Opting Out is the New “In” Thing: Study Discusses Alternatives to Workers’ Compensation

By John Stahl, Esq.

The astronomical benefits-related costs, protracted dispute resolution process, and numerous other ills associated with workers’ compensation that have prompted reforms have also increased support for the “opt-out” movement. Opting out initially requires that a state enact a law that allows employers that would otherwise have to provide workers’ compensation coverage to offer employees alternative forms of reimbursement for compensable harm.

A study titled “Workers’ Compensation Opt-Out: Can Privatization Work”, of which Peter Rousmaniere is the primary researcher, comprehensively examines why some employers favor opting out over lobbying for reform. This research also discusses the features of the Texas and Oklahoma opt-out models.

A recap of a telephone interview with Rousmaniere provides additional insight on opting out.

Overview of Opt-Out Movement

Rousmaniere describes workers’ compensation as a no-fault “grand bargain.” This refers to the system’s “exclusive remedy” element awarding workers’ compensation claimants (claimants) medical-care and lost-income benefits in exchange for the right to pursue liability claims against employers for compensable harm.

The research concludes that “the modern opt-out alternative to the statutory, state-controlled workers’ compensation system has been gaining increasing interest throughout the United States.” These findings are based on evidence that specific support in Texas, Oklahoma, and other states for opting out of workers’ compensation reflects “employers’ belief that statutory workers’ compensation systems are inherently and excessively costly and burdened with fraud and abuse.”

The enhanced control that opting out grants employers includes:

  • Conditioning compensability on promptly reporting employment-related injuries;
  • New restrictions on the right of injured employees to present medical evidence regarding an injury;
  • Interpreting the term “arises out of the course and scope of employment” more narrowly than the workers’ compensation system.

[Author’s Note: Additional reasons why a non-subscribing employer would choose to opt out include: limiting injuries, raising the causation bar, limiting the doctors that would express an opinion in favor of the claimant, and requiring that all injuries must be reported within 24 hours or no benefits are paid.]

Rousmaniere states as well that, just as the exclusive remedy element of workers’ compensation is a key component of that system, opt-out systems usually follow the principle of applying efficiencies and other cost-reducing risk-management tactics from general health insurance and other employee programs to work-injury benefits programs.

Texas Model

The study describes the current opt-out system in Texas as a “legally authorized privatization of the workers’ compensation system.” This research concludes as well that “state and academic studies [of the Texas model] lead to a profile of a community of non-subscribers increasingly tilted toward large employers that are happy with the choice to opt-out.”

The three alternatives for Texas employers are:

1. Traditional workers’ compensation;

2. A custom “non-subscription” program that Rousmaniere evaluates as “gaining freedom and its advantages but losing exclusive remedy protection.” This program grants a non-subscribing employer “extremely broad discretion” regarding the “opportunity to privatize work-injury benefits.” The associated right to determine an employer’s “threshold of eligibility for work-injury benefits” typically results in many employers setting “a very high bar that work must be the sole cause of … injury” for the related harm to be compensable.

Arbitration agreements, which often become effective on an employee starting a job with a non-subscribing employer, are a common element of a non-subscription program. The report states both that those agreements help ensure expedited and inexpensive dispute resolution and that “employers can strongly influence the arbitration process.” That control can extend to “selecting the vendor which provides arbitrators [and] to framing the scope of the decision.”

3. “Offer no workers’ compensation benefits or protection at all and risk catastrophic legal liability.”

Closer Look at Non-Subscription Plans

One reported limitation of the middle-ground non-subscription plans in Texas is that “The Employee Retirement Income Security Act of 1974 [ERISA] is a federal law that sets minimum standards for retirement, health and other employee benefit plans at private-sector employers.” This analysis states as well that traditional “workers’ compensation is expressly exempt from” ERISA requirements, but that satisfying ERISA standards is “one critical shared aspect” of the strategy of “more prominent non-subscribers.” This primarily relates to how those employers administer work-injury benefits.

The following six workers’ compensation-related problems that non-subscription plans either control or eliminate relate to leading causes of rising workers’ compensation costs and delays in claimants receiving “reasonable and necessary” medical care. Controlling or eliminating these negative aspects of workers’ compensation additionally support the nationwide effort to improve return-to-work statistics.

1. “Lack of control over medical provider selection”

2. “Weak enforcement of evidence-based medicine practices”

3. “Pharmaceutical management and excessive opioid use”

4. “Complexities in terminating temporary disability”

5. Typically eliminating “pervasive permanent partial disability awards”

6. “Cumbersome and expensive dispute resolution”

Oklahoma Opt-Out Model

The study of the opt-out movement includes an exam of the 2012 Oklahoma legislation that a 42-50 vote in that state’s House of Representatives defeated. Rousmaniere states that that bill may provide a guide for other states’ opt-out efforts, and he forecasts that the Oklahoma legislature will consider similar legislation in 2013.

The research describes the Oklahoma model, which explicitly retains the element of exclusive remedy, as permitting “employers to forgo workers compensation coverage if these employers agreed to a set of minimum benefits similar to many in the existing Oklahoma workers’ compensation law.” This model additionally mandates that non-subscribers “operate under federal ERISA rules and regulations.” In simpler terms, these requirements provide for a privatized system that ensures that the savings to employers does not cost employees any existing benefits.

Alternative Opt-Out Model

A third basic opt-out system model combines elements of the Texas and Oklahoma systems to achieve the cost savings and overall reduced administrative burden that motivated those pioneer efforts. Rousmaniere states that the four elements of what can be considered a “national” model are:

1. “Statutorily defined benefits to injured workers for medical costs and wage replacement.”

2. “State measures to ensure that employers will pay these benefits” even if the employer becomes bankrupt or insolvent.

3. “Use of state administrative or civil courts to resolve disputes.”

4. The no-fault exclusive remedy aspect of workers’ compensation.

This model is in addition to current hybrid ‘carve-out’ laws that authorize employers and employees that are subject to a collective bargaining agreements “to negotiate variances, within limits, to a jurisdiction’s workers’ compensation laws.” Elements of these carve outs include:

  • Improved work-injury benefits;
  • Treatment restrictions within a provider network. Not authorizing chiropractic care is a hypothetical example;
  • Mandatory alternative dispute resolution, which is often either mediation or arbitration.

Additional Rousmaniere Analysis

Rousmaniere states in his telephone interview that “the reason I [Rousmaniere] conceived of the study in 2011 was due to a very specific finding that experts in the workers’ compensation field … were in a collective bad mood about the bad state of workers’ compensation. They all wanted to take a completely fresh take at how the system could work.”

One identified method for evaluating an opt-out system’s effectiveness is whether it “worsens or eases” the following elements of workers’ compensation that disadvantage injured employees:

  • Claims are filed for only 40-percent of compensable incidents;
  • Employers are insulated from liability claims;
  • “State oversight of workers’ compensation claims is inert;”
  • “Post-injury downstream income experienced by injured workers is miserable.”

Rousmaniere’s thought regarding creating a detailed model opt-out plan is that providing one in his report would have been premature because creating such a guide requires a “robust problem-solving process” involving ERISA experts and other professionals with relevant knowledge. He adds that “there will be a lot of local variation that comes from ‘sausage making’.”

The same skepticism that prompts employers to choose opting out over having faith in workers’ compensation reform comes out in Rousmaniere’s conclusion that “I find it definitely unrealistic” that legislative reform would simplify the workers’ compensation system. His reasoning includes that effective legislative reform “would require enormous determination by the reformers to overcome resistance” by those who oppose reform.

Weighing the Options

The mixed results associated with privatizing traditional government functions, such as operating schools and prisons, suggest that those who consider participating in any opt-out system tread lightly and cautiously. Employers should recognize as well that many pro-labor forces may consider opting-out as putting the fox in charge of the henhouse in the same manner that many employers distrust medical professionals in the workers’ compensation system who dispense prescription drugs from their offices and/or have financial interests in outpatient medical facilities. The final word of caution is that a state legislature’s duty to protect the health and safety of the workers in its jurisdiction trumps lawmakers’ responsibility to support local businesses.

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