Tag Archives: injury claim

What Happens When Big Firms Opt Out?

A 74-page study released on March 18, 2016, covers 15 large, multi-state employers that provided their Texas employees with customized occupational injury benefits in lieu of workers’ compensation coverage between 1998 and 2010. This is Professor Morantz’s second research study on Texas “nonsubscription” (also known as the Texas “option” to workers’ compensation).

The new report is found here.

Major findings:

1. Option programs paid better wage replacement benefits than workers’ comp programs did.
2. The frequency of severe, traumatic employee injury claims was cut in half.
3. The percentage of employees disabled dropped by a third.
4. Employer costs were cut in half.
5. Coverage exclusions had minimal impact on cost savings.
6. Negligence liability exposure gave incentives to option employers to invest in safety.
7. As large Texas employers elected the option, workers’ compensation costs dropped.

In the study, Morantz stated all the study participants “offered employees private plans whose benefits roughly resembled (yet also differed from) those available through workers’ compensation.” She said, “Some ubiquitous features of private plans—such as first-day coverage of lost earnings  and wage replacement rates that are not capped by the state’s average weekly wage—are more favorable to injured workers than workers’ compensation.”

See Also: Texas Work Comp: Rising Above Critics

Morantz expressed concern in her study because past studies have confirmed the existence of two moral hazard effects:

  1. “Risk-bearing” moral hazard predicts employees will take more risks on the job as benefit levels increase; and
  2. “Claims-reporting” moral hazard refers to the expectation that a worker will be more likely to file an injury claim (including for a feigned or off-the-job injury) as benefit levels increase.

The study says: “Consistent with the existence of both moral hazard, nearly all studies have found that increasing benefits or shortening waiting periods increases the frequency, cost and duration of claims.”

Fewer Traumatic Claims and Lower Costs

In spite of this historic research on injury benefit improvements, Morantz found:

  • Frequency of severe, traumatic injury claims declines by about 47% under the Texas option;
  • Serious claims involving replacement of lost wages are about 33% less common in the option environment;
  • Employer costs per claim fell by 49% under the option;
  • Employer costs per worker hour fell by about 44%; and
  • Although the fall in wage-replacement costs is larger in percentage terms, the decline in medical costs was equally consequential.

Coverage Exclusions Have Minimal Impact.

The option injury benefit plans studied all contain:

  1. Exclusions (non-coverage) for permanent partial disabilities;
  2. Exclusions for certain diseases (such as any caused by mold, fungi, pollen or asbestos) and some non-traumatic injuries (such as non-inguinal hernias, cumulative trauma if the employee has worked less than 180 days, carpal tunnel syndrome, chronic fatigue syndrome and fibromyalgia),
  3. Caps on total benefits; and
  4. An exclusion for chiropractic care.

Morantz found these exclusions from benefit coverage account for little of the estimated cost savings, writing, “Even when all four factors are accounted for, [the Texas option] is still predicted to lower total cost per worker hour by more than 35%.”

Benefit Enhancements and Liability Exposure Lead to Safety Improvements

Morantz mentioned a prior research finding that a rise in benefits can spur employers to invest more heavily in safety. Also, the study says the significantly lower frequency of severe, traumatic accident claims “provides strong evidence for a real safety effect, which is precisely what economic theory would lead one to expect. [Texas option employers] are, at least in theory, internalizing all of the costs associated with workplace accidents (including tort liability), which should induce them to invest more in safety-enhancing technologies.” The negligence liability exposure for employers that elect the Texas option “may prove costly in exceptional cases” and “may strengthen their incentives to implement costly safety improvements” which, in turn, offsets the above moral hazard effects.

Grounds for Denying or Terminating Benefits

Morantz found the majority of private plans include more grounds for denying claims or terminating benefits in particular cases than are commonly found in workers’ compensation. These provisions focus on employee accountability just before or after the injury takes place and on the nature of the injury. (Those provisions are commonly subject to a “good cause” exception that must be administered by a fiduciary under ERISA in the best interests of the injured worker.)

Impact of Employment Status

Contrary to option critics’ claims that all injury benefits cease upon any termination of employment, Morantz found that medical benefits continue unless the employee is fired for gross misconduct. She also found that option plans commonly do not terminate wage-replacement benefits if an employee is laid off, but such benefits do cease if the employee voluntarily quits or is fired for other reasons. Only one study participant’s plan reserved the right to terminate wage-replacement benefits if the employee was fired for any reason at all.

See Also: What Schrodinger Says on Opt-Out

Retaliatory Discharge Claims 

Morantz noted that the Texas’ Workers’ Compensation Act protects employees who file workers’ compensation claims from retaliatory discharge but that employees covered by option programs enjoy no similar protection under state law. However, she also noted the anti-discrimination/anti-retaliation claim available to workers under Section 510 of ERISA.

Drop in Texas Workers’ Compensation Rates as Large Employers Moved to the Option

Although very small firms (those with one to four employees) have always been disproportionately likely to forgo participation in Texas workers’ compensation, Morantz noted that substantial numbers of very large employers (those employing at least 500 workers) began doing so around the turn of the millennium. In 2001, Texas had among the highest reported cost-per-claim among the 14 states included in the annual Workers’ Compensation Research Institute (WCRI) cost benchmarking study. Since then, both medical costs and indemnity payments per claim under Texas workers’ compensation have plummeted.

Need for More Study

Morantz concluded there is an urgent need for further analysis of the economic and distributional effects of workers’ compensation systems co-existing with privately provided forms of occupational injury insurance. This includes the need to further (1) identify which specific characteristics of private plans are producing the majority of cost savings, (2) study potential cost-shifting to government programs or group health plans and (3) consider differences between option programs sponsored by small-, medium- and large-sized employers.

A Victory for Exclusive Remedy on Asbestos

In a recent case, the 2nd Appellate District of California declined to open an new avenue to avoid the exclusive remedy of workers’ compensation in Melendrez v Ameron International Corporation, not only upholding the lower court’s grant of summary judgment for defendant/employer but also allowing the defendant to recover expert witness fees.

The employee, Lario Melendrez, was employed by Ameron for 24 years and was exposed to asbestos from insulation products. In 2011, he died from mesothelioma related to his asbestos exposure. His survivors/plaintiffs attempted to circumvent the exclusive remedy rule by alleging the employee had been allowed to take waste and scraps of insulated pipe home for personal use. Plaintiffs asserted the employee should not be shielded by workers’ compensation exclusivity for his non-work-related use of the employer’s asbestos products. Neither the trial court nor the appellate courts agreed with the effort to create a new exception to the exclusive remedy rule. The Appellate Court commented as follows:

“While we agree that a triable issue of fact exists whether Melendrez’s exposure to asbestos at home arose out of and in the course of his employment with Ameron, that issue is not material to the viability of Ameron’s defense of workers’ compensation exclusivity. It is undisputed that Melendrez’s exposure to asbestos in his employment with Ameron substantially contributed to his mesothelioma. Therefore, under the contributing cause standard applicable in workers’ compensation law, his mesothelioma is covered by workers’ compensation, and his separate exposure at home does not create a separate injury outside workers’ compensation coverage. Thus, plaintiffs’ lawsuit is barred by workers’ compensation exclusivity.”

Citing the recent California Supreme Court holding in South Coast Framing, the 2nd district held:

“Given the purposes of workers’ compensation, courts have long applied a broad concept of contributing cause to bring injuries within workers’ compensation coverage. In short, if a substantial contributing cause of an injury arises out of and in the course of employment, the injury is covered by workers’ compensation, even if another, nonindustrial cause also substantially contributed to the injury. As recently explained in South Coast Framing, Inc. v. Workers’ Comp. Appeals Bd. (2015) 61 Cal.4th 291 (South Coast Framing): “[T]he workers’ compensation system is not based upon fault. ‘It seeks (1) to ensure that the cost of industrial injuries will be part of the cost of goods rather than a burden on society, (2) to guarantee prompt, limited compensation for an employee’s work injuries, regardless of fault, as an inevitable cost of production, (3) to spur increased industrial safety, and (4) in return, to insulate the employer from tort liability for his employees’ injuries.’…”

The court also cited case law that had established that the exclusivity provisions of workers’ compensation also apply to collateral or derivative injuries:

“[C]ourts have regularly barred claims where the alleged injury is collateral to or derivative of a compensable workplace injury.”… see also Vacanti, supra, 24 Cal.4th at p. 815 [“courts have barred employees from suing for psychic injuries caused by their termination, or their employer’s abusive conduct during the termination process]; LeFiell, supra, 55 Cal.4th at p. 284 [“‘[c]ourts have held that the exclusive jurisdiction provisions bar civil actions against employers by nondependent parents of an employee for the employee’s wrongful death, by an employee’s spouse for loss of the employee’s services or consortium, and for emotional distress suffered by a spouse in witnessing the employee’s injuries…'”

The court further distinguished authorities proposed by plaintiff to expand the ability to escape the exclusivity clause. In each of the cases cited by plaintiff, the court noted there were findings that the employee was not performing any service related to employment or even actions prohibited by his employer. In each of those cases, the injury was solely related to the non-work-related episode, and the plaintiff offered no authority to support severing a single injury into separate components as would be required in this case.

Comments and Conclusions:

This case represents an interesting effort to evade the exclusive remedy provisions in workers’ comp. A successful plaintiff’s result could potentially have expanded the ability to file civil actions whenever an employee took home something from work that eventually contributed to a work injury. Think a carpenter who receives permission to take home a tool and later files both a WC injury claim and a civil action against his employer for allowing him to use a work tool at home that resulted in injury. The potential combinations are endless for such scenarios.

Luckily, with this case the exceptions noted by plaintiffs in their brief will remain isolated and not expanded under this ruling.

The Changing Insurance Marketplace And How It Can Affect How Employers Manage Costs

Workers' compensation insurance, like other employee benefits programs, continue to be a major expense to most employers. Decision makers are always looking for ways to better manage their cost, but sometimes the containment can be out of their influence.

For many years, employers enjoyed lower workers' comp rates as a result of reforms signed by our previous Governor and the competitive nature of the California insurance marketplace. Late last year, the workers' comp market began to change and insurance companies began to raise rates and become more selective about which employers they would keep or consider as new customers. Rising medical costs to treat injuries, increases in the insurance company costs of doing business, as well as lower returns of investment by insurance companies also led to this market shift.

Employers who had a series of injury claims, or even a large claim, also experienced greater increases in their workers' comp premium, because of the way their Workers' Comp Experience Modification Factor calculation was changed.

As a result of these premium increases, there has been a move by employers to seriously consider a Professional Employer Organization (PEO) to take the place of their workers' comp and employee benefits programs. A Professional Employer Organization is an arrangement where an employer essentially transfers their employees to another organization who then “leases” them back to their organization. This may relieve employers of direct involvement in the management of employees, but they still retain responsibilities as a “co-employer.”

Professional Employer Organizations have historically been an alternative to employers who have had a history of claims, because the Professional Employer Organization companies seem to offer lower costs. In my experience, most Professional Employer Organizations organizations offered little or no reduction in the number and severity of work injuries and resulted in a continued increase in the employer's Experience Modification Factor.

To obtain up to date marketing information about how the major Professional Employer Organization organization view this changing insurance marketplace and how they are planning to respond to these changes, my firm's specialist contacted the seven Professional Employer Organization organizations that are utilized. The following information was obtained and it is being passed on to you, because this segment of employment and insurance providers is important for employers to know so they can make a more informed decision when considering the use of a Professional Employer Organization:

  • Those employers who are unprofitable to a Professional Employer Organization are receiving rate increases in their insurance premiums and/or administrative fees to make them profitable to the Professional Employer Organization
  • For those unprofitable employers who are not accepting the rate increases, they are being non-renewed. This action is very rare, but is a sign that the Professional Employer Organization marketplace, like the workers' comp insurance companies, are taking actions to become more profitable.
  • Professional Employer Organizations only seem to consider new employers that have at least 10 full time employees
  • The annual employees' compensation must average at least $30,000
  • Professional Employer Organizations are dropping certain industries where the PEOs have encountered consistent non profitability

This information update causes us to conclude that employers who are historically financial losers to the insurance industry are also losers to the Professional Employer Organization organizations.

It can no longer be assumed that a Professional Employer Organization is always a viable alternative to employers who are not controlling their cost of work injuries.

Claims-prone employers who feel they can just “shop” every year to get the lowest rate will probably have a rude awakening.

What are some of changes that employers need to make to avoid a history of frequent and costly work-related injuries to keep employees from becoming “patients” of the workers' comp medical system?

  • Accept that workers' comp is a way to finance claims
  • Understand that you, as the employer, are ultimately paying for each work injury — have a claim and you the employer pays it back plus more
  • Take the selection of employees and safety in the workplace more seriously — match the characteristics of the job with the characteristics of the candidate being considered
  • Take an active role in the claims process
  • Train employees in safe work practices and hold them and their supervisors accountable
  • Maintain a respectful and positive relationship with employees
  • Create an open working relationship with a medical clinic that practices “evidenced based medical treatment”
  • If you do not have the resources to make changes, hire the appropriate insurance advisor to help them

The decisions employers make will determine how profitable their enterprise will be and ultimately will influence the financial value of their business. This is one of those times where appropriate decisions need to be made. The organization's financial success and the welfare of those who are employed by the enterprise are in the “hands” of the company's leaders. Let's hope the best decisions are made.