Friday, May 4, 2012

OK Demonstrates Disruption Will Occur

By now you have likely heard that the Oklahoma non-subscription option bill, HB 2155, failed to pass out of the state House, ostensibly because of some amendments that occurred to the proposed legislation while it was in the Senate.

Bill Minick, president of non-subscription brokerage PartnerSource and fellow Pepperdine Law School alumnus, said in a press release:

At the end of the day, Oklahoma House Bill 2155 was defeated for many reasons: some political, some philosophical, some strategic…but most ALL about money. Our primary opponents were a few workers’ compensation insurance carriers and a large group of trial attorneys, all of whom wrongly consider themselves “stakeholders” in the Oklahoma workers’ compensation system. They focused substantial resources on blatantly misrepresenting the adequacy and administrative process for Option benefits. They also worked hard to generate fear among small business owners, medical providers, and insurance agents, without pursuing either research or dialogue that would have led to greater understanding and advancement of a further-improved system. What this odd carrier/attorney alliance most feared was losing tens of millions of dollars annually in their own profits from one of the most highly contentious, expensive and economically-debilitating workers’ compensation systems in the United States. 

Did the Oklahoma non-subscription option bill really fail?

Or, as Minick contends, did it succeed by breaking new ground and starting a new dialogue?

I'm going with the second option.

First, Bill is right when he alleges that industry forces "consider themselves 'stakeholders'" - there are only two: employer and employee. All others are vendors. The job of workers' compensation is to enable employers to provide employees with reasonable protections in the event of a work injury/disease in an economical fashion. That equation has room for only two variables: employer and employee. All others are add-ons. They have nothing at stake other than profit.

I don't know for a fact that the insurance industry and the trial attorneys worked together to defeat HB 2155, or what their fears were, but I suspect that Minick is correct that the issues were all about money.

Employers pay the bills. Employees get protection. That's The Deal. Everything else enables this situation and they do so in anticipation of profit.

There is no question in my mind that non-subscription is a huge threat to the insurance industry that makes its money in the workers' compensation industry. Non-subscription is hugely threatening because it is true market competition. If an employer with a sizable workforce, representing an equally sizable premium, elects to take on the obligations of The Deal itself via non-subscription, that removes that employer, and its premium, from the market. Non-subscription in Oklahoma (and in Texas) targets very large employers with big premiums - the large juicy ones that generate the biggest commissions, the largest cash flows.

This is a big threat.

Lawyers are also hugely threatened because non-subscription uses arbitration to resolve disputes. Very, very rarely does a non-subscription case get to the courts. The litigation rate of non-subscribers is virtually nil. There's not a lot of room for lawyers in such systems.

All of the ancillary services that tend to add friction and costs to the workers' compensation system are virtually eliminated in non-subscription because of the control the employer has over the entire process. This is why, in Texas, non-subscribers are reporting savings of over 40% compared to their workers' compensation programs, reporting much higher return to work rates and much higher employee satisfaction.

If we were to have said five years ago that non-subscription outside of Texas could be viable we would have had a good laugh together. At that time it did not seem like there was any appetite for such service nor the political fortitude to bring it about.

But Oklahoma came very close to changing the landscape. And Oklahoma certainly DID change the conversation.

Right now there is a nationally recognized, very well respected and impartial journalist exploring the Texas non-subscription model. He wrote me the other day and said, "Overall, what I called the modernized Texas non sub program -- the one with ERISA plans, for instance -- comes across as quite impressive."

Indeed, the last time I went to Texas to talk to folks involved in non-subscription I too was impressed. These are folks that genuinely care for their work force, and have genuine fear of outsiders intermeddling with their business by taking control over a process that they hold very close - employee management.

Responsible Texas non-subscribers have perfected the employer/employee relationship. Non-subscription goes far beyond just providing protection in an economical fashion. It is a culture change that brings about tight cooperation between employer and employee, increasing trust, production, profits and social responsibility in a private fashion free from governmental mandates that may make no sense to either the business or the culture of the company.

Let's look at it this way - in the current environment there is plenty of talk about "reform", particularly in California.

In California the Brown Administration has made it publicly known that it wants to increase indemnity for injured workers but control costs, which means one part of the workers' compensation equation has to lose.

What if California went radical and contemplated permitting Oklahoma style non-subscription allowing employers to opt out while meeting the minimums of workers' compensation? Don't think this can't happen. What part of the equation loses then? More than just one part; a whole number of vendors lose and THAT is real reform because the cost of reform is spread out against ALL vendors, not just one segment.

The state is partially there by permitting opt outs where there are collective bargaining agreements in place and from what I can see these are, for the most part, very successful.

But these opt-outs have two big problems: 1) only employers governed by collective bargaining agreements can opt out and 2) there is a lack of consolidation between health care and workers' compensation, or what the non-subscribers cover with their ERISA plans.

My opinion has been very clear from the beginning, we can not talk about reforming only the benefit delivery system and that the only way to conduct true reform is to include the risk allocation system too.

As I've opined before, workers' compensation is not a free market. It is an involuntary market and it requires a heavy dose of regulation to keep people playing fair. However people will always seek an advantage. Sometimes this can be controlled, sometimes it can't be controlled, and sometimes we think it is controlled but we're just getting shoveled bovine excrement scented with multi-syllabic words which we don't understand.

This is the risk allocation system. Lots of big words, complex sounding formulas, intimidating numbers that all serve a singular purpose - to keep the uninformed public from understanding what is really going on.

In a future post or two I will try and explain to the best of my limited ability the concepts that allow insurance companies with combined ratios of 126% (or whatever) to still make money and come to California. Suffice to say that without the magic of modern day finance companies that appear to be losing money are in fact making good money over the long term. Don't think this constituency, along with the lawyers, the doctors, the other vendors, feel threatened by the prospect of non-subscription.

Could an Oklahoma style non-subscription system prove fruitful to California? I think it could. Non-subscribers would not be complaining about liens, would not be complaining about the high cost of medical, and would have a more engaged work force. I am convinced of these outcomes based on what I have seen in Texas.

Non-subscription in this manner is HUGELY DISRUPTIVE.

And we know that disruptive technology can not be stopped. It is most apparent in the electronics field where the speed of computing innovation constantly disrupts entire industries - retail (Amazon), computers (Apple), social interaction (Facebook) - the list is endless. Industry disruption isn't isolated to electronics or computing either - service industries can also be hugely disrupted and they have been in the past.

What the Oklahoma non-subscription failure shows is that there is unrest, and that this unrest is very threatening to entrenched interests who fear this model will spread.

But guess what, this model will spread. It can not be stopped. The proverbial cat is out of the bag.

No, Oklahoma non-subscription is not dead - not even close. It came out very powerfully, very swiftly, with adroit speed and momentum to be stopped only by some political missteps.

There is no doubt in my mind that Oklahoma non-subscription will be back in the legislative debate in 2013 and the proponents will be smarter, more tactical, and likely successful.

The revolution has begun. The Oklahoma non-subscription attempt has started a conversation that is changing the landscape.

You've been forewarned.

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