Large companies reduce costs by opting out of workers’ compensation for private plans
About two decades ago, many large companies stopped offering workers' compensation in Texas, the only state that allowed them to do so. Now, big companies are pushing other states to allow them to opt out. Oklahoma made employer participation in workers' compensation voluntary in 2013, although the law is being challenged. Tennessee and South Carolina introduced similar bills in 2015.
In a first attempt at understanding the effects of allowing large firms to opt out of workers' comp, Stanford law professor Alison Morantz finds that company costs drop significantly – by about 44 percent.
Morantz’s findings are in a working paper.
Private benefit plans
Morantz, a senior fellow at the Stanford Institute for Economic Policy Research, analyzed all of the injury and illness claims filed by employees of 15 large, multi-state companies that withdrew from workers' compensation in Texas between 1998 and 2010. Those companies offered private benefit plans to cover workers injured on the job in lieu of traditional workers’ compensation.
Workers’ compensation was designed about 100 years ago to give employees salary and medical benefits in exchange for their agreement not to sue their employers when hurt on the job.
By 1996, Texas was the only state without a compulsory workers’ compensation law, and 39 percent of all firms opted out of the program. Although historically this group consisted mostly of small firms, a substantial number of large companies (employing more than 500 workers) began withdrawing from workers' compensation in the late 1990s – deciding to risk large lawsuits rather than pay high insurance costs.
But Morantz found the threat of ballooning legal costs was a paper tiger. In fact, their legal expenses went down.
"The most salient aspect of worker's compensation is immunity from lawsuits. Yet as it turns out, these companies are not accruing any additional costs from shouldering tort liability," said Morantz, the James and Nancy Kelso Professor of Law at Stanford Law School.
A potentially important factor driving legal cost savings is that 13 of the 15 companies in the study added mandatory arbitration clauses to their private occupational benefit plans. And that curtailed the risk of large jury awards against them.
And while their legal fees didn't rise, the companies were still able to dramatically reduce their occupational injury costs. Morantz estimates that their costs per worker-hour plummeted about 44 percent, from roughly 14 cents per worker-hour under workers' compensation to around 8 cents per worker-hour under the private plans.
Not only did companies see fewer serious claims involving some loss of work, but costs per claim were nearly halved, saving employers an estimated $1,900 per claim. These savings were about equally divided between medical and wage-replacement costs for injured workers. Moreover, these cost savings occurred even though in some ways voluntary plans are more generous than workers’ compensation – for example, in offering first-day wage replacement (as compared to seven-day waiting periods).
The broader policy implications of these findings depend on the underlying reason for the savings, according to Morantz. Do the private plans do a better job of preventing workers from making weak claims? Or do they aggressively screen out legitimate claims and leave injured workers without benefits they deserve? Alternatively, exposure to lawsuits could strengthen companies’ incentives to invest in worker safety – potentially reducing accidents.
Morantz found that the types of injuries that leave greater room for interpretation – low back pain and other non-traumatic injuries – are disproportionately affected by the opt-out choice. Coverage by private plans lowers the costs of these injuries much more than it does for others, and also lowers the proportion of all claims that arise from non-traumatic injuries.
“The hyper-responsiveness of non-traumatic injuries to the opt-out choice suggests that more aggressive claim screening by employers or less over-claiming by employees – or some combination of both – could be important parts of the story,” Morantz said.
Still, exiting workers' compensation was associated with a 47 percent drop in the frequency of fractures, amputations, concussions and other severe, traumatic accident claims. Because these types of injuries are the least likely to be faked or disputed, such a large and significant drop raises the possibility that real safety improvements occurred following the adoption of private plans. However, aggressive claim screening cannot be ruled out as an explanation, Morantz says.
Factors behind cost savings
Unlike workers' compensation, the fine print of most voluntary plans includes provisions allowing companies to deny claims if, for instance, the injury was not reported quickly enough or the employee failed to comply with safety policies.
Moreover, under Texas law, employees who are not covered by workers' compensation are not protected from being fired for reporting their injuries. Their only remedy involves filing a claim in federal court and offers a narrower scope of remedies.
Surprisingly, Morantz found that several high-profile features of voluntary plans play a relatively small role in driving cost savings. She focused on four features that constitute striking departures from workers' compensation: the lack of permanent partial disability benefits; caps on the total benefits individuals can receive; categorical exclusion of many diseases and some (mostly non-traumatic) injuries; and elimination of chiropractic coverage.
While all of these factors do contribute to making private plans less costly, they explain a relatively small share of total savings.
“The impact of these plan features on total savings looks much smaller than I expected,” Morantz said. “It suggests that companies that offer private plans could expand their coverage of conditions that have devastating and headline-grabbing effects on individual workers without too much effect on their bottom line.”
Her findings also imply that other private plan characteristics play a major role in driving savings. All of the private plans Morantz studied give the company control over medical providers. They also uniformly require that injuries be reported to the company by the end of the work shift or within 24 hours, unlike the 30-day reporting window permitted under Texas workers’ compensation.
Though she could not test the hypothesis directly in her study, Morantz suspects that short reporting windows could be a big cost driver. While companies say the policies help weed out fraudulent claims and expedite medical care, critics claim some injured workers may not file timely claims because they are traumatized, overwhelmed or suffering from cumulative injuries that take more than 24 hours to detect.
As companies push more states to make workers’ compensation voluntary, Morantz said more research is needed before determining whether the cost savings also translate into fair protection for workers.
Miriam Wasserman is a freelance writer.