RIMS Executive Report The Risk Perspective. Alternatives. to Traditional. Workers Compensation. Systems

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1 The Risk Perspective Alternatives to Traditional Workers Compensation Systems

2 Alternatives to Traditional Workers Compensation Systems Authors Nathan Bacchus Senior Government Affairs Manager, RIMS John Burkholder Director of Risk Management, Broward County, Florida Barry Dillard Director, Claims Management, Walt Disney Parks & Resorts U.S. William Frese Director, Risk Management, The ADT Corporation The authors would like to thank the RIMS External Affairs Committee for their contributions to this report. As the preeminent organization dedicated to advancing the practice of risk management, RIMS (Risk and Insurance Management Society, Inc.) is a global not-for-profit organization representing more than 3,500 industrial, service, nonprofit, charitable and government entities throughout the world. Founded in 1950, RIMS is dedicated to advancing risk management for organizational success, bringing networking, professional development and education opportunities to its membership of more than 11,000 risk management professionals who are located in more than 60 countries. For more information on RIMS, visit Risk and Insurance Management Society, Inc. All rights reserved.

3 Introduction Since Wisconsin s 1911 enactment of the first state workers compensation statute, the general construct of the state-based workers compensation system has remained relatively unchanged at a base level. By 1948, the radical idea that an employee have a process through which employment related injury costs would be reimbursed in exchange for employer protection from liability suits, was adopted in some form by all 50 states. While there are certainly differences between states on the specifics of the various workers compensation systems, the general construct has remained relatively unchanged; however, that is beginning to change. Some interested parties, including the Association for Responsible Alternatives to Workers Compensation (ARAWC), believe it is past time to consider alternatives to this traditional workers compensation structure. The idea is to build on the opt-out system that has been in place in Texas for decades and to give employers in other states an option on whether they will participate in the traditional statebased system. Oklahoma has adopted an option, while Tennessee and South Carolina have recently introduced legislation that would allow certain employers in their states to opt-out as well. The purpose of this paper is to provide a general overview of the opt-out systems, compare and contrast the enacted and introduced legislation in the different states, and to provide basic considerations employers should have when determining whether to opt-out. RIMS Position on Workers Compensation Alternatives RIMS has not taken any official position on specific legislation that was enacted in Oklahoma or that is currently a matter of debate in Tennessee and South Carolina. As the representative organization for risk management professionals, we do recognize the importance of giving organizations choices for how to best manage their risks, while also understanding the critical need to ensure that employees are adequately protected and cared for in the event of an on-the-job injury. We encourage every organization to carefully consider the pros and cons of choosing a workers compensation alternative, if given the choice. 1

4 Texas Following a 1917 U.S. Supreme Court ruling that states could legally require employers to provide workers compensation coverage to their employees, many states revised their laws to include mandatory workers compensation. Texas did the same; however, it also retained its voluntary participation component. This optout system would serve as the basic framework for the state for the next 72 years until a new workers compensation law was enacted in While this law was a significant revision, employers continue to have the option of nonsubscribing, or deciding not to carry workers compensation. Nonsubscribers Employers in Texas are given three basic options for managing employee injuries in the workplace: 1) they can join the traditional workers compensation system and be subject to all state workers compensation laws and regulations governed by the Texas Department of Insurance; 2) opt-out of the state statutory system and create their own internal work-injury compensation system, while losing exclusive remedy protection; or 3) choose not to offer any workers compensation benefits either through the state system or internally. Those who optout of the traditional workers compensation system are referred to as nonsubscribers. Private sector businesses engaged in state building and construction projects and government entities are not given these options and must participate in the state-based system. It is important to note that nonsubscribers are not necessarily the same as self-insured employers. Self-insured employers continue to participate in the workers compensation system and remain subject to all state laws and regulations governing that system. Self-insured employers receive the same tort protections as other subscribing employers while employee benefits are also strictly regulated. Responsible Nonsubscription While private employers do have the option of providing no coverage to their employees, this decision would leave the employer open to catastrophic legal liability claims in the event of workplace injuries. For that reason, nearly all nonsubscribers choose to establish their own internal workplace safety and injury management programs. These programs establish practices for both injury prevention and reimbursement of quality benefits to those employees injured in the workplace. The Texas Association of Responsible Nonsubscribers (TXANS) has established several primary components that a responsible nonsubscriber should have in place: A workplace safety program designed to meet the unique needs of the nonsubscribing business. A well documented responsible nonsubscriber occupational injury benefit plan that establishes the provision of workplace injury benefits. A program that communicates the programs elements to employees. Benefit funding, which is typically secured through insurance or a combination of selffunded and insured benefits. Employer/employee selection of quality medical providers to provide exceptional care for employee injuries. A program to manage benefit claims. Programs to prevent and address disputes in a manner that is fair to employees and employers alike. Regulatory compliance, both state and federal. Notification Employers who do not have traditional workers compensation coverage must provide written notice in their workplace notifying employees of that fact. This notice must be written in English, Spanish and any other appropriate language and must be placed within the employer s personnel office and in a prominent place where employees will regularly see it. Additionally, an employer who does not obtain workers compensation coverage must notify the Texas Division of Insurance in writing that the employer elects to forego coverage. Any employer who terminates workers compensation must also notify the division in writing and must file the appropriate forms with the Texas Division of Workers Compensation. Nonsubscriber statistics In November 2014, the Texas Department of Insurance released a study entitled Employer Participation in the Texas Workers Compensation System: 2014 Estimates. Some of the key findings include: 33% of Texas employers are nonsubscribers with 20% of private sector employees working for nonsubscriber employers. The industries with the highest percentage of nonsubscribers are health care/educational services (41%), arts/entertainment/ accommodation/food services (39%), and wholesale trade/retail/transportation (34%). Employer nonsubscribers overall satisfaction with their experience is 67% vs. 61% for subscribers. Only 30% of non-subscribing employers offer permanent partial benefits. Only 25% of non-subscribing employers offer permanent total benefits. Only 45% of non-subscribing employers offer death benefits in the case of a workrelated fatality. 470,000 or 5% private sector employees do not have any workers compensation coverage or a nonsubscriber occupational benefit plan. 2

5 Oklahoma On May 17, 2013, Oklahoma Governor Mary Fallin signed into the law the Oklahoma Employee Injury Benefit Act (OEIBA). This new law made Oklahoma the second state to allow qualified employers to opt-out of the state workers compensation system. The Oklahoma option features many more restrictions than the Texas system and does not give employers the option to completely forego offering any workers compensation benefits. Qualified Employers Any employer, private or public, may voluntarily elected to become exempt from the Administrative Workers Compensation Act (the traditional state-based system) and become a qualified employer under the following conditions: Demonstrate the financial ability to pay claims using either purchased insurance or posting securety through a surety bond or letter of credit in an amount determined by the Oklahoma Insurance Department. Obtain approval of a written private benefit plan offering similar benefits to the state workers compensation program including indemnity, permanency, death benefits, vocational rehabilitation, disfigurement, medical, etc. Pay a $1,500 filing fee with to the Department of Insurance. Remain compliant with the Employee Retirement Income Security Act (ERISA). Potential Benefits to Employers As mentioned, any employer choosing to opt out of the state workers compensation system must continue to provide benefits similar in form to those required under system, similar in concept to the way that private group healthcare plans are managed. However, the employer does have some discretion in how the plan functions. Employers select their own list of approved medical providers and may impose a stricter deadline for injury reporting than the state s 30-day window. In theory, this allows employers electing the option to provide better medical care while also having greater employee accountability. In exchange for providing similar benefits as the state system, employers are granted exclusive remedy protection against negligence liability lawsuits, similar to those under the state system. The option program also gives the employer discretion on how to best manage workers compensation benefits from a financial standpoint. Employers may choose to purchase insurance sufficient to cover the benefits required, or choose to self-insure such benefits. In some cases, the employer may be required by the Insurance Commissioner to purchase a surety bond to secure the employer s obligations. Employee Protections Any option plan must include minimum appeal rights for any employee who has had their claim denied by their employer. The employer must notify the employee in writing within 15 days of the receipt of the claim that the claim has been denied, why it was denied and the method for appealing the decision. Appeals will initially be heard by a committee consisting of at least three people that were not involved in the original benefit determination and claim denial. If that committee upholds the denial, the employee retains the option to appeal to the Oklahoma Workers Compensation Commission, and then ultimately to the Oklahoma Supreme Court. Under certain circumstances, the appeal may also be heard by federal courts. OEIBA also created two guaranty funds that will pay claims in the event of default by an insurer or self-insured plan: the Oklahoma Option Insured Guaranty Fund and the Oklahoma Option Self-Insured Guaranty Fund. These will be funded by premium assessments against insurers and self-insured employers. Court Challenges Once OEIBA was enacted, an immediate constitutional challenge (Coates v. Fallin) was made on the grounds that the Oklahoma constitution prohibits a single legislative bill from addressing multiple subjects. The Oklahoma Supreme Court, in a ruling that took effect on February 1, 2014, ultimately ruled that the new law only deals with work-related injuries and that the legislature followed a permissible process; however, it seems unlikely that this will be the last court challenge to the law. If, in future challenges, portions of the law are found partially invalid, then the remainder of the OEIBA will remain in effect. If the entire law were found invalid, employers will remain entitled to exclusive remedy protections and have 90 days to secure compliance with the state based workers compensation system. 3

6 Tennessee Under current Tennessee law, cities, counties and school boards within the state are allowed to opt-out of the workers compensation system and participate in a privately established plan. In February of 2015, the Tennessee Employee Injury Benefit Alternative Act was introduced in the Tennessee General Assembly and Senate to extend this option to private employers. The legislation, modeled after parts of both the Oklahoma and Texas laws, has been deferred to the 2016 session. Employer Qualifications and Minimum Benefits To become certified as a qualified employer for the purpose of opting-out of the state system, an employer must have at least five employees and apply to the Tennessee Insurance Commissioner for certification. An application will include certain employer information, a $500 application fee, and satisfactory proof, as determined by the Commissioner, that the employer is able to financially secure compensation for its covered employees for occupational injuries. The applicant employer must also provide a written benefit plan providing at least the following: Medical expense coverage for at least 156 weeks and $500,000 per employee. Temporary total disability benefits of at least 70% of the employee s average weekly wages up to 110% of the state average weekly wage for at least 156 weeks. Temporary partial disability benefits of at least 70% of the difference between the employee s average weekly wage at the time of the injury and the wage the employee is able to earn in the employee s partially disabled condition until the employee reaches maximum medical improvement. Permanent partial disability benefits of at least 70% of the employee s average weekly wages up to 110% of the state average weekly wage. Permanent total disability benefits of at least 70% of the employee s average weekly wages up to 110% of the state average weekly wage. Death benefits in at least an amount equal to the lesser of three times the employee s average annual salary or $300,000 per employee. A combined single limit for all benefits payable due to an occupational injury of at least $1,000,000 per employee. It is important to note that under this legislation, employers who choose to opt-out will not have exclusive remedy protections and does not limit the right of an employee, the employee s personal representative, dependents or next of kin from recovering further damages under a cause of action for employer negligence. South Carolina On May 13, 2015, H.4171, the South Carolina Employee Injury Benefit Plan Alternative was introduced in the South Carolina House of Representatives. This legislation would allow qualified employers in the state to opt-out of the state workers compensation system. The legislation is similar to the Oklahoma option law and proposed Tennessee legislation; however, some of the mandated benefits under the South Carolina legislation are even greater than what is required under the state s workers compensation system. Qualified Employers and Minimum Benefits Employers may become qualified by applying to the Director of the Department of Insurance by providing certain employer information, payment of a $500 application fee and satisfactory proof of ability to pay benefits. The employer must also have a benefit plan in place that, at a minimum, covers the following: Total disability benefits of 75% of the employee s average weekly wages. Temporary partial disability benefits of 75% of the difference between the employee s average weekly wages before the injury and the average weekly wages that he or she is able to earn thereafter for up to 340 weeks. Use of American Medical Association s Guides to the Evaluation of Permanent Impairment for cases involving loss, loss of use or disfigurement. Death benefits of 75% of the employee s average weekly wage for at least 500 weeks and burial expenses of up to $7,500. Unlike the proposed Tennessee legislation, employers who opt-out in South Carolina would be granted exclusive remedy protections meaning that the employer s injury benefit plan would be the injured worker s only source for recovery. 4

7 Should I Stay or Should I Go? The decision on whether to opt-out of the state workers compensation is a critical decision that no employer should take lightly. While there may be obvious potential benefits to the employer s financial bottom line it should also take into consideration its relationship with its employees, the well-being of those employees, and other factors including reputational risks. Planning Before making any opt-out decision, the employer must be sure that it understands the differences between the opt-out system and the traditional workers compensation system in the state under consideration. The systems in Texas and Oklahoma and the proposed legislation in South Carolina and Tennessee all have different processes and requirements. Once the differences between opting-out and remaining in the system are understood, the employer must take the steps necessary to develop a benefits plan. This plan will be different based on the minimum requirements of each state that it is considering opting-out of. While employers have almost total leeway to develop their benefits plan in Texas, there are far stricter requirements in Oklahoma. The South Carolina and Tennessee bills also include their own minimum requirements that must be considered. This is also the appropriate time to determine how the employer plans to cover those benefits. If it plans to procure insurance coverage, then it is important to gather quotes and to submit requests for proposals. If it plans to self-insure, then it is critical that sufficient proof of financial viability is obtained for the certification step of the process. Employers should also begin development of employee training materials, a communications plan, claim review procedures and any other human resources planning required should the employer move forward with opting-out. Applying Each state offering an option, or proposing to do so, has its own procedures and requirements for being officially certified as a qualified employer. While the development of a benefits plan is the largest component in most of the states, the employer should also be aware of all potential fees, required documents and proof of financial standing that will be needed during the application process. Implementation Once certification is received, the employer moves into the implementation phase. If the employer has chosen to purchase insurance coverage, and has not already done so, it will now be time to bind that coverage. It is also time to confirm that a sufficient and effective claims administration and management process has been put into place, as well as an appeals process should a need arise in the future. One of the most critical components of an effective rollout will be communication to employees. A decision to opt out may be seen as drastic and it is important that employees are provided with as much information as possible about how opting out will impact them should they be injured in the workplace. It is important to note that many of the states that have enacted or proposed option plans have notice requirements that must be followed; however, going beyond the statutory minimum may help improve employee compliance with the new plan and increase employee satisfaction. As implementation moves forward, the employer should closely monitor the plan and process while also continuing strong communication with employees. The employer should ensure that the claims process is being efficiently and effectively handled, employment safety practices are meeting their goals, treatment plans are working effectively and being followed, employees are satisfied with the plan, and whether employees are ultimately returning to work in a satisfactory way. Conclusion With any program that has been around as long as workers compensation systems, ideas for alternatives were bound to come up eventually. While Texas had an alternative in place for decades, three other states have recently moved in the direction of allowing employers to opt out of the workers compensation system. Option advocates have expressed interest in pushing similar legislation in other states, so it does not appear that this trend will die out anytime soon. There are certainly many potential benefits that employers and risk management professionals may gain from opting out, if given the opportunity. It is important, however, to weigh all potential risks for the employer and its employees in making what may be a drastic change. 5