Federal Employers' Liability Act: Issues Associated With Changing How
Railroad Work-Related Injuries Are Compensated (Chapter Report, 08/15/96,
GAO/RCED-96-199).
Pursuant to a congressional request, GAO examined how replacing the
Federal Employers' Liability Act (FELA) with a no-fault compensation
system would affect the railroad industry.
GAO found that: (1) the cost of replacing FELA with a nationwide
no-fault compensation system depends on the number of injured railroad
workers permanently disabled and the number of workers unable to return
to work at preinjury wages; (2) the costs under a no-fault compensation
system would be the same as or lower than FELA costs; (3) overall injury
compensation costs would be lower under a no-fault system if fewer than
70 percent of injured rail workers are able to return to work; (4)
railroads would save an average of $100 per employee if injured workers
continue to work after receiving settlement; (5) a no-fault compensation
system would reduce railroads' administrative costs, but limit the
amount of compensation and legal counsel that injured workers receive;
(6) small railroads have fewer lost workdays and lower injury rates than
large railroads; (7) small railroads have lower FELA costs than large
railroads and rely on insurance payments to avoid high FELA payouts; (8)
railroads could reduce their administrative costs by placing a cap on
compensation for noneconomic losses and limiting plaintiff's legal fees;
(9) railroad management and labor disagree over how well FELA is working
and whether it should be replaced or changed; and (10) FELA is no more
burdensome for passenger and small freight railroads than it is for
large freight railroads.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-96-199
TITLE: Federal Employers' Liability Act: Issues Associated With
Changing How Railroad Work-Related Injuries Are
Compensated
DATE: 08/15/96
SUBJECT: Railroad industry
Administrative costs
Legal fees
Railroad transportation operations
Labor-management relations
Workers compensation
Employee medical benefits
Federal employee disability programs
Compensation claims
Railroad employees
IDENTIFIER: California
Georgia
Illinois
Kansas
Missouri
Nebraska
Ohio
Pennsylvania
Texas
Virginia
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Chairwoman, Subcommittee on Railroads, Committee on
Transportation and Infrastructure, House of Representatives
August 1996
FEDERAL EMPLOYERS' LIABILITY ACT -
ISSUES ASSOCIATED WITH CHANGING
HOW RAILROAD WORK-RELATED INJURIES
ARE COMPENSATED
GAO/RCED-96-199
Federal Employers' Liability Act
(343871)
Abbreviations
=============================================================== ABBREV
AAR - Association of American Railroads
AMTRAK - National Railroad Passenger Corporation
FECA - Federal Employees' Compensation Act
FELA - Federal Employers' Liability Act
GAO - General Accounting Office
LHWCA - Longshore and Harbor Workers' Compensation Act
Letter
=============================================================== LETTER
B-261963
August 15, 1996
The Honorable Susan Molinari
Chairwoman, Subcommittee on
Railroads
Committee on Transportation and
Infrastructure
House of Representatives
Dear Madam Chairwoman:
In response to your request, this report examines the issues
associated with changing how railroad workers are compensated for
their work-related injuries. In particular, we identify the
potential implications for railroad costs and railroad workers of (1)
replacing the Federal Employers' Liability Act (FELA) with a no-fault
compensation system or (2) modifying FELA. We also discuss FELA's
effects on small railroads and the availability and affordability of
insurance to protect small railroads against large FELA payouts.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter. At that time, we will send copies to
the Secretary of Transportation, the Secretary of Labor, and the
Director, Office of Management and Budget. We will also make copies
available to others upon request.
Please call me at (202) 512-2834 if you or your staff have any
questions. Major contributors to this report are listed in appendix
V.
Sincerely yours,
John H. Anderson, Jr.
Director, Transportation and
Telecommunication Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
Unlike most American workers, railroad workers are not covered by
state no-fault workers' compensation insurance systems when they are
injured on the job. Instead, railroad workers must recover their
losses under the provisions of the Federal Employers' Liability Act
(FELA). Under FELA, an injured worker negotiates a settlement with
the railroad. If the negotiations fail, the worker may file a
lawsuit alleging negligence by the employer to recover losses.
No-fault systems do not require that the parties demonstrate
negligence. The Chairwoman, Subcommittee on Railroads, House
Committee on Transportation and Infrastructure, asked GAO to identify
the implications for railroad costs and railroad workers of (1)
replacing FELA with a no-fault compensation system or (2) modifying
FELA. GAO was also asked to assess how FELA particularly affects
small railroads (those with annual revenues of less than $250
million) and determine the availability and affordability of
insurance to protect small railroads against large FELA payouts.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
FELA was enacted in 1908, a time when the railroads were the nation's
largest employer and rail work was especially hazardous. At that
time, injured railroad workers had difficulty getting compensated
under the common law that governed injury compensation. Railroads
often avoided paying compensation for on-the-job injuries by arguing,
for example, that a coworker's negligence had caused an injury or
that workers assumed the risk of injury at the time they accepted
employment. In an effort to better protect workers against financial
loss and to make the railroads more accountable and responsible for
work-related injuries, FELA limited the railroads' defenses against
liability for compensating injured workers. Such limitations
provided railroad workers with more protection than other employer
liability laws of the time, but workers were still required to
establish negligence. At about the same time, the individual states
were enacting no-fault workers' compensation systems. Today, most
workers in other industries are covered under state workers'
compensation systems, but railroad workers continue to be covered
under FELA. FELA allows workers to seek recovery for economic
damages (such as lost wages) and noneconomic damages (such as pain
and suffering), while workers' compensation systems typically limit
recovery to economic losses.
Many in railroad management believe that FELA should be replaced or
changed. In general, railroad management is dissatisfied with FELA
because, among other things, the need to demonstrate negligence
creates an adversarial relationship between management and labor.
Management also believes that the system is excessively litigious,
that FELA lawsuits are often filed in court jurisdictions that have
historically been favorable to plaintiffs, and that the system is
unnecessarily costly. Railroad labor officials, on the other hand,
believe that FELA is working well and should not be replaced or
changed. In labor's view, FELA provides workers with the opportunity
to fully recover their losses from on-the-job injuries and provides
railroads with an incentive to operate safely. Railroad labor
believes the problem is not that FELA provides workers with excessive
compensation but that no-fault compensation systems provide too
little compensation.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Whether replacing FELA with a no-fault compensation system would
reduce railroad costs depends to a large extent on the number of
workers who are permanently disabled by on-the-job injuries. If many
of the railroad workers who currently leave a railroad after
receiving a FELA settlement are physically capable of returning to
work, then total injury compensation costs for the railroads could be
less under a no-fault system. On the other hand, if about two-thirds
or more of these workers were permanently and totally disabled and
unable to return to any work, the costs of a no-fault compensation
system could be the same as or higher than under FELA. Railroad
management believes that some railroad workers who leave a railroad
after taking their FELA settlement are physically capable of
returning to work and, therefore, would not receive long-term
benefits under a no-fault system. However, little information is
available on how many railroad workers who leave a railroad after
taking a FELA settlement are physically capable of returning to work.
For those workers who can return to work at their preinjury wages,
the railroads' compensation costs would be less under a no-fault
system because it does not provide compensation for noneconomic
losses.
Modifying FELA could reduce the railroads' costs. For example,
placing caps on awards for noneconomic damages or on plaintiffs'
attorneys' fees might reduce injury compensation costs, depending on
what proportion of FELA awards are represented by noneconomic damages
and how attorneys' fees relate to settlement amounts. On the other
hand, such modifications could adversely affect railroad workers by
reducing the compensation they receive and limiting the availability
or quality of their legal counsel.
Small railroads' 1994 FELA costs per employee-hour worked were less
than those of larger railroads. In part, this is because small
railroads had, on average, fewer lost workdays per injury than the
large railroads and a lower percentage of injuries that resulted in
lost work time. GAO also found that the small railroads rely heavily
on insurance to protect against large payouts under FELA. It appears
that at the current time, liability insurance that includes FELA
coverage is both available and affordable.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
COST IMPACT OF REPLACING
FELA WITH A NO-FAULT
COMPENSATION SYSTEM DEPENDS
ON MANY FACTORS
-------------------------------------------------------- Chapter 0:4.1
The cost of replacing FELA with a nationwide no-fault injury
compensation system depends on a number of factors. One of the most
important is the number of injured railroad workers who are
permanently disabled by their injuries and unable to return to work
at their preinjury wages. Under FELA, some workers leave their
railroad after receiving a lump-sum FELA settlement. Little
information is available on how many of these workers are able to
work. GAO estimates that if about two-thirds or fewer of the injured
workers at four large railroads had been permanently and totally
disabled, then the costs under a no-fault compensation system could
have been the same as or lower than those under FELA.
To produce this estimate of the potential benefits of replacing FELA
with a no-fault system, GAO used a cost analysis model developed for
the Association of American Railroads. The model used information on
claims under FELA that were closed in 1994 for four railroads that
employ about 60 percent of the workers at large railroads. To
calculate the costs under a no-fault alternative, GAO used the
benefit provisions of the two nationwide systems covering civilian
federal workers and maritime workers--the systems under the Federal
Employees' Compensation Act (FECA) and the Longshore and Harbor
Workers' Compensation Act (LHWCA), respectively. Using the model,
GAO found that overall injury compensation costs would have been less
under a no-fault system if fewer than 65 or 70 percent (depending on
whether FECA- or LHWCA-level benefits are used) of the injured rail
workers at these railroads who accepted FELA settlements and left the
railroad had been less than permanently and totally disabled and were
able to return to work. GAO also estimates that for the group of
injured workers who continued to work at their railroad after a
settlement, the railroads might have saved about $100 million in
compensation costs.
Replacing FELA with a no-fault compensation system would likely
reduce the railroads' administrative costs. With the elimination of
the need to investigate negligence and assess noneconomic damages,
the costs of processing injury claims would be lower than they are
under FELA. Although rehabilitation costs can be compensated under
FELA, rehabilitation plays a larger role in no-fault compensation
programs, and railroads might incur higher costs for these services.
MODIFYING FELA WOULD LIKELY
REDUCE RAILROADS' COSTS BUT
COULD ALSO ADVERSELY AFFECT
WORKERS
-------------------------------------------------------- Chapter 0:4.2
In lieu of replacing FELA, the Congress could modify it. GAO found
that some modifications have the potential to reduce the railroads'
injury compensation costs. For example, placing a cap on
compensation for noneconomic losses could reduce costs. Because the
data that GAO received from the railroads did not identify the
proportion of each FELA award represented by noneconomic damages, a
precise estimate of the savings from capping them could not be made.
However, on the basis of an examination of the FELA claims that were
closed at four large railroads in 1994, GAO found that under a range
of assumptions about these proportions and using $250,000 as a cap
(an amount considered in recently proposed legislation on the
National Railroad Passenger Corporation), the railroads might have
saved between $7 million and $48 million of the $479 million they
paid out in 1994. Placing a cap on plaintiffs' attorneys' fees is
also a way to reduce costs. However, any savings would depend on the
relationship between these fees and settlement amounts. Rail labor
organizations told GAO that attorneys currently receive no more than
25 percent of a FELA award.
Although these options might reduce the railroads' FELA costs, they
could adversely affect injured railroad workers. For example, a cap
on noneconomic damages could reduce the compensation that such
workers receive. Similarly, placing a cap on plaintiffs' attorneys'
fees might affect the availability or the quality of the workers'
legal counsel. On the other hand, capping plaintiffs' attorneys'
fees might, in some cases, increase the amount of the settlement that
goes to the injured worker. The position of current railroad workers
could be protected by continuing to cover them under FELA and its
present provisions (known as "grandfathering"). This solution,
however, could increase the railroads' costs to administer injury
compensation cases and could create a situation in which employees
with similar injuries have access to different types and amounts of
compensation.
SMALL RAILROADS HAVE LOWER
FELA COSTS AND RELY ON
INSURANCE TO PROTECT AGAINST
LARGE PAYOUTS
-------------------------------------------------------- Chapter 0:4.3
Small railroads' experience with FELA has differed somewhat from that
of the large railroads. In a survey of 560 small railroads, GAO
found that, in general, the small railroads' injury compensation
costs under FELA were less than those of the large railroads. In
1994, the small railroads paid about $42 million in FELA costs, or
about $0.96 per employee-hour worked. In contrast, the large
railroads paid about $2.26 per employee-hour worked. Some of this
cost difference may be attributable to the fact that the small
railroads had, on average, fewer lost workdays per injury than the
large railroads--30 days compared with 77 days--and lower average
wages. In addition, in 1994, only 54 percent of the injuries on the
small railroads resulted in lost workdays, compared with 67 percent
on the large railroads. GAO also found that the small railroads rely
heavily on insurance to protect themselves against large FELA
payouts. GAO's survey found that about 88 percent of the small
railroads are covered by insurance that includes FELA coverage. Most
of the large railroads have high deductibles and are generally
considered self-insured for FELA purposes. GAO found that for the
small railroads, liability insurance covering FELA is currently
readily available and appears to be affordable.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
GAO is making no recommendations in this report.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
GAO provided officials of the Departments of Transportation and Labor
with copies of a draft of this report. GAO met with officials from
these agencies, including the Chief of the Industry Finance Staff at
the Department of Transportation's Federal Railroad Administration,
and the Deputy Director, Division of Federal Employees' Compensation
and the Director, Division of Longshore and Harbor Workers'
Compensation at the Department of Labor. The Department of
Transportation officials said they had no reason to disagree with the
reports' contents and had no comments. The Department of Labor
officials provided GAO with technical comments on the FECA and LHWCA
programs, which GAO incorporated where appropriate.
INTRODUCTION
============================================================ Chapter 1
Unlike most American workers, when railroad workers are injured on
the job, they are not covered by state no-fault workers' compensation
insurance systems. Instead, they must seek to recover their losses
from the railroads under the provisions of the Federal Employers'
Liability Act (FELA). Under FELA, injured workers must either
negotiate a settlement with the railroad or file a lawsuit against
the railroad to recover their losses. FELA allows injured workers to
recover noneconomic damages, such as pain and suffering, in addition
to economic damages, such as medical expenses and lost wages. In
contrast, the benefits paid under no-fault workers' compensation
systems are largely limited to medical expenses and lost wages.
Under FELA, if a lawsuit is filed, workers must show negligence on
the part of the employer; under no-fault systems, issues of
negligence are not a factor.
Railroad management's and labor's opinions differ over how well FELA
is working. Management, which favors replacing FELA, believes that
FELA creates an adversarial environment between the railroads and
their employees and is unnecessarily costly. On the other hand,
railroad labor believes that FELA is working well and allows injured
employees to receive better compensation for their injuries than they
would under no-fault alternatives. Labor also believes that FELA
provides railroads with an extra incentive to operate safely.
RAILROADS' INJURY COMPENSATION
DIFFERS FROM THAT OF OTHER
INDUSTRIES
---------------------------------------------------------- Chapter 1:1
Compensating railroad workers injured on the job is governed by the
provisions of FELA. If negotiations between an injured worker and a
railroad fail to result in a settlement, then the worker can sue to
recover both economic damages and noneconomic damages. In contrast,
most American workers are covered by state workers' compensation
systems that are essentially no-fault insurance systems. Although
compensation under these systems varies from state to state, the
benefits are largely limited to economic damages--lost wages, medical
expenses, and rehabilitation costs. There are also two federally
administered no-fault workers' compensation systems. Civilian
federal employees are covered by the Federal Employees' Compensation
Act, and employees in the maritime industry are covered by the
Longshore and Harbor Workers' Compensation Act.\1
--------------------
\1 For more information about how FELA operates and how it compares
with no-fault compensation systems, see Compensating Injured Railroad
Workers Under the Federal Employers' Liability Act, Special Report
241, National Research Council, Transportation Research Board
(Washington, D.C.: National Academy Press, 1994).
FELA GOVERNS RAILROADS'
INJURY COMPENSATION
-------------------------------------------------------- Chapter 1:1.1
FELA was enacted in 1908, at a time when railroads were the largest
employer in the United States and rail work was particularly
hazardous. Prior to the act's passage, injured railroad workers had
difficulty recovering losses resulting from workplace injuries.
Under the common-law doctrine of negligence, railroads often avoided
paying compensation for on-the-job injuries by arguing, for example,
that employees assumed the risk of injury at the time they accepted
employment or that an injury had been caused by a fellow employee.
At about the same time, efforts were underway in various states and
at the federal level to enact employers' liability legislation that
would limit these defenses and increase employers' liability for
workplace injuries. In an effort to better protect workers against
financial loss and to make the railroads more accountable and
responsible for work-related injuries, FELA limited the railroads'
defenses against liability for compensating injured workers. As
such, it provided railroad workers with more protection than other
employer liability laws of the time.
FELA covers virtually all railroads operating in interstate service,
including the freight railroads, the National Railroad Passenger
Corporation (Amtrak), and most commuter railroads.\2 Under the act,
injured workers can seek recovery of all their losses, including
economic losses, such as actual and future wage losses, and
noneconomic losses, such as pain and suffering. If negotiations
between a railroad and an employee do not produce a settlement,
employees can seek recovery of their losses in a state or federal
court. Should a lawsuit be filed, an employee must show that the
railroad was negligent in order to recover damages. However, an
employee's recovery for losses might be reduced to the extent that
the employee's own negligence caused an injury, and in some
instances, the employee could receive nothing. As a result, injured
workers may not recover all of their losses, and some workers might
not recover any. In addition to compensation under FELA, injured
employees may also be eligible for retirement benefits, sickness
benefits, and disability annuities from the Railroad Retirement
Board.\3
In 1994, the railroads paid about $1.2 billion in FELA costs, and
nearly 75 percent of all FELA injury claims for the large railroads
(excluding the occupational illnesses of hearing loss and asbestosis)
were settled between the railroads and the injured employees without
a lawsuit.\4
While the total number of injury claims has declined since 1990, the
number of lawsuits has remained relatively stable at about 3,100
cases per year. (See table 1.1.) Over the same period, railroad
employment declined from 296,000 to 267,000. The average payout per
negotiated claim increased from about $24,000 in 1990 to about
$34,000 in 1994, while the average payout per lawsuit remained
relatively stable at about $160,000. (See table 1.2.)
Table 1.1
Number of FELA Injury Claims and Suits
Settled by Large Freight Railroads and
Amtrak, 1990-94
Claims
Railroad Negotiated with Total
Year employment claims lawsuits claims
---------------------- ---------- ---------- ---------- ==========
1990 296,000 14,269 3,129 17,398
1991 285,000 12,204 3,120 15,324
1992 276,000 11,053 3,178 14,231
1993 271,000 9,613 3,109 12,722
1994 267,000 8,815 3,210 12,025
----------------------------------------------------------------------
Note: Excludes the occupational illnesses of hearing loss and
asbestosis and those cases where no payments were made.
Source: Association of American Railroads.
Table 1.2
Average Payout per Settled FELA Injury
Claim and Lawsuit for Large Freight
Railroads and Amtrak, 1990-94
(Dollars in constant 1994 dollars)
Negotiated Claims with Average for
Year claims lawsuits all claims
---------------------- -------------- -------------- --------------
1990 $24,414 $159,356 $48,683
1991 29,163 146,369 53,026
1992 29,536 160,159 58,706
1993 32,713 166,500 65,408
1994 33,919 165,421 69,023
----------------------------------------------------------------------
Note: Excludes the occupational illnesses of hearing loss and
asbestosis and those cases where no payments were made.
Source: Association of American Railroads.
--------------------
\2 FELA also covers maritime employees who are governed by the Jones
Act but does not cover the Alaska Railroad or railroads operating
solely within a company-owned plant.
\3 The Railroad Retirement Board is a federal agency that administers
the Railroad Retirement and Railroad Unemployment Insurance acts.
Any sickness benefits paid must later be paid back to the Railroad
Retirement Board from a subsequent settlement under FELA. Between
July 1994 and June 1995, a total of $55.1 million in sickness
benefits was paid, and $29.9 million was recovered. Recoveries do
not necessarily occur in the same year that the benefits are paid.
\4 In this report, "large" railroads refer to Class I railroads.
Class I is a designation used by the former Interstate Commerce
Commission. In 1994, railroads with annual revenues of at least
$255.9 million were designated as Class I. Class II railroads had
annual revenues of from $20.5 million to $255.8 million, and Class
III railroads had annual revenues of less than $20.5 million. We use
the term "small railroads" to include all freight railroads other
than Class I railroads. A more detailed description of the types of
railroads included under this term can be found in chapter 4.
MOST WORKERS IN OTHER
INDUSTRIES ARE COVERED UNDER
NO-FAULT INJURY COMPENSATION
SYSTEMS
-------------------------------------------------------- Chapter 1:1.2
In contrast to railroad workers, workers in most other industries are
covered by state no-fault compensation systems. Workers'
compensation legislation was initially enacted by most state
legislatures in the early 20th Century.\5 One of the principal goals
of this legislation was to provide injured workers with adequate
benefits while limiting employers' liability to compensating workers
only for their lost wages and medical costs. Payments were to be
prompt and predetermined to relieve employees and employers of
uncertainty and eliminate the need to litigate the claims.
The benefits available under no-fault compensation programs depend on
the nature and extent of an injury. For less serious injuries, only
medical benefits might be paid. For more serious injuries or
illnesses, in addition to medical benefits, an employee might receive
wage-loss benefits, vocational rehabilitation, or "scheduled"
benefits--for injuries resulting in permanent impairments, such as
the loss of a limb or a bodily function. Each state sets its own
benefit levels, and benefits vary considerably from state to state.
Two groups of employees are covered by federally administered
no-fault systems. The Federal Employees' Compensation Act (FECA)
covers federal civilian employees, and the Longshore and Harbor
Workers' Compensation Act (LHWCA) covers those in the maritime
industry. Enacted in 1916, FECA covers more than 3 million federal
civilian employees and authorizes the federal government to
compensate employees when they are temporarily or permanently
disabled as a result of an injury or illness sustained while
performing their duties.\6 The Department of Labor's Office of
Workers' Compensation Programs administers this program. Disputes
may be handled in one of the Labor Department's district offices or
by the Branch of Hearings and Review. Appeals can also be made to
the Department's Employees' Compensation Appeals Board. FECA cases
cannot be appealed to a court. Enacted in 1927, LHWCA covers about
500,000 longshore workers for disability due to a job-related injury
or occupational disease occurring on the navigable waters of the
United States or in adjoining shore areas.\7 The Department of Labor
also administers this program. Disputes are handled informally in
one of the Labor Department's district offices or before the
Department's Office of Administrative Law Judges or the Benefits
Review Board. Unlike FECA cases, LHWCA cases may be appealed to a
federal appeals court.
There are important differences between FELA and no-fault
compensation systems. First, both state and federal workers'
compensation systems cover an employee's work-related injury
regardless of negligence on the part of the employer or employee by
imposing strict liability on an employer for compensating most
economic damages suffered by injured workers. However, they do not
allow compensation for noneconomic damages. Second, benefits under
no-fault systems are generally paid as losses occur, rather than in a
lump sum as they are under FELA. While some states permit lump-sum
payments, at least one state--Texas--has essentially banned them.
Under FECA and LHWCA, compensation continues as long as a disability
continues. Both FECA and LHWCA authorize higher benefit levels than
most state workers' compensation systems.
While many no-fault claims are handled directly between employees and
their employers or insurance companies, no-fault systems are not free
from dispute or litigation. As the National Research Council
reported in 1994, disputes may arise over issues such as eligibility
for benefits, the level of benefits, and the readiness of workers to
return to work.\8 Disputes may also arise over the permanency of
injuries. For the most part, adjudicative bodies within a state (or
the Labor Department, in the case of FECA and LHWCA) and the judicial
system handle the resolution of these disputes. In recent years,
litigiousness has tended to increase in no-fault compensation
systems. Some states have also been concerned about increasing
medical costs in workers' compensation claims, and some (such as
California and Texas) have made efforts to control these costs.
--------------------
\5 For more information on workers' compensation programs, see our
recent report Workers' Compensation: Selected Comparisons of Federal
and State Laws (GAO/GGD-96-76, Apr. 3, 1996).
\6 FECA also covers some nonfederal employees, such as some state and
local law enforcement personnel and employees in the Civil Air
Patrol.
\7 LHWCA also covers certain other workers, such as some employees on
military, air, or naval bases.
\8 National Research Council, Transportation Research Board, 1994.
RAILROAD MANAGEMENT AND LABOR
DIFFER OVER CONTINUED NEED FOR
FELA
---------------------------------------------------------- Chapter 1:2
Railroad management and labor disagree over how well FELA is working
and whether it should be replaced or changed. Although the railroad
industry has undergone substantial change over the years, including
technological improvements designed to improve safety, the nearly
90-year old system for compensating injured railroad workers has
changed little. In general, railroad management is dissatisfied with
FELA and believes it should be replaced or substantially changed. In
particular, management believes that because FELA involves issues of
negligence, it creates an adversarial environment between railroads
and their employees. Management also believes that FELA is
unnecessarily costly. In addition, management sees little reason why
railroads should be treated differently from other industries in
terms of workers' compensation. Railroad labor, on the other hand,
believes that FELA is working well and should not be replaced or
changed. In labor's view, FELA is a model system that fairly
compensates injured workers and provides an incentive for railroads
to operate safely. Labor believes the problem is not that FELA
provides workers with excessive compensation but that no-fault
compensation systems generally provide too little.
RAILROAD MANAGEMENT BELIEVES
FELA IS FLAWED AND SHOULD BE
REPLACED
-------------------------------------------------------- Chapter 1:2.1
FELA has remained relatively unchanged in its nearly 90-year history
despite substantial changes in the industry. Enhancements in braking
and signaling, for example, have improved the safety of train
operations. The Association of American Railroads (AAR), the trade
association of the major railroads, issued a report criticizing FELA
and claiming that it has adversely affected the railroad industry.\9
That report included data showing that, as railroad employment has
declined and the number of injuries has fallen since 1981, FELA
payouts have increased. In 1994, railroads paid about $4,200 per
employee in FELA costs, up from about $2,250 per employee in 1985.\10
AAR believes that FELA needs to be replaced.
Many in railroad management believe that FELA is no longer
appropriate to the modern railroad operating environment. Among the
problems with FELA cited by railroad management are (1) the
adversarial environment created between employers and employees
because FELA requires the parties to establish fault, (2) the high
degree of involvement by attorneys in FELA cases, (3) the
unpredictability of FELA costs, (4) the practice of filing FELA
lawsuits in court jurisdictions that have historically rendered
judgments favorable to the plaintiffs, and (5) the high
administrative costs. In general, railroad management questions why
the rail industry must be treated differently from other industries
regarding injury compensation.
The National Association of Railroad Trial Counsel, an organization
of 1,200 lawyers who provide legal services to railroads, believes
that because both the right to recover and the amount of the recovery
depend on assigning fault, FELA not only inhibits good
employer-employee relations but also frustrates attempts to determine
the causes of accidents.
--------------------
\9 Tort Abuse and the Rail Industry: The Facts About FELA,
Association of American Railroads, Washington, D.C. (undated).
\10 In constant 1994 dollars.
RAILROAD LABOR BELIEVES THAT
FELA IS WORKING WELL AND
SHOULD NOT BE REPLACED OR
CHANGED
-------------------------------------------------------- Chapter 1:2.2
In contrast to management's view, railroad labor believes that FELA
is effective and should not be replaced or modified. Railroad labor
believes that FELA offers the railroads incentives to operate safely
and gives workers the opportunity to recover full compensation for
their injuries. Railroad labor does not believe that FELA should be
replaced with a no-fault compensation system like state workers'
compensation because, in labor's view, injured workers would not be
adequately compensated under a no-fault system.
Railroad labor also takes issue with the criticisms of FELA voiced by
railroad officials. For example, railroad labor points out that FELA
is not a particularly litigious system because over 75 percent of the
FELA cases are settled without any third-party intervention.
Moreover, in labor's view, FELA provides the railroads with an
incentive to operate safely and if they do so, they could lower their
injury compensation costs. Attorneys representing railroad labor
also took issue with railroad management's belief that FELA lawsuits
are filed in jurisdictions favorable to plaintiffs. In their view,
the practice of selecting court venues favorable to the plaintiffs to
try FELA cases is no longer an issue because most states have acted
to limit where suits can be filed.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:3
Concerned about the cost of FELA, the Chairwoman, Subcommittee on
Railroads, House Committee on Transportation and Infrastructure,
asked us to identify the implications for railroads' costs and
railroad workers of (1) replacing FELA with a no-fault compensation
system or (2) modifying FELA. We were also asked to assess how FELA
particularly affects the small railroads and determine the
availability and affordability of insurance to protect against large
FELA payouts. As agreed with the requester's office, we focused our
analysis on comparisons between FELA, FECA, and LHWCA. This approach
was taken to avoid duplicating work previously reported by the
National Research Council that compared FELA with state workers'
compensation programs.
To identify the cost and other effects of replacing FELA with a
no-fault system with FECA- and LHWCA-level benefits, we used a
computerized cost model developed by Mercer Management, Inc., for
AAR. This model and the assumptions we used in performing our cost
analysis are described in appendix I. As input for our analysis, we
obtained information on all of the FELA claims closed in 1994 by four
large railroads--Burlington Northern, CSX, Norfolk Southern, and
Union Pacific. These railroads employed about 60 percent of all
employees at large railroads in 1994 and also had previously
participated in a 1991 unpublished study of FELA by AAR. To examine
how the administrative and dispute resolution mechanisms of no-fault
compensation systems compare with those of FELA, we reviewed data
from the Department of Labor on the FECA and LHWCA programs. We
reviewed similar information on the California, Illinois, Nebraska,
Pennsylvania, and Texas workers' compensation systems. We selected
these states because they had the largest number of freight railroad
employees as of March 1995. Finally, we analyzed information from
the Federal Railroad Administration to determine the number of lost
workdays resulting from on-the-job injuries by the type of railroad.
To evaluate the cost and other impacts of modifying FELA, we examined
a number of proposals selected on the basis of discussions with
officials at AAR and with the requester's office. We used data on
claims closed under FELA in 1994 provided by the four railroads
mentioned in the above paragraph to evaluate the financial impact of
capping noneconomic damages under FELA. This information identified
the number of claims that could have been affected by a cap and the
dollar value of these claims. To analyze the impact of placing a cap
on plaintiffs' attorneys' fees under FELA, we interviewed officials
at selected railroads and obtained the views of railroad labor
organizations. We also reviewed reports prepared by the Workers'
Compensation Research Institute--a nonpartisan, not-for-profit
organization that conducts research on workers' compensation issues.
To assess the use of arbitration, we interviewed officials from
selected railroads and obtained information from the Federal Judicial
Center on the use of arbitration in FELA cases in federal courts.
The National Center for State Courts provided us with information on
the use of arbitration in state courts. To evaluate the proposal to
limit the jurisdictions where FELA cases might be tried, we reviewed
state venue provisions in the 10 states with the most railroad
employees in 1995, interviewed officials at selected railroads and
attorneys who handle FELA cases, and obtained written comments from
railroad labor organizations.
To assess how FELA affects the small railroads compared with the
large railroads, we designed a questionnaire to obtain cost and other
information from the small railroads. After pretesting the
questionnaire with officials from seven railroads, we surveyed 560
small railroads operating in the United States and asked them about
their experience with FELA in 1994. To determine the universe, we
used AAR's Profiles of U.S. Railroads, 1994 Edition and Supplement,
a compilation of information on all railroads offering freight
service in 1993, and the July 1995 membership list of the American
Short Line Railroad Association. We received 437 responses, for a
response rate of 78 percent.\11 The employee hours of the respondents
to our survey represented 93 percent of the employee hours worked on
the small railroads in 1994. The results of our survey of the small
freight railroads are presented in appendix II. We also requested
information on 1994 FELA claims and costs from 16 railroads
identified by the American Public Transit Association as offering
commuter service as well as from Amtrak. We received data from 12
commuter railroads and Amtrak.\12 Information on these railroads'
FELA settlements and costs can be found in appendix III.
The organizations we contacted in the course of our review are listed
in appendix IV. In addition, we received assistance from a
consultant, Mark Dayton, who was the Study Director for the National
Research Council's 1994 study of FELA.
Our work was conducted from June 1995 through July 1996 in accordance
with generally accepted government auditing standards.
--------------------
\11 Of the 437 responses we received, 398 were usable. Two responses
were submitted too late to be included in the analysis, and 37
responses were from railroads that were not operating, employed no
workers directly, were operated by other railroads, or submitted
blank questionnaires.
\12 One commuter railroad, the Southeastern Pennsylvania
Transportation Authority did not respond; the Tri-County Commuter
Rail Authority did not have FELA data because it was under state
workers' compensation; and 2 of the 16 commuter railroads (Dallas
Area Rapid Transit and San Diego Northern Railway) had not yet begun
operations in 1994.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 1:4
We provided the Departments of Transportation and Labor with copies
of a draft of this report. We met with officials from these
agencies, including the Chief of the Industry Finance Staff at the
Department of Transportation's Federal Railroad Administration, and
the Deputy Director, Division of Federal Employees' Compensation and
the Director, Division of Longshore and Harbor Workers' Compensation
at the Department of Labor. The Department of Transportation
officials said they had no reason to disagree with the contents of
the report and made no comments. The Department of Labor officials
provided us with technical comments on the FECA and LHWCA programs,
which we have incorporated where appropriate.
COST SAVINGS FROM REPLACING FELA
WITH A NATIONWIDE NO-FAULT
COMPENSATION SYSTEM DEPEND ON MANY
FACTORS
============================================================ Chapter 2
Railroad management advocates replacing FELA with a no-fault
compensation system, in part because of a belief that a no-fault
system would be less costly. Whether replacing FELA with a
nationwide no-fault system with FECA- or LHWCA-level benefits would
reduce railroads' injury compensation costs depends on many
factors.\1 Prime among these is the number of railroad workers who
are permanently disabled and are unable to return to work at their
preinjury wages. Some injured railroad workers leave the railroad
after receiving their FELA settlement, but railroad management
believes that some of these workers are capable of returning to work
and, therefore, would not receive permanent disability payments under
a no-fault compensation system. However, the number of such workers
is not known. The higher the proportion of this group of injured
workers that can return to work at their preinjury wages, the higher
the probability that railroads' injury compensation costs would be
reduced under a no-fault system. A no-fault system could reduce
railroads' administrative costs by eliminating the need to
investigate negligence and to assess noneconomic damages. However,
the time it takes to resolve claims that are contested under no-fault
systems might not differ much from what it is under FELA.
--------------------
\1 The discussion of injury compensation presented here excludes
compensation of medical expenses. We assumed that employees would
continue to be provided with such expenses under the railroads'
health insurance plans regardless of the compensation system. (See
app. I for more information.)
IMPACT OF NO-FAULT SYSTEM ON
INJURY COMPENSATION COSTS
DEPENDS ON SEVERITY OF INJURIES
---------------------------------------------------------- Chapter 2:1
One of the most important factors in determining the cost differences
between FELA and a no-fault compensation system is the number of
railroad workers who are permanently disabled by on-the-job injuries.
On the basis of our analysis of FELA claims at four large railroads,
the lower this number is, the greater the likelihood that the
railroads' compensation costs would be reduced under a no-fault
compensation system. Under no-fault compensation systems, when
injured workers recover and return to work at their preinjury pay
level, their wage compensation benefits cease. In addition, under a
no-fault compensation system, those workers who return to work would
likely receive less than they would have under FELA because they
would be compensated only for economic damages and not for
noneconomic damages as they could have been under FELA. Finally,
while it is difficult to estimate precisely the impact on death
benefits of replacing FELA with a no-fault system, the cost
difference would likely be small because death benefits are a
relatively small portion of the total compensation outlays.
POTENTIAL CHANGES IN
RAILROADS' INJURY
COMPENSATION COSTS ARE
DIRECTLY RELATED TO LEVELS
OF PERMANENT DISABILITY
-------------------------------------------------------- Chapter 2:1.1
Replacing FELA with a no-fault system with FECA- or LHWCA-level
benefits would reduce the railroads' injury compensation costs only
if many of the workers who currently leave a railroad after receiving
their FELA settlement are physically capable of returning to work.
Under a no-fault compensation system, benefits end or are reduced
once an injured worker returns to work or takes another job. If
those injured railroad workers who did not return to work under FELA
were so severely injured that they could not return to any work, then
under the no-fault alternative, they would receive permanent total
disability payments as long as their total disability continued. The
present value of this amount could be considerably greater than the
lump-sum payment that a worker actually accepted under FELA.
Officials from several railroads told us that once a settlement is
made and an employee leaves a railroad, they do not keep information
on any subsequent employment of these individuals. However,
officials from several railroads believe that at least some of the
workers who accept a FELA settlement and leave a railroad are
physically able to return to the workforce.
For the four large railroads in our analysis, we estimate that if all
of the workers injured on the job who left the railroad after taking
a FELA settlement were able to return to work, the railroads' overall
injury compensation costs in 1994 under either FECA- or LHWCA-level
benefits would have been about one-third what they were under FELA.
(See fig. 2.1.)\2 Under FECA, we estimate that injury compensation
costs would have been $168 million and that under LHWCA, they would
have been $149 million, instead of the $479 million actually paid.
But if all of these workers were permanently and totally disabled, we
estimate that these railroads' injury compensation costs would have
been about one-third higher than they were under FELA--$650 million
under FECA and $609 million under LHWCA. As the number of injured
railroad workers who are permanently disabled declines, the estimated
total compensation costs decline. Conversely, as the number of
railroad workers who are permanently disabled increases, estimated
compensation costs increase under the no-fault alternatives.
Figure 2.1: Potential Injury
Compensation Costs in 1994 for
Four Large Railroads Under FELA
and No-Fault Systems With FECA-
and LHWCA-Level Benefits, Given
Various Rates of Permanent
Total Disability
(See figure in printed
edition.)
Legend
PTD = permanent total disability
Note: A 10-percent discount rate is used to calculate the
compensation costs. The four railroads are Burlington Northern, CSX,
Norfolk Southern, and Union Pacific.
As figure 2.1 shows, the estimated compensation costs with FECA-level
benefits would have been the same as they were under FELA if 65
percent of the workers who left the railroad after their FELA
settlement were actually permanently and totally disabled. This
break-even point would be 70 percent with LHWCA-level benefits
because of the different benefit levels of FECA and LHWCA.\3
--------------------
\2 Our compensation cost estimates are the value of the current and
future compensation costs for actual and future wage loss, scheduled
benefits, rehabilitation expenses, and death benefits that would be
payable under a no-fault system for the injury claims closed in 1994
in then-year dollars. We used a 10-percent discount rate to
calculate the present value of future FECA and LHWCA benefits
payments. (See app. I for our results using different discount
rates.) The cost of future health insurance premiums is included for
permanent total disability claims.
\3 The degree of permanent disability among workers who leave the
railroad likely ranges from low levels of partial disability to total
disability, but the actual distribution of permanent disability is
unknown. Various percentages of permanent total disability (100
percent disability) are used in figure 2.1 to illustrate the cost
differences and break-even points between FELA, FECA, and LHWCA. The
compensation costs for these percentages are the same as the costs
for other possible permanent disability distributions; e.g., the cost
for 50 percent of the workers who are 100-percent disabled
approximates the cost for 100 percent of the workers who are
50-percent disabled. (See app. I for more details.)
NO-FAULT COMPENSATION
SYSTEMS WOULD COST LESS FOR
LESS SEVERELY INJURED
WORKERS
-------------------------------------------------------- Chapter 2:1.2
According to our analysis, the four large railroads would have paid
less for less severely injured workers under a no-fault system than
they did under FELA. For those workers who did not leave the
railroad but returned to work after their settlement, these four
railroads paid $147 million under FELA. In contrast, we estimate
they would have paid $50 million and $42 million under the provisions
of FECA and LHWCA, respectively--about a $100 million difference.
The benefits paid under both FECA and LHWCA would be limited to lost
wages and possibly some scheduled benefits (for the loss of, or the
loss of the use of, a body part), which are usually calculated as
some number of weeks' wages. Because most economic losses were
probably also compensated in the FELA settlement, the difference can
likely be attributed to payments for noneconomic damages. Therefore,
for those workers who return to work, moving to a no-fault system
that does not include noneconomic damages would have saved these
railroads about 20 percent of their total compensation costs.
CHANGES IN THE OVERALL COST
OF DEATH CLAIMS ARE
DIFFICULT TO PROJECT BUT ARE
PROBABLY SMALL
-------------------------------------------------------- Chapter 2:1.3
Changes in the cost of death claims as a result of replacing FELA
with a no-fault system with FECA- or LHWCA-level benefits would
likely be small. In 1994, the four large railroads in our analysis
paid about $10 million in death benefits. Using the simulation model
with a 10-percent discount rate, we estimate that these railroads
would have paid about $11 million and $12 million, respectively,
under a no-fault system with FECA- or LHWCA-level benefits.
Estimating the change in costs for death benefits is uncertain for
two reasons. First, the railroads' data files we examined for our
analysis did not identify clearly whether or not some death claims
were work-related. Some of the death claims closed in 1994 for the
four railroads involved heart attacks and resulted in no payment
under FELA. Given this information, it is likely that these deaths
were not work-related. However, so as not to underestimate the cost
of death claims under the no-fault alternatives, we assumed that all
of the death cases reported, whether compensated under FELA or not,
were work-related, and we included their costs in our analysis.
Second, all federal and state workers' compensation statutes
authorize death benefits to the surviving spouse and dependents of an
employee whose death results from a job-related injury or illness.
Because the railroads do not necessarily need to record information
on spouses and dependents for FELA settlements, we do not know the
extent to which this missing information affected the estimates of
the FECA and LHWCA death benefits. As a result, death benefits could
also be underestimated in our analysis, especially for employees with
relatively young surviving spouses and/or dependents. Nevertheless,
because death benefits are a relatively small portion of the total
FELA costs, it is unlikely that the net effect of any over- or
underestimates would significantly affect our estimate of total
compensation payments.
ADMINISTRATIVE COSTS UNDER A
NO-FAULT SYSTEM MIGHT BE LESS
THAN UNDER FELA, BUT COSTS FOR
REHABILITATION COULD BE HIGHER
---------------------------------------------------------- Chapter 2:2
Replacing FELA with a nationwide no-fault compensation system could
reduce the railroads' administrative costs for handling claims.
Currently, the large railroads generally handle all of the
administrative tasks of negotiating and settling FELA injury claims,
including processing claims, investigating injury claims, negotiating
settlements, litigating claims, and making payments. Claims for
medical benefits are processed within the railroads' overall employee
health insurance programs. AAR estimates that railroads paid about
$169 million in 1994 in administrative costs under FELA. Under the
no-fault alternatives, administrative costs would likely be less
because claims administration would be simplified. Railroad claims
staff would be primarily concerned with determining how extensive and
severe the injury is, whether the injury was job-related, and whether
continuing impairment exists. They would not be involved in
investigating negligence or negotiating the value of noneconomic
losses. As a result, the administrative time and cost required per
claim would likely be less than they are under FELA.
However, the costs for employee rehabilitation programs might
increase under a no-fault system. Rehabilitation does not appear to
receive much emphasis under FELA. Although rehabilitation expenses
can be compensated under FELA, it appears that not many employees
elect to undergo rehabilitation. According to an official from one
railroad, most railroads offer rehabilitation programs to injured
employees. However, he said that few employees take advantage of
such programs, in part because doing so could jeopardize their FELA
settlements. Rehabilitation plays a much larger role in no-fault
compensation systems. As we recently reported, both federal and
state workers' compensation programs emphasize returning employees to
work with their original employer.\4 Under FECA, federal employees
who refuse to cooperate in vocational rehabilitation programs or to
make a good faith effort to be reemployed could potentially lose
benefits. The impact on railroad costs of changing to a no-fault
system that emphasizes rehabilitation is difficult to forecast.
While the outlays for rehabilitation itself might be higher, overall
compensation costs could be less if rehabilitation allows workers to
return to work sooner.
--------------------
\4 See GAO/GGD-96-76, p. 29.
RESOLVING DISPUTED CLAIMS MAY
STILL BE TIME-CONSUMING
---------------------------------------------------------- Chapter 2:3
In 1994, the average time from the date of an accident to the date of
a settlement for three large railroads from which we obtained data on
this issue--Conrail, Norfolk Southern, and Burlington
Northern--ranged from about 7 to 10 months for direct settlements, 19
to 25 months for cases in which the claimant was represented by an
attorney but there was no lawsuit, and 36 to 46 months for cases in
which lawsuits were filed. The time it takes to process cases under
FELA may not be that different from what it is under FECA and LHWCA
when the claimant is represented by an attorney. Contested cases
that went through all appeal levels averaged about 26 months to be
decided under FECA and about 30 months under LHWCA. These periods do
not include any additional time that might elapse between the time of
the injury and the filing of an appeal or any additional time that
might elapse if LHWCA cases go to court. Even if this additional
time is short, the overall time taken to process contested FECA and
LHWCA cases can be lengthy. The resolution of contested cases under
state workers' compensation may also take a long time.
RESOLUTION OF CONTESTED
CASES UNDER FECA AND LHWCA
MIGHT BE SIMILAR TO
RESOLUTION UNDER FELA
-------------------------------------------------------- Chapter 2:3.1
No-fault compensation systems were developed in part to provide
injured workers with benefits in a timely manner. However, resolving
contested cases under these systems can be lengthy. Although the
Department of Labor noted that most FECA claims are approved for
payment the first time they are presented--about 92 percent of all
claims received in fiscal year 1994--claims can later be appealed.\5
On average, in fiscal year 1995, holding a hearing took about 10
months and obtaining an appeals board decision took about 16 months.
Therefore, it could take, on average, about 26 months to resolve a
FECA case that requires both a hearing and an appeals board decision.
This period does not include any additional time that might elapse
between the time of an injury and the time a case is contested or the
time it takes to prepare an appeal. The time it takes to receive a
decision from the Employees' Compensation Appeals Board has increased
substantially over the last 6 years--from about 3 months in 1990 to
almost 16 months in 1995. The Labor Department attributed this rise
to an increase in the number of appeals and to loss of staff to
process the appeals.
Resolving contested LHWCA cases can also take a long time. In fiscal
year 1995, it took about 12 months, on average, to process an LHWCA
case before an administrative law judge and about 18 months to
process a case before the Benefits Review Board.\6 Therefore, it
could take, on average, about 30 months to process an LHWCA case that
is heard by both an administrative law judge and the Benefits Review
Board. The time between when the injury occurs and when the case is
contested is additional as is the time between the appeal processes.
Over the past 5 years, the time taken to process cases at the
Benefits Review Board has ranged from 15 months to 27 months; in
fiscal year 1995, it averaged about 18 months.
--------------------
\5 According to a Labor Department official, FECA cases are appealed
for a number of reasons, including dissatisfaction with the amount of
benefits awarded and disputes over the degree of disability (e.g.,
permanent or temporary; partial or total).
\6 LHWCA cases may also be appealed to a U.S. Court of Appeals. We
did not obtain information on how long this process may take.
RESOLVING CONTESTED STATE
WORKERS' COMPENSATION CASES
CAN BE SLOW
-------------------------------------------------------- Chapter 2:3.2
Resolving contested cases under state workers' compensation sometimes
can be even slower than it is under FELA. For example, in 1994 in
Illinois--a state with a large number of freight railroad workers--a
contested case took, on average, about 45 months to be processed
through the various levels of appeal at the Illinois Industrial
Commission. Cases could then be appealed further to the state court
system. According to data from the California Workers' Compensation
Institute, a trade organization that collects data on California
workers' compensation, in 1994 the percentage of litigated insurance
claims open for at least 28 months had increased from 27 percent in
1993 to 38 percent in 1994.\7 However, not all states take a long
time to resolve contested claims. For example, in 1994 contested
cases took, on average, about 14 months to process in Nebraska.
--------------------
\7 California Workers' Compensation Institute Bulletin, No. 95-3
(Mar. 14, 1995).
CONCLUSIONS
---------------------------------------------------------- Chapter 2:4
From a financial perspective, railroads might or might not see their
injury compensation costs reduced if FELA were replaced by a no-fault
compensation system with FECA- or LHWCA-level benefits. The outcome
would depend to a great degree on how many employees who leave the
railroads after receiving their settlements would be physically able
to resume working. However, without better information on these
workers, it is difficult to conclude that the railroads would be
better off financially under a no-fault system paying FECA- or
LHWCA-level benefits. In evaluating any proposals for replacing the
current FELA system, it will be important to obtain a better sense of
the likely number of injured railroad workers who are physically able
to return to work and those who would be permanently disabled.
MODIFYING FELA MIGHT REDUCE
RAILROADS' COSTS BUT COULD
ADVERSELY AFFECT WORKERS
============================================================ Chapter 3
As an alternative to replacing FELA with a no-fault compensation
system, the Congress could modify FELA by adding certain
restrictions. Such restrictions could include capping awards for
noneconomic losses, limiting the fees received by plaintiffs'
attorneys, requiring the use of arbitration to resolve disputes, or
restricting where FELA suits can be filed. The Congress could also
permit railroads and their employees to opt out of FELA into some
other compensation arrangement.
While some of these modifications might reduce the railroads' FELA
costs, they could also adversely affect some injured railroad workers
by reducing the compensation they receive in a settlement or limiting
the availability or the quality of their legal counsel. The Congress
could allow workers to continue under the current FELA provisions
through "grandfathering" and subject only newly hired employees to
any or all modifications. However, the workers would then be under
different rules or different systems, and workers with similar
injuries would thus have different compensation benefits. In
addition, permitting railroads and their employees to opt out of FELA
might make disputes about collectively bargained injury compensation
subject to the provisions of the Railway Labor Act, possibly leading
to federal intervention to resolve these disputes.
CAPPING THE NONECONOMIC PORTION
OF FELA AWARDS COULD REDUCE
COSTS BUT DECREASE WORKERS'
BENEFITS
---------------------------------------------------------- Chapter 3:1
Over the past several years, the Congress has proposed capping awards
for noneconomic damages in product liability litigation. Recently,
the Congress has considered placing a $250,000 cap on noneconomic
damages awarded in personal injury suits arising from accidents
involving Amtrak.\1 A similar cap could be placed on the noneconomic
portion of FELA awards. Because the railroads do not specifically
identify the proportions of FELA awards that are for economic and
noneconomic damages, we could not estimate precisely the impact of
such a cap on FELA costs. However, using assumptions about the
proportion of FELA awards that might be for noneconomic damages, we
developed hypothetical estimates of the potential impact of a
$250,000 cap on four large railroads' 1994 FELA costs. On the basis
of the hypothetical distributions shown in table 3.1, the potential
reduction in costs associated with these claims ranged from about $7
million to about $48 million.
Table 3.1
Potential Effect of $250,000 Cap on
Noneconomic Damages for Claims Closed by
Four Large Railroads in 1994
(Dollars in millions)
Hypothetical
Number of claims reduction in FELA
Percentage of payout for potentially costs associated
noneconomic damages affected by cap with the cap
------------------------------ ------------------ ------------------
30 32 $ 6.7
40 68 13.2
50 107 22.0
60 179 33.4
70 255 48.1
----------------------------------------------------------------------
Source: GAO's analysis of FELA claims data.
Although FELA could be modified to cap awards for noneconomic
damages, such an action could reduce the benefits received by injured
workers. Under the hypothetical distributions shown in table 3.1,
the compensation received by an injured worker would be reduced
dollar for dollar for any amounts over $250,000 that the worker would
have received for noneconomic damages. The railroad labor
organizations we contacted uniformly opposed a cap on noneconomic
damages, believing it would adversely and unfairly affect their
members. Several railroad labor organizations and plaintiff
attorneys said a cap would allow railroads to avoid paying the full
cost of injuries.
--------------------
\1 See Amtrak and Local Rail Revitalization Act of 1995 (S. 1318).
As of June 1996, this bill had not been enacted.
LIMITS PLACED ON PLAINTIFFS'
ATTORNEYS' FEES COULD BENEFIT
RAILROADS, BUT IMPACT ON
WORKERS IS UNCERTAIN
---------------------------------------------------------- Chapter 3:2
In an effort to reduce FELA's costs, the Congress could place a cap
on the amounts payable to plaintiffs' attorneys. Railroad labor
organizations told us that attorneys representing injured workers
generally receive no more than 25 percent of a FELA award. AAR
estimates that in 1994, attorneys representing injured workers at
large railroads received between $182 million and $240 million in
fees.\2
Whether the railroads' FELA costs would decline as the result of a
cap depends to a large extent on what cap was established and the
relationship between a cap and a FELA settlement. The railroads'
FELA costs could decline if a cap was set at less than the 25 percent
that the plaintiffs' attorneys receive from a FELA award, assuming
that a lower attorneys' fee would lead to a lower settlement amount.
On the other hand, a cap on plaintiffs' attorneys' fees might have
little impact on FELA costs if settlement amounts stay the same or
increase as attorneys push for higher settlements to compensate for
the lower percentage allocated to legal fees. A cap on what the
plaintiffs' counsel could receive might also benefit injured workers
to the extent that lower legal fees might allow workers to keep a
larger share of a settlement. Railroad officials with whom we spoke
were split on the possible effects of a cap on costs, and some
suggested that a sliding scale could be a better way to control legal
fees. Under a sliding scale, the percentage of an award payable as
attorneys' fees would either decline as the size of the award
increases or increase if a case is settled quickly.
Other workers' compensation systems limit attorneys' fees. While
FECA and LHWCA do not necessarily limit the amount of an attorney's
fee, they do require that such a fee be approved before being paid
and that the fee be reasonable. In particular, FECA requires that
approval of attorneys' fees be based on the actual necessary work
performed. In making this determination, such factors as the
complexity of a claim and the amount of time spent actually
developing and presenting the claim are assessed. State workers'
compensation systems also limit attorneys' fees. In four of the five
state workers' compensation systems we reviewed--in the states that
employed the most railroad workers in 1995--attorneys' fees are in
some way limited.\3 In general, attorneys' fees in these four states
are limited to between 9 and 25 percent of a worker's compensation
award. In Texas, attorneys' fees are limited to no more than $150
per hour, and guidelines are used to determine how many hours can be
billed and for what types of services. The total fees are not to
exceed 25 percent of a benefit award.
Although limits on the fees received by the plaintiffs' counsel might
have financial benefits to railroads and injured workers, such limits
could affect the availability and/or quality of the workers' legal
representation. This appears to have happened in some state workers'
compensation systems. For example, Texas revamped its state workers'
compensation program in 1991 and set limits on attorneys' fees. In
April 1995, the Workers' Compensation Research Institute reported
that initial indications were that the limits placed by Texas on the
fees for plaintiffs' attorneys had caused a number of attorneys who
previously had practiced workers' compensation law to leave the
field.\4
The institute's report concluded that at a minimum, it was more
difficult for claimants with low-value claims to find attorneys to
handle their cases. The institute noted similar problems in
California, reporting in December 1992 that California's typical 9-
to 12-percent limit on attorneys' fees may have contributed to the
devolution of work to paralegals and to the refusal by some attorneys
of cases that were more complicated and time-consuming.\5
--------------------
\2 This represents 25 to 33 percent of the total FELA payouts in 1994
in cases in which the worker was represented by an attorney ($727.8
million).
\3 Attorneys' fees are in some way limited in California, Illinois,
Pennsylvania, and Texas. In general, Nebraska does not limit
attorneys' fees.
\4 P. Barth and S. Eccleston, Revisiting Workers' Compensation in
Texas, Administrative Inventory, Workers' Compensation Research
Institute, WC-95-1 (Apr. 1995).
\5 P. Barth and C. Telles, Workers' Compensation in California,
Administrative Inventory, Workers' Compensation Research Institute,
WC-92-8 (Dec. 1992).
ARBITRATION OFFERS TIME AND
COST BENEFITS BUT MAY BE
DIFFICULT TO ADAPT TO FELA
---------------------------------------------------------- Chapter 3:3
Arbitration is a mechanism typically used in contract and other
commercial disputes to resolve issues quickly and at low cost.\6 The
Congress could modify FELA to require that compensation disputes be
arbitrated before being tried in a court of law. As we reported in
July 1995,\7 arbitration and other approaches to resolve disputes are
being used to avoid the time and cost of litigation and to minimize
the adversarial relationship between employers and employees
resulting from disputes. The court system has also looked to
arbitration and other approaches to resolve disputes quickly and to
reduce backlogs in court dockets.
The use of arbitration to resolve workplace injury cases has varied.
It does not appear to be widely used in the rail industry.
Information from the Federal Judicial Center indicates that for
1990-95, of the approximately 6,600 cases identified as FELA cases in
the 18 federal district courts with mandatory or voluntary
arbitration programs, about 11 percent (710 cases) were successfully
closed as a result of arbitration.\8 The remaining cases either went
on to trial or were resolved in some other manner. In all of the
courts, arbitration was nonbinding, and a trial could be requested
following an arbitration decision. In October 1993, the National
Center for State Courts reported that over half of the states had
experimented with arbitration programs associated with courts since
they were introduced in 1952.\9 However, no information was available
on the arbitration of FELA cases at the state level. According to
the center, the characteristics of state arbitration programs varied,
but typically, arbitration was based on the amount of money at
stake--frequently $50,000 or less. Finally, three of the five state
workers' compensation programs we reviewed--in California, Illinois,
and Texas--had arbitration programs. The success of these programs
appears to be limited. For example, in 1994 over 50 percent of
Illinois' arbitration decisions were appealed, and in Texas no
arbitration hearings were held.
Although arbitration has the potential for saving time and costs, it
may be difficult to adapt to a system like FELA. Railroad officials
and their attorneys agreed that so far, arbitration has not been very
effective in resolving FELA cases. One railroad official told us
that arbitration is not useful when a serious disagreement exists
between the parties, such as a dispute about negligence. The
National Association of Railroad Trial Counsel commented that without
fundamental change to FELA itself, arbitration would merely transfer
FELA's negative aspects to an arbitration setting. Some attorneys
representing injured workers also do not support arbitration in FELA
cases. In their view, for arbitration to be successful, the parties
must be able to agree on liability. The larger the gap between the
two sides on this and other issues, the more likely it is that a case
will proceed to trial and a jury verdict.
--------------------
\6 In arbitration, a third party receives and reviews evidence, hears
arguments, and renders a decision, which may, upon prior agreement,
be binding.
\7 Employment Discrimination: Most Private-Sector Employers Use
Alternative Dispute Resolution (GAO/HEHS-95-150, July 5, 1995).
\8 Not all of the 6,600 cases may have been FELA cases. According to
the Federal Judicial Center, the code used to identify FELA cases may
also have included some workers' compensation cases and some other
types of cases. An additional 266 FELA cases in the 18 federal
district courts were not arbitrated because they met the requirements
for exemption from the program.
\9 For information on the use of arbitration in state courts, see
National Symposium on Court-Connected Dispute Resolution Research, A
Report on Current Research Findings--Implications for Courts and
Future Research Needs, National Center for State Courts and State
Justice Institute (1994).
THE CONGRESS COULD LIMIT WHERE
FELA SUITS CAN BE FILED, BUT
EFFECTS ARE UNCERTAIN
---------------------------------------------------------- Chapter 3:4
FELA gives plaintiffs the right to bring cases in either a federal or
state court. Railroad management frequently complains that FELA
permits injured workers and their attorneys to file suit in
localities where judges and juries are favorable to plaintiffs.
According to the railroads, these jurisdictions are often far from
the scene of an accident where the injury occurred.\10 The Congress
could modify FELA to limit the places where lawsuits can be filed.
The monetary impact of changing the venue rules is hard to forecast
because we do not have data comparing awards in similar FELA cases in
different jurisdictions. Any potential benefit to the railroads must
be weighed against taking away injured workers' right to choose a
state court that they believe is the best place for the case to be
heard as well as the states' overriding decisions about who can bring
cases in their courts.
--------------------
\10 This discussion focuses on state venue rules, since we heard few
complaints of the practice of seeking a favorable venue at the
federal level.
JURISDICTIONAL RULES PROVIDE
PLAINTIFFS WITH CHOICE OF
VENUE
-------------------------------------------------------- Chapter 3:4.1
Although FELA gives plaintiffs the right to bring a suit in either a
state or a federal court, plaintiffs are still limited to bringing
cases in courts that have jurisdiction to hear the case.
Jurisdiction over a defendant in state court is limited by the
Fourteenth Amendment to the Constitution to those instances in which
the defendant has at least "minimal contacts with the state." This
restriction protects defendants from being sued in a state with which
they have no relationship. The rule for determining whether states
have jurisdiction is broad and flexible.\11 Suits may generally be
brought against companies where they regularly do business.
In addition to the constitutional restrictions, venue laws in the 10
states whose venue statutes we reviewed generally restricted suits to
the jurisdiction where the claim arose, where the defendant does
business, or where the plaintiff resides.\12 While these laws do not
leave plaintiffs free to file in any court they wish, plaintiffs
generally have the latitude to choose a locality that they believe
will provide them with the best outcome.
Finally, bringing suit in a court with jurisdiction to hear the case
does not necessarily obligate the court to hear the case. Many
states have adopted the doctrine of forum non conveniens, which
permits courts to dismiss a case when it "is a seriously inconvenient
forum for the trial of the action provided a more appropriate forum
is available to the plaintiff."\13 Such a dismissal is left to the
trial judge's discretion and will only be overturned on appeal for
abuse of that discretion.
--------------------
\11 International Shoe v. Washington, 326 U.S. 310 (1945).
\12 We reviewed the venue rules in 10 states: California, Georgia,
Illinois, Kansas, Missouri, Nebraska, Ohio, Pennsylvania, Texas, and
Virginia. Freight railroad employment in these states represents
about 51 percent of total rail employment (95,474 employees out of
187,945 employees).
\13 Restatement (Second) of Conflict of Laws, Sec. 84 (1971). Only
Georgia and Texas do not apply the doctrine of forum non conveniens;
the latter does not apply the doctrine for FELA cases only.
THE CONGRESS COULD RESTRICT
STATE VENUE, BUT COST IMPACT
IS UNCERTAIN
-------------------------------------------------------- Chapter 3:4.2
The Congress could restrict the venue in which FELA cases can be
heard within a state. Proponents of such a change believe that doing
so would reduce the railroads' FELA costs and alleviate
inconveniences caused by cases being filed far from where the injury
occurred. Opponents believe that restricting where suits can be
filed would hinder railroad workers' access to adequate compensation
and could be inconvenient for workers who travel for their jobs and
are injured away from home.
The cost impact of restricting venue at the state level is uncertain.
We did not analyze individual FELA cases, so we are unable to
estimate the potential cost savings, if any, of restricting venue.
In addition, venue alone does not determine the size of FELA awards.
Other factors also play a role, such as the comparative negligence of
injured workers and the merit of the arguments in individual cases.
OPTING OUT OF FELA MAY HAVE
UNINTENDED CONSEQUENCES FOR
RAILROADS AND LABOR
---------------------------------------------------------- Chapter 3:5
Another modification that the Congress could make is to permit
railroads and their employees to elect to opt out of FELA. That is,
the Congress could allow the railroads and their employees to decide
for themselves, through collective bargaining, what workers'
compensation arrangement they prefer. FELA would have to be amended
to allow for such agreements. While the option to opt out would give
both parties more freedom in arriving at a mutually advantageous
solution, making injury compensation part of the overall collective
bargaining agreement may have the added consequence of bringing
disputes over injury compensation under the Railway Labor Act. Also,
for railroads without unions, as is typical with many small
railroads, the possibility arises that workers at some railroads
could be covered by different compensation systems, increasing the
railroads' administrative costs and giving employees with similar
injuries different compensation opportunities. This situation could
negatively affect employees' morale. Finally, opting out would
require changes in either federal or state laws to ensure that
injured rail workers are covered by a workers' compensation program
in the absence of FELA.
COLLECTIVELY BARGAINED
INJURY COMPENSATION MIGHT
INCREASE FEDERAL INVOLVEMENT
IN RESOLVING DISPUTES
-------------------------------------------------------- Chapter 3:5.1
If FELA is made a matter for collective bargaining, federal
involvement in the railroad industry might increase. In particular,
disputes about the selection of an injury compensation system during
contract negotiations could come under the Railway Labor Act. This
act governs labor-management relations in the railroad industry and
is designed to reduce the likelihood of strikes. The Railway Labor
Act does so by mandating a lengthy contract negotiation process and
by using federal agencies, such as the National Mediation Board, when
necessary, to mediate disputes.\14 If a dispute is not resolved, the
President may convene an emergency board to propose recommendations.
If a dispute threatens interstate commerce, the Congress may impose
emergency board recommendations or other conditions on both railroads
and unions. Unless disputes about injury compensation are
specifically excluded from the Railway Labor Act, such mechanisms
could be triggered, and the federal government could be directly
involved with any subsequent settlement of such disputes.
--------------------
\14 For more information on the Railway Labor Act, see Railroad
Competitiveness: Federal Laws and Policies Affect Railroad
Competitiveness (GAO/RCED-92-16, Nov. 5, 1991).
ALLOWING OPTING OUT MIGHT
CAUSE PROBLEMS AT NONUNION
RAILROADS
-------------------------------------------------------- Chapter 3:5.2
Allowing railroads to opt out in a nonunion environment could also
raise the issue of injury compensation coverage. There are two
aspects to this issue. One is partial coverage of a workforce. Some
state workers' compensation programs do not allow partial coverage of
a workforce. Instead, all privately employed individuals must be
covered unless certain numerical thresholds are met, employees fall
into an excepted group, or a waiver is granted.\15 The second issue
is potential exemption from coverage. In January 1995, the
Department of Labor reported that 15 states allowed exemptions from
their workers' compensation programs if employers had fewer than a
threshold number of workers or met other conditions.\16 While the
requirements varied, in general, exemptions could be granted for
employers with less than three to five employees.\17 Our survey of
the small railroads found that 116 railroads (about 30 percent of the
398 respondents) employed five or fewer employees.\18
--------------------
\15 Some state workers' compensation programs exempt railroad
workers, some farm and casual workers, and/or state and local
government employees.
\16 State Workers' Compensation Laws, U.S. Department of Labor,
Employment Standards Administration, Office of Workers' Compensation
Programs (Jan. 1995).
\17 Some states also allowed exemptions if certain financial or
payroll conditions were met.
\18 It should be noted that if an employer elects not to be covered,
then the employer may be subject to lawsuits by employees under the
states' general employer liability laws.
ALLOWING RAILROADS TO OPT
OUT WOULD REQUIRE CHANGES IN
FEDERAL AND STATE LAWS
-------------------------------------------------------- Chapter 3:5.3
The opting-out alternative would necessitate changes in federal law.
Not only would FELA have to be amended, but legislation might be
required to provide for alternative coverage. For example, FECA and
LHWCA could be modified to cover all railroad workers currently
subject to FELA. FECA currently covers employees of the Alaska
Railroad who incurred any injuries or illnesses before the railroad
was transferred to the state of Alaska in 1985. FECA also covers
those railroad workers who are federal civilian employees. LHWCA
also covers those workers who work for a railroad but who are engaged
in maritime activities, such as loading and unloading vessels. In
assessing this option, the Congress would need to consider the extent
to which the federal government would be responsible for handling
and/or adjudicating railroad workers' claims for benefits and the
potential impact on federal agencies' budgets and operations from
assuming these responsibilities.
Allowing railroads to opt out of FELA might also require changes in
state law. FELA currently preempts state law in the coverage of
work-related injury compensation of railroad workers. However, in
our review of state workers' compensation law in the 10 states with
the most railroad workers, we found that some railroad workers might
not be covered if the railroads opt out of FELA and changes are not
made in state law. For example, in 3 of the 10 states--Georgia,
Nebraska, and Virginia--interstate railroad workers are specifically
excepted from state workers' compensation programs. Railroad workers
also might not be covered in Texas if a railroad elects not to be
covered by state workers' compensation. Coverage of railroad workers
in the other six states was less clear and could depend on a number
of factors, including legal interpretations about the extent to which
states have the power to regulate businesses engaged in interstate
commerce.
THE CONGRESS COULD
"GRANDFATHER" THE CURRENT
WORKFORCE UNDER FELA
---------------------------------------------------------- Chapter 3:6
The Congress could elect not to subject the current railroad workers
to any one or all of the proposed modifications to FELA. In fact, if
the Congress chose to replace FELA with a nationwide no-fault system
or allow the railroads to come under state workers' compensation
systems, it still could choose to allow existing employees to remain
under the current FELA system. Such "grandfathering," however, may
have problems. First, the railroads might have to handle injury
claims under two systems or under two sets of rules and restrictions,
likely adding to costs rather than reducing them. Second, two
railroad workers suffering from the same injuries might have access
to different types and levels of compensation. Although
grandfathering might assuage opposition to replacing or modifying
FELA, doing so might create significant problems.
CONCLUSIONS
---------------------------------------------------------- Chapter 3:7
Decisions about modifying FELA are complex and must be viewed in
several ways. From the railroads' perspective, there may be
opportunities to reduce costs. For example, capping the noneconomic
portion of FELA awards and attorneys' fees might act to reduce the
railroads' costs, depending on the portion of FELA settlements
represented by noneconomic damages and the relationship between
attorneys' fees and settlements. Similarly, restricting where FELA
suits can be filed might reduce costs, depending on how many suits
continue to be filed in jurisdictions perceived as being favorable to
plaintiffs. From the injured workers' perspective, however, the
issues are different. Modifying FELA could reduce the amount of
compensation they receive or limit the availability of legal counsel.
There are other complexities as well, such as whether arbitration
would actually save time and money if applied to a compensation
system that involves issues of negligence like FELA, how opting out
could change the character of injury compensation for railroads and
their workers, and whether opting out could lead to federal
involvement in resolving disputes about compensation.
If the Congress decides that it wants to modify FELA, it will need to
take into account the possible consequences of some of the proposed
changes. For example, permitting current employees to remain under
FELA while new employees are under a new system could create tension
in the workplace.
FELA IS LESS EXPENSIVE FOR
PASSENGER AND SMALL FREIGHT
RAILROADS
============================================================ Chapter 4
FELA applies to employees of nearly all railroads regardless of size
or type of service provided. We surveyed the small freight railroads
to determine, among other things, the impact of FELA on overall
operating costs.\1 We also collected information from passenger
railroads--commuter railroads and Amtrak--on their experience with
FELA in 1994. Our survey found that small freight railroads
experienced lower FELA costs than the large freight railroads. In
part, small freight railroads have lower costs because, on average,
fewer workdays are lost per on-the-job injury and they have a lower
percentage of injuries that result in lost-work time. In general,
data obtained on passenger railroads showed similar results. Like
the large freight and passenger railroads, the small freight carriers
purchase insurance to protect against large FELA payouts and other
liabilities. Most large railroads have high deductibles and are
considered self-insured for FELA purposes.
--------------------
\1 For the purposes of our analysis, small freight railroads include
(1) regional railroads, which are line-haul railroads operating over
350 or more miles of road and/or earning annual revenues of at least
$40 million but less than the thresholds for Class I railroads; (2)
local railroads, which are line-haul railroads falling below the
criteria for regional operations; and (3) switching and terminal
railroads, which primarily perform switching services in a terminal
area. The passenger railroads include Amtrak, which provides the
public with intercity passenger services, and commuter railroads,
which provide the public with local and regional passenger services
usually between a central city and its suburbs.
FELA COSTS WERE LESS FOR
PASSENGER AND SMALL FREIGHT
RAILROADS
---------------------------------------------------------- Chapter 4:1
In 1994, the passenger and small freight railroads experienced lower
FELA compensation costs than the large freight railroads. As shown
in table 4.1, the passenger carriers paid about $83.7 million, or
$0.96 per hour worked, while the small freight carriers paid about
$42 million in compensation costs, or $0.96 per hour worked. In
contrast, the large railroads paid $2.26 per hour worked--more than
twice what the passenger and small freight railroads paid.
Table 4.1
Summary of 1994 FELA Compensation Costs
by Type of Railroad
Claims and Average cost
Claims and suits per Payout for per
suits 100 claims and Average cost employee-
Type of railroad settled employees suits per employee hour worked
----------------- ------------ ------------ ------------ ------------ ------------
Large freight 21,478 11 $896,706,801 $4,756 $2.26
railroads
Small freight 1,284 6 42,043,569 1,966 0.96
railroads
Passenger 4,370 10 83,715,524 1,911 0.96
railroads
---------------------------------------------------------------------------------------
Note: Payouts include amounts paid by insurance companies.
Source: GAO's survey and data from AAR and the passenger railroads.
The cost differences may be traced, in part, to two factors: (1) the
average number of lost workdays and (2) the wage rate. Data on
injuries from the Federal Railroad Administration showed that the
passenger and small freight railroads generally average fewer lost
workdays per injury than the large freight carriers. For example, in
1994, the average number of lost workdays per injury for both the
small freight railroads and the passenger carriers was less than half
that of the large railroads--30 days each compared with 77 days.
Also, the proportion of injuries that resulted in lost workdays was
lower at the small freight railroads than it was at the large freight
carriers and passenger railroads. In 1994, only 54 percent of the
injuries at the small freight railroads resulted in lost workdays,
compared with 67 percent at the large carriers and 75 percent at
passenger railroads. We did not attempt to analyze the reasons for
these differences. At the same time, average wages and salaries were
more than 20 percent higher at the large railroads--$46,714 compared
with $38,730 at the small railroads that responded to our
survey--resulting in higher compensation for lost wages per day lost.
Average wages and salaries at passenger railroads were even
lower--$36,690.
Adding the administrative and legal expenses for FELA increased the
passenger and small freight railroads' costs by about 21 percent and
41 percent, respectively. As shown in table 4.2, the small freight
carriers paid about $17 million in administrative and legal costs, or
$0.39 per hour worked. In contrast, the passenger carriers paid
$0.21 per hour worked, and the large freight railroads paid about
$0.34 per hour worked for these expenses--about 46 and 13 percent
less than the small freight railroads, respectively. In part, this
is because of certain economies of scale in processing claims. The
passenger and large railroads might have in-house counsel, for
example.
Table 4.2
Summary of 1994 FELA Administrative and
Legal Costs by Type of Railroad
Administrative Average cost
and legal Average cost per employee-
Type of railroad costs per employee hour worked
---------------------- -------------- -------------- --------------
Large freight $136,089,284 $722 $0.34
railroads
Small freight 17,080,437 799 0.39
railroads
Passenger railroads 17,183,687 425 0.21
----------------------------------------------------------------------
Source: GAO's survey and data from AAR and the passenger railroads.
FELA COSTS WERE NOT THE SAME
FOR ALL SMALL RAILROADS
---------------------------------------------------------- Chapter 4:2
Although the small railroads experienced lower overall FELA costs
than the large railroads, the costs were not the same for all types
of small railroads. For example, in 1994, the switching and terminal
railroads experienced significantly higher compensation costs under
FELA than the regional and local carriers. As shown in table 4.3,
these railroads paid about $1.30 per hour worked, or almost 67
percent more in such costs than the regional carriers and 41 percent
more than the local carriers.
Table 4.3
Summary of 1994 FELA Compensation Costs
by Type of Small Freight Railroad
Claims
and Payout
Claims suits for
Type of small and per 100 claims Average Average cost
freight suits employee and cost per per employee-
railroad settled s suits employee hour worked
-------------- -------- -------- -------- -------- --------------
Switching and 475 7 $16,508, $2,556 $1.30
terminal 941
railroads
Regional 523 5 16,804,8 1,644 0.78
railroads 27
Local 286 6 8,729,80 1,857 0.92
railroads 1
----------------------------------------------------------------------
Source: GAO's survey.
The higher compensation costs experienced by the switching and
terminal railroads may be attributable to at least three factors,
including the nature of the work these railroads perform, the degree
of union representation, and the average level of wages. First,
switching and terminal railroads, by definition, perform switching
services in terminal areas; therefore, their employees are exposed to
potentially dangerous activities connected with moving and placing
freight cars and locomotives. Second, according to our survey, in
1994, the switching and terminal railroads had more employees
represented by labor unions than the regional and local railroads--74
percent of employees compared with 61 percent and 33 percent of
employees at the regional and local railroads, respectively. Those
switching and terminal railroads that were unionized had higher
annual FELA compensation costs than the nonunion switching and
terminal companies--$2,858 per employee compared with $874 per
employee. Finally, in 1994, the switching and terminal railroads
paid average annual wages that were comparable to those of the
regional carriers and higher than those of the local
railroads--$40,707 compared with $40,204 and $32,806 at the regional
and local railroads, respectively.
Switching and terminal railroads also experienced the highest
administrative and legal costs. As shown in table 4.4, these
railroads paid almost $9 million in administrative and legal costs,
or $0.71 per hour worked. In contrast, regional railroads paid $0.24
per hour worked, while local railroads paid $0.31 per hour worked.
The switching and terminal railroads' legal costs alone amounted to
$7.4 million--about three times the legal costs of either the
regional or local carriers. Two factors that may have contributed to
this result are the number of cases in which an employee filed a
lawsuit and the number of cases in which the railroads hired outside
defense attorneys. In 1994, 32 percent of the switching and terminal
railroads' FELA cases involved a lawsuit, compared with 23 percent at
regional railroads and 13 percent at local railroads. This situation
may have necessitated the need for outside defense attorneys. In
1994, the switching and terminal railroads settled 41 percent of
their cases with the assistance of outside defense attorneys,
compared with 29 percent at the regional railroads and 20 percent at
the local railroads.
Table 4.4
Summary of 1994 FELA Administrative and
Legal Costs by Type of Small Freight
Railroad
Administrative Average cost
Type of small freight and legal Average cost per employee-
railroad costs per employee hour worked
---------------------- -------------- -------------- --------------
Switching and terminal $8,966,643 $1,388 $0.71
Local 2,923,925 622 0.31
Regional 5,189,869 508 0.24
----------------------------------------------------------------------
Source: GAO's survey.
SMALL RAILROADS RELY ON
INSURANCE TO PROTECT AGAINST
LARGE FELA AWARDS
---------------------------------------------------------- Chapter 4:3
The availability of insurance to cover a large FELA award is critical
to a small railroad because a large FELA award has the potential to
severely affect the railroad's financial health. Although liability
insurance that includes FELA coverage has not always been readily
available and affordable, it appears that it currently is. At the
time of our review, most small railroads had liability insurance that
included coverage for FELA payouts.
INSURANCE IS CRITICAL FOR
PROTECTION AGAINST LARGE
FELA AWARDS
-------------------------------------------------------- Chapter 4:3.1
Like the large freight and passenger railroads, most small railroads
purchase insurance to protect against large FELA payouts and other
liabilities.\2 Fifty percent of the small railroads that responded to
our survey had fewer than 13 employees and payrolls under $400,000.
Seventy-eight percent had annual operating revenues of less than $5
million. A large FELA award, if paid entirely out-of-pocket, could
threaten these railroads' survival. To reduce the impact of large
FELA awards, these railroads purchase insurance from private
companies.
The results of our survey showed the critical role that insurance
plays in protecting the small railroads against large FELA awards.
Almost 88 percent of the small railroads had some form of insurance,
typically railroad liability insurance that included FELA coverage,
and 68 percent of these policies had deductibles that ranged from
$25,000 to $100,000 per claim. In the event of a large FELA award, a
railroad with liability coverage would be responsible for its
deductible.
Only about 12 percent of the railroads that responded to our survey
reported that they were self-insured. Railroads can self-insure if
it is cost-effective to do so. For example, some railroads choose to
self-insure themselves because they have the resources to cover their
potential liabilities. Similarly, a railroad with a history of only
a few minor injuries per year could also choose to self-insure itself
for FELA purposes, finding it cheaper than paying insurance costs.
Our review of the accident and injury histories of the self-insured
railroads that responded to our survey showed that about 25 percent
of these railroads had no work-related injuries from 1990 through
1994. An additional 25 percent had five or fewer injuries during
this period.
--------------------
\2 Although the large freight and passenger railroads are generally
considered to be self-insured for injury compensation, many of these
railroads maintain liability insurance that includes FELA coverage.
However, the deductible levels are much higher than those for the
small railroads. In 1994, the deductibles for large freight and
passenger railroads that provided this information ranged from $2
million to $25 million.
INSURANCE DOES NOT PAY ALL
FELA COSTS
-------------------------------------------------------- Chapter 4:3.2
Although insurance protects the small railroads from paying
out-of-pocket for large FELA awards, most FELA settlements are within
the limits of the deductible. As shown in figure 4.1, on the basis
of our survey results, we estimate that in 1994 the small railroads
paid about 89 percent of the FELA compensation costs themselves.
Liability insurance paid only about 5 percent of FELA costs, and
medical insurers paid the remaining 6 percent. According to our
survey, only 10 small railroads had FELA payouts that exceeded their
deductible levels. These payouts accounted for $2 million and only
17 of the 1,284 cases settled in 1994.
Figure 4.1: Distribution of
1994 FELA Payouts for the Small
Railroads
(See figure in printed
edition.)
Source: GAO's survey.
To cover employees' medical expenses, the small railroads either pay
the costs directly or, like some large freight railroads, obtain
special health insurance. A special health plan provides for 24-hour
coverage of both work-related and off-duty injuries and illnesses.
Our survey showed that in 1994, about two-thirds of the small
railroads purchased some form of health insurance to cover injured
employees' medical costs.
INSURANCE IS CURRENTLY
AVAILABLE AND AFFORDABLE
---------------------------------------------------------- Chapter 4:4
FELA insurance has not always been affordable for the small
railroads. In the late 1980s, only one domestic company provided
small railroads with insurance that included FELA coverage, and
according to one insurance company official, premiums were double
what they are today. As a result, the small railroads either paid
costly insurance premiums or assumed the risk of these liability
costs themselves. We identified eight companies that as of August
1995, provided small railroads with liability insurance that included
FELA coverage. Because of the increased competition, premiums have
declined over the past 5 years. Insurance industry officials
estimated that in 1995, small railroads' annual premiums for
liability insurance with FELA coverage generally ranged from $25,000
to $50,000. One official described an average policy as costing
$50,000 for $5 million in coverage with a deductible of $50,000 per
claim.
Our survey results for the small freight railroads generally support
the estimates of the insurance providers. Of the 264 railroads that
provided us with information on their insurance costs, 54 percent
paid less than $50,000 for a liability policy that included FELA
coverage. Most of these railroads' deductible levels ranged from
$25,000 to $100,000, and just over half of the railroads had annual
premium costs that were 10 percent or less of their payroll. Many of
the railroads with annual premiums of $200,000 or more had more
employees and higher payrolls. The cost of premiums for half of
these latter railroads was also in the 10-percent-of-payroll-or-less
range.
Figure 4.2: Liability
Insurance Costs Paid by the
Small Freight Railroads in 1994
(See figure in printed
edition.)
Source: GAO's survey.
INSURANCE PURCHASING GROUPS ARE
NOT WIDELY USED
---------------------------------------------------------- Chapter 4:5
A small railroad could reduce its liability insurance costs by
pooling its resources with other small railroads and obtaining a
group policy. Such purchasing groups were authorized for FELA
purposes by the Liability Risk Retention Act of 1986. A purchasing
group would spread all or any portion of its members' liability
exposure and costs. While 10 percent of the railroads in our survey
reported that they were part of purchasing groups, upon further
review, we found that most of these railroads were technically not in
such groups. Rather, these railroads were subsidiaries of railroad
management companies and other entities that owned more than one
railroad and had group insurance for their railroads. Like a
purchasing group, this arrangement serves to spread the railroads'
liability exposure and costs.
Most of the railroads that responded to our survey reported very
little interest in participating in a purchasing group, and only 16
percent indicated that they had ever seriously considered entering
into such an arrangement. For the railroads that had not considered
a purchasing group, the most common reason given was that no other
railroad had suggested it. Another leading reason was that these
railroads did not want to depend on the safety records of other
railroads in the underwriting process.
CONCLUSION
---------------------------------------------------------- Chapter 4:6
FELA does not appear to be any more burdensome for passenger and
small freight railroads than it is for the large freight railroads.
Our review suggests that compared with the large freight railroads,
passenger and small freight railroads are less burdened by FELA and
that they currently can insure against catastrophic losses.
Therefore, we found no reason, at least on the basis of financial
considerations, that these railroads need to be treated differently
in any deliberations about whether to either modify FELA or replace
it with a no-fault compensation system.
METHODOLOGY FOR ESTIMATING COST
DIFFERENCES BETWEEN FELA, FECA,
AND LHWCA
=========================================================== Appendix I
The model used in this analysis was developed for the Association of
American Railroads (AAR) by Mercer Management, Inc. It is designed
to estimate the benefits that injured railroad workers might have
received if their injury compensation had been provided under a
no-fault compensation system rather than under the Federal Employers'
Liability Act (FELA).
If the railroads' files divided information on injury compensation
settlements into amounts for each type of loss suffered as a result
of an injury (i.e., economic compared with noneconomic losses),
comparing FELA payouts with those likely under alternative no-fault
systems would be straightforward. Those damages that are not
compensable under the no-fault alternatives, such as awards for pain
and suffering, would be deleted. Damages that are compensated at
different levels would be adjusted, and damages that are not
compensated under FELA but are compensated under no-fault
alternatives would be added. However, because the railroads do not
separate the compensation settlements by the various types of
damages, estimating payments under the alternative systems involves
estimating the benefits that workers would receive under the
alternatives, summing those benefits, and comparing them with the
lump-sum settlement that the workers actually received under FELA.
We made some modifications to the model to account for changes in the
data supplied by the railroads and to adapt the model to the
alternative no-fault systems that we chose to analyze.
Data were supplied by the Burlington Northern, CSX Transportation,
Norfolk Southern, and Union Pacific railroads. These four railroads
are the same ones that participated in the Mercer Management, Inc.,
study for AAR, and the model is designed to use the data from these
railroads. While only four railroads are used in the estimates,
these railroads represent about 60 percent of the employees of Class
I railroads.\1 The data supplied are for all 10,158 injury claims
closed in 1994 for these four railroads.\2
We looked at the effect on the railroads' injury compensation costs
of adopting a uniform benefit plan that would apply to all workers.
We considered two alternatives whose level and structure of benefits
were derived from the two existing nationwide no-fault insurance
systems that are administered by the federal government. The Federal
Employees' Compensation Act (FECA) defines the compensation system
that applies to civilian employees of the federal government, and the
Longshore and Harbor Workers' Compensation Act (LHWCA) defines the
system that applies to workers employed in the maritime industry.
FECA benefit levels are higher than those under LHWCA, but both
systems authorize higher benefits than are generally paid under state
workers' compensation systems. If the railroads shifted to state
workers' compensation systems, their injury compensation costs would
likely be lower than the estimates presented here, as would the
benefits received by injured workers.
In this appendix, we describe the structure of the model, the
benefits paid under the two alternative systems used in our analysis,
the assumptions we made about inflation and various discount rates,
and the effect of different assumptions about permanent disability.
Finally, we present the results of the model.
--------------------
\1 Class I is a designation used by the former Interstate Commerce
Commission. In 1994, railroads with revenues of at least $255.9
million were designated as Class I railroads.
\2 We had sufficient data to analyze 10,153 of these claims.
STRUCTURE OF THE MODEL
--------------------------------------------------------- Appendix I:1
The Mercer Management model incorporates a main computation model and
four small mapping programs. The mapping programs translate the
unique data sets of each of the four railroads into a consistent set
of inputs for the computation model. The computation model estimates
the benefits that a worker would have received under an alternative
system by running the claim through a number of modules, each of
which computes one of the benefits.
MAPPING PROGRAMS
------------------------------------------------------- Appendix I:1.1
The mapping programs translate the data into consistent forms,
construct new variables, and estimate missing data. Each railroad
tracks information on an employee and the circumstances of an
on-the-job injury in its own way. However, the computation model
requires that all of the variables used to estimate a benefit be
consistent. The primary purpose of the mapping programs is to
translate the railroad-unique data into variables that can be used in
the computations. Because some railroads do not track all of the
data that are required to estimate a benefit, the mapping programs
also construct variables (from available data) and supply data for
missing variables.
We modified the mapping programs supplied by Mercer Management to
reflect changes made by the railroads to their claims files since the
model was developed and to provide the specific variables required
for estimating the benefits of FECA and LHWCA. The only additional
significant change was our substitution of different wage variables
for those used in the original program for missing wage data. For
two of the railroads, CSX and Burlington Northern, we used the median
wage of injured workers in the year of the claimant's accident from
the other railroad in their region (Norfolk Southern for CSX in the
East and Union Pacific for Burlington Northern in the West).
COMPUTATION MODEL
------------------------------------------------------- Appendix I:1.2
The computation model runs each claim through modules that estimate
the benefits for current and future wage loss, scheduled benefits,
vocational rehabilitation expenses, health insurance premiums (for
totally disabled employees), and death benefits, when appropriate.
Parameter values that reflect the benefits of the compensation system
being estimated must be entered. Medical expenses were not estimated
because it is assumed that coverage for medical expenses related to
workplace injury (including medical rehabilitation) would continue to
be provided as it is now through the railroads' health plan if the
railroads adopted a uniform, nationwide no-fault compensation
system.\3
The model produces estimates for each injury claim on the basis of
the severity of the injury. For those workers with temporary and
permanent partial disabilities who return to work, the model
calculates actual wage loss and any scheduled benefits. For those
workers who do not return to work, the model estimates actual wage
loss, rehabilitation expenses, future wage loss, and future medical
premiums. For deaths, the model calculates funeral and survivors'
benefits.
The model permits the user to select values for key parameters in the
estimates. These include wage compensation rates, the scheduled
benefit structure, rehabilitation expenses, health insurance premium
benefits, death benefits, inflation rates, the discount rate, and the
percentage of permanently totally disabled workers who are unable to
return to any employment.
--------------------
\3 This assumption is based on evidence considered in the National
Research Council's 1994 FELA study that indicated that the railroads'
current medical costs for injuries may be lower than those of typical
no-fault workers' compensation systems. Consequently, if railroads
were to join state workers' compensation systems, the medical cost
component of their injury compensation costs would likely rise,
particularly if medical self-insurance were not permitted. Railroads
currently pay 100 percent of the medical costs for work-related
injuries. Both FECA and LHWCA also require 100-percent coverage by
the employer.
BENEFITS PAID UNDER FECA AND
LHWCA USED IN THE ANALYSIS
--------------------------------------------------------- Appendix I:2
The principal benefits paid under the two alternative systems--and
computed by the model--are wage loss, scheduled benefits,
rehabilitation expenses, health insurance premiums for permanently
totally disabled workers, and death benefits. The benefits of these
two systems differ somewhat.
WAGE LOSS
------------------------------------------------------- Appendix I:2.1
Wage-loss compensation may be temporary or permanent, depending on
the nature of the injury. Temporary disability extends from the time
of injury until the employee returns to work. Permanent disability
may occur if some lingering impairment from the injury reduces the
injured worker's ability to work (permanent partial disability) or
prevents any work at all (permanent total disability). The model
estimates temporary total, permanent partial, and permanent total
disability benefits, where applicable.
For FECA, 100 percent of the wages are paid for the first 45 days of
lost work. After that time, either 66.7 percent or 75 percent of the
wages are replaced, depending on the number of dependents. For
LHWCA, the wage replacement rate is 66.7 percent for all lost time
after a minimum period of 3 days for all employees. After 14 days,
the first 3 days are also compensated. Under FECA, the employer pays
the employee's full wage for the first 45 days of the wage loss due
to injury in the workplace. Only if the disability continues past 45
days do the wage replacement and other provisions of FECA apply. At
that time, a 3-day waiting period applies before wage replacement
benefits begins. Those 3 days are compensable if the disability
continues for 14 days or permanent impairment results from the
injury.
Both FECA and LHWCA provide for permanent partial disability
compensation only if the workers' wages are affected (except for
scheduled benefits, which are discussed below). If the worker
returns to work at a lower wage than before the injury, a portion of
the difference between the new and old wage rates is provided as
compensation. This compensation continues as long as the wage loss
continues.
Permanent total disability compensation provides wage replacement
benefits for those workers unable to return to any employment. Under
both FECA and LHWCA, compensation continues as long as the total
disability continues.
Under most no-fault systems, the wages paid for wage replacement are
about two-thirds of the preinjury wages, are not taxable, and are
subject to maximum and minimum amounts. The wage replacement rate is
two-thirds of the weekly wages for workers covered by LHWCA and for
employees with no dependents under FECA. For married employees or
those with at least one dependent, the wage replacement rate is 75
percent under FECA. Under LHWCA, the minimum weekly payment is 50
percent of the national average weekly wage as determined annually by
the Department of Labor. The maximum is 200 percent of the national
average weekly wage. The minimum for FECA is 75 percent of the
salary at the wage rate in the GS (general service) schedule for a
GS-2, step 1, or 100 percent of actual pay, whichever is less. The
maximum is 75 percent of the salary at the highest step of the wage
rate at the GS-15 level.
SCHEDULED BENEFITS
------------------------------------------------------- Appendix I:2.2
The two federal compensation systems, as well as nearly all state
workers' compensation systems, have a limited schedule of benefits
for specific injuries in addition to compensation for lost wages.
These benefits are for injuries that result in the loss of, or loss
of the use of, various body parts including fingers, hands, arms,
toes, feet, legs, sight in one or both eyes, hearing in one or both
ears, and disfigurement.
The benefit schedules for FECA and LHWCA are the same, but because
the wage caps and wage replacement rates of the two systems differ;
the dollar amount received by an employee may differ as well.
Compensation is based on a schedule that provides a certain number of
weeks' pay for each injury, although scheduled payments are not made
while temporary total disability payments are occurring under FECA.
For example, the loss of a leg would entitle the injured worker to
288 weeks pay that is independent of any salary that the employee
might also be earning after the injury.
REHABILITATION EXPENSES
------------------------------------------------------- Appendix I:2.3
For those employees with serious injuries who may not be able to
return to their previous job, vocational rehabilitation is often
available in an attempt to return the worker to some gainful
employment. Both FECA and LHWCA provide vocational rehabilitation
benefits for training and expenses. Rehabilitation expenses depend
on the number of employees who receive vocational rehabilitation and
the average cost per employee. It is assumed that all employees who
did not return to work after their FELA settlement will go through
rehabilitation. Those who are assumed to return to work in the model
are assumed to have been successfully rehabilitated, and those who
are assumed to be permanently totally disabled are not successfully
rehabilitated and therefore are not capable of returning to work.
HEALTH INSURANCE PREMIUMS
FOR PERMANENTLY TOTALLY
DISABLED WORKERS
------------------------------------------------------- Appendix I:2.4
Although permanently disabled workers receive wage replacement, they
may or may not be eligible for continued health insurance premium
subsidies from their employer. Under FECA, disabled federal
employees receive the same health insurance premium subsidy that they
received as employees. There is no requirement under LHWCA for firms
to subsidize health insurance premiums, although firms may elect to
provide injured employees with this benefit.
DEATH BENEFITS
------------------------------------------------------- Appendix I:2.5
Death benefits are typically paid to surviving spouses and dependents
of workers who die from job-related injuries. Funeral expenses may
also be provided. Both FECA and LHWCA provide survivors' and funeral
benefits. Under FECA, the percentage of the deceased employee's wage
that is paid to the survivors depends on the number of survivors.
For example, a surviving spouse would receive 50 percent, and a
spouse and two children would receive 75 percent--the maximum. FECA
provides a funeral benefit of $800 and $200 for the administrative
expenses for terminating the decedent's employment with the federal
government. Under LHWCA, a single survivor receives 50 percent of
the employee's wages; if there is more than one survivor, the amount
is raised to two-thirds of the wages subject to the LHWCA maximum.
The funeral benefit is $3,000.
ASSUMPTIONS ABOUT INFLATION
--------------------------------------------------------- Appendix I:3
Inflation rates are used to estimate future changes in employees'
wage rates, in the national average weekly wage, and in the cost of
health insurance premiums. For estimating future wage increases, we
used the long-term inflation rate for the consumer price index for
urban consumers estimated by the Congressional Budget Office in its
August 1995 budget update-- 3.2 percent. For the health insurance
premiums, we used 6.5 percent as the inflation rate. This rate
represents the recent trend in estimates of the annual increase in
the cost of medical services.
USE OF VARIOUS DISCOUNT RATES
--------------------------------------------------------- Appendix I:4
Discount rates are used in the model to discount back to 1994 the
estimated future stream of payments that injured employees would
receive if they were paid under FECA and LHWCA. Under those systems,
wage replacement occurs as it is incurred. Therefore, an employee
who is permanently disabled would receive wage replacement extending
a number of years into the future. To compare these payments with
the lump-sum settlements made to employees under FELA in 1994, the
payments must be discounted back to 1994.
The choice of discount rates can significantly affect the outcome of
the estimates, particularly when combined with the permanent
disability rate that determines the estimated number of severely
injured workers for whom benefits will be calculated. Therefore, we
ran the model with three different discount rates: 8 percent, 10
percent, and 12.5 percent. These rates are nominal--not
real--discount rates because future benefits have been inflated.
These rates cover a range of possible discount rates around the
7-percent real rate used by the Office of Management and Budget for
regulatory and benefit-cost analyses, which equates to a 10-percent
nominal rate.
EFFECT OF ASSUMPTIONS ABOUT
PERMANENT DISABILITY
--------------------------------------------------------- Appendix I:5
As part of their FELA lump-sum settlements, many injured workers do
not return to work for their previous employer.\4 We assume that for
some, the severity of their injuries may preclude their return to any
work. Others may not be capable of returning to their previous job
on the railroad, and still others may be capable of returning to work
but choose to take their FELA settlement and attempt to find gainful
employment in another industry. If all workers who did not return to
work under FELA were so severely injured that they could not return
to work under the no-fault alternatives, they could receive permanent
total disability payments until their death. For lesser levels of
permanent disability that result in only a partial loss of
wage-earning capacity, workers would receive compensation for a
proportion of this wage loss.
The actual distribution of permanent disability and the resulting
loss of wage-earning capacity determines the compensation that must
be estimated for this group of workers who left their railroad after
settlement. However, the information on injuries reported in the
railroads' files and used as the input in the model is insufficient
to determine with certainty the severity of these employees'
injuries. Because this distribution is unknown, assumptions about it
must be made. A wide range of distributions is possible, each with a
different number of workers at different levels of permanent
disability ranging from 5- or 10-percent disability to a 100-percent
disability (permanent total disability). Rather than estimating a
large number of alternative distributions, various levels of
permanent total disability were estimated; each level is equivalent
in wage compensation cost to a large number of possible disability
distributions.
Assuming that all these workers are not capable of returning to work
would be an extreme assumption, and in the estimates reported, this
is used as one extreme. The other extreme, in which all these
workers are capable of returning to railroad employment, is also
estimated, as are various intermediate points.
--------------------
\4 Of the 10,153 claims closed by the four large railroads, 1,327
claims involved workers who did not return to work after their
settlement.
MODEL RESULTS
--------------------------------------------------------- Appendix I:6
The results of our estimations are presented in table I.1.\5
Besides the benefit levels of the no-fault system being estimated,
the results depend primarily on the discount rate chosen and the
unknown number of workers who are permanently disabled by their
injuries. Table I.1 shows the total estimated payouts for the four
large railroads that we examined for three discount rates and for a
range of assumptions about the incidence of permanent total
disability among the workers who did not return to railroad
employment after receiving their FELA settlement. If all workers who
did not return to the railroad were actually physically capable of
returning to employment at their preinjury wage, then these
railroads' costs might have been only about one-third what they paid
under FELA in 1994. At the other extreme--if all of these workers
are permanently totally disabled and therefore incapable of returning
to any work--then these railroads' costs might have been higher by 13
percent (LHWCA at a 12.5-percent discount rate) to 53 percent (FECA
at an 8-percent discount rate). In 1994, the four railroads paid
$479 million in total FELA payouts.
Table I.1
Estimated Payouts in 1994 for Four Large
Railroads Using Various Assumptions
About the Incidence of Permanent Total
Disability Among Workers Who Did Not
Return to Work Following a FELA
Settlement
(Dollars in millions)
Incidence of permanent
total disability in
percents 8 10 12.5 8 10 12.5
---------------------- ------ ------ ------ ------ ------ ------
0 $164 $168 $174 $146 $149 $154
10 222 217 216 201 196 195
20 280 266 256 256 243 234
30 336 313 296 310 288 272
40 393 361 337 364 334 310
50 453 412 379 421 382 351
60 506 457 417 471 425 387
70 562 505 458 525 470 426
80 619 553 498 580 517 465
90 677 602 540 635 564 505
100 733 650 580 688 609 543
----------------------------------------------------------------------
Although the incidence of permanent disability is unknown for this
group of workers at these four railroads, the break-even point
between FELA and the no-fault alternatives can be seen in the
results. The percentage of workers who must be permanently totally
disabled for the cost of the no-fault alternative to equal the
amounts actually paid under FELA varies with the discount rate
applied and the no-fault systems' benefit levels. (See figs. I.1
and I.2.) The lower the discount rate, the more costly the future
payments to each injured worker and, therefore, the higher the
percentage of workers who must be capable of returning to work for
the break-even point to be reached. The break-even point ranges from
about 55 to 75 percent for FECA-level benefits and from about 60 to
80 percent for LHWCA-level benefits.
Figure I.1: Estimated 1994
Total Injury Compensation Costs
for Four Large Railroads Using
FECA-Level Benefits and
Different Discount Rates
(See figure in printed
edition.)
Source: GAO's analysis of data on FELA claims that were closed in
1994 at four large railroads.
Figure I.2: Estimated 1994
Total Injury Compensation Costs
for Four Large Railroads Using
LHWCA-Level Benefits and
Different Discount Rates
(See figure in printed
edition.)
Source: GAO's analysis of data on FELA claims that were closed in
1994 at four large railroads.
For the group of workers who return to railroad employment following
their FELA settlement, these four railroads would likely have saved
about two-thirds of their actual FELA payouts of $147 million.\6 The
payouts with FECA- and LHWCA-level benefits are shown in table I.2.
Most of the estimated amounts that these workers would have received
under the no-fault options are for wage loss. Under their FELA
settlement, these workers likely received an additional amount for
noneconomic damages (chiefly pain and suffering) and perhaps for some
expected future wage loss or other impairment not shown in their
claim file. If the latter is the case, the estimates for FECA and
LHWCA would underestimate the costs for these workers. The numbers
in table I.1 include the amounts shown in table I.2.
Table I.2
Estimated Payouts in 1994 for Four Large
Railroads for Workers Who Returned to
Work Following a FELA Settlement
(Dollars in millions)
Payout with FECA- Payout with LHWCA-
Discount rate in percents level benefits level benefits
------------------------------ ------------------ ------------------
8.0 $48 $40
10.0 50 42
12.5 53 45
----------------------------------------------------------------------
(See figure in printed edition.)Appendix II
--------------------
\5 If a worker was eligible for a Railroad Retirement Board
disability or retirement benefit, that benefit was estimated and
subtracted from the results reported here.
\6 Of the 10,153 claims examined, 8,826 involved workers who
continued to work for their railroad after their settlement.
SMALL RAILROADS' RESPONSES TO
GAO'S QUESTIONNAIRE ON EXPERIENCES
WITH FELA
=========================================================== Appendix I
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
Table II.1
Responses to Question 1 on FELA
Settlements in 1994
Dollars
paid for
future
Dollars lost wages
paid out- and pain
Number of of-pocket and
railroads and by suffering
reporting insurance Dollars or other
settlement Number of for paid for non-
Categ s of this settlement medical current monetary Total dollars
ory type\a s costs lost wages losses paid
----- ---------- ---------- ---------- ---------- ---------- -------------
Settlements in 1994 with employees who were not represented by attorneys
--------------------------------------------------------------------------------
Work- 120 787 $6,124,536
rela N=393 N=393 $1,630,165 $1,181,085 $3,357,845 N=388
ted N=390 N=390 N=390
inju
ries
Work- 1 1 $339 $0 $449,661 $450,000
rela N=391 N=391 N=391 N=391 N=391 N=391
ted
deat
hs
Occup 7 27 $5,498 $2,525 $74,722 $82,745
atio N=391 N=391 N=391 N=391 N=390 N=390
nal
illn
esse
s
Total 121 814 $6,655,841
not N=390 N=390 $1,625,401 $1,183,610 $3,882,228 N=385
repr N=387 N=388 N=387
esen
ted
Settlements in 1994 with employees who were represented by
attorneys
--------------------------------------------------------------------------------
Work- 68 297 $25,144,92 $30,804,459
rela N=393 N=393 $3,062,812 $2,679,099 3 N=385
ted N=388 N=386 N=386
inju
ries
Work- 5 5 $2,218 $0 $2,947,000
rela N=390 N=390 N=391 N=391 $2,944,782 N=391
ted N=391
deat
hs
Occup 15 171 $20,968 $0 $1,791,354
atio N=389 N=389 N=390 N=390 $1,770,386 N=390
nal N=390
illn
esse
s
Total 68 470\b $29,787,09 $35,542,813
repr N=389 N=389 $3,076,622 $2,679,099 1 N=383
esen N=384 N=384 N=383
ted
================================================================================
Grand 145 1,284 $33,542,81 $42,043,569
total N=388 N=388 $4,697,557 $3,862,709 9 N=377
N=380 N=381 N=379
--------------------------------------------------------------------------------
Legend
N = number
Note: The numbers in individual rows and columns do not total the
numbers in total rows and columns because of missing data.
\a The number of railroads reporting settlements of each type does
not total the numbers in the total rows because of railroads that
reported more than one type of settlement.
\b Out of the 470 cases represented, 311 involved FELA lawsuits and
18 were settled by a jury verdict.
PASSENGER RAILROADS' FELA COSTS,
1994
========================================================= Appendix III
Amount paid
for future
Amount paid lost wages
out-of- and pain and FELA-related
pocket suffering or administrative
and by Amount paid other and
Number of insurance for for current noneconomic Total FELA FELA-related investigative Number of
settlements\a medical costs lost wages losses payout legal costs costs employees Payroll
---------- -------------- -------------- -------------- ------------- ------------ -------------- -------------- ------------ --------------
Total 4,370 $ 8,862,462 $ 9,408,850 $ 65,444,212 $ 83,715,524 $ 8,287,210 $ 8,896,477 43,804 $
1,607,180,022
Mean 336 $ 738,539 $ 784,071 $ 5,034,170 $ 6,439,656 $ 753,383 $ 808,771 3,370 $ 123,629,233
Number of
railroads 13 12 12 13 13 11 11 13 13
-----------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
1. Passenger railroads are listed in appendix IV. In 1994, the
following commuter rail systems were operated by the National
Railroad Passenger Corporation (Amtrak) and are included in the
table: Connecticut Department of Transportation (Connecticut DOT),
CalTrain, MARC, Massachusetts Bay Transportation Authority (MBTA),
Metrolink, and the Virginia Railway Express. The information for
Metra includes only operations run directly by Metra, not Metra
operations run by Burlington Northern Railroad and Chicago and North
Western Transportation Company. The data on MARC include only
operations run by Amtrak, not those services operated by CSX
Transportation. The information for MBTA includes only cases handled
by Amtrak, not those cases directly litigated by MBTA. We did not
obtain information on FELA from the following commuter rail systems
for the reasons indicated: Tri-County Commuter Rail Authority is
under the Florida workers' compensation program, the San Diego
Northern Railway and Dallas Area Rapid Transit had not begun
operations in 1994, and the Southeastern Pennsylvania Transportation
Authority did not provide us with information.
2. In general, when Amtrak operates commuter railroads, it
administers and pays for cases related to FELA on behalf of the
commuter railroad in return for a fee based on a percentage of
payroll. The exception to this is MBTA, which, in 1994, directly
handled and paid for its litigated FELA cases itself.
\a Of the 4,370 settlements, 950 involved lawsuits and 52 involved
jury verdicts.
Source: Amtrak and commuter railroads.
ORGANIZATIONS CONTACTED FOR THIS
REVIEW
========================================================== Appendix IV
FEDERAL AGENCIES
-------------------------------------------------------- Appendix IV:1
Federal Judicial Center
Federal Railroad Administration
Office of Workers' Compensation Programs, Department of Labor
Railroad Retirement Board
Social Security Administration
FREIGHT RAILROADS
-------------------------------------------------------- Appendix IV:2
Alaska Railroad
Burlington Northern Railroad
Canton Railroad
Chicago & Illinois Midland Railway
Colorado & Wyoming Railway
Conrail
CSX Transportation
CP Rail Heavy Haul U.S.
Dakota, Minnesota & Eastern Railroad
Eastern Shore Railroad
Emons Transportation Group
Great Western Railway
Gulf & Ohio Railways
Illinois Central
Indiana & Ohio Rail Corporation
Kansas City Southern Railway
Maryland & Delaware Railroad
Norfolk and Portsmouth Belt Line Railroad
Norfolk Southern Corporation
Pinsly Railroad Company
Rail Management and Consulting Group
RailTex, Inc.
Southern Pacific Lines
Union Pacific Railroad Company
Washington Central Railroad
Wisconsin Central Ltd.
(398 small railroads provided us with information through our survey)
PASSENGER RAILROADS
-------------------------------------------------------- Appendix IV:3
Amtrak
CalTrain--Peninsula Corridor Joint Powers Board
Connecticut DOT
Dallas Area Rapid Transit
Long Island Railroad
MARC
Massachusetts Bay Transportation Authority
Metra
Metrolink--Southern California Regional Rail Authority
Metro-North Commuter Railroad
New Jersey Transit
Northern Indiana Commuter Transportation District
Port Authority Trans Hudson Corp.
San Diego Northern Railway--North San Diego Transit Development
Board
Southeastern Pennsylvania Transportation Authority
Tri-County Commuter Rail Authority
Virginia Railway Express
ASSOCIATIONS
-------------------------------------------------------- Appendix IV:4
Academy of Rail Labor Attorneys
American Arbitration Association
American Short Line Railroad Association
American Public Transit Association
American Trial Lawyers Association
Association of American Railroads
National Association of Railroad Trial Counsel
Regional Railroads of America
UNIONS
-------------------------------------------------------- Appendix IV:5
American Federation of Railroad Police
Railway Labor Executives Association
Safe Transit and Rail Transportation, on behalf of the following
unions:
American Train Dispatchers
Brotherhood of Locomotive Engineers
Brotherhood of Maintenance of Way Employees
Brotherhood of Railroad Signalmen
Hotel and Restaurant Employees Union
Firemen and Oilers National Conference, Service Employees
International Union
International Association of Machinists
International Brotherhood of Electrical Workers
International Brotherhood of Boilermakers, Iron Ship Builders,
Blacksmiths, Forgers and Helpers
Sheet Metal Workers International Association
Transport Workers Union
Transportation Communications International Union
United Transportation Union
INSURANCE COMPANIES/BROKERS
-------------------------------------------------------- Appendix IV:6
Alexander and Alexander, Inc.
American Custom Insurance
Canton Agency, Inc.
Continental Excess and Select
Cigna Specialty Insurance
Fireman's Fund Insurance
General Star Insurance
Leach Agency
Lexington Insurance Company
Reliance Insurance Company
Shortline Railroad Insurance Brokers
United Underwriters Agency, Inc.
United Shortline, Inc.
Zurich American Insurance Group
RAILWAY CLAIMS SERVICES
-------------------------------------------------------- Appendix IV:7
Railway Claim Services, Inc.
Rail Services Incorporated
STATE WORKERS' COMPENSATION
ORGANIZATIONS
-------------------------------------------------------- Appendix IV:8
California Division of Workers' Compensation
California Workers' Compensation Rating Bureau
Illinois Industrial Commission
Nebraska Workers' Compensation Court
Pennsylvania Bureau of Workers' Compensation
Pennsylvania Workmans' Compensation Appeals Board
Texas Workers' Compensation Commission
OTHER
-------------------------------------------------------- Appendix IV:9
California Workers' Compensation Institute
National Center for State Courts
National Council on Compensation Insurance
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Phyllis F. Scheinberg, Associate Director
Francis P. Mulvey, Assistant Director
Richard A. Jorgenson
Carol A. Ruchala
Jonathan T. Bachman
SaraAnn W. Moessbauer
Phyllis D. Turner
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Michael R. Volpe
Michael G. Burros
SEATTLE-SAN FRANCISCO FIELD
OFFICE, SEATTLE, WASHINGTON
Sarah R. Brandt
Adrian Gonzales
*** End of document. ***