Monday, September 15, 2014

Work Comp and Monopoly Profits

In our Blogger's Panel at the California Workers' Compensation and Risk Conference in Dana Point, CA last week we were asked about whether the Grand Bargain was still relevant.

The panel was commenced on September 11, 2014, 13 years to the date after that fateful day in New York City that changed the face of American history, and that of the world, forever.

What arose out of that day affected not only airline travel, our sense of security and safety, but also workers' compensation.

Because the people at work on that day in the Twin Towers, and the people that rushed to rescue them, were treated differently than the people that were responsible for building the Twin Towers, cleaning up the site for reconstruction and erecting the memorial.

The people directly affected by 09/11 got special treatment. Workers' compensation wasn't good enough for those injured or dead. For whatever reason, Congress and the political powers that oversaw New York's workers' compensation programs determined that the thousands of people and their families deserved more than what their system provided.
Pepperdine University's annual 09/11 flag display.

Perhaps this was just one step along the 100 plus year history of workers' compensation that the previously negotiated Grand Bargain may no longer represent sufficient compensation.

Earlier this year, a Florida trial judge wrote a scathingly long opinion in a case of limited legal affect declaring that state's workers' compensation as unconstitutional because it no longer represented a fair and equitable bargain.

I've written before about the conflict between the social mission of workers' compensation and the business mission - the inherent friction is what creates, in my mind, inefficiencies because people just get confused on what they are supposed to do.

There are some in our community who argue that the only thing that matters is that the employer get good value for the insurance they purchase.

There are others that say that the injured worker is the only one that matters because the safety net of work comp was established for those people.

There are plenty amongst us that say neither part of the deal is working any longer, that government hasn't done a good job of ensuring the viability and ongoing relevancy of workers' compensation.

And there are plenty who make convincing arguments that without all of the vendors to the system, the doctors, the lawyers, the brokers and agents, risk professionals, interpreters, pharmacies, etc., that there would be no system.

Without the big interaction of everyone "on the team" workers' compensation simply would not function. The people that are charged with providing goods and services to make workers' compensation system function won't do so unless there is an upside - and that upside is profit.

Though workers' compensation is a compulsory (for the most part) revenue redistribution system, it takes businesses, clusters of people with a mission of making money, to make it function. Because work comp is compelled by the state, i.e. businesses must have coverage and workers must accept the benefits, we tend to think of it as a monopoly held by the state.

The state seems to hold the power over what does and doesn't happen with work comp. Sometimes there are challenges as to the state's power (witness Judge Cueto in Florida) and sometimes the state itself challenges it's own powers (e.g. California's huge reform, SB 863).

But maybe we are looking at this incorrectly.

What may be the issue is that workers' compensation is NOT a monopoly.

You may take issue with this statement but I was moved to this thought as I read the Wall Street Journal yesterday.

In business, money is either an important thing or it is everything, writes Peter Theil, PayPal co-founder and overall wealth dude, in a Wall Street Journal opinion Sunday.

He opines that there is only one thing can allow a business to transcend the daily brute struggle for survival and that is monopoly profits.

Theil uses the term "monopoly" a bit liberally - his use is not in the pure, complete, domination sense of the word, but in the sense that a business gets so big that there generally can not be any true competition in very tight, albeit vertically deep, niches.

He uses Google as an example of a company with monopoly powers. Think of search and you think of Google. Google dominates web based advertising and though it has a multitude of other products and services, most of which don't make any money, the company is fabulously successful in monetizing Internet search by selling advertising.

Google figured out how to make money out of very small advertising transactions, millions of transactions that are enabled through mass distribution. Most people and businesses don't have a lot of money for advertising in the traditional sense - magazine, television and radio advertising is very expensive.

Google figured that the cost of distribution of ads on the Internet, when personalized through search algorithms, could be arbitraged in a huge way, so an ad that could have cost thousands of dollars in the traditional advertising model only costs a few pennies in the Google model.

But if you look at Google from the bigger picture - that of the advertising world, it represents just pennies on the dollar in terms of the global advertising market.

Yet, Google transformed the Internet, transformed our lives, and I argue has transformed the global society, and the company and its shareholders, have made spectacular profits - what Theil calls "monopoly profits.

Theil ponders:

"So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.


"But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better.


"But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can't dream of."

And I think that Theil describes the present state of workers' compensation eloquently, "If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place."

That's what happens in workers' compensation insurance. The death of a company, or several companies as was the case in the late 1990s and early 2000s, affected rates and premiums for a short while because of the dearth of capital, but ultimately the system continued functioning. Folks weren't happy, but it didn't collapse either.

What Theil argues, if applied to the workers' compensation industry, is that it hasn't evolved; that there isn't any "monopoly profits" to be derived because the system itself stifles innovation. There won't be any huge improvement to workers' compensation in any respect unless someone can see, and realize, excess profit by doing something different.

Is this just to say that work comp "is what it is" and won't be any better no matter what we do? I don't think so.

But I do think that without profits for the companies and people that provide service and goods to the industry there would be no work comp - whether it's doctors, carriers, TPAs, etc.

The government's job under the present workers' compensation model is to regulate all those vendors to ensure a fair playing field, to make sure no one takes excessive profits, that no one be taken advantage of.

Maybe government is doing too good of a job - maybe government needs to focus on those who take, but don't give back.

In Theil's model, the monopoly is rewarded because it returns so much more in value to society and the economy. In workers' compensation there isn't any great reward in returning value, so that just isn't done.

Remember, for some businesses money is either an important thing, or it is everything...

Is workers' compensation still relevant? Yes, I believe it is. But I also believe that 100 years of competition has stifled innovation.


  1. I don't think the State has a monopoly. I think the big insurers own the State legislators, and they the big insures, are the one's with the monopolies. And I would use the word racket over monopoly.

    If WorkComp is UNCONSTITUTIONAL, as the Judge said. Then is not fixing it allowing corporate Oppression&ClassWarfare2continue in the USA?

  2. I would like to see an article of how were treating the mental health of the Victims of this unconstitutional abuse? For Im finding two different schools of thought on the subject, on how we go about treating folks who are truly victims of an oppressive ruling elite class.

  3. How would Winston Churchill frame the question? Something like: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

    We need to remember that injured workers in the 1800s didn't have financial support for medical treatment and lost time, and our current system, though flawed, is a huge improvement over those days. Employees receive benefits regardless of fault, which is a good deal since a significant majority of injuries result solely from employees' own actions.

    Consider an auto accident. The injured person has to manage and pay for his own medical care, and use his own sick or vacation to cover lost time. If the auto accident is in the course and scope of employment, the employee has support and resources to help access appropriate medical care (at no cost) and he receives tax-free temporary disability for lost time. The resources may not be perfect, but they're there, so why the entitlement mentality?

    It's time to start looking at real, workable solutions, and recognize that everyone will need to step up to contribute. We can blame whoever we want for where we are now, but if we stay here, it's our own fault.