Non-subscription -- An Alternative that Works

Saturday, December 30, 2006 | 0

Editor's note: Texas is now the only state allowing employers the option to opt out of the workers' compensation system. The 2006 non-subscription survey conducted by the Texas Department of Insurance Workers' Compensation Research and Analysis Group revealed that 37% of employers are now non-subscribers while the percentage of Texas employees employed by non-subscribers is 23%.

Legislation mandating workers' compensation coverage has been filed several times since 1989. Each attempt to pass legislation that makes workers' compensation mandatory has failed. It is possible that legislation that proposes amending the Texas Labor Code to mandate workers' compensation coverage will be filed during the upcoming legislative session. With that possibility in mind, Bill Minnick, an attorney and proponent of responsible non-subscription as an alternative to mandatory workers' compensation coverage, and Richard S. Geiger, an insurance industry lobbyist and proponent for mandatory workers' compensation, have cooperated in a venture to each write an article that represents their perspective on whether or not legislation should be passed to require all employers to purchase workers' compensation insurance coverage. The articles were published by the Insurance Council of Texas.

By Bill Minick

Although available since the first Texas workers' compensation law was enacted in 1913, the "non-subscriber option" received little attention prior to 1989. At that time, we saw the beginning of a significant increase in the rate of non-subscription, with up to 44% of all Texas employers non-subscribing by 1993.

Few employers, employees, insurance carriers, claim administrators, attorneys, or other interested parties knew what to make of this trend or what the long-term implications would be for Texas business or injured employees. What we did know was that the playing field looked like this:

Workers' compensation rates were unaffordable and driving companies out of business (or, at least, out of the state). A little known statutory option allowed employers to walk away from the state system and do absolutely nothing for injured workers.

A statutory "penalty" said employers that opt out of the state system could be sued by injured workers (for simple or gross negligence), stripped of the common law defenses of negligence of a fellow employee, assumption of the risk, and contributory negligence.

Few, if any, employers and advisors whole-heartedly embraced the non-subscriber option in those early days. The only thing clear was that the non-subscriber option would be vital to retaining jobs in Texas, and we needed to see if employers and other market forces could make it work.

Here's what we've found:

Similarities of Workers' Compensation and Non-Subscription

Workers' compensation benefits are (1) pre-determined by statute, (2) provided on a "no fault" basis, (3) in an environment that includes many employee protections.

Most non-subscribers also provide benefits that are (1) pre-determined, in writing, and communicated to employees in accordance with federal law, (2) provided on a "no fault" basis, (3) in an environment that includes many employee protections.

Pre-determined Benefits

Any payment of medical benefits by a non-subscribing employer (regardless of employer size) creates an "employee welfare benefit plan" that must comply with the many employee protections of ERISA (the Employee Retirement Income Security Act, passed by Congress in 1974). Those protections include several "Reporting and Disclosure Requirements", such as:

The need for a written plan document stating all rules on eligibility, with definitely determinable benefits, and clarity on any exclusions or limitations on benefits.

An affirmative duty to distribute to employees a Summary Plan Description, written in terms understandable by the average Texas employee.

These are the same federal rules that apply to group health plans and retirement plans, and are enforced by the U.S. Department of Labor.

No Fault Benefits

Like workers' compensation, most non-subscribers pay injury benefits on a "no fault" basis. This feature:

recognizes "the reality of the workplace" (i.e., good employees sometimes make mistakes),

reflects the paternalism most employers feel toward their workforce,

protects the employer's hiring and training investment, and

represents a good defense litigation strategy.

Employee Protections

In addition to injured worker rights to sue their non-subscribing employer for negligence in causing the injury (stripped of the above common law defenses), ERISA also includes other regulatory protections, such as:

Penalties up to $110 per day for any employer failure to provide copies of the injury benefit plan or Summary Plan Description documents (referenced above) upon employee request;

A Form 5500 (Annual Return/Report) must be filed for all non-subscriber injury benefit plans that cover 100 or more employees. Failure to file such disclosures can result in penalties up to $1,100 per day;

Fiduciary rules, requiring non-subscribers to administer their injury benefit plans in the best interests of covered workers; and

Civil and Criminal enforcement mechanisms to enforce such fiduciary rules and provide remedies for discrimination in payment or other wrongful denial of benefits.

These regulatory protections have been front page news in recent years in the context of retirement plan asset management and group health plan benefit disputes. Most of those same rules apply to non-subscriber injury benefit plans and are taken very seriously by non-subscribing employers and their advisors. Personal liability can attach to those who violate these ERISA rules.

Note that non-subscribers also must comply with:

Texas Department of Insurance (TDI) filing requirements, providing timely notice of non-subscriber status and injuries involving lost time, occupational disease, or death & subject to Texas Administrative Code penalties up to $25,000 per day, per violation; and Medical Privacy and Security Rules under the Health Insurance Portability and Accountability Act ("HIPAA")&subject to penalties of $100 per violation, per employee; criminal penalties; and potential lawsuits.

Lawsuit Protection and Employer Accountability

The common law remedy of an injured employee suing his or her employer for negligence was inadequate and inequitable for injured workers at the time Texas' workers' compensation statutes were first enacted in 1913. Employers retained their common law rights to defend such lawsuits and few employees received adequate care or compensation for their injuries. Solving that problem has been a key objective and accomplishment of the Texas workers' compensation system and non-subscription.

But unlike workers' compensation, employees of non-subscribers are not forced to accept the state system's (or their employer's) limited benefits. They can sue for more, if needed. And, in principle, having been stripped of various common law defenses (per the Texas Labor Code), the injured employee must only show 1% fault on the part of the non-subscribing employer and he or she can recover 100% of the damages.

Most attorneys agree that the non-subscribing employer is at a big disadvantage under this scheme. And the fact of the matter is that non-subscribers who have not maintained safe workplaces and appropriately cared for injured workers are being held accountable.

Through research in court records and surveys among defense counsel, insurance carriers, third party administrators and employers, we have identified (to date) thirty-four (34) settlements or judgments against non-subscribing employers of $1 million or more. The largest judgment against a non-subscribing employer for negligence resulting in employee injury was for $22 million. Such settlements and judgments have sent a clear message within the non-subscriber community that employers who do NOT carry Texas workers' compensation insurance coverage and do NOT provide safe work environments and adequate care for injured workers WILL be held accountable.

So any assertion that Texas workers employed by non-subscribers are left "unable to protect themselves" is without merit, and flies in the face of ample state and federal statutory and regulatory requirements that specifically provide employee protections and actual litigation experience to the contrary.

Myths of Non-Subscription

It is true that, in practical terms, Texas is currently the only state that does not mandate workers' compensation coverage. But the argument that "everyone else has done it, so Texas should too" will never hold water with most Texans. The spirit of Texas is that of an independent mind. Texas has it RIGHT (in offering a two-track, competitive system), and other states have it WRONG (offering only a one-size-fits-all system with fewer free market incentives). And Texans are not followers.

Nevertheless, proponents of a mandatory Texas workers' compensation system continue to propagate various myths about non-subscription in an effort to support their position, such as:

Non-subscription depopulates the workers' compensation system of low risk employers.

Non-subscription is dominated by retail, healthcare, food service, transportation, and manufacturing employers with high occupational injury frequency. These are not white collar industries that simply pay their insurance premiums and rarely file claims. Thus, there is no "adverse selection" against the workers' compensation system. In fact, the Texas system would only be further strained by the return of these employers.

Non-subscribers are unregulated and unaccountable.

As noted above, this ignores a myriad of current TDI and ERISA reporting and disclosure requirements for non-subscribers, Occupational Safety and Health Act (OSHA) requirements, the ERISA claims regulations, and various other non-subscriber benefits to and protections for employees.

Non-subscription is bad for Texas business.

Non-subscription can be credited with acting as a "safety valve" to the current workers' compensation system, saving tens of thousands of jobs in Texas that would have otherwise been lost to China, India, Mexico and other places.

As noted in a January 14-20, 2005 Dallas Business Journal editorial: "Texas is the only state that does not force companies to participate in its workers' compensation system. And because of that, many employers have been able to thrive under alternative, market-driven plans, which have allowed them to spend more on innovation and job creation instead of feeding a one-size-fits-all state bureaucracy."

Numerous employers (headquartered in Texas and around the U.S.) will testify that non-subscription has allowed them to open new business locations, expand existing facilities, and create jobs throughout the state. We anticipate that either academic studies or employer surveys, coupled with further improvements to data mining at TDI, the Texas Workforce Commission and other government agencies will (one day) permit a cross-referencing that objectively proves the substantial economic benefit that the State of Texas and its citizens have enjoyed through job growth, lower injury frequency and severity, better return-to-work rates, and employee satisfaction directly attributable to the non-subscriber option.

Non-subscribers are abusing their injured workers.

As described above in the context of negligence liability settlements and judgments, non-subscribers are HIGHLY MOTIVATED to prevent employee injuries. This myth of employee abuse is debunked by the State of Texas research studies that have found higher satisfaction levels among injured workers employed by non-subscribers in the areas of employer treatment, medical coverage, and income benefits paid during recovery.

Non-subscription really does not save employers money.

Although a full rebuttal of this narrowly-held view is beyond the scope of this article, rest assured that data to defend the reality of employer savings, including actuarially credible analysis, is now readily available.

Non-subscription prevents the workers' compensation system from gaining critical mass to succeed. (i.e., "if we were all just rowing in the same direction&.")

With well over 100,000 businesses and millions of employees currently covered by the Texas workers' compensation system, how many are enough? These numbers are significantly higher than most other state workers' compensation systems around the U.S.

Workers' Compensation System Objectives

The modern era of non-subscription addresses key societal objectives. These same objectives stand behind the Texas workers' compensation system and led to enactment of OSHA in 1970.

These objectives include:

Broad coverage of employees for work-related injuries and diseases; Substantial protection against loss of income; and Sufficient medical care and rehabilitation services.

TDI research data demonstrates that these first three objectives are being satisfied by the non-subscriber alternative. Consider the following results from studies conducted by the Research and Oversight Council on Workers' Compensation (and its predecessor, the Research Center, and its successor, the TDI Workers' Compensation Research Group):

The 1994 study found:

87 percent of both employees of subscribers and employees of non-subscribers reported having had all the medical costs for their on-the-job injuries paid.

40 percent of employees of subscribers and 42 percent of employees of non-subscribers reported receiving 100 percent of their lost wages, and 88 percent of employees of subscribers and 94 percent of employees of non-subscribers reported that the coverage for wage replacement extended for the entire period away from work.

34 percent of injured employees of subscribers and 44 percent of injured employees of non-subscribers reported being offered assistance in getting back to work.

The 1997 study found:

The vast majority (92 percent) of injured workers employed by non-subscribing firms indicated that their employer/insurance company paid for medical costs related to their on-the-job injury.

Attorney involvement was relatively low among injured workers employed by non-subscribers. Likewise, the propensity of injured workers to file lawsuits against their employers as a result of their on-the-job injury was also low.

The 2002 study also noted that past studies "suggest that satisfaction levels for injured workers employed by non-subscribers are fairly high." The 2004 study found:

Percentage of non-subscriber workforce covered by occupational injury benefit plans increased from 80% in 2001 to 88% in 2004.

Thus, our state government's own data supports the fact that the vast majority of non-subscribers offer "alternate coverage" for injury benefits, either on an insured or self-insured basis.

It is also important to note that:

Non-subscribers Can Settle Claims & Responsibly. A non-subscribing employer and injured worker can always agree to a settlement of medical, lost wage, and other expense and damage amounts outside of the terms of the "alternative" injury benefit plan through a release of liability. This ability to determine a fair and reasonable settlement of the claim (something the workers' compensation laws prohibit) has been beneficial to both employers and employees and their families. And note that ERISA's fiduciary rules prohibit an employer from withholding benefits and trying to force a settlement if the employee or family prefers to simply receive the promised benefits. Furthermore, the Texas Legislature has enacted laws in 2001 and 2005 that prohibit employee pre-injury waivers of negligence and restrict the ability of non-subscribers to settle claims in a manner that would take advantage of the injured worker.

Group Health Plan Exclusions Apply to Subscribers and Non-subscribers Alike. We all know that group health plans are, by no means, universally offered to Texas employees (by subscribers or non-subscribers to workers' compensation). And, when offered by the employer, such plans commonly (1) are elective by the employee, (2) require some measure of expense payment by the employee, and (3) exclude coverage for injury or illness related to the employee's course and scope of employment. This third item is where workers' compensation coverage or a non-subscriber injury benefit plan is needed. And as reflected in the above data, the vast majority of non-subscribers are providing the needed coverage, in a highly regulated environment that provides numerous employee protections.

Safety in the Workplace

The encouragement of worker safety is also a key component of the federal OSHA standards. It is important to note that non-subscribers are also subject to all OSHA health and safety rules that subscribers to workers' compensation are subject to.

And the non-subscription liability exposure clearly creates a huge economic incentive supporting workplace safety and job training. Death by trial lawyer is the objective of no Texas employer. Employers who approach the effective date of a new non-subscriber program routinely pour thousands and tens of thousands of dollars into new safety, ergonomic, and training programs aimed at both reducing injury frequency and exposure to negligence lawsuits.

Current non-subscribers are also well-known to have a strong focus on safety issues. Consider this: In early November 2006, PartnerSource completed a non-subscriber benchmarking study of 12 Texas retailers (a mix of department, auto parts, convenience, hobby, toy, grocery, and other retailers). We looked at injury data for years 2003 to 2006, valued as of 8/31/06. This analysis considered over 10,000 non-subscriber claims valued at over $14 million on an incurred basis. For all study participants combined in 2006, there are more than 75,000 Texas employees and payroll in excess of $1 billion. Here's one of the findings:

The number of claims per 100 employees is a benchmark of frequency against exposure. The study found that (depending on the particular retail employer) there were 4.0 to 5.0 claims reported per 100 employees. For 2005, the U.S. Bureau of Labor Statistics reported 5.0 recordable cases per 100 retail employees and 6.2 recordable cases per 100 department store employees. This would seem to be some evidence that non-subscribers maintain at least as good (if not materially better) safety programs and perhaps motivated by the negligence liability exposure they face.

Delivery of Benefits

Development of an effective system for delivery of benefits and services to injured workers has been another key objective behind both workers' compensation and non-subscription. As reflected in TDI surveys, the delivery systems for non-subscriber benefits and services are performing well and contribute to a high level of satisfaction among employees of non-subscribers. The 2005 workers' compensation reforms in Texas also hold the promise of strengthening the state's delivery system. We are hopeful the potential for these reforms will be fully realized, to the benefit of both Texas employers and its injured workers.

It is worth noting that the most recent 2006 TDI study of non-subscription shows that employer participation in the Texas workers' compensation system may be increasing and the percentage of covered employees may also be increasing. This is important evidence that the rate of non-subscription among Texas employers has leveled off, and perhaps the 2005 workers' compensation reforms are already having the desired effect of bringing employers back into the system.

In the meantime, the non-subscriber alternative will continue to provide advantages to injured workers, employers, and our state's economy. Non-subscription will maintain financial and other incentives for all workers' compensation insurance carriers, claim administrators, and regulators to compensation and offer an improved workers' compensation product. These incentives have played a positive role in Texas workers' compensation reform efforts during the past three regular legislative sessions, have been objectively proven sufficient, and should never be removed. Within this current framework, Texas businesses are making non-subscription work.

Bill Minnick is the president of PartnerSource Inc. This article was republished with the permission of the Insurance Council of Texas. www.insurancecouncil.org

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