OKLAHOMA'S workers' compensation rates are too high and far out of line with other states. We support major workers' compensation reform, particularly moving to an administrative system. But we're concerned that another proposal could potentially undo much good achieved by that reform.
House Bill 2201 and Senate Bill 1026 would mutualize CompSource, turning it into a private entity. Legislatively created in 1933, CompSource was designed as an insurer of last resort for those who can't get coverage through the private market (known as the “residual market”). But in subsequent decades, CompSource has become a state-run direct competitor for private carriers.
Critics argue that CompSource has a financial advantage over private carriers because it doesn't face the same rate regulations. Those advantages partially explain why the company now controls about 33 percent of Oklahoma's market, far more than any private competitor. These facts make the case for privatization, which we generally support, but proposals to mutualize CompSource would continue providing it favorable regulatory treatment. As a result, privatization may not increase competition. It could actually impede it.
Although CompSource would be subject to premium taxes and guarantee fund contributions like other carriers, early versions of the privatization bills exempt it from having to submit rate increases for state Insurance Department review. Meanwhile, that agency could order other private carriers to modify rates. Private-carrier rates must also be tied to the loss-cost modifiers issued by the National Council on Compensation Insurance; CompSource would be exempt from that requirement. These provisions could give CompSource financial advantages over its competitors.
As an insurer of last resort, CompSource also gets a federal tax break. In many states, residual policies comprise between 3 percent and 6 percent of the market, although that number nears 15 percent in a handful. But CompSource would reportedly get the tax break on its entire book of business — the full 33 percent of the market. That's another significant financial edge.
The residual market includes new businesses without an established worker safety record. In other states, those companies are typically insured by a state fund for only a year or so. By then private carriers have enough data to set rates for those consumers, prompting those companies' exit to the private market. In comparison, the anticompetitive advantages enjoyed by CompSource have made it the Hotel California of workers' comp: Companies may enter any time they like, but they can never leave. This outcome seems likely to continue under the privatization plans being discussed.
Oklahoma must provide coverage for the residual market, but that doesn't require a designated carrier of last resort. In auto insurance, an assigned risk pool handles residual coverage. In that system, all carriers basically take turns writing residual coverage to equitably share risk.
Policymakers must be mindful that anti-competitive protectionism usually increases consumer costs in the long run. Or it generates unintended consequences when prices are kept artificially low (consider Fannie Mae and Freddie Mac's role in causing the Great Recession).
Instead of creating a level playing field and allowing the free market to sort things out, these privatization plans appear to continue tipping the scales in favor of CompSource, setting competitors up for failure. This could steer Oklahoma to near-monopoly control of its workers' comp market — while easing state oversight of the market's biggest player.
Here's an alternative: Treat all companies the same.