Cutting Costs a Likely Driver of Workers’ Comp Opt-Out Rules

Since 1913, Texas had been the only state generally accepted as allowing employers to opt out of the workers’ compensation system.

One hundred years later, in 2013, Oklahoma enacted legislation seeking to give its employers the same option. Provisions in the Oklahoma version sought to protect employees to a greater degree than in Texas. While enacting opt-out legislation, the state also improved the overall climate for workers’ compensation, which in turn helped lower rates and premiums for employers. These changes, and some general reluctance on the part of many employers, has led to a smaller percentage of employers seeking to opt out than originally predicted. 

Two years into the new system, a ruling by the Oklahoma Workers Compensation Court has dealt a legal setback to employers seeking to design their own benefit plan by calling the Oklahoma Employee Injury Benefit Act — as the Oklahoma workers’ compensation opt-out provision is formally called — unconstitutional. This ruling has triggered speculation about where these opt-out systems are headed and if it could lead to their demise.

Do I believe this will cause the end of the Oklahoma opt out as we know it? For now, the answer is a resounding no.

For starters, some believe the Oklahoma WCC overstepped its authority by ruling the act unconstitutional. The Oklahoma State Supreme Court is expe

cted to take a closer look at this, as well as other issues pertaining to the ruling and case in question.

The practical issues driving the rise of these systems, even more so than a court ruling, are more likely to determine the fate of the opt-out systems and the effort to spread them beyond Texas and Oklahoma.

Traditional individual state workers’ compensation systems were first established around the beginning of the 20th century in response to the often-horrible way workers were treated after industrial accidents. In essence, a grand bargain; workers in these systems forfeited their ability to sue for work-related injuries and received guaranteed medical care and lost wages in return. This no-fault approach has had its ups and downs since it began, but has generally benefited both employees and employers.

So what happened? Why would an employer opt out of this traditional system, essentially turning all of their employees into potential third-party claimants? In short, it’s about costs.

Opt-out promoters may use their public relations machine to play up the potential for improved worker benefits under opt out, but the real goal is cost reduction. According to the National Council on Compensation Insurance’s 2015 State of the Line Report, the average medical cost per claim has more than tripled since 1995, rising from $9,000 in 1995 to over $29,000 in 2014. The data for 2015 is not yet available.

While increasing medical costs are a contributor, utilization, rehabilitation and prescription drug costs have all risen dramatically over the same period. For comparison, the indemnity or lost wages component of claims has risen to $23,000 from $10,000 in the same time period, as wage growth has been inconsistent.

Certainly, electing to use an opt-out program will reduce premiums, but how does it control claim costs?

Employers are already focused on more directly managing doctors and medical treatment, so it is unlikely an opt-out program will magically lower the cost of a claim. A recent review by Propublica of the filed programs in Texas and Oklahoma shows that in most cases benefit levels are potentially lower than traditional workers’ compensation programs and come with severe limitations on an employee’s ability to file a claim. 

Often, these plans put rules in place that are nearly impossible for an injured worker to comply with. One is obtaining pre-authorization for treatment, which in emergency situations can be complicated. Another issue often cited is the need to report injuries within 24 hours — or by the end of an employee’s shift. Most state legislated workers’ compensation plan have no equivalent rules.

Because employees covered by opt-out programs can technically bring a third-party suit against them for providing an unsafe workplace, the potential now exists for substantial employer liability judgments. A smattering of successful employee suits in Texas makes this clear and suggests not all is perfect in opt-out land — including a $2.25 million verdict against Tyson Foods, a $780,000 verdict against Kay Spring & Manufacturing and a $5.3 million award against West Star Transportation.

Those millions in lawsuit payouts, however, are unlikely to dampen interest in opt-out programs because these court judgments are still rare and the increase in medical costs remain broad and steady. Addressing the rising cost of workers’ compensation claims requires one to look at the broader economy and recognize that the cost of medical care continues to be the biggest concern — for employers and employees alike.

As employers seek additional ways to be competitive in the global economy, the continuing rise of opt-out systems reveals the problem of rising medical costs is far from solved, including the increasing price of prescription drugs. Taking on the steady rise of medical treatment and prescription drug costs in a substantial and meaningful way would benefit the economy, reduce workers’ compensation costs and ultimately reduce the appeal of switching to an opt-out program.