Nevada’s workers’ comp system in the early 1990s was facing a near-perfect storm of problems.

State bureaucrats and politicians — as reported previously — had for years been ducking the politically sensitive issue of the State Industrial Insurance System’s (SIIS) growing financial shortfall. And they did so until that shortfall was metastasizing and the system was effectively insolvent.

The behavior of elected and appointed officials — regardless of party — casts revealing light on the real-world incentives and disincentives built into the world of workers’ comp: Because that world rests upon state-passed laws, all issues ultimately become political.

What naturally results is an intense lobbying-and-lawmaking field of fire. Upset those who deem themselves stakeholders in Nevada’s industrial-insurance money-dispensing system and — and, as the end of last week’s story demonstrated — one can easily find oneself portrayed as everyone’s problem.

Frequently, therefore, players in the system decide to keep their heads down, rather than acknowledge the systemic problems.

As one legislative advocate said to Nevada Journal, when asked to discuss one area of work comp rarely brought up, “With what you’ve told me, I’m going to, not walk, I’m going to run away from this subject. There’s so much passion on both sides.”

Thus the actual incentives built into Nevada workers’ comp often turn out to be at loggerheads with the system’s proclaimed goals.

Like other government social-insurance entitlement programs that collect and dispense millions of public dollars, workers’ comp has mismatched incentives — instances of moral hazard — all over the place.

Their role in Nevada’s SIIS shortfall was significant.

For example, the incentives of individuals inclined to seek undeserved money and benefits from SIIS were, and are, often quite strong, yielding immediate payoffs to them personally. On the other hand, incentives within the state bureaucracy and political class to police such scams were, and are, significantly weaker, if existing at all.

Medical costs

Because medical benefits had become a huge chunk of SIIS’s spending on claims — rising from an average of 28 percent early in the 1980s to 39 percent between fiscal years 1985 and 1990, according to auditors — the state’s inquiry into causes of the SIIS insolvency necessarily began with health-care providers.

Receiving the medical benefits money were physicians, chiropractors, surgeons, hospitals, pharmacies, nurses, diagnosticians, physical therapists and more.

In many of those categories, SIIS was being gamed. In the decade of the ’80s, before the law was eventually changed, workers’ comp doctors could increase their income from SIIS by doing self-referrals. As a former SIIS employee said in an interview:

…we had a physician in Las Vegas who did orthopedic work. Well, he also happened to have two physical therapy units. And he referred virtually every person that he saw, under workers’ compensation, whether they had a sprain of the wrist or knee or ankle, they all routinely got six weeks of three-days-a-week at physical therapy. ... Everybody, almost guaranteed, got six weeks of three-days-a-week physical therapy. And I do remember that … between his two separate physical therapy operations, [SIIS]… alone paid him $3 million in one year. That was separate and distinct from any money he got as a treating physician doing physician stuff.

Other physicians were using their position in the state work-comp system to fund the purchase of high-end medical equipment for their businesses. Many orthopedic physicians had purchased magnetic resonance imaging scanners, the Nevada Journal source said:

[And so] we routinely saw the same thing as we saw when a physician had an interest in a physical-therapy operation. If they had an interest in an MRI scanner … [and] you had a wrist sprain, you got an MRI. And in those days … MRI scans seemed to run around three grand apiece… Now, clearly, there are times when it’s appropriate to do an MRI scan. But those MRI machines were then costing, I think, $1 [million] to $1.5 million. And let’s face it: If you’ve invested $1 [million] to $1.5 million in a machine, you want to pay it off pretty fast. And so we were faced with a number of these things where physicians were sending workers’ comp patients to these machines they owned, and we were getting these bills for thousands of dollars, and we had no control over it.

Certain surgeons also maneuvered to multiply the number of surgeries they could perform — and then bill SIIS for:

There were two doctors up here in the north, in particular, that had a routine practice of doing multiple back surgeries. The most that I ever saw were five on a person. And I think that if you were to do your own research, and look at some orthopedic journals and talk to some good orthopedic doctors, many of them would tell you, that if the first surgery on a back doesn’t work, you don’t want to go and do another one, because you virtually never got a better result with the second.…

Well, when you see a physician that does five back surgeries, and you see what happens to people [who receive only] two or three… No, we don’t want that.

Because [SIIS] had to approve surgeries… we would often say, after the first surgery, “We’re not going to approve a second.” But in the instance of the individual who got the five, we contested [numbers] 2, 3, 4 and 5 [in court] and lost. That person was functionally crippled.

Such cases led SIIS to seek, and the state legislature to approve, an end to what had long been law in Nevada: the right of injured workers to choose their own treating physicians.

The new system was called “managed care.”

The state’s argument was that the system needed to have more control over selection of the treating physicians. And, indeed, it appeared that such control — among the large entities that the state had allowed to self-insure in 1979 — did produce noticeable savings. Studies from other states added momentum to the push, reporting that physician-owned facilities did more procedures, and charged more, per patient than did similar facilities not owned by physicians.

Initially, a list of state-approved doctors was created by the state Division of Industrial Relations. Almost any licensed doctor could be on the list.

Then, in 1993, the legislature further restricted the doctor choices available to injured Nevada workers under work comp.

Workers were told: “If your employer has a managed care group, and if the managed care program has a panel of physicians, you must pick your doctor from that panel.” Managed-care groups thus became the new statewide model, effectively restricting the choice of physician for ever-more employees.

SIIS found additional areas where money could be saved by controlling doctors’ behavior. Some incentives that the system had not acknowledged, it turned out, were motivating physicians and the workers whose care SIIS was funding.

The way the problem showed up on the program’s radar screen was in the form of statistics that revealed the reluctance of certain physicians to return their patients to full duty.

Eventually, one of the doctors explained what was happening:

I have patients, who come in here, and I’m not naïve — I know some people want to stay on these public programs. There are a variety of reasons: They’re getting paid, they don’t have to go to work, they’re not getting their full wage, but there are tradeoffs some people are willing to make.

I’ve had people who’ve said to me, “If you send me back to full duty, and I get hurt again, I guarantee you I will bring a malpractice action against you.”

I’m not going to assume that risk. So, if I have a problem with them, I just say they can’t go back to work. I know you guys at SIIS will eventually send them off to a consulting doctor. That doctor can say, “This man can go back to full-duty work,” and that gets me off the hook.

Workers’ comp, of course, had initially been premised on the idea that it would provide medical care and a living stipend — traditionally 66 2/3 of the injured worker’s previous income — in cases of genuine work-related injuries and until workers could return to work.

The reality, however, is that, even though workers’ comp is not very lucrative, it can present a significant temptation for the unskilled or semi-skilled who find themselves not actually having to work but nevertheless receiving something close to their regular wages, tax free.

Certain individuals thus could conclude: “Wow — I can ‘officially’ retire now, and get my checks forever.”

In fiscal year 1991, 57.3 percent of total SIIS spending was the distribution of wage-compensation payments.

The Supreme Court

Doctors weren’t alone in having motivations that push up costs.

Throughout Nevada’s work-comp adjudication system, such incentives were recognized — operative not only with hearing and appeal officers, but also with judges in the district courts and the Nevada Supreme Court.

If a worker’s initial injury claim gets rejected by a workers’ comp claims adjuster, that worker can then request an informal hearing before a state hearing officer. If unsatisfied there, the worker can take his or her claim more formally before a state appeals officer. The next level of appeal is the state district court, and after that, the Nevada Supreme Court.

Until the 1993 Legislature, the state’s hearings officers exercised wide discretion in the benefits they could award. Scathing reports from Legislative Counsel Bureau auditors, however, changed all that.

In one case, the injured worker wanted SIIS to train him to be a hunting guide and purchase a guide business for him. Although SIIS denied the request and was upheld by the first-level hearing officer, the appeals officer at the next level reversed both the insurer and the hearing officer and ordered SIIS to give the injured worker both the training and fund the man’s new business. The total cost was $87,447.08.

In other cases where workers proposed “self-employment” plans, hearing officers ordered SIIS to purchase a commercial fishing boat for one worker and a $29,000 embroidery machine for another.

Although LCB auditors had suggested that such rehabilitation “deals” had been optional, not mandatory, SIIS argued that “in practice the legal system in Nevada” treated such rehabilitation programs “as mandatory if the injured worker [was] unable to return to their [sic] prior job.”

It turned out that even the LCB’s own in-house lawyers agreed with SIIS. Responding to a query from the auditors, they noted that, as far back as 1952 the Nevada Supreme Court had ruled that “The Nevada Industrial Insurance Act … is to be construed broadly and liberally to protect the interests of injured workers and their dependents.” Moreover, the Supreme Court had repeatedly emphasized that view in different cases.

It thus became common for claimants’ attorneys to conclude their closing arguments — even before hearings and appeals officers — with phrases like, “Now remember, according to the Nevada Supreme Court, these laws are to be liberally construed in favor of the injured workers.”

Not only did Nevada case law explicitly tilt the legal playing field in favor of claimants, but it provided hearing officers and judges an easy justification for using employers’ premiums money to indulge their own emotional responses, even when to do so meant ignoring statutory law.

Indeed, one Supreme Court justice admitted precisely that, according to an attorney who’d represented SIIS on a case.

The case in question had been decided long before the admission was made. High court justices appeared to have chosen to directly and consciously ignore the clearly governing state law. So, when one of them happened to contact the attorney for his known expertise on another matter, the attorney took the occasion to ask what exactly had happened in the case.

As he relates it, the justice said, “We knew we were wrong. But we felt sorry for the guy.”

He continued: “Our way of helping him out was to make you guys [at SIIS] pay for him, because it’s one case out of several hundred thousand that you have, and we just felt sorry for the man. He was very nice, and we weren’t going to make that a precedent-setting case, because we knew the district-court judge was wrong. But to be honest with you, we just all felt sorry for him.”

One element behind such behavior by hearing and appeal officers, judges and Nevada Supreme Court justices was the doctrine — arising in 19th Century Prussia — that workers’ comp law must be “liberally construed” in favor of claimants. But also evident was the ego-gratifying nature of the presumption embraced by such “deciders” — that they had been anointed by society to decide to whom, among the unfortunate, they should dispense society’s collective philanthropy.

In actual fact, however, worker’s compensation — both originally and in Nevada — had never been designed to be anything so broad. Rather than to make all ills whole, its purpose and benefits necessarily had to be much more limited — or the entire project would capsize.

Thus, in 1993 the Nevada Legislature explicitly repudiated the judicial doctrine of liberal construction, passing into state law this statute, which remains on the books:

NRS 616A.010 — Legislative declarations: Statutory construction; repudiation of common law; basis of provisions; balanced interpretation required. The Legislature hereby determines and declares that:

1. The provisions of chapters 616A to 617, inclusive, of NRS must be interpreted and construed to ensure the quick and efficient payment of compensation to employees who are injured or disabled at a reasonable cost to the employers who are subject to the provisions of those chapters;

2. A claim for compensation filed pursuant to the provisions of chapters 616A to 616D, inclusive, or chapter 617 of NRS must be decided on its merit and not according to the principle of common law that requires statutes governing workers’ compensation to be liberally construed because they are remedial in nature;

3. The provisions of chapters 616A to 617, inclusive, of NRS are based on a renunciation of the rights and defenses of employers and employees recognized at common law; and

4. For the accomplishment of these purposes, the provisions of chapters 616A to 617, inclusive, of NRS must not be interpreted or construed broadly or liberally in favor of an employee who is injured or disabled or the dependents of the employee, or in such a manner as to favor the rights and interests of an employer over the rights and interests of an employee who is injured or disabled or his or her dependents.

(Added to NRS by 1993, 660) — (Substituted in revision for NRS 616.012).

Steven Miller is the managing editor of Nevada Journal.