The Benefits of Sizing Your State Up to Others

Oregon’s workers’ compensation reform shows benchmarking (when done right) can lead to big gains in efficiency.
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It may be hard to believe in these days of governmental cost-cutting, but back in the early 1970s, a federal commission came to the conclusion that state workers’ comp programs weren’t providing nearly enough support to employees who were injured on the job. Over the next two decades, these efforts were expanded. But beginning in 1990, says John Burton, who had chaired President Richard Nixon’s workers’ compensation commission, “the momentum definitely switched to concerns about reducing costs in workers’ compensation.”

That’s because some officials are concerned that comp programs can hurt economic development efforts. The more expensive the program, the logic goes, the more difficult it will be to attract new businesses to a state. That’s a persuasive argument.

Workers’ comp has been a stellar example of the use of benchmarking to help states lower program costs. One of the most respected and widely accepted benchmarking efforts has been Oregon’s. Nearly three decades ago, Oregon started to compare workers’ compensation premium rates across states. The exercise wasn’t simple. Mike Manley, research coordinator for the Oregon Department of Consumer and Business Services (DCBS), explains that the industry mix is different in each state. In order to compare states, Oregon had to shift the industry mix in other states to resemble its own.

The first study, in 1986, showed that Oregon had the sixth-highest workers’ comp rates of the 50 states and the District of Columbia. By 2012, however, Oregon’s rates were a more comfortable 16 percent below the national median. (By contrast, neighboring California was 55 percent above the median in 2012.)

The study initially helped Oregon confirm that its rates were out of line with those in other states. Over the years, it has helped keep attention focused on the issue and encouraged leaders to develop new ways to lower costs while still offering adequate benefits to injured employees. It is not necessarily beneficial to be the least expensive state -- it may mean that benefits are too skimpy -- “but probably no state is aiming to be the most expensive either,” says Manley.

One step the Oregon Legislature took, for example, was to provide an incentive to encourage employers to get injured employees back to work more quickly by putting them in a less strenuous job. Another cost-cutting measure states have used is improving workplace safety and keeping close tabs on medical costs.

Oregon’s workers’ comp benchmarking is unique in that it looks at all 50 states -- not just its regional competitors -- and examines a single important factor, which is an approximation of the insurance premium. It does not explain why states are different, or why costs are going up. This limits the capacity of the Oregon numbers to be the final word on workers’ comp rates. But that has not stopped it from being useful, sometimes in tandem with other benchmarking projects. Montana’s state economists, for example, have utilized the Oregon work in their efforts to drive down high workers’ comp rates, as have those in Florida, where reliance on benchmarking data played a large role in that state’s workers’ compensation reforms.

Of course, as a result of the adjustments to other states’ industry mix, Oregon’s benchmark survey is not as precise a ranking of workers’ comp rates as other states might like. Ultimately, that doesn’t matter. As in many other benchmarking exercises, well-informed users of this data don’t assume that state 44 is necessarily any better or different than state 43. This is kind of an old lesson about benchmarking. A difference of one, two or even 10 places isn’t necessarily meaningful (though the press seems to believe it is).

This leads, in turn, to one of the golden rules for the use of most benchmarking exercises. Rarely is a methodology precise enough to make fine distinctions between governments, particularly those in the middle of the pack. But there is a strong and convincing difference between the governments in the top 10 and the bottom 10. If you’re the second most expensive or the 10th, you’re still out of line with other states -- and that gets attention.

From our perspective, that is really one of the most significant things about benchmarking -- in workers’ comp or any other field. It’s very easy for a state or a city to ignore all manner of measurements -- and many do. But it’s a lot more difficult to cast aside well-executed studies that compare one entity to another, particularly when they’re competing in the same geographic region. Nothing succeeds in the public sector more than triumphing over your next-door neighbor.

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