Tag Archives: opt-out

The Key Choices in Workers’ Comp

Workers’ compensation is a no-fault form of insurance that an employer is legally obligated to secure, providing wage replacement as well as medical, rehabilitation and death (survivor) benefits to employees injured in the course of employment. Workers’ comp is in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for the tort of negligence. The lack of recourse outside the workers’ compensation system is sometimes referred to as “the compensation bargain.” This compromise system also establishes limits on the obligations of employers for these workplace exposures, so that the costs are supposedly more predictable and affordable.

The system is always evolving, and there are key choices in workers’ comp, which I will cover here — and update as the system continues to evolve.

First, some background:

Where did workers’ comp come from?

Workers’ compensation has roots all the way to 2050 B.C., where ancient Sumerian law outlined compensation for injury or impairment involving loss of a worker’s specific body parts. Beginning in the 17th century, most pirate crews, including the one led by English privateer Capt. Henry Morgan, organized fairly sophisticated and favorable benefits for injured crew members. Injured pirates were treated on board and fitted for prosthetics – as popularized in literature and film. Furthermore, they were compensated in pieces of eight depending upon the type and severity of injury. As for modified duty, crew members were oftentimes offered non-physically demanding work on the ship. Such work could include cleaning cannons, cooking meals and washing the ship decks.

In modern times, workers’ comp as we know it today was first modeled in Germany and Prussia in the late 19th century, then adopted in the U.S. in 1908 by the federal government, then in 1911 by Wisconsin. Workers’ comp spread to all states and the District of Columbia by 1948, with Mississippi as the last state to adopt the model.

Why is workers’ comp coverage mandated?

At first, participation in U.S. workers’ compensation programs was voluntary. In 1917, however, after the Supreme Court upheld the constitutionality of compulsory workers’ comp laws, the majority of states then passed legislation that required employers to purchase workers’ compensation coverage for their employees. Requirements varied — and still vary — from state to state. Currently, Texas and Oklahoma have voluntary “opt-out” or “non-subscription” provisions, which allow employers to provide their own formal injury benefit plan options.

How is workers’ comp different from other insurance?

Workers’ comp is intended to eliminate tort liability litigation arising from employee injuries or work-related diseases by providing wage replacement, vocational rehabilitation and medical benefits to employee injured in the course and scope of their employment. This is intended to minimize worker conflicts and to avoid costly lawsuits. The standard workers’ compensation insurance policy is a unique insurance contract in many respects. Unlike other liability insurance policies, it doesn’t have a dollar amount limit to its primary coverage. The coverage is considered “exclusive remedy,” to deny employees the opportunity to sue their employee. In general, an employee with a work-related illness or injury can get workers’ compensation benefits regardless of who was at fault — the employee, the employer, a coworker, a customer or some other third party.

Why does a workers’ comp policy have two parts?

Part One is the standard workers’ compensation insurance policy (formerly known as Coverage A) that transfers liability for statutory workers’ compensation benefits of an employer to the insurance company. If a state increases benefit levels during the term of the policy, the employer doesn’t have to make any adjustments to the policy. Instead, the policy automatically makes it the responsibility of the insurance company to pay all claims due for workers’ compensation insurance for the named employer in the particular states covered by the policy.

Part Two (formerly known as Coverage B) addresses employers’ liability coverage. This coverage protects the employer against lawsuits brought by the injured employee or the survivor. If an employer is thought to be grossly negligent, the employer runs the risk of being sued for that negligence. Under Part Two of the workers’ comp policy, the employer would be defended in such a suit. If a judgment were rendered against the employer, that judgment would be paid by the workers’ comp coverage, but no more than the limits provide for in the policy. Part Two also insures an employer in cases such as third-party “over suits,” where an injured worker sues a third party and that third party seeks to hold the employer responsible.

How states differ

Examine your company’s possible exposures to workers’ compensation claims from different states. If you have employees who live and work in or who travel to other states, you need to make sure you are properly covered in each state. In most jurisdictions, employers can meet their workers’ compensation obligations by purchasing an insurance policy.

Five states and two U.S. territories (North Dakota, Ohio, Puerto Rico, the U.S. Virgin Islands, Washington, West Virginia and Wyoming) require employers to get coverage exclusively through state-operated (“monopolistic”) funds. If you’re an employer doing business in any of these jurisdictions, you need to obtain coverage from the specified government-run fund unless you’re legally self-insured. A business cannot meet its workers’ compensation obligations in these jurisdictions with private insurance.

Thirteen other states also maintain a state compensation insurance fund, but their state funds compete with private insurance. In these states, an employer has the option (at least theoretically) to use either the state fund or private insurance. Those states that offer employers this option are Arizona, California, Colorado, Idaho, Maryland, Michigan, Minnesota, Montana, New York, Oklahoma, Oregon, Pennsylvania and Utah.

FORMS OF FINANCING WORKERS’ COMP

  1. Fully Insured

There are more than 300 workers’ comp insurers writing policies in the U.S., although many will only provide coverage with a high deductible. Most states have a State Fund Insurance Carrier that is the insurer of last resort and provides fully insured (no deductible) workers’ comp coverage to entities operating in their state. State fund programs are also referred to as the residual markets. They are more commonly known as state insurance funds, assigned risk plans or workers’ compensation pool policies. Generally speaking, state insurance funds are non-profit entities that cost more than private companies (10% to 40% higher premiums) but that guarantee availability of coverage as a “last resort” carrier.

Some common reasons that employers fail to obtain competitive quotes from private carriers include: 1) a high frequency of claims or a high cost of claims; (2) the dangerous nature of the risk or industry (based on codes from the National Council on Compensation Insurance, or NCCI); 3) prior bankruptcies or poor financial status of the business; and 4) prior cancellations because of nonpayment of workers’ compensation premiums.

  1. Group or Association Coverage Plans

In various states, there are options for small to medium-sized companies to obtain group coverage through their industry associations. These options include Self-Insured Groups (SIGs), which provide a true self-insured option. Group members make contributions to the self-insured group, and the self-insured group pays expenses and claims for injured workers.

SIGs directly contract for services normally performed by an insurance company. Services secured on behalf of members include: elected Board of trustees, program administration, safety and loss-control services, third-party administration (TPA), independent accountants and actuaries and excess insurance carrier.

Companies must apply for membership and generally indicate adherence to effective risk management and loss control programs.

  1. Large-Deductible Plans

This is a form of self-insurance where the employer is responsible for reimbursing the insurer for claims up to a certain dollar amount and the insurer is responsible for paying claims in excess of that deductible. The insured funds an account (loss fund) to pay losses, and the insured reimburses the fund as losses are paid. The insured must collateralize, usually by letter of credit, an amount approximately equal to the difference between paid and ultimate losses. The actuary is typically one assigned by the carrier.

With the advent of the high-deductible program in the early ‘9Os, actuarial efforts focused principally on pricing issues. Employers are able to save significant premium expenses if they manage their loss-control and return-to-work programs effectively. The “deductible” is a sum that is subtracted from the insurer’s indemnity or defense obligation under the policy. Importantly, the responsibility for the defense and settlement of each claim rests almost entirely with the insurer, and the insurer typically maintains control over the entire claim process.

Large-deductible programs were slow to find favor in the U.S. In 1990, only six states approved of such deductibles. Currently, at least 45 states utilize large-deductible programs for workers’ compensation.

Deductibles are based on a per claim or per occurrence basis, with self-insured retentions of $100,000 to $1 million. The insurer sets the minimum deductible allowed. Insurers initially developed this program to provide both themselves and insureds certain advantages, including:

  • price flexibility, by passing risk back to the insured
  • reduced residual market charges and premium taxes in some states
  • better cash flow
  • coverage options for aggregate limits
  • broadest choice of insurance carriers
  • the possibility that a separate TPA may be allowed as an option to the carrier
  • that certificates of insurance issued to the employer’s key business partners show full coverage and policy limits

With a well-designed and -managed, loss-sensitive product, companies can potentially lower costs by assuming a greater proportion of their risk. You get increased cash flow and lower costs and improve claims outcomes for the business and its employees. What’s important with a loss-sensitive program is that the organization is committed to fully leveraging the insurer’s loss control, claims, medical and pharmacy management programs.

Additionally, it is critical to choose the right risk-financing structure. That involves having the business itself, you, the agent and the carrier carefully examining the organization’s current financial situation and short- and long-term goals.

Because the carrier is legally responsible for the employer’s claims, the carrier will require collateralization of existing and future claims covered by the policy period. Collateral is usually a letter of credit, surety bond or cash.

Keep in mind, however, that choosing a high retention is all about the frequency and severity of your workers’ comp claims as well as the responsiveness and quality of your claims administrator. In essence, the employer is giving the insurance company an open checkbook with respect to the handling and disposition of claims.

  1. Retrospective (Deferred) Premium Options

Retro programs are written through an endorsement on your large-deductible workers’ comp policy. It is the ultimate amount of money you will owe your carrier for the contract period. It can be broken down into installment payments. It consists of basic premium and converted losses, both of which get adjusted by the tax multiplier, which are the taxes and assessments due to the state. The insurer provides you a written agreement that defines the terms of your contract. It will show the basic and maximum and minimum premium, how the premium will be paid during the policy year, how the retrospective premium will be calculated and, most importantly, when you will be eligible for a premium refund. The agreement also defines any penalties associated with a midterm cancellation of the contract.

The two major retro payment plan options:

A.   Incurred Loss Retro:

You’ll pay the same up front as with a guaranteed-cost program, but you’ll be refunded money if your loss experience is favorable. The risk, however, is having to pay additional premium if your loss experience is unfavorable. The cost of the insurance program is determined by the actual incurred loss experience for a specific policy period. Incurred costs include paid costs as well as future expected costs (reserves). The premium is adjusted annually until all claims are paid and closed.

B.     Paid Loss Retro:

Premiums are determined using paid only loss amounts rather than incurred (reserved amounts). Timing of premium and loss payments are negotiated before inception, and disbursements are made as costs are realized and billed. Because this option is typically the favorite of insureds, this option is typically only offered to large entities paying in excess of $1 million in premium.

How is the basic premium determined?

Basic premium is basically the insurer’s cost of doing business plus expected profitability. The amount is determined by multiplying the standard premium by a percentage called the basic premium factor. This factor varies based on your actual premium size and the amount of risk you are assuming. In general, if you take on more risk for your claims, the amount you will pay for the basic premium decreases.

What are converted losses?

 Converted losses are the total claims, also called incurred losses, adjusted by the tax multiplier (see below) and multiplied by the loss conversion factor (LCF), which is negotiated with you prior to the inception of the coverage. As the loss conversion factor increases, you assume more risk, so the basic premium decreases.

What is the tax multiplier?

This is a factor that is applied to the basic premium and converted losses to cover state taxes and assessments that must be paid by your insurance carrier.

What is the maximum premium?

Maximum premium is the most you will have to pay under a retro plan. It helps protect you by placing a limit on the impact of any substantial losses you could have. It can range from 100% up to 150% of audited standard premium. For example, if the audited standard premium was $100,000, and you selected a 125% max, the most you could pay for the total of all retro charges under the specific contract period is $125,000.

When will my money be returned if losses are low?

After completing the full contract period, the first adjustment for a possible refund is usually calculated six months after the policy expiration date. The premium is adjusted according to the retro formula, using the basic premium, converted incurred losses and taxes. If your claim losses are better than expected, you will get as much as 50% of the total estimated refund. Another adjustment is usually made in 12 months, with as much as 25% of the total estimated refund. The final adjustment is at least 12 months after that, with the final 25%. If, however, you have complex indemnity (lost-time) claims that are unresolved, the adjustments may drag out for years.

  1. Captive Insurance

A captive insurance company is an insurance company formed by a business owner to insure the risks of related or affiliated businesses. A captive permits a business to manage its risks while potentially providing substantial benefits to that related business. More than 75% of the Fortune 500 now utilize some form of captive insurance, but captives are usually not a viable alternative for most small to medium-sized companies.

Is a captive still a viable alternative?

The number of captive insurance entities is growing worldwide. Today, nearly 10,000 businesses in the world employ some form of captive insurance coverage. Those totals are expected to triple over the next 10 years as more companies further examine comprehensive and well-targeted risk-management plans. More than 5,750 large companies have their wholly owned captive insurance entities that were formed to insure the risks of the parent company and its subsidiaries.

What risks does a captive typically underwrite?

Captives are formed in 30 domestic locations (state) or in foreign (“off-shore”) domiciles like Bermuda and the Cayman Islands. Vermont is the most popular state. Each domicile has its own set of laws and regulations. To be successful, captives usually cover disparate types of risk, with a good geographical or industry spread. Captives are intended to build financial strength over time and help insulate the parent company from price fluctuations in the traditional insurance market. Increasingly, captives’ owners are also looking to their captive to provide broader coverage, including unusual or emerging risks, where risk transfer is either expensive or unavailable.

The type of risks that captives cover is expanding rapidly, from the more common property damage and casualty coverage, to employee benefits, environmental, cyber, business interruption and other non-traditional covers like operational risk and supply chain. Captives typically provide large companies an opportunity to insure against risks that are generally uninsurable or exotic.

Are there different types of captives?

There are at least 10 types of legal insurance captives, including:

  • Pure captives (single parent)
  • Industry group captives
  • Agency captives
  • Association captives
  • Risk-retention groups (RRGs)
  • Rent-a-Captives
  • Segregated and protected cell captives
  • Special-purpose reinsurance captives
  • Series LLC captives
  • Internal Revenue Code 831b captives.

How is workers’ comp coverage provided in each state?

A commercial insurance company (“fronting company”), licensed in the state where a risk to be insured is located, issues its policy to the insured. That risk is then fully transferred from the fronting company back to the captive insurance company through a reinsurance agreement, known as a fronting agreement. Thus, the insured obtains a policy issued on the paper of the commercial insurance company.

The cost varies for a fronting carrier, which legally assumes the workers’ comp risk it fronts, in the event of default by the captive. The fronting company will almost always require collateral to secure the captive’s obligations to the fronting company under the fronting agreement, in addition to a 4% to 10% fee.

Is there a tax advantage to using captives?

While the tax advantages from captive arrangements should never be at the top of any company’s list, captives can offer accelerated premium deductions, unlike most self-insurance programs. However, if the IRS believes that a captive has been established purely for tax purposes, the agency may challenge the captive status of the company. Comprehensive documentation of the objectives of the captive structure is important.

  1. Self- Insurance

A self-insured workers’ comp program is one where the employer sets aside an amount to provide for any workers’ comp claims and associated expenses—losses that could ordinarily be covered under an insurance program. Self-insurance is a means of capturing the cash flow benefits of unpaid loss reserves and offers the possibility of reducing expenses typically incorporated within a traditional insurance program. It involves a formal decision to retain risk rather than transfer (insure) and allows the employer to pay workers’ comp associated expenses as incurred.

A self-insured workers’ comp plan is one in which the employer has legal approval from the one or more states to assume the financial risk for providing workers’ comp benefits to its employees. In practical terms, self-insured employers pay the cost of each claim “out of pocket” as necessary. The employer maintains its ability to settle or adjudicate each claim within its self-insured retention – assuming it has excess insurance.

Importantly, key decisions, including which vendors to use to treat injured workers and to administer claims, remain with the employer and not an insurer.

How many employers currently operate a self-insured workers’ comp program? 

It is estimated that more than 6,000 corporations and their subsidiaries nationwide operate self-insured workers’ comp programs. Many other smaller employers participate in Self-Insured Groups (SIGs), where they pool their risks with other companies.

How large do you have to be to self-insure?

Each state sets its own minimum standards for eligibility. For example, in California, you only need to have at least $5 million in shareholder equity and a net profit of $500,000 per year for the last five years. Eligibility is not based on the number of claims.

Keep in mind that each state is a distinct entity, so a company might be self-insured in one state where it has a high concentration of employees and have a large-deductible policy in another state with fewer employees.

Does the state require collateralization?

Every state, except California and North Carolina, has mandatory minimum security deposits that consist of: letters of credit, surety bonds, securities or cash. In many states, the amount posted by the self-insured is less that that required by an insurer or captive.

Can self-insured employers protect themselves against unpredicted or catastrophic claims?

Most states, except California, require self-insureds to purchase statutory (no limit) excess insurance from a state-licensed workers’ comp insurer. Where available, a negotiated, aggregate stop-loss (“attachment point”) endorsement protects an employer to a specific policy period dollar cap regardless of the per-claim self-insured retention or number of claims incurred.

Is self-insurance typically only used by large entities?

No. Employers of all sizes typically choose to self-insure because it gives them the greatest opportunity of any workers’ comp funding alternative to manage their own destiny. A self-insured can control its costs by choosing and managing various program vendors and by implementing a wide variety of loss-prevention and return-to-work programs that serve to greatly reduce workers’ comp claims. Self-insureds choose program components that they feel are the most cost-effective and responsive.

Who administers claims for self-insured workers’ compensation programs?

Self-insured employers can either administer the claims in-house (if allowed by the state) or subcontract to a TPA. Other medical treatment or claim-related services can be “unbundled,” or obtained through TPA contractual services.

  1. Opting Out of Workers Comp

The opt-out concept is appealing to those who believe that statutory workers’ comp systems are hopelessly complicated, burdensome to both employers and their injured employees and out of touch. Privatized opt-out programs are intended to better integrate into the matrix of existing employee health plans and benefits.

Just two states have laws that allow employers to opt out of the state-regulated system: Texas and Oklahoma.  Texas has always had this law, with 114,000 employers (about 1/3 of the total employers) choosing to forgo workers’ comp coverage. Oklahoma recently adopted a variation where employers can choose an alternative to workers’ comp coverage.

Practically speaking, “Opt-Out” (“non-subscription”) gives employers enormous discretion to decide under what circumstances to compensate an injured worker under the employer’s own benefit plan. To protect the employer from most negligence lawsuits, as a condition of employment the employer can force the employee to sign a contract so all cases are resolved through an employer-designed, secret arbitration system rather than in court.

One crucial aspect is the adoption of federal standards under the Employee Retirement Income Security Act of 1974 (ERISA) for administering work-injury benefits. A state insurance or self-insured guarantee fund would not back up an opt-out employer that defaults.

With continuing legal challenges to workers’ compensation, including recent lawsuits against Uber and Lyft seeking court approval to mandate workers’ compensation benefits for “app assigned” work, traditional workers’ comp may give way to modern versions of the opt-out programs. The goal would be to create a more seamless benefit program that participants hope will take out the litigation components that have haunted the “no-fault compensation bargain” that began just more than 100 years ago.

Workers’ Comp Is Under Attack

This is the Year of Awareness — awareness by the general public about workers’ compensation issues.

There is the series by ProPublica, with three installments so far and more to come. You might not like it, but Michael Grabell and his team are accurately portraying pain points in workers’ compensation.

The Federal Occupation Safety and Health Administration’s review of the literature over the past couple of decades also fuels the fire about the inadequacy of workers’ compensation, and the spill of employer obligations onto the general taxpaying population.

Last year, the Texas Tribune ran a series, “Hurting for Work,” that criticized that state’s work injury protection system (or lack of it).

And a Florida trial judge has taken the position that workers’ comp is no longer of constitutional grade.

Now, Mother Jones has published an article it says exposes the true intent of the opt-out movement: to diminish benefits across the nation. Opt-out supporters contest that conclusion and say they only want employers (in this case, only big business can afford the resources to opt out) to be able to provide better benefits in a more consolidated manner to their workers. Proponents are not, however, shy about confirming that their intent is to take opt-out nationwide, to all states.

The latest test case is Tennessee, where Sen. Mark Green’s SB 721 has gone through several amendments in an attempt to address critics — albeit, in my opinion, these amendments fall far short.

There are two major problems with opt-out, and in particular with SB 721 if it is to be used as a model: 1) the cap on lifetime medical benefits; and 2) the lack of accountability to public regulators.

Most state workers’ compensation systems have a limitation on both temporary disability indemnity and permanent disability indemnity. There has been for a long time a debate as to the adequacy of indemnity benefits to keep the paycheck-to-paycheck worker sustained during recovery, and those benefits differ greatly from state to state. This debate is sure to continue regardless of what “reform” ever gets passed.

This debate also applies to the adequacy of permanent disability indemnity– whether it adequately compensates for the loss of an eye, etc. Again, where one gets hurt makes a huge difference in how much money a disability is “worth,” and the debate about this will never settle.

The provision of medical benefits for the lifetime of an injured worker, however, has never been on the table — that is a topic that is simply sacrosanct, for the very simple reason that it was part of the original grand bargain.

State reforms have, however, over the past two decades done as much as possible to eviscerate lifetime medical by requiring adherence to guidelines, by scaling based on co-morbidities, by forcing third-party reviews and by trimming reimbursement or rebalancing fee schedules, among other tactics.

These efforts have been in reaction to perceptions that employers are unfairly paying for someone else’s problem, or to abuses by unscrupulous providers. Broad-brush attempts to correct these problems reel in unsuspecting victims, just as tuna nets capture innocent dolphins.

The Mother Jones article is critical of the lobbying efforts of the Association for Responsible Alternatives to Workers’ Compensation, implying that its big-company sponsorships and spending is sinful.

It’s not — it’s just political reality. Just because a bunch of people with resources get together on a specific mission is not a reason to castigate either the people or the mission. It’s done on both sides of nearly any debate. That’s how we do things in America.

Painful as it is for this industry, though, the fact is that workers’ compensation is under attack — from all sides.

Employers are sick and tired of the cost of the system and how little control they have over it. They’re paying for it and don’t see much if any value or return on investment.

And guess what? Workers who go through workers’ compensation are likewise sick and tired over the cost of the system and how little control they have over it.

Is this the fault of us, the professionals who have the task of administering benefits?

In part, yes.

But the larger issue is what society wants, and what all this attention lately is telling me is that society wants a way to provide security to both business and workers — in a manner that is better than what workers’ compensation has devolved into.

I don’t view opt-out as evil. I do view it as a necessary element in the debate about the adequacy of workers’ compensation to deliver on its original promise: protect employers from economic ruin when someone gets hurt, and protect the worker who got hurt.

If you take ARAWC’s mission at face value, what the group wants to do is laudable. It is saying that state workers’ comp systems no longer are a viable piece of the social contract, that private industry can do it better.

Maybe it can, if there are reasonable protections that meet the essential elements of work injury protection — and that means taking care of an injury for life and not stacking dispute resolution in favor of one party or the other.

But this column isn’t about ARAWC, or opt-out; it’s about an awareness that is developing.

Workers’ compensation used to hide in the shadows of healthcare and disability. Ask anyone just a few years ago about work injuries and you’d get an earful about “workman’s compensation” and how a neighbor is cheating the system.

Now the public is beginning to ask: What are all these businesses doing for their pay when there’s all these people who are being thrown to the curb for trash pick-up day? Why are businesses paying for services that don’t seem to be delivered on time or in enough quantity? How is it that an insurance company that agreed to take care of an injured person for life can delegate that obligation to public welfare?

As I see it, the public assault on workers’ compensation, the trend that is developing toward opt-out systems and the overall malaise that seems to have settled over work comp portends a much-needed, long-deserved debate.

The public is asking questions. Hard questions. Because the public isn’t seeing the value in work comp that had been promised (and delivered) for so long.

We’re entering into a whole new era of business vs. labor dispute. The haves and the have-nots are drawing lines in the sand.

The last time this happened, the federal government threatened imposition. It could happen again.

What we rely on for work injury protection systems will be vastly different in 10 years than what exists now. It’s clear to me this is what’s happening.

Less clear is what will actually exist in 10 years.

This article first appeared at WorkCompCentral.

Workers’ Comp Issues to Watch in 2015

Tis the season for reflections on the past and predictions for the future. As we kick off 2015, here are my thoughts on the workers’ compensation issues to watch this year.

What Does TRIA’s Non-Renewal Mean for Workers’ Compensation?

Thanks to congressional inaction, a last-minute rewrite added this subject to the issues for this year. I’m not about to predict what Congress will do with TRIA legislation in 2015, as there are no sure things in the legislative process. We have already seen the reaction from the marketplace. Back in February 2014, carriers started issuing policies that contemplated coverage without the TRIA backstops. We saw some carriers pull back from certain geographic locations, and we also saw some carriers change the terms of their policies and only bind coverage through the end of the year, giving themselves the flexibility to renegotiate terms or terminate coverage if TRIA wasn’t renewed. But while some carriers pulled back in certain locations, others stepped up to take their place. While some carriers tied their policy expiration to the expiration of TRIA, other carriers did not.  Going forward, some employers may see fewer carrier choices and higher prices without the TRIA backstop, but ultimately most employers will still be able to obtain workers’ compensation coverage in the private marketplace. Those that cannot will have to turn to the State Fund or assigned risk pool.

Rising Generic Drug Prices

The opioid epidemic, physician dispensing and the increased use of compound drugs are issues the industry has faced for years. While these issues continue to be a problem, I want to focus on something that is getting less attention. Have you noticed that the costs for generic prescription drugs are increasing, sometimes significantly? In the past, the focus was on substituting generic drugs for brand names, which provided the same therapeutic benefit at a fraction of the costs.  But now the rising costs of these generic medications will drive costs in 2015. These price increases are being investigated by the Federal Drug Administration (FDA) and Congress, but I do not expect this trend to change soon.

Medical Treatment Guidelines

Another issue to watch on the medical side is the continued development of medical treatment guidelines and drug formularies in states around the country. This is a very positive trend and one that our industry should be pushing for. There is no reason that the same diagnosis under workers’ comp should result in more treatment and longer disability than the same condition under group health. One troubling issue that I see here is the politics that come into play. Sorry, but I do not accept that human anatomy is different in California or Florida than in other states. I feel the focus should be on adopting universally accepted treatment guidelines, such as Official Disability Guidelines, or “ODG,” rather than trying to develop state-specific guides. The ODG have been developed by leading experts and are updated frequently. State-based guidelines often are influenced by politics instead of evidence-based medicine, and they are usually not updated in a timely manner.

How Advances in Medical Treatment Can Increase Workers’ Comp Costs

There is one area in which advances in medicine are actually having an adverse impact on workers’ compensation costs, and that is in the area of catastrophic injury claims. Specifically, I’m referring to things such as brain injuries, spinal cord injuries and severe burns. Back in 1995, Christopher Reeve suffered a spinal cord injury that left him a quadriplegic. He received the best care money could buy from experts around the world, and he died less than 10 years after his injury.  But as medicine advances, we are now seeing that a quadriplegic can live close to normal life expectancy if complications can be avoided. Injuries that used to be fatal are now survivable. That’s great news. The downside for those paying the bills is that surviving these injuries is very costly. The cost of catastrophic medical claims used to top off around $5 million, with a $10 million claim being a rarity. Now, that $10 million price tag is becoming more the norm.

The Evolving Healthcare Model

For years, workers’ comp medical networks focused on two things: discount and penetration.  Sign up as many physicians as you can as long as they will agree to accept a discount below fee schedule for their services. I’m happy to say that we are slowly, finally, evolving away from that model. Payers are realizing that a better medical outcome for the injured worker results in lower overall workers’ compensation costs, even if that means paying a little more on a per-visit basis. We are now seeing larger employers developing outcome-based networks, not only for workers’ compensation, but for their group health, as well. Employers are also starting to embrace less traditional approaches such as telemedicine. Finally, more and more employers are recognizing the importance that mental health plays in the overall wellness of their workforce. In the end, we are slowly starting to see is a wellness revolution.

The Need for Integrated Disability Management

The evolving healthcare model is tied directly to an evolving viewpoint on disability management. More employers are realizing the importance of managing all disability, not just that associated with workers’ compensation claims. Employees are a valued asset to the company, and their absence, for any reason, decreases productivity and increases costs. I feel this integrated disability management model is the future of claims administration. Employers who retain risk on the workers’ comp side usually do the same thing with non-occupational disability. These employers are looking for third-party administrators (TPAs) that can manage their integrated disability management programs. And make no mistake: Having an integrated disability management program is essential for employers. Human resource issues such as the Americans With Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA) cross over into the workers’ compensation realm. The same interactive process required on non-occupational disability is required in workers’ compensation. Employers must be consistent with how they handle any type of disability management, regardless of whether the cause is a workers’ compensation injury or non-occupational.

Will We See a Push for ‘Opt Out’ in Other States?

Most people know that non-subscription, or opt out, has been allowed in Texas for many years. The Oklahoma Option that started last year is viewed as a much more exportable version of opt out. Under this system, employers can opt out of workers’ compensation, but they must replace it with a benefit plan that provides the same (or better) benefits available under traditional workers’ compensation. While some view the Oklahoma Option as the start of an opt-out revolution, it is just too early to tell what impact it will ultimately have. But, make no mistake, discussions about opting out are spreading to other states. A group called the Association for Responsible Alternatives to Workers’ Compensation is currently investigating the possibility of bringing opt out to other states. I expect to see opt-out legislation in a handful of other states in the next three to five years.

Marijuana

Marijuana legislation is a very hot topic these days.  In national polls, the majority of Americans favors legalization of marijuana in some form.  Recreational use of marijuana is now legal in four states (Colorado, Washington, Oregon and Alaska), and 23 states allow medical marijuana. When it comes to workers’ compensation, much of the attention has been focused on medical marijuana as a treatment option for workers’ comp because a judge in New Mexico allowed this last year. My concern is around employment practices. Employment policies around marijuana have been centered on the fact that it is illegal, so any trace in the system is unacceptable. That is going to change. I fully expect the government to reclassify marijuana from Schedule I to Schedule II in the next few years. When that happens, zero-tolerance policies in the workplace will no longer be valid. Instead, the focus will have to be like it currently is with alcohol: whether the person is impaired.

The Next Pandemic

Another hot topic these days is Ebola. While the threat from this particular disease seems to be subsiding, the concerns about Ebola last year showed we are not ready for that next pandemic. People who were exposed to the disease were allowed to interact with the general population and even use commercial travel. Government agencies debated whether travel to certain countries should be limited. The problem is, diseases don’t wait for a bureaucracy to make decisions. While this threat didn’t materialize, you can see how easily it could have. With work forces that travel around the globe, the threat of a global pandemic is very real. You know where you send your workers as part of their job, but do you know where they go on vacation? As an employer, are you allowed to ask about what employees do during their personal time? Are you allowed to quarantine an employee who traveled to an infected country during vacation? These are very complex legal questions that I cannot answer, but these are discussions we need to be having. How do we protect our employees from the next pandemic?

Rates and Market Cycle

You cannot have a discussion around issues to watch without talking about insurance premium rates in workers’ compensation. After several years of increasing rates around the country, the National Council on Compensation Insurance (NCCI) is projecting that, in 2014, workers’ compensation combined ratios were below 100% for the first time since 2006. This means that, as an industry, writing workers’ compensation is profitable again. So what should buyers expect in 2015? Well, it depends. California continues to be a very challenging state for workers’ compensation costs. New York is challenging, as well. Given the percentage of the U.S. workforce in those two states, they have significant influence on the entire industry. Some employers will see rate reductions this year, and some will not. In the end, your individual loss experiences will determine what happens with your premiums. That seems to be the one constant when it comes to pricing. Employers with favorable loss experiences get lower rates, so it pays to stay diligent in the areas of loss prevention and claims management.

Will We See More Constitutional Challenges Similar to Padgett in Florida?

While I don’t think the Padgett case will be upheld on appeal, I am concerned that the case is the first of many similar ones we could see around the country. Look at the main arguments in Padgett: The workers’ compensation system is a grand bargain between injured workers and employers. Workers gave up their constitutional right to sue in civil courts in exchange for statutorily guaranteed, no-fault benefits. Over the last 20 years, many workers’ comp reform efforts around the country have focused on lowering employer costs. Standards of compensability have been tightened. Caps have been put on benefits. The judge in Padgett looked at these law changes and ruled that workers’ compensation benefits in Florida had been eroded to the point where it was no longer a grand bargain for injured workers. He ruled that the workers’ compensation statutes were unconstitutional on their merits because the benefits provided are no longer an adequate replacement for the right to sue in civil court that that the workers gave up. Attorneys tend to mimic what succeeds in other courts, so I expect we are going to be seeing more constitutional arguments in the future.

Impact of the Evolving Workforce

One of the biggest issues I see affecting workers’ compensation in 2015 and beyond is the evolving workforce. This takes many forms. First, we are seeing technology replace workers more and more. When was the last time you went to a bank instead of an ATM? I have seen both fast food and sit-down restaurants using ordering kiosks. Also, we are seeing more use of part-time vs. full-time workers. Some of this is driven by concerns around the Affordable Care Act. But part-time workers also have fewer human resource issues, and their use allows employers to easily vary their workforce based on business needs. Unfortunately, part-time workers are also less-trained, which could lead to higher injury frequency. Finally, the mobile work force is also creating concerns around workers’ compensation. Where is the line between work and personal life when you are using a company cell phone, tablet or computer to check e-mails any place, any time? Where do you draw the line for someone who works from home regularly? There have been numerous court cases around the nation trying to determine where that line is. This is a very complex and evolving issue.

To view a webinar that goes into these topics in more detail, click here: https://www.safetynational.com/webinars.html

5 Misperceptions About ‘Opt-Out’

The Oklahoma Option, which went into effect early in 2014, is ramping up. More employers and insurers are electing to participate. And more workers’ compensation professionals around the country want to understand the “opt-out” concept. They are thinking about their assets in Texas or Oklahoma or about the feasibility of introducing opt-out into other states.

Much of the discussion about opt-out is accurate but not complete. It is easy to absorb a part of the story. Consider the following five common ways in which it’s very easy to be half-right.

One:  For employers, opt-out is basically about saving money.

Conversations with corporate risk managers have shown me that saving on claims costs is usually not the only, nor even the leading, reason why employers choose to opt out.

Employers appear to have two complementary goals with opt-out. One is to reduce claims costs, with a target in the range of 30% to 50%.  The other is to simplify management headaches over a benefit program perceived to be excessively complicated and rife with risk of misbehavior.

Corporate risk managers, while not questioning the need for a separate work injury benefit system, are quick to say that injured employees can easily slack off in recovering from injury. They say doctors may not be motivated to get their patients back to work. Permanent partial disability benefits, in particular, are often cited as subject to gaming. In sum, risk managers see a lot of moral hazard that opt-out appears to them to severely curtail.

Brokers and risk advisers, on the other hand, appear to be more comfortable talking about reducing the cost of risk. It’s interesting to listen and respond to both messages.

Two: Employees of the opting-out employer benefit from better medical care.

Advocates of opt-out often make this claim. (There are NO pro-labor advocates of opt-out, at least yet.) The claim might be justified, were employers to measure quality of medical care and show, perhaps, that care under opt-out adheres more closely to evidence-based care guidelines.

The quality-of-care argument stems from opt-out employers negotiating service terms with well-regarded medical providers and avoiding providers and types of care they consider questionable. The employer might decide to ban chiropractic care, for instance, and use teaching hospital-based surgeons who otherwise may not treat injured workers.

Medical care quality can be in the eye of the beholder. especially along the dimension of doctor skills in listening to and communicating with her patients. What is not measured so judgmentally is the package of disability benefits accorded to opt-out employees. Inspection of the typical package in Texas ERISA plans suggests that the common opt-out benefit is superior to the workers’ compensation system when one compares after-tax income of a cohort of opt-out cases with the same cohort in the conventional system if (a big if) the injuries are well-managed for timely return to work.

Opt-out benefit packages in Texas ERISA plans typically pay indemnity benefits from the first day of disability. They do not impose caps on weekly benefits. The large majority of workers who use at least one day of disability return to work within a brief period. For them, these benefit features amount to real money. This assumes that the median duration of injury for all with at least one shift of lost time is about two weeks, and the median duration for all with disabilities lasting at least a week is about five weeks.

Compensation for injuries with long durations appear to be much less favorable to opt-out workers, if you assume that duration of disability will be the same in each system. However, one does not have to assume that durations will be the same.

Three: Opt-out claims management is a variant of workers’ comp adjusting.

A striking aspect of opt-out claims management is that some leading opt-out claims managers do not hire former workers’ compensation adjusters. Opt-out managers may even decide to not hire people with any claims experience, in any line of insurance. It’s useful to consider whether out-out claims management is more similar to absence or even productivity management than to workers’ compensation.

The opt-out claims adjuster has to have the skills and confidence to use a lot more discretion than that to which workers’ compensation adjusters are acculturated. She needs to understand the employer’s benefit plan, not workers’ compensation. She needs to act quickly and with initiative.

Over time, opt-out claims management may, at least for the larger employer, merge with absence benefit and ADA accommodation management, further removing it from affinity with workers’ compensation in the conventional sense.

Four: Negligence liability is a major stumbling block.

Opt-out employers in Texas are subject to negligence liability. An injured worker can seek economic and non-economic damages from her employer if the employer is found in any way negligent for the injury. As a defense attorney in Dallas told me, one will likely find in every severe injury some degree, however slight, of employer action or non-action that arrives in the courtroom dressed by the plaintiff attorney in negligence clothes.

Large Texas employers usually insure for this exposure and require their employees to sign mandatory arbitration agreements to cover negligence complaints. Some don’t; for instance, Ben E. Keith, a prominent member of the opt-out community incurred in 2012 an $8 million jury award over a severely scarifying injury a worker suffered on one of his first days with the company. The company had not adopted mandatory arbitration.

The Oklahoma Option extends the exclusive remedy protections of the workers’ compensation system. What will happen if the Oklahoma Supreme Court nullifies that protection? The answer depends in part on how one views the Texas experience with negligence liability. Many opt-out employers in Texas who know several jurisdictional systems appear to feel comfortable managing this exposure.

Five:  States can mandate minimum benefits for opt-out, as Oklahoma has.

The Oklahoma Option requires the employer to offer same or greater benefits than the workers’ compensation system. A lot of details need to be worked out, but there will remain a fundamental problem with the Oklahoma Option minimum benefit requirement. At first blush, it conflicts with a substantial body of court decisions that have confirmed the exemption of ERISA plans from state interference. At the very heart of ERISA plans is their immunity from state legislatures, regulatory agencies and courts.

Oklahoma law offers a means to opt-out without setting up an ERISA plan, but, given the success of ERISA plans in Texas, it is likely that employers, at least the large ones, will elect to go the ERISA route in Oklahoma.

Not being literate in legal discourse, I am the last person to suggest how this apparent conflict will be resolved, but resolved it must be and in federal court. And I expect to see some interesting arguments in favor of retaining Oklahoma’s requirement in its original or a revised form.

A California case, Golden Gate Restaurant Association v. City and County of San Francisco, offers a clue. As one commentator noted, in San Francisco, a city ordinance requires employers to make certain expenditures toward employee healthcare. Employers have a number of options for compliance, including paying a specified amount to a public insurance program that their uninsured employees can access at discounted premium rates or setting up an ERISA-governed health insurance plan of their own. At the last iteration of litigation, the local government prevailed.

The Oklahoma Option’s chances to withstand a court challenge over its benefit requirements may well depend on how the benefits are construed (this is not clear to me) and the manner in which Oklahoma employers are free to elect opt-out over the conventional system.

Getting the story right

The workers’ compensation community needs to prompt a full, transparent discussion of opt-out to get to a complete story, for which chapters are being written every day.

Splitting California Into 6 States? Crazy

If a million people say a foolish thing, it is still a foolish thing.

Anatole France

Maybe that quote should be, “If 1.3 million people. . . . “ That’s because Tim Draper, having spent $5 million, secured 1.3 million signatures and put a measure on the 2016 California ballot that would split the Golden State into six states.

Calling himself the “risk master,” the 56-year-old, billionaire tech investor expresses his quirky desire to “reboot and refresh our state government” by creating separate areas that would be more governable – think “Hunger Games.”

California is the largest state by population, with 38 million people (12% of the U.S.’s total of 316 million), and third largest by area behind Alaska and Texas. It is the world’s 8th-largest economy. If Draper’s measure were approved, the new state of Silicon Valley would be the wealthiest in the country. Central California would be the poorest.

No state has been created from an existing one since West Virginia split from Virginia in 1863. But California has had at least 30 serious proposals to divide it into multiple states since its statehood in 1850, including a proposal passed by the state senate in 1965 to divide California into two states with the boundary at the Tehachapi Mountains, near Bakersfield. In 1992, the state assembly passed a bill to allow a referendum to partition California into three states: North, Central and South. Pundits referred to these proposed states as Log Land, Fog Land and Smog Land.

It is said that the area of the state adjacent to Oregon, long known by the fiercely independent locals as Jefferson State, produces 60% of the U.S. marijuana crop. Three years ago, ex-Google engineer-turned-political-economist Patri Friedman came up with a goofy proposal to build his own floating libertarian nation 12 miles off the coast of California – Googleland?

Assuming the current state legislature and Congress both approve of Draper’s nonsensical measure, the area we currently call California would have 12 senators in Congress, not two. As much as Texans like their beer, I’m not sure they’d like to see California get a six-pack of senators.

Among the serious repercussions that Draper fails to address are vital state infrastructure issues. These include water distribution, transportation systems, state prisons, the University of California system of 10 campuses and two national laboratories – and the largest and most progressive workers’ compensation system in the country.

Workers’ compensation laws in the U.S. are promulgated on a state-by-state basis. Besides a myriad of workers’ compensation laws, each state’s bureaucracy must produce and enforce a plethora of complex regulations, licensing procedures, collateralization requirements and other rules. States have choices to make about self-insurance, including about workers’ comp pools of smaller employers.

Perhaps one or more of the new six California states would be monopolistic – where workers’ compensation coverage is purchased through the state (as in North Dakota, Ohio, Washington and Ohio). Another possibility is an “opt-out” program (as in Texas, Oklahoma and Tennessee) that allows employers to litigate injuries in the civil system, as an alternative to the “exclusive remedy” system.

As if this weren’t enough to be concerned about, the legacy of the current active California workers’ compensation claims would be an issue.

Three key institutions were created by the state legislature and are operated like private companies: the State Compensation Insurance Fund (SCIF); the California Insurance Guaranty Fund (CIGA); and the Self-Insurers’ Security Fund (SISF). SCIF is the state’s largest workers’ comp insurer and provides an insurance alternative to those companies doing business in California that are unable or unwilling to: (1) purchase workers’ compensation coverage from private competitive insurance carriers, or (2) self-insure. CIGA provides insolvency insurance for property casualty insurers admitted to doing business in the state. SISF provides protection to the state and taxpayers for non-public, self-insured entities by taking over workers’ compensation obligations from entities that have defaulted (79 since its formation in 1984).

These three entities combined cover billions of dollars of known and incurred but not reported (IBNR) workers’ compensation with open claims going back as far as World War II. Their combined assets total in the billions.

How would those three entities be broken up into six pieces and reestablished?