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April 5, 2016

What Happens When Big Firms Opt Out?

Summary:

A major study of Texas' "nonsubscription" altenative to workers' comp found benefits for both workers and employers.

Photo Courtesy of Ed Schipul

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.

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About the Author

Bill Minick is the president of PartnerSource, a consulting firm that has helped deliver better benefits and improved outcomes for tens of thousands of injured workers and billions of dollars in economic development through “options” to workers’ compensation over the past 20 years.

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