Discussing WorkComp #4: Don Quixote and the Administrative State

                               

"What giants?" said Sancho Panza.

 "Those thou seest there," answered his master, "with the long arms, and    some have them nearly two leagues long."

 "Look, your worship," said Sancho; "what we see there are not giants but windmills, and what seem to be their arms are the sails that turned by the wind make the millstone go."

Don Quixote, Chapter VIII

Introduction

In the recently released Dallas Summit Final Report, “regulatory complexity” was named as one of the 3 Top Priority Issues in Workers’ Compensation. The report goes on to further define this friction point as the concern that “regulatory complexity brings cost and does not contribute to the delivery of benefits”. While ridding workers’ compensation of regulatory complexity may seem as hopeless as Don Quixote's tilting at windmills, it need not be: efficient and certain regulations are not only tolerable but also necessary. And I am confident we can achieve efficiency and certainty, if not an elegant simplicity.

Whether you have been in the workers’ compensation industry for months, years, or decades, you may well have wondered if the system would be improved if every injured employee and every employer, regardless of state, were subject to simple and uniform rules regarding indemnity benefits, medical treatment and conflict resolution. If so, you may have also wondered whether such a program might be directly administered by the federal government, or as the result of collaborative and voluntary efforts by all of the states, or as part of a state response to federal mandates. (I have not mentioned the very separate issue of opt-out, which I will address in a future post.) Here are some ideas to think about as you participate in future conversations.

Federalized Workers’ Compensation

I have stated before that I am biased against this idea. First, the federal government is mired in a debate about the reach and effectiveness of the Administrative Procedures Act, under which any such federal program would be developed. One can see the problems in the current controversy over the U.S. Army Corps of Engineers & EPA joint rule concerning “Waters of the United States”, among other activities.

Second, albeit a less substantive aspect, is the legislators’ time spent on whether such regulations should be evaluated on a cost/benefit basis or a benefit/cost basis. For brevity I will simply say that there is an important distinction in a social insurance program, and this would cause further delay and confusion.

Third, FECA benefits have unique design aspects, which if mirrored in a national commercial program would result in moderate (in the case of TTD) or significant (in the case of PPD/PTD) benefit increases, which might have a tremendous impact on employers and fail to reflect specific state economic conditions.

Fourth and finally, the recent track record of expanding regulatory activity is concerning: both Dodd-Frank and the ACA began as laws of about 250,000 words, but enacting regulations became 15-20 million words each. For the record, I did not personally count them.

For balance, I offer some evidence supporting the idea that a federal workers’ compensation program might work. First, the federal government is not a stranger to workers’ compensation. The Office of Workers’ Compensation Programs, including FECA, L&H, BL and EEOICP, have administered claims for nearly as long as state systems, and have a fairly efficient process, involving nearly 3 million employees. Second, with the aggregation of state and federal claims, a federal program would have tremendous leverage in medical treatment costs. Third and finally, one of the recent success stories in federal regulation – in terms of efficiency and thoroughness - is the recent OSHA rule on ergonomics.  Perhaps the DOL has a secret sauce.

Voluntary State Reforms

It is tempting to dismiss this path, since voluntary state reform has been the sole remedy for perceived or actual problems over the past 100 years.   If it is conceded there is a problem with benefits across the country, we are left with what is well stated in a definition of insanity by Albert Einstein, as “doing the same thing over and over again and expecting different results”.

But the fact is that states have routinely addressed issues identified by advocacy groups, carriers, employers, regulators and other stakeholders. The reform process has in fact followed a cycle not unlike the premium changes over time. Much of what has been written over the past 18 months by NPR/ProPublica and others refers to reforms passed over the last 20 years. While it can be easily argued that some reforms in the 1990’s were too aggressive, it can be fairly said that the 1970’s-80’s saw many benefits raised, and those were a response to reforms lowering benefits during the 1950’s-60’s. And so on.

So how do we avoid “doing the same thing over and over again”? By using a ‘best practices’ approach to the regulatory process. Although states adhere to some basic standards regarding notice and comment periods, many studies have shown significant variance in results. See, e.g. studies by Shapiro, Borei-Holtz, Yackee, West and Russo among others. One reason is that some pre-draft processes invite industry stakeholders (with vested interests) to assist prior to the formal notice and comment periods, and rely heavily on their expertise. And final rules rarely provide any clarity for future court review. If we can avoid those issues, and add consistent economic analysis to the mix, we can accomplish a lot.

 Federal Oversight

In the early 1970’s the National Commission on State Workmen's Compensation Laws offered a way of avoiding a total transfer of state authority to a federal program. The National Academy of Social Insurance (NASI), chaired by John Burton, and Peter Barth, its executive director, were leaders in that effort. They suggested that federal oversight would be appropriate if the states could not agree to some basic common structural elements. An initial group of 19 improvements were identified, but since not all states actually made those 19 changes no second group was set forth.

Despite state failures in self-improvement, it is unclear that federal oversight – which would logically include the development of a fiscal ‘stick – would yield much more than an even more complex regulatory structure than those we see today.   Irrespective of political views of federalism, there seem little to suggest that a federal agency approach to making improvements in each state, without direct legislative authority, would help. 

Conclusion

Don Quixote’s giants were windmills, which had the mundane task of “mak[ing] the millstone go”. Likewise, WC regulations may seem to be the unassailable constructs of special interests, but they are merely signposts on the path of an employee’s injury and recovery. As in previous posts, I leave you with the simple request that you work to understand why our system operates as it does and then participate in the process to improve it.

About the Author

Henry Cabaniss is President of Transform WorkComp, where he provides program consulting to PEOs and advises equity investors on opportunities in the workers’ compensation industry. He has been in the workers’ compensation industry for 20 years.

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