Second Injury Fund on last leg

The disability support system utilized by Missouri workers and employers will have to change dramatically if it is to continue on, according to business groups and those in the public and private sectors advocating for reform of the Second Injury Fund. No matter the solution, businesses are bracing for surcharges to cover a swelling $6 million deficit.

Despite a February plea from Attorney General Chris Koster, manager of the fund that covers workers with pre-existing conditions who seek disability claims, as of May 3, legislators have yet to pass a bill designed to fix the ailing fund.

Ray McCarty, president of business advocacy group Associated Industries of Missouri, said whether the fund is eliminated or reformed, legislators would have to increase the surcharge businesses pay on workers’ compensation insurance premiums, at least through 2020.

Springfield-based workers’ compensation attorney Darren Morrison of Morrison, Webster & Carlton said groups such as McCarty’s are largely responsible for the state of the fund.

AIM worked together with the Missouri Chamber of Commerce and Industry and others in 2005 to set the 3 percent cap on the surcharge businesses in Missouri pay on their workers’ compensation insurance premiums – a move both Morrison and Koster credit with the fund’s current insolvency.

One thing parties familiar with the fund can agree on: A fix is needed for the fund to continue.
 
The problem at hand
According to Koster’s office, 219 people have received permanent total disability awards but have yet to be paid. The fund’s balance was just more than $10 million as of May 1, but the unpaid awards total $16.2 million.

Though the fund had reserves of $25 million in 2005, by 2008 the fund’s annual expenditures increased to $74 million while its revenue dropped to $56 million.

In 2009, Koster lowered settlement authority on claims found to have merit to $40,000 from $60,000, but reserves still fell. In 2011, the fund collected $43 million in revenue, though obligations had increased to $77 million.

Last year, Koster decided to stop paying new claim awards, which are now racking up 9 percent interest. That delayed the inevitable, according to Koster’s February speech at the Capitol, but now the fund is deep in the red with roughly 30,000 claims pending.

McCarty said the issue is not the cap, but rather the types of claims the fund allows.

The fund was established in 1943 as a way to help employers cover the costs of workplace injuries that lead to long-term disability for employees with pre-existing disabilities.

Rules that govern the fund don’t require that those pre-existing conditions be work-related.

“We’ve allowed every type of claim from sports injuries and regular diseases that have nothing to do with work,” McCarty said.

Prior to 2005 reforms, the surcharge varied depending on the health of the fund, and was adjusted annually by its actuaries. The year it was capped, the surcharge was set at 3.5 percent, according to Koster’s office.

“It was capped at 3 percent, partially as a way to force legislators to deal with some of the problems,” McCarty said.

But reform never came.

To save or not to save?
McCarty said business groups believe the fund can be fixed in two ways: Eliminate it altogether or shrink its obligations.

“If we end the fund, the only question is what types of claims should be carried over into the workers’ comp system,” McCarty said.

Richard Moore, assistant general counsel and director of regulatory affairs for the Missouri chamber, said lawmakers are currently trying to find a solution that would reduce the fund’s liability.

“The fund is not going to die,” Moore said. “Based on the bills filed, we do expect a shrinking of the fund. There is wide business support for that.”

Moore acknowledged that the surcharge cap the chamber once favored contributed to the current state of the fund.

“There were a couple of other factors,” he added, pointing to economic effects such as fewer workers and less revenue for the fund, as well as a recent increase in awards.

According to the 2011 annual report for the Missouri Division of Workers’ Compensation, there were 7,782 claims filed against the Second Injury Fund, representing a 6.5 percent decrease compared to 2010 claims. On average, claims have been decreasing about 7 percent a year since 2003, when there were nearly 14,000 claims. But with cases not being settled, awards have skyrocketed. In 2009, 2.9 percent of cases received a hearing and award compared to 21 percent in 2011.

Attorney Morrison said inaction among lawmakers as the fund runs dry has left 11 of his Springfield clients waiting for the more than $1 million they’re owed from fund judgments. Before the fund is abandoned, he hopes legislators and others remember why it is there in the first place.

“When you get rid of a workers’ comp remedy, you open employers up to other civil remedies, including getting sued in circuit court, paying punitive [damages and] paying attorney’s fees,” Morrison said. “A quick history lesson will tell you that employers are the ones who wanted workers’ comp; employers are the ones who wanted the Second Injury Fund back in the day.”

In the thick of it
McCarty and others have said House Bill 1403 and Senate Bill 807 have the best chances of rescuing the fund. Both bills eliminate permanent partial disability liability and remove nonmilitary or nonwork-related pre-existing disabilities from consideration in permanent total disability cases.

McCarty said the second injury portion of HB 1403 – which also would put occupational diseases back in the workers’ compensation system – likely would be removed.

Earlier this session, members of the state House and Senate passed SB 572, which required that occupational diseases be exclusively covered under the workers’ compensation system. Gov. Jay Nixon vetoed the bill in late March before the Senate voted to override his veto April 2.

While the House has yet to override the veto, the Associated Press reported on May 2 that Nixon said in a letter to Senate leaders he’d be willing to sign legislation that put occupational diseases back into the workers’ compensation system should it meet certain conditions such as broadening the definition of heirs who receive payments after the worker dies from an occupational disease.

Morrison said he hopes the fund is fixed despite an expectation he’d benefit if the fund is eliminated or no solution is sought.

“Insurance companies have to be more careful as they understand they may owe my client $400,000 or so if I win. They run the risk of paying that much if they have to pay for future medical, which the Second Injury Fund never owes. And they run the risk of having interest tacked on or costs tacked on if they make bad-faith legal arguments that the fund doesn’t get hit with,” Morrison said. “When that happens, the employer owes much more than if the Second Injury Fund had been there to pay it. I think it behooves business to fix the fund.”