The Emerging Opt-out Debate

Monday, February 24, 2014 | 0

The workers' compensation system (actually, more than 50 jurisdictional systems) has not changed its core model in a century while surviving several upheavals within living memory.

In the 1970s, many states significantly improved their benefit structures and administration in response to a sharply critical assessment by the National Commission on State Workmen’s Compensation Laws, created by the 1970 act that created the Occupational Safety and Health Administration. Benefits since then have remained basically flat or declined.

Then, in the early 1990s, managed-care practices began a long surge, largely (but not only) driven from new legal mandates on selection of doctors, medical-utilization review, medical treatment guidelines and the like. A detailed history will reveal that this surge drew ideas which private health insurance tried out in health maintenance organizations.

Now another major disruption may be challenging state houses and workers' compensation professionals. The opt-out concept, once a peculiar institution of Texas, took root in Oklahoma in 2013. Given the largely conservative political climate, the emergence of a national opt-out lobby and the possibility of surviving state constitutional challenge, opt-out may become a major disruptive force, taking a decade or more to play out.

I wrote a report on opt-out that was published in late 2012 (Sedgwick, the third-party administrator, funded the project). The report is available here, along with a 2013 update on the “Oklahoma Option” that goes into effect Feb. 1. The draft regulations for the Oklahoma Option is here.

Texas has a bare bones statute for “non-subscribing.” The employer simply informs the state that it is not participating in the conventional workers’ compensation system. Indicative of the scantiness of state oversight, more than 90,000 of the 110,000 or so non-subscribing employers do not bother to file. Non-subscription law is almost entirely case law arising from state and federal courts. 

Oklahoma, in contrast, has an extensive albeit mostly untested statute. Its language is complicated by the drafters’ effort to preclude state constitutional problems. If one removes some language, Senate Bill 1062 can serve as a reference point for drafters in other states.

Five years ago, opt-out was understood only by Texans, but not necessarily by Texas workers' compensation professionals. The opt-out bar there, both plaintiff and defense, only partly overlap with the workers’ compensation bar. Claims departments may, as a policy, not hire adjusters with a workers’ compensation background. Many workers' compensation professionals there cast a wary and distant eye on this alternative.

The opt-out elements most alien to workers’ compensation professionals include ERISA plans, which are based on the 1974 Employee Retirement Income Security Act for benefit design and administration. Another alien feature is mandatory arbitration under the aegis of the Federal Arbitration Act for negligence complaints. Oklahoma’s act implicitly embraces ERISA but not arbitration for negligence. Advocates and critics in other states will likely need to acquire a foundational knowledge of both topics.

(Note that the disruptive forces in the 1970s, 1990s and today developed outside state legislatures.)

ERISA is an essential element in opt-out because in all likelihood other states will require that opting-out employers produce a benefit plan, and by definition that plan will almost certainly be automatically covered by ERISA. Mandatory arbitration for negligence suits will be the employer’s option to use, weighing its exposure to negligence suits as statutes, case law and insurer demands determine. 
 
With Oklahoma’s legislation, opt-out gains a national presence. The Oklahoma law’s preservation of exclusive remedy is particularly important, as the main stumbling block to employer reception of opt-out is exposure to negligence suits, as is the case in Texas. (An initial Oklahoma Supreme Court decision on the new law, Coates vs. Fallin, did not address the exclusive remedy provision.)

The national opt-out lobby’s chief asset is the credibility of national firms with Texas opt-out experience and national reputations for good employee relations. These include Costco and Safeway. They and their peers can tell their Texas story. They can compare their Texas experience with workers’ compensation in other states in ways businesses in, say, Illinois, may find persuasive. 

Notably absent from the opt-out debate is an articulate critique of opt-out that is based not just on constitutional legal theory or on disparate court decisions but on patterns of fact. Surprisingly, I cannot find in Texas any documentation of a pattern of adverse experience of injured workers due to opt-out, even though I expect one exists. This research gap needs to be closed. Opponents to opt-out need to see they are playing to a national audience, not just the state house in Austin or Oklahoma City.

A challenging critique of opt-out needs to be lodged by those expert in workers’ compensation as well as in ERISA and mandatory arbitration. This is a miniscule community. A national plaintiff ERISA bar exists, to be sure, but it is generally not prepared to critique the problems with ERISA in the context of state work injury benefit experience. The ERISA bar may know non-occupational disability, but not workers’ compensation. 

To mention just one fertile area of dispute, ERISA plans in Texas typically deny benefits to workers who fail to report their injuries promptly, such as within 24 hours. The United State Supreme Court decided in Heimeshoff vs. Hartford Life and Accident Insurance Company in December, 2013, that ERISA time limits for claiming benefits are enforceable unless “unreasonably short.” Will a limit of 24 hours survive this test?

Regarding mandatory arbitration, academia-based authors such as Alexander Colvin and David Schwartz have published critiques but, again, these have not been flavored with attention to work injuries.

For the time being, someone interested in talking directly with opting-out employers might contact the Austin-based Texas Association of Responsible Nonsubscribers (TXANS). The Oklahoma Injury Benefit Coalition led the push for the new law. To explore the injured worker’s experience, Rick Levy, the Texas AFL-CIO’s legal and education director, also in Austin, is a ready resource.

Join the debate.

Peter Rousmaniere is a consultant for workers' compensation claims administrators and vendors and a veteran observer of workers' compensation industry trends.