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Top 5 Things PCI Got Wrong on Work Comp

In June, the Property Casualty Insurers Association of America (PCI) published a report titled “Cost Shifting from Workers’ Comp Opt-Out Systems: Lessons from Texas and Oklahoma.” It claims to show how employers in those states are avoiding costs that should be covered by workers’ comp and that are instead paid by workers, their families, private payers and taxpayers. The report is part of a year-long, anti-competitive campaign that has been orchestrated with claimant attorneys who profit under workers’ comp and resist any move away from the traditional approach. The report shows little regard for the facts, applicable law or actual data on performance of alternatives to traditional workers’ compensation.

Here are five of the most significant bits of misinformation and misrepresentation:

1. No relevant data. The PCI cost shifting report boasts of using “verifiable and relevant data” and speaks to “the behavior of opt-out employers.” But the report fails to actually include any Texas or Oklahoma Option claims data, and the truth is that there is no evidence that PCI has even attempted to obtain such claims data.

2. No apples-to-apples comparison. PCI fails to consider the benefit plan payments, supplemental plan payments and negligence liability settlements and awards under Texas Option programs that are not available under workers’ compensation.

See also: 2016 Outlook for Property-Casualty

3. No mention that the majority of Texas workers are covered. PCI fails to acknowledge that the Texas Department of Insurance has determined that more than 95% of Texas’ workers are covered by either workers’ compensation or an injury benefit plan.

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Instead of criticizing responsible Texas and Oklahoma employers who provide injury benefit coverage for their workers, PCI should instead focus on the approximately 14 million — and growing — American workers across all states who have no work injury protection whatsoever.

4. No mention that proposed programs in other states have mandated benefits. PCI extrapolates from Texas to posit a false model for Tennessee and South Carolina. Option programs proposed in those states — unlike Texas — have mandated benefits. No bill has been introduced in either of those states to allow employers to “go bare.”

5. No acknowledgement of option program compliance with Medicare reporting and MSA requirements. Option programs normally pay full benefits before Medicare pays anything. The programs comply with Medicare quarterly, electronic reporting rules on open medical claims and liability settlements. The programs protect Medicare’s primary interest before settling claims with Medicare beneficiaries by setting aside a portion of the settlement funds to pay for future treatment.

Instead of using option programs as a scapegoat and pursuing the fatalistic view that savings by employers equate to cost shifting, perhaps the PCI should expend more energy on how to achieve better medical outcomes for injured workers through communication, employee advocacy, accountability and competition.

Option Program Success in Delivering Better Outcomes Is the Real Story

We will continue to advocate for a more positive discussion on how to achieve better medical outcomes. That should include a sincere discussion of the PCI board’s criteria for an acceptable alternative to workers’ compensation, which was approved in July 2015 and publicly introduced eight months later at the 2016 annual conference of the Workers’ Compensation Research Institute.

See also: Healthcare Reform’s Effects on Workers’ Compensation  

Workers’ comp options in Texas and Oklahoma have disrupted the industry with much-needed innovation and positive change. This has understandably created some dissonance and has rightly generated calls for proof. We welcome a review of real option program data, which amply demonstrates how highly respected industry players and employers are improving the lives of injured workers and reducing costs.

Who could be against that?

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.

Texas Work Comp: Rising Above Critics

Recently, published articles have been critical of the Texas workers’ compensation system and the choice of an “Option” available to Texas employers. Such articles tend to be an accumulation of plaintiff attorney opinions and confusion of out-of-state persons who do not have sufficient working knowledge of the subject matter. This article will address two recent examples:

  1. “The Status of Workers’ Compensation in the United States — A Special Report” by the Workers’ Injury Law and Advocacy Group (“WILG”).[1]

This is a group of attorneys supposedly “dedicated to representing the interests of millions of workers and their families.”[2]  Their paper is at best a rant against the original “grand bargain,” which was struck to create each state’s statutory workers’ compensation system. It is without virtually any legal citations or other back-up. It does, however, illustrate the wisdom of the Texas system in offering a choice — (1) workers’ compensation insurance or (2) the “nonsubscriber” Option. For example, the article notes that many physicians will not take workers’ compensation patients, that 33 states have cut workers’ compensation benefits and that insurance companies continually clamor for reform by lobbying legislatures to cut medical costs or implement other cost savings — all of which the authors say makes it more difficult for the injured worker to recover.

See Also: Who Is to Blame on Oklahoma Option?

The article changes course when it suddenly says that an option to workers’ compensation is at fault, boldly declaring that “opt-out is bad for everyone” and claiming that intervention by the federal government is “immediately needed.” WILG criticizes the no-fault workers’ compensation insurance system and in the same breath castigates those who elect the Texas Option and thrust themselves into the tort system, which plaintiff attorneys have long claimed they love. This is particularly perplexing for Texas readers in view of two factors: (1) the need for plaintiff attorneys has been largely eliminated from the Texas workers’ compensation system,[3] and (2) the fact that the Texas Option gives the injured employee the right to sue for negligence and recover actual and punitive damages. [4]

Responsible employers that elect the Texas Option establish injury benefit plans for medical, lost wage and other benefits.   The benefits are subject to the Employee Retirement Income Security Act (ERISA), which provides numerous employee protections, including communication of rights and responsibilities, fiduciary requirements, and access to state and federal courts.[5] Only negligence liability claims against the employer can be forced into arbitration, which many employers insist upon as a more efficient method of dispute resolution that has been sanctioned for decades by both the U.S. Supreme Court and the Texas Supreme Court. Arbitration even supports awards for pain and suffering and punitive damages. In those cases, plaintiff attorneys have the advantage because an Option employer loses the defenses of contributory/comparative negligence, assumption of the risk or negligence of a fellow employee.

Perhaps the real reason why WILG is fighting Options to workers’ compensation is a combination of not wanting to learn how to succeed at ERISA litigation and fear that other workers’ compensation systems will become as efficient as the Texas system. Why aren’t these self-serving lawyers touting workers’ compensation Option that embraces the tort system they have so righteously pledged to protect?

  1. “Worse Than Prussian Chancellors: A State’s Authority to Opt-Out of the Quid Pro Quo” by Michael C. Duff, University of Wyoming College of Law, Jan. 9, 2016. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713180

Professor Duff complains primarily about “compulsory arbitration” of workplace claims. He erroneously and boldly declares, “In states both retaining the exclusive remedy rule and allowing employers to opt-out of the workers’ compensation system, employees of opt-out employers are left with no legal remedy for workplace injury.[6]

This apparently refers to the Oklahoma Option, in which an employer can adopt an injury benefit plan with benefits at least equal to or greater than traditional system levels. Such a high benefit mandate may merit application of the “exclusive remedy rule,” which prevents an injured employee from suing their employer. However, Professor Duff overlooks the fact that ERISA provides injury claimants with extensive legal rights, including causes of action for wrongful denial of benefits, failure to produce documents, breach of fiduciary duty and discrimination (including retaliatory discharge). He also overlooks the fact that ERISA claims generally cannot be made subject to mandatory arbitration. [7] So, is this really a matter of having “no legal remedy” or a case of Professor Duff (who is also a WILG member) trying to support the positions and business of his plaintiff attorney friends?

See Also: Strategic Implications of the Oklahoma Option

Professor Duff makes it clear in the rest of his long article that the real enemy is an employer’s ability to implement a employment dispute resolution system that includes arbitration. Professor Duff omits the fact that he is bucking almost the entire U.S. judicial system, which endorses arbitration. For example, the U.S. Supreme Court clearly maintains that arbitration is right, proper and allowed.[8] “By agreeing to arbitrate a statutory claim, a party does not forego the substantive rights afforded by the statute, it merely results in submitting the resolution of the claim in “an arbitral, rather than judicial, forum.”[9] The Texas Supreme Court has been even more clear by stating that “. . . an agreement to arbitrate is a waiver of neither a cause of action nor the rights provided under [The Texas Labor Code]” and is not the denial of a right but rather simply “an agreement that those claims should be tried in a specific forum.”[10]

Oddly, when discussing his arguments against arbitration, Professor Duff states emphatically that it might be “acceptable if employees have knowingly signed pre-injury waivers of workers’ compensation benefits.” [11] What Professor Duff apparently does not understand is that pre-injury waivers of negligence claims have long ago been essentially outlawed in Texas, and an injured employee under the Texas Option retains his rights to sue the company for negligence. [12] The Texas Labor Code also specifies strict conditions under which an employee is allowed to even settle such a tort claim — i.e., only after at least 10 days have passed following the employee’s receipt of a medical evaluation from a non-emergency care doctor, the agreement is in writing with the “true intent of the parties as specifically stated in the document” and the provisions are “conspicuous and appear on the face of the agreement.”[13]

Like the WILG report, Professor Duff confuses benefit and liability exposures in Texas and Oklahoma, overlooks available legal remedies in both states and refuses to accept well-established public policy and judicial precedent that favors arbitration of employment-related claims.

Conclusion

The publication titled, “Non-Subscription: The Texas Advantage,” [14] states that, “Fortunately . . . legislators who drafted the first workers’ compensation laws in 1913 were farsighted enough to provide an option.” Employers that elect the Texas Option to workers’ compensation are subjected to an extra measure of liability as they cut out the middleman and decrease the taxpayer expense of the governmentally prescribed workers’ compensation system. Those Option employers that are operating legally and responsibly should be credited with advancements, such as improving worker access to better medical care, offering modified duty job availability and oftentimes providing better wage replacement benefits.

At the end of the day, perhaps WILG and Professor Duff should make an investment of their time to learn how ERISA protects injured workers and how to litigate an ERISA dispute. These authors should also further consider the ample remedies under Texas law for employer negligence liability, an exposure that provides more incentive to maintain a safe workplace.

No doubt, pursuing such claims does require some effort. Perhaps, therefore, the real objectives of these two papers is a desire to maintain the profitability of legal work favoring injured workers and reducing the attorney effort.

[1]https://s3.amazonaws.com/membercentralcdn/sitedocuments/wp/wp/0245/745245.pdf?AWSAccessKeyId=0D2JQDSRJ497X9B2QRR2&Expires=1458161961&Signature=7rYh45nzAcLAZ%2BYqPx1HilrodQ4%3D&response-

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[2] www.wilg.org

[3] St. Mary’s Law Journal 2000, “Texas Workers’ Compensation: At Ten Year Survey – Strengths, Weaknesses and Recommendations,” Phil Hardburger, Chief Justice, Court of Appeals, Fourth District of Texas, San Antonio, page 3, 41, citing to research an oversight counsel on workers’ comp, an examination of strengths and weaknesses of the Texas Workers’ Compensation System (August, 1998).

[4] Tex. Lab. Code § 406.033 and Carlson’s Texas Employment Laws Annotated, 2015 Edition.

[5] 29 USC Chapter 18, Subtitle B, Parts 1, 4 and 5.

[6] Page 3 of Professor Duff’s treatise.

[7] 29 C.F.R. 2560.503-1(c)(4); see also Professor Duff’s footnote 26, stating “in Texas and Oklahoma, employers are able to combine opt-out with arbitration.”

[8] Scherk v. Alberto-Culver Company, 417 U.S. 506, 519, 94 S. Ct. 2449, 41 L. Ed. 2nd 270 (1974) (holding that arbitration clauses are, “in effect, a specialized kind of forum-selection clause.”)

[9] Id. at 631 quoting Mitsubishi Motors Corp v. Solar Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985).

[10] In re Golden Peanut Company, LLC, 298 S.W.3d, 629 (Tex. 2009).

[11] Professor Duff at page 2.

[12] Tex. Lab. Code see 406.033(e) and (f) (a legal cause of action by an employee who claims to be injured on the job “may not be waived by an employee before the employee’s injury or death”); Tex. Lab. Code 406.033(a).

[13] Tex. Lab. Code 406.033(f) and (g).

[14] Published by the Texas Association of Business.

More States to Offer Work Comp ‘Opt-Out’?

As we are all too familiar, the handling of workers’ compensation is dictated by statutes in all states. Only Texas and Oklahoma offer the freedom to “opt out” of the statute, and their approaches are quite different.

In Texas, “non-subscription” has been around for more than 100 years. Practitioners have achieved dramatic costs savings and better outcomes for many claims. Over time, non-subscribers also often experience significant reductions in frequency and length of disability. All of these outcomes are what we work hard to help our clients achieve, but we are often frustrated by the statutory requirements of many states that bring bureaucracy and controversy to many claims.

In February 2013, the state of Oklahoma enacted workers’ compensation legislation, SB 1062, which allows any employer to exit, or opt-out of, the state’s statutory workers’ compensation system. While not exactly like  “non-subscription” in Texas, this new statute is a significant move forward in giving employers more options in how they respond to and finance employee injuries and related benefits. A key focus is on ensuring injured employees are treated respectfully and compensated fairly.

Just as there are significant differences between what Oklahoma has done and what has been in place in Texas for more than 100 years, there are state-specific opportunities to improve in many other states.

Enter the Association for Responsible Alternatives to Workers’ Compensation, or ARAWC (pronounced “A-Rock”). This national coalition of employers and workers’ compensation system providers has formed after many realized the benefits achieved in Texas and those anticipated in Oklahoma.

Where SB 1062 offers Oklahoma employers that choose to opt-out of the state system the opportunity to substantially reduce work-injury costs and avoid both the statutory system’s extensive regulation and litigation risk, similar goals for other states are being established by the leaders of ARAWC for the benefit of both employers and employees. Two key statistics show why Oklahoma changed:

  • Oklahoma employers said that workers’ compensation costs were the #1 reason they were either leaving the state or adding jobs at facilities located in other states, such as Texas.
  • National Council on Compensation Insurance (NCCI) statistics for 2012 showed Oklahoma loss costs to be 225% higher than those in neighboring states.

ARAWC is now developing strategies and plans that will identify the states where statutory change can bring the most benefit to both employers and employees through a more effective, efficient mechanism. The founders expect that their efforts will enable the delivery of better medical outcomes to injured workers and give employers more choice on how employee injuries will be managed. The organization will be announcing its first target state at the first of the year.

Currently, all but Oklahoma and Texas effectively mandate workers’ compensation insurance as the sole option for employers to cover employee injuries. The Texas and Oklahoma options are not currently available elsewhere. ARAWC’s mission is to expand the delivery of better medical outcomes to injured workers by expanding employer choice in other states. Experience under these alternative employee injury benefit platforms has proven to dramatically reduce employee injury costs, while achieving higher employee satisfaction and substantial economic development.

Over the past two decades, Texas non-subscribers have achieved better medical outcomes for hundreds of thousands of injured workers and saved billions of dollars on occupational injury costs. While ARAWC is not necessarily taking the Texas model forward into other states, it will leverage the learnings from more than 100 years of having options in Texas and from what emerges from the changes from Oklahoma’s new statute, to drive a strategy for process improvements and lower costs in selected states where change is overdue. It is important to remember that ARAWC views an option as a positive, competitive complement to workers’ comp, not necessarily a replacement to the current system.

Some of the core benefits that ARAWC will be seeking include:

  • Delivering better medical outcomes and higher process satisfaction for injured workers without the cost and burden of traditional workers’ compensation.
  • Driving state economic development through the attraction of employer savings.

This newly minted organization was established and is governed by a founding board that includes many Sedgwick clients that, in some cases, have tens of thousands of employees throughout the U.S. and have an intense interest in seeing those employees helped by a better-designed and -managed system.

The member companies of ARAWC aspire to refocus state-based mandates in response to growing gaps in quality medical care, efficient risk financing, effective return to work and other gaps in many current systems. Some of the other expected benefits of ARAWC’s strategy for employees are expected to be:

  • Improved workplace safety and training supporting injury prevention.
  • Expanded access to quality medical providers providing exceptional care.
  • Opportunity for expanded benefits through custom-designed plans.
  • Opportunity for reduced waiting periods for wage replacement, with greater benefits.
  • More expedient medical treatment and more immediate referral to specialized medical treatment to enhance recovery.
  • Early identification of potentially complicating medical conditions and securing appropriate medical treatment to aid recovery.
  • Improved communications with injured workers to address benefit questions and assist early return to work.

Nationwide, the experience under alternative employee injury platforms will provide employers the option of alternative mechanisms, which can result in:

  • A more competitive insurance marketplace — experience shows significant rate reductions when choice is introduced.
  • Improved incentive for existing workers’ compensation providers to improve services and pricing, knowing the employer has an option to be more engaged in helping injured workers recover and return to work more quickly and efficiently.
  • Incentives for medical providers to act in the best interests of the employee and improve levels of service
  • Expanding employee access to medical providers who do not accept workers’ compensation patients because of low fee schedules and paperwork.
  • An injury benefit plan that can more efficiently deliver care to and achieve better medical outcomes for injured workers.

ARAWC shows what an often inefficient system can motivate: change that can benefit all participants while reducing bureaucracy and many other negative elements.

As the conversations that ITL is driving are focused on disrupting the status quo, what better place to start than with choice in workers’ compensation?