Workers’ Comp Reform Will Spur Oklahoma Economy

April 4, 2013

Perennially debated issues at the state legislature have their own peculiar rhythm. With proposed tax cuts or exemptions, for example, the discussion focuses on the Oklahoma Tax Commission’s estimate of how many dollars the proposal will (depending on your perspective) cost the state or benefit the taxpayers. Perhaps it would be better if, instead, we judged the proposal based on its economic impact. For example, we should ask how much economic growth will occur or how many jobs will be created if we enact this proposal. But too often, it’s just easier to go with what we know.

The same problem arises with workers’ compensation reform legislation. The legislative dance on workers’ comp issues is similar to tax issues; the dance partners are different, but the tune is the same. The legislative leadership assembles its comprehensive reform legislation and, then, in preparation for the coming debate, just as tax bills are evaluated by the Tax Commission, the bill is “scored” by the National Council on Compensation Insurance (NCCI). The NCCI, a private organization respected by all sides in the workers’ comp debate for its gathering and analysis of workers’ comp insurance data, studies the bill and issues a report estimating how much money each of the bill’s reforms will save employers over the cost of the current system. The legislature then battles over which of the reforms to enact and, thus, how much of the cost savings can be preserved.

Last month marked the beginning of this year’s dance. The primary reform vehicle, authored by Senate President Pro Tem Brian Bingman, with technical advice offered by the State Chamber, was released to the public. Accompanying the bill was the eagerly awaited scoring by NCCI. The bill, compared to recent reform efforts, received a good score: NCCI estimates that the reforms included in the bill would reduce state workers’ comp costs by 14.2 percent, or $138 million.

What does this number mean? It means that state employers will save $138 million in costs—money that can go to creating new jobs, increasing pay, or funding other employee benefits. Economically, this significant cut in costs has the same effect as a large tax cut—it increases growth.

But what is most shocking about this estimate is that, according to NCCI, their benefit estimate only scratches the surface of how much this bill’s reforms may spur the economy. The most important reform in this bill is the conversion of our overly litigious and burdensome court system into the administrative system that is the dominant model throughout the nation. Under its existing methodology, NCCI could not calculate how much money switching to an administrative system will save Oklahoma employers, but its report states that the savings may be significant—at least five percent. Thus, the most conservative estimate of how much the structural reform will save, once fully implemented, is a little less than $50 million a year. This savings is in addition to the $138 million.

But the truth is that the shift to the administrative system could save far more than $50 million a year. The administrative system the bill seeks to implement is modeled on the one employed in Arkansas. The latest, most comprehensive study of workers’ comp costs finds that costs in Arkansas are less than half of what the costs are in Oklahoma. If we conservatively estimate that adopting a system similar to that of our neighbor will cut the gap in costs roughly in half, we will reduce costs by about 25 percent. The resulting savings, then, will be $250 million a year. If we match Arkansas, the savings rise to an astounding $500 million a year.

Here, then, is the path of real change. If we can transform our adversarial system, which has the 6th highest costs in the nation, into one more like our competitors in Arkansas (49th lowest), Colorado (43rd lowest), Kansas (41st lowest), and Texas (38th lowest), we will significantly improve our economy. When you understand that our state is the extreme outlier in our region, savings of this magnitude become far more realistic.

While the real reform lies in switching to an administrative system, we should not neglect the importance of those reforms that produce the $138 million of savings identified by NCCI. The bulk of these reforms seek to reduce costs associated with permanent partial disability (PPD) awards. PPD awards, which have nothing to do with the compensation rightly awarded employees when they cannot work, are the biggest pot of money from which plaintiffs’ lawyers get their piece of the action. Not surprisingly, PPD is the category of award where Oklahoma’s costs are far higher than those of other states. Far too often, injured employees go back to the same job, performing the same duties, and get a check for some kind of amorphous permanent damage that obviously doesn’t affect their ability to do exactly the same work. There’s no doubt that there are legitimate permanent injuries that merit compensation. But there’s something fishy about a state system in which the average PPD award has more than doubled since 2002.

The proposed bill seeks to reform the system by limiting both the weekly amounts used to calculate the awards and the number of weeks used in the calculation. These reforms add up to $88 million of the $138 million in savings found by NCCI. The hope is that reducing the size of the pot of gold will persuade those inclined to milk the system for more money that the money available isn’t worth the trouble.

However, the most important proposed reform of the broken PPD system couldn’t be evaluated by NCCI. The bill states that workers who return to the same or an equivalent job will be ineligible for the most abused category of PPD awards (as opposed to compensation for injuries that are self-evidently legitimate, such as the loss of use of a body part.) The business community estimates that this change could save as much $69 million a year.

As important as these PPD reforms may be, it is important to remember that they treat only the symptom, not the cause. The cause of our inflated costs, no matter where in the system they manifest themselves, is the adversarial structure of our system. Even if the current players could no longer cash in by inflating PPD awards, they would find another way to game the system. We will only get our costs under control if we change the nature of the system so that it is designed to effectively and fairly treat and compensate injured workers at the lowest possible cost.

We must also remember that, just as with tax policy, doing the NCCI dance probably isn’t the best way to measure the benefits of true reform. There’s no doubt that the most likely direct cost savings to employers are remarkable. Adding the firm NCCI estimate of $138 million to the possible hundreds of millions in savings produced by moving to an administrative system demonstrates that an astounding $200-400 million in savings is within our reach. This savings certainly dwarfs the paltry few million it might take in government system start-up costs. It would take a special kind of dumb to pass up hundreds of millions of dollars in private savings because you’re concerned about $5 million or $10 million of appropriations.

What matters most are the jobs that will be created and the rising incomes that will be spurred by this infusion of capital into our economy. At a time when we are right to worry about whether we will ever fully shake off our nation’s economic funk, we can’t afford to turn back from this opportunity.

Andrew Spiropoulos (J.D., University of Chicago) is a professor of law at Oklahoma City University. Before joining the OCU faculty, he clerked for Judge Danny Boggs of the United States Court of Appeals for the Sixth Circuit and practiced law with the Chicago firm of Gardner, Carton & Douglas. A former Salvatori Fellow at the Heritage Foundation, he now serves as the Milton Friedman Distinguished Fellow at OCPA. From 2005 to 2006 he served as senior counselor to the Speaker of the Oklahoma House of Representatives.