In 1990, workers’ comp costs were spiraling out of control, and most states were looking for reform. That’s when I began working in workers’ comp in Texas, and that’s when I met Tippy Foster.
A Workers’ Comp Mentor
In 1993, the 73rd Texas Legislature recognized Tippy Foster for 50 years of service to the Industrial Accident Board and the Texas Workers’ Compensation Commission (TWCC, now Texas DWC).
Tippy Foster began her career as temporary file clerk in 1943 and worked her way up the chain of responsibility. In 1979, Tippy became the assistant executive director of the Texas Workers’ Compensation Commission and later served as interim executive director. Tippy was named the Outstanding Woman in Texas Government in 1987 for her contributions to her state and profession. It’s easy to see why Tippy Foster inspired women both inside and outside her field.
Tippy Foster taught me about the history of workers’ comp and how important it was for the system to have enough checks and balances that both employers and employees saw the benefits of a good system. Texas, as I was told, was the only state that did not require private employers to buy workers’ comp insurance.
Why do Employers Want to Opt Out?
Insurance is, of course, highly regulated. Most states help determine fair rates to ensure employers are getting the right value for their premium. The rates insurers pay must account for the basic employee medical and indemnity benefits.
Regulation is the key difference between true workers’ compensation coverage and opt out options. Some states have extensive and far-reaching rules designed to ensure fairness for all system participants.
The term “opt out” is really another way of saying “I am opting out of being regulated.” Employers and other stakeholders believe that overreaching government control is creating obstacles instead of balancing all the needs. Many employers believe that getting regulations out of the process can lead to more cost-effective ways be a responsible employer and provide good or even great benefits. Others believe that the regulations are necessary because without them our citizens will likely not do what is right.
Knowing and doing what is right is at the heart of the issue.
Why Consider Opting-Out?
A company can ‘self-insure’ in order to control costs by paying first dollar on all claims, have highly involved internal risk managers, customized RTW programs, and hand-selected claims professionals, all intended to help the company do the right thing. Many of these are the same Texas employers that decided the regulated insurance system was still not accomplishing the goals for providing sufficient benefits at a commensurate cost.
Is cost the only reason to opt-out? Actually yes, because cost comes in many forms – not just the cost of insurance itself.
1. Cost of Insurance – As mentioned above, many self-insured (certified self-insureds and high-deductible plans) employers have implemented methods to minimize their exposure but have not eliminated the potential high rates of insurance. We cannot forget that the cost of insurance is a benchmark factor of system health. Higher costs, whether purchased or self-monitored, drive decisions for growth in a state and balancing other benefits for employees.
2. Cost of Managing WC Benefits – Internal risk management programs, relationships with providers, and the ability to select claims professionals and create effective return-to-work programs are overhead costs for employers managing benefits. These costs exist in purchased insurance, self-insurance and opt-out programs. If the overhead costs always exist, then we have to look at controlling the costs and whether the regulated program or an internal program has more or less opportunity to control these costs.
3. Cost of Regulatory Risks – Texas has a strong regulatory environment where even clerical errors can cause regulatory penalties. Most employers understand that significant lack of oversight on critical processes should have some form of penalty. Auditing yourself (or being audited if you don’t) can reveal gaps that need to be closed. An employer who wants to do the right thing welcomes identification of these gaps so they can improve programs. Most employers don’t need monetary penalties to do the right thing. These costs of doing business have to be factored into the overall cost.
4. Cost of Benefits – Each state determines what benefits are included in its workers’ comp program. The two primary benefits are medical care and wage replacement. The traditional medical care model includes direct fee schedule costs for services and other regulated controls such as treatment guidelines and utilization review. The cost for wage replacement determines automatic covered conditions, waiting periods, length of benefits and the actual percent of wages, along with any future benefits and supplemental income benefits (e.g. credit for severe injuries/impairments).
These costs drive the decision to opt out. If employees felt that the cost of insurance, along with the other costs, was a fair deal for the benefits provided, I am not sure we would be having an opt-out discussion.
The opposition to opt out is whether the employers are doing the right thing as it relates to the goals of workers’ compensation. For those that want to do the right thing for their employees and our economy, getting out of the stronghold of regulations is a key driver.
Regulations exist to provide a framework for doing the right thing. This framework has to balance the components of cost drivers and help motivate all system participants to do the right thing. When these regulations create frictional costs without balanced benefits, then people are going to want to go outside the framework.
Remember Where We Came From
So why the argument for going outside the framework? According to many sources, including speakers at the 2016 WCRI conference, National Public Radio and ProPublica, opting out often results in lowering or eliminating benefits to employees. One of the most devastating changes can be the elimination of lifetime medical care. And for some injuries and illnesses, employees could receive no benefits at all.
According to noted Texas workers’ compensation attorney Jane Stone, of Stone Loughlin & Swanson, LLP, companies are trying to cut workers’ comp costs, and employee benefits are suffering. “If any of this sounds familiar, Stone said, “it should; this is the broken system that workers’ compensation was created to fix.”
Balancing costs of benefits with the reward of the benefits is critical.
Late in her career, Tippy Foster saw Texas’ Senate Bill 1 take effect in 1991, reforming the Texas system for injured employees, making workplaces safer, and eventually driving down costs for employers – but not soon enough for many Texas employers to not opt-out.
Tippy was proud of the sweeping changes, and she helped TWCC adopt rules to carry out the law’s intent. She was also wise enough to know the “New Law” was only the beginning of needed reforms. With Senate Bill 1 as a foundation, additional Texas reforms had to continue in order to improve the system and get some of the cost drivers balanced as they are today. Driving balance for all cost drivers still remains important to increase responsibility in the system.
What Does Responsibility Mean?
Opting out responsibly does not mean ignoring the need to provide benefits to employees injured on the job. If an employer neither buys insurance nor provides benefits in another way, that employer is acting irresponsibly.
Are there irresponsible system participants? Of course. There are outliers in every industry. But should the actions of outliers dictate the reasons to not require a fair and equitable alternative to comp?
As states consider workers’ comp alternatives, legislators and other leaders have more to consider than ever before. Healthcare costs have continued to skyrocket, business models are rapidly changing, and the Great Recession led to increased fear and sometimes desperate business practices.
While these factors are all important, my litmus test is simple, “What would Tippy say?”