Workers' Compensation: Investigative Report Raises Issues

The tension between public pension systems and workers' compensation programs was highlighted in a recent investigative report by the NJ State Comptroller. The report raises additional critical issues common to other state and national collateral social insurance programs challenged by current fiscal limitations.

The New Jersey Office of the State Comptroller [O.S.C.] determined that the use of medical monitoring settlements entered by the N.J. Division of Workers’ Compensation [D.W.C.] for injured employees was inconsistent with law and public policy. The O.S.C. concluded that employers must pay complete workers’ compensation benefits, and the state pension system should be permitted to take an offset in benefits that it pays out.

Cost-Shifting

The D.W.C. settlement using the medical monitoring mechanism, the report concluded, creates a cost-shifting of the burden of work-related accidents and exposures from employers to the State's taxpayers. The workers’ compensation insurance program's legislative intent was to pass the cost of injuries and accidents to the consumers of products and services and not to general taxpayers.

Cost shifting by employers and workers’ compensation insurance companies is a national issue. The Medical Secondary Payer Act [M.S.P.] enacted in 1980 permits the US Centers for Medicare and Medicaid Services [C.M.S.] to seek reimbursement for medical costs from employers and their insurance companies for work-related injuries.

Likewise, the Social Security System can seek an offset in most jurisdictions for disability insurance payments to injured workers. Ironically, NJ remains one of the few states grandfathered by federal legislation to take a reverse-offset allowing the employers and their insurance companies to take the offset.

Additional Issues

While the report presents recommendations for resolving this specific issue, it raises far more problems encompassing the workers’ compensation system, both affecting the social insurance program in N.J. and nationally. Some of the problems are:

1. Will N.J. State Pension system seek retroactive reimbursements of all claims involving disability pensions and, if so, through what process?
2. Who will be responsible for the reimbursement?
3. Should the entire workers’ compensation process be subject to greater oversight and transparency going forward?
4. Does the remedy of “medical monitoring” require statutory or regulatory definition and structure?
5. Does the mechanism of the lump-sum settlement, N.J.S.A., 34:15-20, ie. “Section 20,” which was initially enacted to allow for the resolution of dependency claims, require additional legislative definition and restriction?

Abstract of the OSC Investigative Report

Introduction

The Office of the State Comptroller (OSC) conducted an investigation related to the use of medical monitoring settlements by the Division of Workers' Compensation (DWC), a division within the Department of Labor and Workforce Development (Department of Labor), and the impact of such settlements on the State’s pension funds. OSC initiated this investigation following receipt of a complaint alleging that public employees who received an accidental disability pension (ADP) were permitted, and even encouraged, to accept medical monitoring settlements, rather than monetary settlements, in their workers’ compensation cases. DWC’s policies regarding such settlements result in public employees avoiding a pension offset by the Division of Pensions and Benefits (DPB), a division within the Department of Treasury. A pension offset, which is mandatory and intended to prevent a double recovery by a public employee, reduces an employee’s ADP payment dollar-for-dollar, thus saving the pension funds from incurring substantial costs.

DWC’s policies encourage workers’ compensation petitioners to settle claims that undermine New Jersey’s pension funds, provide windfalls to workers’ compensation insurance providers, including joint insurance funds and private insurance companies, and provide medical monitoring and coverage to employees without evaluating whether these benefits are justified by the nature of the injury. The benefit of DWC’s approach to a public employee is that the employee receives the same amount of monetary compensation through the ADP while receiving coverage for medical treatments for the work-related injury beyond the two-year statute of limitations normally in effect. The law on ADPs is that public employees may not receive more than a certain percentage of their base salary at the time of the event that made them eligible for an ADP. DWC’s approach circumvents that requirement by allowing employees to also receive medical monitoring and injury-related health coverage for life.

While public employees receive more than contemplated by state law, insurance providers appear to benefit the most from this arrangement. Public entities, including, for instance, school districts, municipalities, and counties, purchase insurance either directly or through joint insurance funds to pay compensation to public employees injured while working. Financial obligations related to workers’ compensation may be substantial, especially when the injury is severe enough to justify an ADP's receipt. Under DWC’s approach, joint insurance funds and other insurance providers that otherwise would be required to make considerable workers’ compensation payments pay nothing more than the costs associated with the proceeding and attorney’s fees and agree to cover future medical costs related to the injury. The entity responsible by law for paying compensation to an injured public employee may end up paying nothing beyond that if the employee does not request additional medical care, which is entirely possible given that most employees who receive ADPs also retain health benefits. This allows insurance providers to avoid making payment for even the most severe, non-fatal injuries. DWC’s use of medical monitoring settlements as a way to avoid pension offsets relieves workers’ compensation insurance providers of substantial financial obligations they agreed to assume and would otherwise be required to satisfy.

All of the downsides of DWC’s use of medical monitoring settlements in the manner discussed in this report fall on the State’s pension funds and, ultimately, New Jersey.taxpayers, as financial obligations that would have been satisfied by insurance providers are placed on the pension funds. Each dollar saved by an employer or its insurance provider is a dollar that must be paid by a pension fund. This report identifies

specific changes that should be implemented by DWC and DPB to prevent the State from incurring these unnecessary expenses.

DWC and DPB were provided with drafts of this report and asked to comment on OSC’s findings and recommendations. Their responses have been considered and, to the extent appropriate, addressed in this final version of the report.

Conclusion and Recommendations

This report identifies a set of policies created and implemented by DWC that cause unnecessary financial harm to the State and the pension funds. This financial harm can be avoided in the future if DWC and DPB implement changes that ensure the pension funds benefit from the offsets required by law when a workers’ compensation petitioner petitions for both an ADP and workers’ compensation. The two agencies should take whatever steps are necessary, in accordance with applicable law, to prevent medical monitoring settlements from causing further financial harm to the State of New Jersey and its pension funds.

Pursuant to N.J.S.A. 52:15B-15 and N.J.S.A. 52:15C-11(a), OSC therefore recommends the following corrective actions be taken by DWC and DPB:

Rescindment by DWC of the 2006 and 2011 memoranda and any other documents that institute policies that encourage and facilitate medical monitoring and coverage settlements as a stand-alone form of workers’ compensation benefit. The current policies should be replaced with interim instructions that direct DWC judges to proceed in the normal course with claims brought by employees who have applied for or received ADPs. DWC should be clear that the adjudication of workers’ compensation claims brought by applicants for or approved recipients of ADPs must result in a monetary judgment, a settlement based on weeks of benefits, or a Section 20 settlement in order for the attorney to receive attorney’s fees, unless other considerations not involving the policies that are the subject of this report indicate a different approach is appropriate. This recommendation does not apply to workers’ compensation cases involving occupational disease and continued medical monitoring in which the facts justify such relief and in which medical monitoring and coverage is not used simply to avoid a pension offset.
Adoption of regulations by DWC, in coordination with DPB, that prevent windfalls to workers’ compensation insurance providers and that protect the State’s and the pension funds’ interests at the intersection of workers’ compensation and disability pensions, including through the efficient facilitation of pension offsets, as contemplated by applicable laws. To accomplish this, DWC and DPB should ensure that a workers’ compensation petitioner and the petitioner’s attorney possess a sufficient incentive or a mandate to pursue a workers’ compensation recovery. DPB could require that pending workers’ compensation proceedings either be completed, or at minimum that the amount workers’ compensation benefits be fairly projected, with an appropriate review by a DWC judge, prior to awarding an ADP. Following the conclusion of the workers’ compensation proceeding, DWC and DPB should coordinate to ensure that the appropriate pension offset was implemented by DPB.
Adoption of regulations by DPB, in coordination with DWC, that protect the State’s and the pension funds’ interests at the intersection of workers’ compensation and disability pensions, including through the efficient facilitation of pension offsets, as contemplated by applicable laws.
Execution of a memorandum of understanding between DWC and DPB that facilitates information sharing between the agencies regarding pension offsets and any other matters that relate to the State’s prohibition of double recoveries.

The Department of Labor and DPB provided comments in response to the above recommendations. The Department of Labor, on behalf of itself and DWC, agreed to implement Recommendation 1, stating that “[t]he Director/Chief Judge of the DWC will issue a memorandum that is consistent with this recommendation,” thereby rescinding the 2006 and 2011 memoranda. The Department of Labor likewise agreed with Recommendations 2 through 4, stating that the Department and DWC would work toward the adoption of regulations with DPB and a memorandum of understanding as necessary to protect the State’s pension funds and prevent windfalls to insurance carriers, consistent with OSC’s findings and recommendations.

DPB agreed with OSC’s findings, but contended that legislation may be needed to implement OSC’s recommendations. DPB did not identify any limitations on its statutory authority or in the laws creating the pension funds that prevent DPB from implementing

the recommendations in this report. DPB correctly noted that under Conklin v. East Orange, 73 N.J. 198, 204 (1977), an injured employee may seek "the more advantageous of the benefits payable under the respective statutory provisions." The opportunity to pursue the “more advantageous” benefits is not undermined by the effective administration of pension offsets and the avoidance of double recoveries. Indeed, Conklin also states that “[t]he statutory purpose is to allow the employee the more advantageous of the respective benefits, but to require the off-set heretofore mentioned in order to avoid double recovery for the same disability.” These concepts are reconcilable. Employees may continue to pursue “more advantageous” benefits while DPB implements rules that avoid double recoveries and set reasonable expectations regarding pension offsets.

No law prohibits DPB or DWC from using their discretion in ways that achieve their respective statutory goals, prevent double recoveries, and ensure pension offsets are fairly applied. The precise ways in which the agencies seek to accomplish these goals should take into account their other statutory obligations and their expertise while avoiding and discouraging any outcomes that cause unnecessary financial harm to the pension funds.

There may be very limited instances in which an injured employee does not petition for workers’ compensation benefits prior to or while seeking an ADP. DPB notes that no law requires an injured employee seeking an ADP to petition for workers’ compensation; that “every applicant for accidental disability has a basis to file a Workers’ Compensation Claim Petition”; and that the standard for receiving workers’ compensation benefits is “much lower.” In view of those facts, the Legislature could further protect the pension funds and require insurers to pay for risks they assumed by requiring an employee to petition for workers’ compensation as a condition of receiving an ADP. This approach would prevent pension funds in all instances from being used prematurely to compensate injured employees who have not exhausted their workers’ compensation benefits. Although such legislation would strengthen DPB’s ability to protect pension funds, it does not appear that legislation is needed to empower DPB to adopt rules that protect the pension funds in the vast majority of cases.