One of the pending bills on workers’ compensation is the imposition of a cost of living adjustment (COLA) for claims after three years.  It is a classic example of how and why Maine’s laws cripple the state’s economy.

On its face, a COLA makes perfect sense.  Costs go up over time, so the benefits paid to injured workers need to keep pace.  Additionally, when the COLA was repealed years ago it was predicted to save 15% but comp costs have gone down almost 60% since then.    So, the rationale is that there’s plenty of room to add a COLA to the system especially since the current estimated price increase is only 2-3%.  That’s the information the Legislature will receive, all of it true, and that will be the basis for enacting a COLA.

Now for the rest of the story.

Back in the late 80’s, Maine had by far the highest comp costs in the country.  At one point, the state’s average costs were twice as high as the next highest state!  One study showed that average permanent partial disability (the most expensive claims category) costs in Maine were about $58,000/claim when the two big, progressive states of New York and California were less than $12,000 and $17,000 respectively.  Presenting information relative to those catastrophically high costs is very disingenuous.  Even with a 60% cost reduction, Maine’s still ranks well above average nationally in comp costs even while it is losing its industrial base and is one of the poorest states in the country.

Moreover, the major reasons for the cost reduction are not the repeal of the COLA but improved safety and a change in Maine’s economy.  Maine employers have done a tremendous job safety engineering jobs and workplaces.  At the same time, the state has lost over 20,000 manufacturing jobs

(think papermaking, shoes, sawmills) and replaced them with leisure, health care, government, and non-profit jobs—all much lower in comp costs.

And yes, Maine employers saved 60% on comp costs over the years, but those savings were dwarfed by the increase in health care costs.  A quick survey of a number of key Maine employers shows that their return on net assets has been pretty stable over the last many years.  Whatever money was saved on comp stayed in the businesses—probably to pay health care premiums, wages, and other benefits.  The questions the Legislature should be asking are whether or not Maine employers can afford more cost increases given the high taxes, health care, and energy costs they’re already facing, and where the money will come from if comp costs do go up?  (Answer:  stagnant or reduced employee wages, jobs, and benefits.)

This is also a classic example of looking at one particular issue in isolation—a prescription for disaster in today’s complex world.    Total costs in the workers’ compensation system are multiplicative.  Roughly, they result from the number of claimants in the system times the time they’re in the system times the benefit levels.  Right now, Maine’s system sweeps far more cases into the comp system than most states and it has a tremendous amount of process—IME’s, employee advocates, administrative judges, hearings, appeals, and so forth—that keep people in the system.

The benefit levels are not extraordinarily high (and they can’t be because benefits have to be lower than wages and Maine has relatively low wages) and relatively few claimants stay out on comp for more than 2 years.  So, looking at the current system, the addition of a COLA might well only add 2-3% to the system costs, but that’s not what happened when Maine had a COLA years ago.

A COLA is a powerful driver of higher costs when it is applied over a number of years.  Once there’s a COLA the incentives change dramatically and there won’t just be a few people claiming benefits after 2 years.  The COLA Maine used to have essentially created a lottery.

Injured workers will be advised that staying out on benefits and receiving payments over many years with no income tax will bring the COLA into play and significantly increase the settlement value of claims—especially for younger workers.  There’s another LD pending to eliminate the durational caps on benefits, and the interactive effect of those laws plus the relative ease of claiming benefits will incentivize workers and their attorneys to claim long durational benefits and very large settlements.  Individual claims costs could be 50-150% larger than for the exact same claim today.

At the end of the day, the system costs are likely to far exceed 2-3%, Maine will be a major outlier in this area relative to other states, employers will have an even harder time competing for business, employees will lose wages and benefits, and there will be more contention, complexity, and confrontation in the comp system—all of which cost money.  The Legislature will believe it has helped deserving injured workers without realizing the damage it will have done to working families, employment, the tax base, and the economy.