Will Competition Drive Improvement in Workers’ Comp?

Employers are growing increasingly frustrated by the continued increase in workers’ compensation costs. Reform bills too often fail to deliver on promised cost savings, and the courts tend to keep expanding the scope of what is covered under workers’ comp. This growing frustration has lead many large national employers to seek alternatives to workers’ comp.

Texas has allowed employers to opt-out of the workers’ comp system for several years. Approximately 30 percent of the employers in Texas have chosen that option with most large national retailers leading the way. These same large national retailers were among the leading advocates for the recently passed opt-out bill in Oklahoma. Other states are looking closely at the Oklahoma bill, and more discussion around opt-out in other jurisdictions is likely next year.

Is this the start of a trend towards allowing opt-out nationwide? Is this the beginning of the end for workers’ comp in the United States? Not likely, but the competition from an opt-out alternative may spark a new wave of employer-friendly workers’ comp reforms nationwide.

Texas’ workers’ compensation system has been a leading innovator in controlling litigation, medical treatment guidelines and pharmacy formularies. It is no coincidence that these innovations happened in a state that has a workers’ comp alternative. If workers’ comp is optional and you want employers to stay in the state-based system you need to make it more attractive.

It is also no coincidence that the recently passed Oklahoma legislation included both an opt-out provision and a complete overhaul of its workers’ comp system and benefits. Tennessee also substantially reformed its workers’ comp system and benefits this year. And yes, not coincidentally, discussions of an opt-out provision were had and will likely be discussed again during the next legislative term.

Competition Leads to Innovation

The lesson learned here is that competition leads to innovation and improvement. This is good for employers.

And it’s not just competition from an opt-out alternative that can lead to workers’ comp reforms. States are also in competition with each other for jobs. This was emphasized last year when Illinois passed a significant tax increase. Neighboring states responded by immediately sending out information to Illinois businesses touting how much more business-friendly their states were. Illinois political leaders were upset, but this is the new reality of business.

In the last three years, there has been significant workers’ comp reform bills passed in various states including California, Oklahoma, New York, Michigan, Kansas, Tennessee, Illinois and Florida.The governors of these states cited a desire to attract new businesses to the state as one of the driving forces behind the legislation.

State Reforms

Oklahoma and Tennessee will be changing from a court-based system to an administrative-based system. This leaves Alabama as the only state with a court-based system. This change will save employers significantly on their litigation expenses, and it also should produce more consistent outcomes.

New York’s reforms streamlined the assessment process, with the hope of lowering the state’s workers’ comp assessments, which are the highest in the nation.

California’s reforms made significant changes to their medical dispute and lien resolution processes. These processes were multi-billion dollar cost drivers for employers. If the reforms are successful, the savings for employers could be substantial.

The trend toward employer-friendly workers’ comp reform legislation is expected to continue. Competition with opt-out options and competition for jobs is creating an atmosphere that is ripe for workers’ comp innovation and reforms.