Gone to Texas: Oklahoma's Workers' Compensation System is a Boon to The Lone Star State's Economy

by Daryl Davis

A recent study from the Oregon Department of Consumer and Business Services shows that—in monetary terms—Oklahoma’s workers' compensation system is sixth worst in the country, ahead of only New York, Illinois, California, Connecticut and, last on the list, Alaska. What are the consequences of Oklahoma’s broken workers' compensation system? In business and economic terms, the consequences of not improving this clearly counterproductive system are harrowing: fewer companies, lost jobs, higher unemployment, slower growth, tenuous employer/employee relationships, lower standards of living and higher healthcare costs. It is time for Oklahoma’s legislature to fix its workers' compensation (WC) system.

The bi-annual Oregon study—a comprehensive resource used by industry experts throughout the nation—falls short of telling just how terrible the Oklahoma story is for at least three important reasons. First, the Oregon study assumed a constant dollar value throughout the U.S., disregarding disparate cost-of-living expenses in various regions of the country. Dollars don't go nearly as far in Anchorage or New Haven as they do in Tulsa, so analysts who take the 2012 Census Bureau cost-of-living adjustments into account can see that Oklahoma’s “relative dollar cost” for WC is worse than Alaska’s by more than 25% and Connecticut’s by more than 15%. No other state, after cost-of-living adjustments, comes close to Oklahoma for last place.

Ralph Harvey, CEO of Marlin Oil, provides a keen insight into the second reason why Oklahoma is in an even worse position than the Oregon study suggests: “the [Oklahoma] system in general has a bias in favor of litigation rather than neutral administration of settled principles of law.” In fact, Oklahoma remains one of only three states in the U.S. to still cling to court-based systems. Most Oklahomans have not directly experienced the consequences of the system’s litigious proclivity, so Mr. Harvey’s insightful comment deserves a bit of explanation. Unlike taxes, which are experienced by everyone, WC directly affects five select groups, listed as follows from most to least experienced: 1) the insurance community, 2) the healthcare community, 3) the legal community, 4) employers and 5) employees. Of that last group, most employees will never file a WC claim—it’s just not something the average employee has experience with. In states which follow “neutral administration” of WC, an employee who files a claim starts with Step A which leads to a textbook Step B, followed by Step C and so on—leaving plaintiff attorneys on the outside looking in. The Oklahoma system, on the other hand, fully expects the participation of opposing attorneys and a judge in a courtroom setting. The inefficiency of the Oklahoma system is staggering, as over 90% of WC claims are litigated. Moreover, since the injured employees are thrust into an adversarial framework where all four other groups with a stake in the process have more experience, it's hard to blame them for lawyering up.

The outcome of a workplace injury claim should be judged primarily by the employee’s physical and economic condition after the occurrence compared to before the occurrence. With over 100 years of such claim history, it is not at all difficult to follow “settled principles” for ordinary cases in an administrative sense (Steps A, B and C), leaving attorneys and judges only for outlier claims. As Oklahoma’s system invites participants to roll up their sleeves in the courtroom, its outcomes are negatively skewed by unwarranted and counterproductive psychological factors that have less to do with compensation and more to do with the bewildering legal process associated with filing a claim. The Oklahoma practice of encouraging workers to take their employers to court over injuries that are handled dispassionately and administratively elsewhere in the country can only serve to exacerbate tensions in the workplace between labor and management.

In an administrative state like Virginia, a WC claim can be closed quickly by an insurance carrier with the healthy and properly compensated employee productively back at work—offering no opportunity for ambulance chasing. In Oklahoma, by contrast, that same injury will likely send legal representatives of the employee and his employer to court. Thanks to the adversarial nature of litigation, even when the worker manages to receive a better financial outcome than his counterpart in Virginia might expect, he is likely to exit the courtroom feeling embittered against his employer and the legal system. While the employee experiences alienation and resentment, the employer is left scratching his head, especially since the portion of WC paid directly to the injured employee (i.e., the indemnity, or non-medical, component) in Oklahoma is 34% higher than the national average (see slide 73 of 124 here). This peculiar inequity is challenging for the most able plaintiff’s attorney to rationalize—notwithstanding the large percentage that may go to his own pocket—in the face of Oklahoma’s exceptional low cost of living.

Oklahoma’s combative system offers potential for none of the five groups listed above to be happy exiting the courthouse: The insurance carrier spends excess time and money fighting the plaintiff’s attorney; the doctor’s medical assessment and/or administrative procedures are criticized while remuneration for services performed is too slow and low; attorneys are predisposed to dissatisfaction; the employer’s productivity will have gone down as surely as his WC insurance premiums will go up; and the employee lacks trust in all other players and may not appreciate just how the attorneys get paid.

The reader can easily disregard the irritation that insurance companies, lawyers and doctors share with each other, but the Oklahoma system seems designed to create an unnecessary and potentially irreconcilable rift between employer and employee. This tendency to transform ordinary mishaps into protracted disputes is arguably more damaging to the Oklahoma workplace than the monetary waste already discussed.

To understand the third limitation of the Oregon study, we need to travel both through time (all the way back to the advent of the steam engine) and through space (just across the Red River into Texas). The Industrial Revolution brought with it untold benefits to mankind, but also left factory workers in deathtraps. In Case Studies of Unemployment, Paul Kellogg recapped comments by Canon Burnett circa 1910 (p. xviii):

He pointed out that England in the old time had finely ordered the business of life, with liberty of self-dependence ingrained therein; but all this had been caught in the grappling mechanisms of the Industrial Revolution. These were taking generation after generation of English youths, squeezing them for what they had to give, throwing them aside. Theirs had become a "scrap-heap civilization." Somehow or other, he said, England must work out a new balance between liberty and life. So must the rest of us. Germany had not found the answer under her autocratic arrangements, nor had we in America in our impetuous foray into industrialism.

Popular books like Upton Sinclair’s The Jungle eventually exposed many of the problems inherent in industrialization, but the tipping point for reforming workplace injuries can be found in a book published in 1911, Work-accidents and the Law, authored by Crystal Eastman. Her work finally provided the scientific research detailing how utterly costly (economically, socially and morally) our unsafe work conditions were—which was exactly what legislators around the country needed to justify reform. Eastman went even further by presenting details of progressive companies’ (e.g., U.S. Steel and International Harvester) and one state’s (Montana’s) in-place plans ensuring employees’ welfare. Thus legislators were further enabled to pick and choose the aspects they liked, discarding less desirable components, and adjusting course along the way. By the 1970s, all states (with the single, notable exception of Texas) statutorily required essentially all employers to provide WC coverage to their employees.

Anyone who reads Eastman’s book and then considers how vastly improved our workplaces are today will agree that the institutionalization of workers' compensation has served our society very well: Workplace safety and employees’ rights are ingrained into our post-industrial zeitgeist. After a century, though, our country’s institution of WC has collected dust. There are systemic problems beyond what has already been reviewed—problems to be expected in any overblown, antiquated, bureaucratic complex system that is “managed” from the top down. Medicare—the federally entitled health insurance for retired seniors—offers various similarities to WC. An oversimplified approach to grasp the systemic WC problems we face in the 21st century is to contemplate a nationwide health insurance system for workplace maladies that is twice as out-dated as Medicare and managed by 50 distinct legislatures, each more-or-less as dysfunctional as our federal legislature.

Many problems are to be expected—and, sadly, are too frequently accepted—as inescapable shortcomings of our WC systems: a reluctance by the most desirable providers within the medical community to accept claims; uber-utilization of those providers who do work the system; an unhealthy detachment between employer and employee post-injury; a statutory bureaucratic morass; the tendency for medical conditions that are by-and-large non-occupational to get pushed into the WC system; and layers of entities and middle-men whose compensation lacks transparency. Bigger problems come from any of the five groups listed above gaming the WC system. On that note, it is ironic that when employees attempt to maximize compensation during recovery they are commonly viewed as unscrupulous, yet when doctors morph practices to avariciously subvert a law’s intent while following the letter of that law, they are commonly viewed as enterprising. Worse still is fraud, which costs WC systems nationwide tens of billions of dollars annually.

Because Texas is the only state in the entire U.S. to have developed an alternative to WC, diligent employers in the Lone Star State are able to cut through all the overhead and eliminate each of the above listed problems while taking better care of employees pre-injury (and, quite frequently, post-injury) by opting out of the WC system altogether—enabling them to create a commonsense employee-friendly solution based on free-market principles for less money. Executives for a manufacturer opening a new facility in the South Central U.S. have to contemplate various factors when choosing between, say, Tulsa, Little Rock and Dallas. Weighing the differences between the three WC systems is standard operating procedure in this contemplation. But as many large manufacturers in Texas are already “nonsubscribers to the WC system, that comparison frequently gets tossed out the window as the company is compelled to pay pennies on the dollar as a nonsubscriber in Texas compared to buying WC in Oklahoma, capturing similar savings for its workplace injuries as its peer group. And this decision leads to less administrative hassle system-wide. What can’t be overstated is how well received these market-based solutions are by employees, who give very high claims satisfaction ratings to nonsubscribing employers (see pdf slide 33 of 37 here).

Those in favor of the status quo (the most vocal being trial attorneys) will object that there are a number of factors executives analyze before any expansion, and quite frequently workplace injury solutions are not near the top of the list. They will trumpet conciliatory tips of the hat, like Senate Bill 878 from 2011, which was well conceived but, as with previous efforts towards change, didn’t change much. The average Oklahoman—inexperienced in the ways of WC—is then left to wonder just how high a business priority fixing their WC system should be? Of course, in politics, ulterior motives should always be considered, and knowing who to trust can be challenging. Governor Fallin has provided curious Oklahomans with an excellent arbiter in ranking our problems: The fallinforbusiness.com website shows that WC costs are the single worst business climate factor for executives surveyed throughout the state. It's difficult to imagine any audience more qualified than these executives to assess the relative importance of this business priority.

Changing WC in Oklahoma is important, but it doesn’t have to be hard. In 2012, HB 2155 came within a handful of votes of turning Oklahoma’s workplace injury system from worst to potentially the best in the nation. We are close! And this year Senate President Pro Tempore Brian Bingman has penned SB 1062, which provides the state with a ready-to-go framework for an administrative system that also takes the best components of Texas’ solution and omits the worst. We can adjust course along the way. The burden of the worst WC system in the country will continue to drive away growth opportunities and close down marginally profitable businesses until we solve it. Residents should contact their elected officials; business leaders should work with local Chambers of Commerce; and employers should make their voices heard by the legislature.

Still, it is hard to see what is not there: the factory that didn’t open, that didn’t create jobs, that didn’t improve economic growth, that didn’t improve standards of living in Oklahoma. So for those Oklahomans who struggle seeing what’s not there, here is a visual aid to appreciate the consequences of not fixing a clearly broken WC system: Simply envision the loud, brash Texans who plainly see the economic benefits on a daily basis. The thought of such gloating Texans should provide ample visual aid to help us see what’s not there.