| February 4, 2011
Time to Make Workers’ Compensation Reform a Priority
According to a business survey conducted last year by The State Chamber of Oklahoma, business owners believe that the cost of the Oklahoma’s workers’ compensation system is the second most important issue facing them today. Ahead of “Oklahoma’s tax system and the tax burden on business” and second only to “access to a skilled workforce,” almost one-quarter of Oklahoma business owners ranked the state’s workers’ compensation system as the single most important issue that is threatening the success of their businesses (see Figure 1 on the following page). Workers compensation insurance provides for benefits to workers’ who are injured on the job or who have a work-related illness.
The importance of creating the most hospitable environment for job creation and business expansion should make workers’ compensation reform a legislative priority in 2011. At times the state-sponsored workers’ compensation program, CompSource, has been in a tenuous financial position. Most states have some sort of state-sponsored workers’ compensation program, but it is interesting to look at those that do not.
Oklahoma vs. the U.S.
Nationwide, there has been a general trend to allow open competition in the workers’ compensation insurance market. Contrary to conventional wisdom, open competition is reducing coverage costs and worker injury rates. This has occurred in a climate of robust open competition, where private insurers set their own rates. While this is forbidden in Oklahoma, it is worth looking at the evidence from other states’ experiences.
Using data from the National Academy of Social Insurance, Oklahoma ranked 14th in the nation for largest increase in total workers’ compensation benefits paid out from 1999 to 2008. The average national increase for the 50 states and the District of Columbia was 44.73 percent. Oklahoma had a dramatic 68.11 percent increase, despite fewer workplace injuries and illnesses in the state (see Table 1).
The four states—North Dakota, Ohio, Washington, and Wyoming—that operate as the sole workers’ compensation provider and do not allow competition between the state fund and private insurance companies saw an average increase of 51.93 percent. The four states—Michigan, Nevada, Texas, and West Virginia—that have privatized or mutualized their workers’ compensation programs saw an average increase of 2.27 percent.
In other words, Oklahoma’s payout grew at a rate 30 times higher than in the states that have reformed their systems to a privatization or mutualization approach (see Figure 2).
Oklahoma and Nebraska are the only states that have not yet adopted an administrative approach to settling workers’ compensation claims. By making litigation the last option in a workers’ compensation dispute, the reliance on attorneys and the potential for abuse are limited—which can dramatically reduce costs and create a more efficient and equitable system.
Created in 1933 and originally funded by the state, CompSource, formerly known as the State Insurance Fund, was intended to be the insurer of last resort. Oklahoma law requires employers to provide insurance to compensate workers injured on the job. Today, CompSource covers more than one-third of the entire workers’ compensation market—far more than the estimated six to seven percent of the state’s residual market (the market of last resort for businesses that might not be able to otherwise obtain coverage). The next-largest insurer has less than 13 percent of the total market.
In Oklahoma, workers’ compensation benefits include coverage of medical costs or cash payout, replacement of lost wages, and payment for death or disability. Employers have three options for obtaining coverage for their employees. They can buy insurance through a state-licensed agent, participate in CompSource, or self-insure through a self-insured group association.
CompSource has 25,000 policyholders and writes 35 percent of the workers’ compensation policies in the state.
While not exactly a government agency, CompSource is not exactly private either. CompSource operates much like Fannie Mae and Freddie Mac, which are federally sponsored government enterprises. They are chartered by the government and receive preferential tax treatment that their competitors do not receive. CompSource employees are state employees. That raises some important questions: Who is financially responsible should CompSource fail? Were CompSource to face insolvency, would Oklahoma taxpayers be called upon for a bailout, or would they dip into the state’s guaranty fund, to which CompSource is exempt from contributing? Most important, should Oklahoma be subsidizing an enterprise that competes with private insurance carriers, especially as the market’s dominant player?
These troubling issues, as well as the state’s skyrocketing workers’ compensation costs and their impact on
Oklahoma job creation and business expansion, make reform a top priority.
Privatization or Mutualization?
While there seems to be strong support for reform in the state legislature, one of the major obstacles has been which approach to take—privatization or mutualization. The privatization approach is a superior approach in terms of limiting the role of state government to its essential functions, as well as giving the state a one-time infusion of much-needed cash. However, either approach is far superior to the status quo.
According to one actuarial source, CompSource is valued at $300 million. If CompSource were privatized, the state would receive the proceeds from the sale. If mutualized (which would essentially transfer ownership to policyholders), a sale at this amount is the equivalent of more than $11,500 per covered worker. With any sale or transfer, the “buyer” could be the insurer of last resort as part of any sale or transfer agreement. This “problem” of who owns CompSource, which will ultimately determine who will receive sale proceeds, is one that will ultimately be decided in the courts.
That is because any legislative reform that privatizes or mutualizes CompSource will undergo judicial review. If the Oklahoma Supreme Court does not take jurisdiction and resolve the issue of whether CompSource is a state asset, then lawmakers should build a political consensus around the idea of reform. A comprehensive reform bill could contain an automatic “fallback” option should the primary option be rejected by the judiciary. That way, the choice will not be between the status quo and privatization or between the status quo and mutualization. Instead, the choice will be between comprehensive reform and the status quo.
A New Approach
Both of these approaches deserve further scrutiny and consideration, as do other approaches. For example, the state might want to encourage more variations of self-insurance; hybrid approaches to insuring health care, workers’ compensation, and disability under a single, portable insurance policy; or allowing some firms to forgo workers’ compensation altogether (which is allowed in Texas, which mutualized its workers’ compensation system, and where about one-third of employers do not participate). Oklahoma policymakers should be seeking more innovation and flexibility in allowing Oklahoma businesses to meet their workers’ interests and needs, while assisting—only when absolutely necessary—in cases where a firm cannot obtain coverage in the private market.
The current workers’ compensation system was originally designed for a 1930s workforce and has not kept pace with today’s modern workforce. The time has come to adopt an approach for the 21st century—fiscally responsible and with the flexibility to reflect the state’s changing workforce. Reform options should include, but are not limited to:
- Privatization (or mutualization) of the state’s CompSource program
- Converting the workers’ compensation system into an administrative one, with litigation as the last resort
- Allowing carriers more flexibility in rate setting with some measures for rate stabilization during the system’s transition
- Allowing employers more flexibility in coverage options
Oklahoma is lagging the nation and, more important, its neighbor to the south when it comes to providing a more equitable approach to workers’ compensation for both taxpayers and the state’s businesses. Allowing the perfect to be the enemy of the good will only serve to obstruct reforms that will reduce the undue burdens on Oklahoma business and taxpayers.
Naomi Lopez Bauman (B.A. in economics, Trinity University; M.A. in government, The Johns Hopkins University) is a public policy consultant.