) annual adjustments in pre-1972 benefits; (B) legal assistance to persons covered under the Act; (C) payment of medical examinations to resolve disputes between medical providers; and (D) medical and compensation benefits in the event of employer/carrier insolvency.
The 1972 amendments also increased the amount of the death benefit assessment from $1000 to $5000 and more importantly, gave the Secretary the authority to assess the maritime industry (self-insured employers and insurers) based on expected calendar year expenditures. This marked the beginning of the employer/carrier-based assessment that apportions a proportionate share of the estimated yearly expense of the Fund to each self-insured employer/carrier based upon their participation in the market. Participation in the market is a percentage and is calculated by dividing an individual self-insured employer/carrier's yearly indemnity benefits paid by the yearly total of all indemnity benefits paid by all self-insured employer/carriers.
Problems soon arose with the changes to the assessment formula in the 1972 amendments. Certain employers and carriers began dumping a high percentage of occupational disease cases into the Fund, and the cost of these claims were being borne by all market participants. Since the Fund's funding mechanism was not in any way tied to the amount the Fund ultimately paid out, employer/carriers with a high claim volume were encouraged by the system to pursue Special Fund relief in as many cases as possible. In response, in 1984, Congress again amended the Longshore Act, changing the Fund's assessment formula. The revised formula, as it stands today, is now based upon each employer/carrier's participation in the market and their individual use of the Special Fund.
The Special Fund Today
To receive relief from the Fund today, an employer must prove three essential elements: (1) the injured employee had a pre-existing permanent disability, (2) which was manifest to the employer prior to the second accident, and (3) which contributed to the subsequent total permanent disability. Although items (1) and (3) above are founded in the statutory language of Section 8(f) of the Act, item (2) and its reference to the term 'manifest' was judicially created and is generally held to mean "what the employer could have discovered had the employer sought out the information." An employer must therefore establish "constructive" rather than "actual" notice of a pre-existing condition to satisfy the manifest requirement.
If an employer is able to prove these three elements to the satisfaction of the Fund and in compliance with the strict procedural hurdles that surround the application process, the employer's liability for indemnity benefits is capped at two years after the date on which the injured worker reached maximum medical improvement. Once accepted, the Fund will pay indemnity benefits directly to the injured worker. Unlike most state Second Injury Funds (SIFs), the Special Fund does not reimburse an employer/carrier for medical benefits. Nor will the Special Fund participate in or contribute to a settlement of the entire claim. Thus, an employer/carrier who wishes to limit its future medical exposure on a claim already accepted by the Fund must fund the entire settlement, including the lifetime payout of indemnity benefits.
Problems with the Special Fund Today
Good intentions, as usual, don't always mean good results over time. Despite the Fund's lofty ideological goals of preventing discrimination against handicapped workers or promoting the hiring of disabled workers, many now question whether the Special Fund (and its state counterparts) accomplishes either. Industry groups, such as the American Insurance Association (AIA), support abolition of state SIFs and the second injury aspect of the Special Fund. Tough questions are being asked, but for the most part remain unanswered: What demonstrable evidence exists proving the Special Fund (and its state counterparts) affects an employer's hiring decisions? Is the Special Fund an outdated, ineffective and costly way to deal with the evolution of how employers deal with disabled workers in today's workplace, all at the expense of employers? Isn't the Americans with Disability Act (ADA) a better way to encourage employers not to discriminate against workers with disabilities?
The Special Fund's policy of spreading or shifting the cost of hiring and retaining partially disabled workers across all employers collides with another fundamental objective of workers' compensation systems – the internalization of costs.
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In 1990, Congress passed the ADA, which prohibits certain improper inquires about the existence or nature of a disability prior to the offer of employment. The ADA also requires an employer to make "reasonable accommodations" to a partially disabled worker as long as the worker can perform the essential elements of the job. Although the ADA is Congress' modern day attempt to further the policy of encouraging employers to hire disabled workers, Congress has not gone back and re-examined the Special Fund – its purpose, goals and most importantly, its effectiveness, since the 1984 amendments and since the ADA was enacted in 1990.
The Special Fund's policy of spreading or shifting the cost of hiring and retaining partially disabled workers across all employers collides with another fundamental objective of workers' compensation systems – the internalization of costs. Simply put, internalization of costs means an employer's price of goods and services accurately reflects the costs of that employer’s work injuries. By shifting the costs from the employer who actually employed the worker to all other employers, larger employers having a high volume of claims enjoy a disproportionate share of Fund relief for second injuries.
Put another way, before a prudent employer/carrier chooses to seek Fund relief, it must first navigate though the assessment formula and conclude that it has more to gain than to lose by applying for Fund relief. Where one employer/insurer stands to gain (pay less), doesn't this also mean that some other employer has to lose (pay more)? Based upon a listing of self-insured employers and carriers who participated in the Longshore market in 2003/2004, only four companies received back from the Fund more than 80% of the amounts paid into the Fund¹. Collectively, all employers are therefore unfairly subsidizing the workers' compensation costs of a few.
Critics further argue there are no effective limitations on the amount of money the Fund spends or assesses. In essence, the Fund has accumulated large, unfunded deficits that will take years (and years, and years...) to pay off. In 2004, the Fund paid out a record $334 million on 4,694 claims. The Fund operates on a pay-as-you-go or cash flow basis, meaning the Fund only collects in one year enough money to fund its expenses in that year. Comparison of yearly Special Fund assessments with state fund assessments in states where the assessment is based upon benefits paid suggests the federal assessment rate may be as much as double the state rate². According to a Government Accounting Office (GAO) estimate in 1999, the Fund had incurred an actuarial deficit estimated as at least $2.5 billion dollars, and this estimate is considered conservative. Unfortunately, this writer could not locate a more recent GAO report on this subject matter.
From a claims and underwriting standpoint, the idea of shifting the cost of permanent total indemnity claim costs to the Special Fund conflicts with a fundamental principle under which both operate – a good claim is a closed claim. In order to obtain Fund relief, an employer/carrier must stipulate that the injured worker is permanently and totally disabled. This stipulation carries a heavy burden – lifetime indemnity benefits to the injured worker. Even where the Fund accepts the claim and provides relief, all other expenses mandated by the Longshore Act, including administrative and medical expenses, are still borne by the employer/carrier. Settlement provides the only remedy, but the Special Fund is not legislatively authorized to settle claims. An employer/carrier must therefore weigh the benefit of receiving limited Fund relief against the strong and proven claims and underwriting principle of closing the entire claim and closing the books as soon as prudently possible.
Conclusion
Although the Fund was originally created to discourage employer discrimination against handicapped workers, its breadth and scope have been slowly expanded to now cover vocational rehabilitation, legal fees, physician costs and insolvency insurance, all at the expense of employers. Since passage of the ADA, Congress has not revisited the issue of whether the existence of the Fund in any way impacts an employer's decision to hire or retain disabled employees. Without justification, the Fund is effectively fulfilling its purpose. Congress should do away with or greatly limit the scope of the Special Fund.
¹USDOL LS Allocation Control Report 2003/2004
²2005 NCCI Exhibit VI, Taxes, Assessments and LAE by State; (Kansas, Louisiana, New Hampshire & South Dakota)
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