Unlike any other US state, Texas has never required its employers to buy or provide statutory workers’ compensation. Texas employers who opt-out of this traditional form of injury benefit system are called non-subscribers. In 1993, 44% of Texas employers were non-subscribers, and they employed 20% of the employees in the state. By 2008, employer non-subscribers had shrunk to 33%, but their percentage of the state’s total workers had grown to 25%. No one knows for sure, but estimates are that as many as 114,000 Texas employers have opted-out.
Until now, with the exception of two academic studies, one in 1996 examining lost injury days, the other, a 2010 survey of large, multi-state non-subscribers, no one has ever fully examined the Texas opt-out phenomenon. But, with the release today of the 87-page “Workers’ Compensation Opt-Out: Can Privatization Work? The Texas Experience and the Oklahoma Proposal,” that has changed.
Funded by the big TPA, Sedgwick CMS, published by the New Street Group and written by Primary Researcher Peter Rousmaniere and former Risk & Insurance editor and New Street Group founder Jack Roberts, this thorough, well-researched and entirely lucid analysis is certain to propel the opt-out debate now and in the foreseeable future.
In Texas, It’s 1910 All Over Again
To get a grasp of the back-to-the-future Texas opt-out, think 1910, the year before states began enacting workers’ compensation laws, the grand bargain in which employers promised to replace lost wages and cover medical costs due to injury and workers agreed not to sue employers when the workers were injured on the job.
Lots of employers buy workers’ comp in Texas, but for those who don’t it’s 1910 all over again with virtually no state oversight. Let me be clear about that: In Texas, there is no requirement for non-subscribers to pay for work injuries in any way. There is one important difference, however. The Texas legislature has statutorily removed the three major defenses used by employers prior to workers’ comp statutes being enacted to defend themselves against worker suits: contributory negligence, assumption of risk and the negligence of fellow employees. Also, without workers’ comp, there can be no “exclusive remedy,” and for non-subscribers there isn’t. Large non-subscribers, such as Costco, have been very creative in dealing with that.
Rousmaniere and Roberts discovered that Texas opt-out was a bit of a carnival sideshow until ten to fifteen years ago when large employers like Costco, whose program they analyze in depth, cottoned on to the idea that they could provide a sleek, fast-moving, common-sensible injury benefit management system if they wove it into their ERISA plans. ERISA, the Employee Retirement Income Security Act, is a federal program which allows employers to design their own benefit systems, and substantially more than a cottage industry has evolved in Texas to help them do that for worker injuries. The operable phrase in that last sentence is “design their own.”
Designing Their Own
Suppose someone, your boss for example, said to you, “There’s no more workers’ comp. Design me a plan that will provide our workers who get injured immediate medical care and wage replacement. Make worker participation mandatory. Keep the administration to nothing more than what is absolutely needed for it to run smoothly, and, before I forget, keep all the lawyers out of it.”
What would you do? Well, large employers in Texas have had about fifteen years to think about that, and at least one of them, Costco, has created the ideal program I would design myself if I had a magic wand. I say “at least one,” because Costco is the only employer Rousmaniere and Roberts point to, although they do report on interviews with many professionals involved in Texas opt-out. They also suggest that Costco is fairly typical of the large employer opt-out experience.
After much research and planning, Costco became a non-subscriber in 2007. At that time, the company operated 15 large warehouses throughout Texas, carried a payroll of $87 million and employed about 4,000 workers. Its loss costs had grown to around $150 per employee, or 97 cents per hundred dollars of payroll. In the four years following non-subscription, losses fell to 46 cents per hundred dollars of payroll, a decline of 52%, with high employee satisfaction for the system.
Here are the main points of Costco’s worker injury benefit program, and remember, Costco was able to start with a blank piece of paper:

• Work must be the “sole cause” of injury, not just a “contributory factor.” More about this below.
• Injuries “must” be reported by end of shift, but in no case later than 24 hours after happening. Failure to do this will negate any benefits. Workers who don’t report in time are on their own; most use group health to cover medical costs, but, as one can imagine, a worker is more likely to win the Powerball than to not report within 24 hours.
• Employees receive a taxable 80% of pre-injury wages with no waiting period. They’re paid from day one.
• Upon hiring, workers are required to accept binding arbitration for disputed claims, and Costco picks the arbitrators. If unsatisfied with the arbitrator’s ruling, employees do have the option of bringing suit for employer negligence in civil court, but since 2007 only three such suits have been brought; two were settled modestly, and the third is pending
• Chiropractic care is not allowed (Costco’s analysis of its losses concluded that excessive chiropractic care was a major driver of loss costs and unnecessary for employee recovery)
• There are no permanent partial disability awards
• Wage and medical benefits end after 156 weeks, but, in rare cases, future medicals can be settled (Rousmaniere and Roberts don’t address this, but I’m wondering about the degree to which CMS plans on extending its long, bony Medicare fingers into this pie)
• Costco carefully picked an emergency care and specialist medical provider network comprised of highly reputable physicians, with as many as possible being board-certified occupational medical physicians. Costco routinely pays its providers full invoiced charges
• If employees fail to follow through on medical recommendations or miss appointments for no good reason, benefits are terminated
• For the rare event when injuries extend beyond 156 weeks, Costco has purchased insurance to cover the tail
• Because any disputes go quickly to arbitration, attorney involvement is nearly non-existent

With loss costs reduced by 52% and employee satisfaction high, Costco obviously has a winning program. Costco has seamlessly woven injury benefits into its ERISA plan, blending them with its group health and short and long-term disability programs.
One thing that Costco wrestles with is co-morbidity. Imagine a Type-1 diabetic warehouse worker without safety shoes who drops some heavy object on his or her foot. Because of the diabetes, the foot is much more susceptible to infection, which actually happens. Then, because diabetes seriously inhibits healing, the infection worsens, and the foot is amputated. In statutory workers’ comp, this would be covered, but what about at Costco. I asked Peter Rousmaniere about this. He wrote back:

“You are right, this would be excluded… With Obamacare assuring universal health coverage, the opt-out employer’s message will be something like, “Don’t expect indemnity payments for a work injury if there is a good chance that your personal health condition will contribute to it.”

Rousmaniere admits that this “sounds draconian,” but he believes that this issue, as well as what to do about degenerative conditions, such as what to do about the 55-year old wall board hanger whose rotator cuff finally gives out, will gradually self correct with help from the ADA as well as the Affordable Care Act. The jury on this is decidedly out. But, just for a moment, imagine that he’s right. What we could be moving toward, after decades of failed experiments, is the first manageable and potentially successful version of 24-hour care.
The Other Side of the Coin
One thing is clear from the Rousmaniere and Roberts study: Costco and other large employers like Target and Safeway, two other non-subscribers, have the resources and core values necessary to provide compassionate care for injured workers while bringing them back to work as fast as medically possible in a businesslike way. But what about Kenny’s CITGO, down the street on the corner with five employees, all of whom, including Kenny, live paycheck to paycheck? And Kenny is just as free to non-subscribe as Costco.
Kenny and others like him are the Third World of non-subscription. Operating with no regulatory or legal oversight by the state, he can do what he pleases or what he perceives he can afford, which is probably not much. If one of his workers is injured, and Kenny decides to offer nothing in the way of injury benefits, the worker is on his own. He can certainly sue Kenny for employer negligence, and Kenny won’t have those three pre-workers’ comp era defenses to rely on. However, no attorney is going to take the employee’s case because Kenny won’t have the resources to pay if he loses, which he probably would. But, to quote Rousmaniere and Roberts, “That is a hollow victory, indeed.”
And on a grander scale, what about the large employer with significant resources, but who also may have more than a bit of malevolence in its DNA and wants to play schoolyard bully (see Massey Energy)? In an environment without one scintilla of regulation will the bully treat workers fairly?
The Oklahoma Proposal
After studying the lay of the land for the Texas opt-out and seeing where the Punji Pits are (see Kenny’s CITGO and Massey Energy), Oklahoma legislators crafted a remarkable piece of opt-out legislation that narrowly lost 42 to 50 in the Oklahoma House of Representatives in late April, 2012.
The Oklahoma proposed legislation would have corrected many of the perceived flaws in the Texas opt-out system. For example, Oklahoma would require any employer choosing to opt-out to provide similar, in some cases better, benefits than the statutory system. Also, injury benefits would be required to be part of an ERISA-approved plan, although there is significant uncertainty if this provision would withstand a constitutionality challenge. Further, employers applying to opt-out would have to pay a fee of $1,500 annually to do so. This would more than likely eliminate the Kennys of the world, employers who just don’t have the resources to “pay to play.”
Rousmaniere and Roberts expect Oklahoma legislators to do some tinkering and re-file during 2013. They think there is a good chance that this time the legislation will pass. Whether Governor Mary Fallin, who campaigned on a platform of workers’ comp reforms, will sign it is another matter.
Summary
This 87-page report is a Herculean effort, and, in my view, the worker’s compensation insurance industry owes Rousmaniere and Roberts a huge debt for spending close to a year to produce it. Sedgwick should be commended for funding it. Perhaps we can forgive Rousmaniere for a bit of acquired bias, but he’s seen, up close, what a conscientious, fair-minded employer can do if given the chance. I come away from his report finding myself agreeing with him as he wrote me the other day: “Every state should offer and every medium and large sized employer should consider opt -out.” But to this I add, “With a healthy dose of regulatory and state oversight. Not everyone is Costco.”