In May 2014, Ohio’s Eighth District Court of Appeals in Cuyahoga County upheld a common pleas court’s decision ordering the Ohio Bureau of Workers’ Compensation (“BWC”) to pay hundreds of millions of dollars to up to 264,000 businesses. Under the decision in San Allen v. Buehrer, some businesses were owed more than $1 million, and many were owed six-figure amounts.
A few weeks after appealing the decision to the Ohio Supreme Court, BWC agreed in July to settle the class-action lawsuit for $420 million.
The appeals court said the case involved a “cabal” of lobbyists and BWC bureaucrats who “rigged” the workers’ compensation premium rates paid by Ohio employers. It found that BWC developed and maintained “an unlawful rating system under which excessive premium discounts were given to group-rated employers at the expense of nongroup-rated employers.”
The common pleas court said BWC “even admitted” to violating statutory requirements in setting premiums. The court also said BWC was “aware of the inequity in the system” and “aware it was violating the statutory mandate.”
Both courts said BWC set up the illegal and unfair program in 1991 and maintained it until 2009. BWC corrected the program only because the filing of the lawsuit pressured it to do so.
Unlike 46 states allowing competition in the workers’ compensation field, Ohio has a monopolistic system requiring employers to obtain workers’ compensation insurance from a state agency – BWC – unless they’re large enough to be self-insured. This meant the vast majority of Ohio employers had to deal with the rigged premium rates set by BWC during all those years.
As the appeals court indicated, the pernicious influence of special interests is why the illegal, inequitable, and extremely harmful premium rates were intentionally instituted and maintained for so long. It’s a story of Ohio’s state government allowing a good idea to be hijacked and used for evil purposes by politically powerful special interests.
The noble initial purposes of group rating
Ohio enacted a law in 1989 allowing employers to be grouped for purposes of calculating their workers’ compensation premiums. The law’s intent was to make small employers eligible for premium discounts similar to those available to larger employers.
In workers’ compensation insurance, the premium rate assigned to an employer is based on its risk of claims losses. A large employer’s risk of loss can be calculated based on its workers’ compensation claims history. If few claims were filed against the employer in the past, it has a lower risk of loss and is charged lower premiums. If there are many claims in its history, the employer has higher risk of loss and is charged higher premiums.
This means large employers can lower their premiums by making their workplaces safer to reduce the number of injuries and claims.
For small employers, a problem was that an individual employer didn’t have enough employees for its claims experience to be an accurate predictor of how much risk it brought to the workers’ compensation system. This lack of claims experience “credibility” caused small employers to pay premiums at or nearer a “base rate,” which is determined from the experience of the entire industry the employers are in and not adjusted for an individual employer’s claims experience.
Group rating was intended to help small employers by allowing them to enter into groups of employers for purposes of determining their premium rates. Unlike an individual small employer, a group of them would have enough employees for a reliable calculation to be made of the amount of risk they brought to the system.
The group’s overall premium rate, and therefore the premium rate for the individual employers in it, could be adjusted based on the combined accident experience of the group. Even for many employers who were large enough to have an individual experience rating, they could obtain larger premium reductions from being in a group than they could from having premiums set based on their own experience.
Group rating would also give small employers an incentive to improve their claims experience by promoting workplace safety. Fewer accidents and claims would mean lower premiums for all employers in a group. And if an employer did not manage its claims costs, it could be removed from the group and lose the group’s discounted rates.
It seemed like a great idea: allow small employers to obtain the same premium savings available to large employers, and at the same time motivate them to provide safer workplaces for their employees.
A cabal of lobbyists and BWC bureaucrats perverted group rating to enrich certain special interests in the workers’ compensation system
Rather than viewing group rating as a means of helping small employers and their employees, some in Ohio’s workers’ compensation system saw an opportunity to line their pockets at the expense of those others.
And BWC obliged them. As the appeals court said, BWC set up the group-rating program “without sufficient controls to address the plan’s susceptibility to manipulation . . . and the potential for premium inequity.”
Although independent actuarial studies in 1990 and 1991 warned BWC about potential premium manipulation and inequity resulting from the program’s design, the agency ignored them. BWC likewise paid no heed to seven additional actuarial studies, issued between 1993 and 2007, finding severe premium inequity in the program and recommending corrections.
Premium manipulation and inequity weren’t BWC’s concerns. The agency’s group-rating program was structured and maintained to maximize the profits of organizations sponsoring the groups (“group sponsors”) and companies administering them (“third-party administrators”).
Group sponsors are often employer or professional associations such as the Ohio Chamber of Commerce, the Ohio Manufacturers’ Association, and the Ohio State Bar Association. They sponsor workers’ compensation groups that their members can join in order to receive the premium discounts in BWC’s group-rating program.
Third-party administrators (“TPAs”) in the workers’ compensation field assist employers with matters such as claims management and safety programs. In regard to group rating, they sometimes are group sponsors themselves and sometimes administer and market the groups of other sponsors.
The group sponsors and TPAs knew that the higher BWC set the premium discounts in the group-rating program, the more money they could make. That’s because their fees were often a percentage of the savings the employers received by being in group rating.
The sponsors that were employer or professional associations also benefited as a result of employers joining those associations in order to obtain the premium discounts available through their groups. Their membership dues were often substantial, sometimes many thousands of dollars per employer.
BWC accommodated the group sponsors and TPAs by allowing premium discounts of up to 95% off the base rates the employers could have paid if not in group rating. This allowed the TPAs and sponsors to reap huge sums from the program.
For example, if an employer was paying $10,000 a year in workers’ compensation premiums, a TPA could approach it and offer to get the employer’s premium reduced to $500 a year by placing it in a group with a 95% discount. As a fee, the TPA might take a third of the savings. Thus the employer would see its workers’ compensation costs reduced by over $6,000 a year, the TPA would get a fee of over $3,100, and employers would flock to become dues-paying members of the associations that sponsored the groups making such discounts available.
In those ways, the group sponsors and TPAs made out like bandits because of the group-rating program’s huge premium discounts, which were unlike anything seen in the workers’ compensation systems of other states.
Unfortunately for many employers, setting premium rates to maximize the income of TPAs and group sponsors made the rates inconsistent with insurance principles, which are intended to protect insured entities, not inflate the profits of politically influential special interests.
BWC’s corrupted group-rating program placed Ohio employers on the verge of disaster
Although the enormous premium discounts available in the group-rating program were great for the bottom lines of group sponsors, TPAs, and employers in the groups, employers left out of groups or removed from them were subject to severe and often ruinous consequences.
Because the discounts provided to employers in group rating were so high, those employers were not paying sufficient premiums to cover the risk of loss they brought to the workers’ compensation system. The difference had to be made up by additional premiums paid by employers who weren’t in group rating. As the courts eventually ruled, this was contrary to principles of workers’ compensation insurance and requirements of Ohio law.
Contributing to the same problem was that an employer having a workers’ compensation claim could be dropped from its group before the claim could affect the group’s experience rating. This meant the employer’s unfavorable claims experience and resulting increased costs were borne by employers not in group rating.
Also as a result of removing employers and their new claims experience before the experience could affect a group’s rates, the group’s high discount would not be lowered, and the sponsors and TPAs could continue reaping huge income from it. As the appeals court put it, “for employers who participated in the BWC’s group rating plan . . . it was ‘heads we win,’ and for employers who did not participate . . . it was ‘tails you lose.’”
One way nongroup-rated employers lost was by paying higher base rates, which were at least 20% more than they should have been.
Additionally, employers that had claims filed against them and were removed from group rating could suddenly and unexpectedly see their workers’ compensation premiums skyrocket. They had gotten used to paying and budgeting for a rate based on steep group-rating discounts, as high as 95%.
When those employers would be removed from group rating after incurring a claim, the loss of the group-rating discount, along with a possible penalty rating for the recent claims experience, could cause their premiums to rise astronomically, even 1,000% or more.
Many employers simply couldn’t afford an increase in workers’ compensation costs of that magnitude.
BWC’s group-rating monster ravaged Ohio’s economy
The high base rates, combined with the loss of the group-rating discounts and the imposition of penalty ratings, were vicious punches blindsiding tens of thousand of Ohio employers when they were removed from group rating. Many thousands of them suffered financial devastation or death. It’s why BWC’s supervisor of rate adjustments told state investigators in 2006 that the group-rating program was “a monster.”
After losing group rating, a nursing care company wrote to BWC: “Our rate went up from $10,000 per 6 months to $100,000 per 6 months. . . . We had no warning of the increase until it was time to pay our premium. It was staggering to us. We are a small home care agency, with less than 200 employees. There is no way we can survive with this type of premium per year.”
A remodeling and home improvement company said removal from group rating “will most likely put our company out of business and with it end . . . the jobs of 35 employees all of whom are the ‘breadwinners’ for their families.”
Those companies were far from alone. The owner of a landscaping company told BWC: “I am writing to appeal our rating increase of 1000%. This increase will certainly put us out of business.” An auto-parts business wrote: “Businesses cannot be exposed to this type of liability in Ohio and expect to survive. This sevenfold increase in our rates is going to be devastating to our company.” A landscaping company whose rates increased tenfold said: “As a small business such a charge is crippling to our survival.” A seller of cookies and desserts told BWC that “a 95% increase in our rates will truly break us.” A cleaning company said: “Our premiums will increase from $17,700 to an estimated $46,500 a year. This could put us out of business.”
The complaints kept coming to BWC for years from companies in various industries. An installer of concrete said “the additional workers’ compensation costs will probably cost us the business.” A property management company said “the full cost . . . without the group rating program will be too much for us. We will not be able to afford it and run our business.” The president of a painting and decorating company said that as a result of losing group rating, “I will be forced to go out of business.” The owner of a masonry company said the costs were “forcing me to dissolve my family business and only source of income,” resulting in “possible bankruptcy.” A vision-care company exclaimed: “There is absolutely no way that we can afford this. . . . We would have to shut our doors for good if we have to pay this amount!!”
Those are just a small sample of the avalanche of complaints that BWC received for years from employers who had been removed from group rating and seen their premiums soar.
In October 2007, the then-new BWC administrator, Marsha Ryan, sent a customer advisory to Ohio employers to warn of the perils of being removed from group rating. It said that in 2006 “over 6,700 employers saw their premiums increase by an average of 697 percent after they were eliminated from their group.” She also reported: “More than 31 percent of these employers either canceled their workers’ compensation policy or filed bankruptcy.”
If BWC’s statistics from just 2006 are multiplied by the nearly 20 years the agency was illegally and unfairly operating the group-rating program, it means the program likely forced tens of thousands of Ohio employers out of business, in addition to inflicting incalculable financial damage on countless others.
Small wonder that after reviewing BWC’s premium rates, Deloitte Consulting issued a report in 2009 saying: “We are unaware of any other state that has a program which functions as poorly as the existing group rating program does in Ohio.”
The lawsuit achieved only partial justice, without affecting much of the injustice
The $420 million settlement provides help to thousands of employers harmed by the rigging of premium rates. Employers who weren’t in group rating are being reimbursed for some of the excessive premiums they paid as a result of the illegally large discounts BWC gave to group-rated employers. But this does nothing to correct much of the massive injustice that was done.
For one thing, the common pleas court’s final calculation of damages, based on directions from the appeals court, was $651 million. The settlement amount of $420 million is $231 million less than what two courts said was owed.
Moreover, the damages were awarded only for the period from 2001 to 2008. The statute of limitations prevents remedies for the same wrongdoing that the courts said was going on at BWC from 1991 to 2000. That’s a huge amount of injustice for which there’s no remedy.
Plus, no remedy is available for many thousands of employers forced out of business by the illegal premium rates. These employers are simply gone, along with the jobs their employees had. They are innocent victims of the wrongdoing but aren’t receiving anything.
Additionally, although the illegal, unfair and rigged premium rates enabled group sponsors and TPAs to reap huge ill-gotten gains, they don’t have to pay anything back. The amount the courts ordered reimbursed to employers is coming not from them but from premiums paid to BWC by all Ohio employers.
Further, BWC officials have not been held accountable for intentionally designing, implementing and maintaining the unlawful and inequitable system that caused massive heartache and destruction for so many years. They kept their well-paid positions and may retire with generous public pensions. Although guilty of misfeasance, malfeasance, and violations of the public trust, they haven’t even been publicly identified.
Finally, there’s no indication the state government is interested in investigating how this disaster occurred, holding anyone accountable, or ensuring that protections exist to prevent similar injustice and devastation in the future.
The bottom line is that despite BWC’s agreement to pay $420 million to illegally charged employers, the entire circumstances of the nearly 20-year wrongdoing still show far less justice than unredressed injustice. The victims are receiving too little or nothing for the intentional harm done to them, and the wrongdoers are suffering no consequences and laughing all the way to the bank.
That appears to be how it is when the wrongdoing is committed by politically powerful special interests in Ohio.
[This is part 1 of a 2-part series. Here’s the link to part 2: “Rigged Premium Rates in Ohio’s Workers’ Compensation System Were Illegally Covered Up for Years.”]