Taking care of injured workers is fundamental to our social fabric. Unfortunately, the economics and politics of workers' compensation have become supersized and the methods by which we deliver injured worker care are outdated.
In 2013, approximately $40 billion will be spent by employers nationally on workers' compensation insurance premiums. Actual workers' compensation costs in the United States are much higher when you consider uninsured claims (within deductibles or self-insured retentions) and other expenses, not the least of which is lost productivity.
Last year, nine insurance companies each wrote over $1 billion in countrywide workers' compensation premium. And there are innumerable service providers (claim administrators, medical providers, medical managers, lawyers, etc.) with multimillion dollar workers' compensation revenue streams. Understandably, these insurance companies and service providers expend vast political capital to protect and grow their businesses.
This is strikingly similar to President Dwight D. Eisenhower's description of the military-industrial complex in his Farewell Address to the nation on Jan. 17, 1961:
"This conjunction of an immense military establishment and a large arms industry [for my purposes, let's replace that with 'immense workers' compensation systems and big industry players'] is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist."
To play off of Daniel Guérin's discussion of the military-industrial complex in his 1936 book Fascism and Big Business, workers' compensation is "an informal and changing coalition of groups with vested psychological, moral, and material interests in the continuous development and maintenance of high levels of [workers' compensation costs], in preservation of [market share] and strategic conceptions of [employee care]."
Further, consider this description, which is built upon the Wikipedia explanation of the military-industrial complex:
* Workers' compensation systems rely on policy and monetary relationships between state legislators, system vendors/providers, and the employer base that supports them.
* These relationships include political contributions, political approval for agency spending, lobbying to support special interests, and oversight of the industry.
* It is an iron triangle of policy-making relationships among state legislative committees, bureaucracy, and interest groups.
* It is a network of contracts and flows of billions of dollars and resources among individuals as well as corporations, state agencies, legislators, and governors.
Workers' compensation is a system designed around a "principal-agent problem" -- the difficulties in motivating an employer to act in the best interests of an injured employee rather than in its own interests.
This problem is addressed today in the same manner as when the first workers' compensation laws were passed in the Industrial Age -- a time dominated by repetitive work performed by cheap labor with virtually no voice or legislative protections.
The legitimate drive toward more employee protections has now gone so far in most states as to create a moral hazard in which injured employees often bear little of the consequences and responsibilities of their own actions.
This moral hazard is supported by information asymmetry, in which injured employees commonly have more information about their actions and intentions than the party paying the benefits, creating a tendency or incentive to behave inappropriately. Employers and insurance carriers are often unable to fully monitor the injured employee and, when learning of fraud or other inappropriate behavior, have no (or severely limited) ability to terminate benefits.
State workers' compensation agencies face tens of thousands of fraudulent claims, and must rely on other government agencies (that may or may not be adequately funded and motivated) to prosecute fraud cases.
Certain well-established workers' compensation structures also reduce total social wealth by spending resources with no new wealth created. For example, medical management and billing practices may extract value without making any contribution to improved medical outcomes or productivity.
In the midst of such immense economic power and systemic challenges, the Texas and Oklahoma legislatures have boldly authorized alternatives to traditional workers' compensation systems. These alternatives ("Texas Nonsubscription" and the "Oklahoma Option") recognize that we are no longer in the Industrial Age.
In the modern employment environment:
* Employers recognize employees as their best asset and strive to be recognized as a "Best Place to Work."
* State and federal laws (particularly those developed over the past 40 years, like the Americans with Disabilities Act, Family and Medical Leave Act, and Employee Retirement Income Security Act) require substantial employee communications and protections against wrongful benefit denial, discrimination and employment termination.
* Claim procedures that balance employee and employer interests can be largely self-executing, requiring minimal (if any) government involvement.
* Government committees and commissions staffed by non-physicians should not be making medical judgments, particularly on individual injury claims.
* Companies and individuals have new technological capabilities to access, gather and utilize large amounts of data.
Going forward, the methods by which we achieve employee protection should reflect these modern-day facts. The time has also come to reconfirm whose interests we are trying to protect and how to do so at the lowest economic and social costs.
There is no perfect, ordained state workers' compensation system; and in the national aggregate, a workers' compensation system-industrial complex has emerged. We need not be guardians of the status quo.
Bill Minick is president of PartnerSource, an employee benefits and risk management consulting firm.
July 18, 2013
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