Monday, November 12, 2012

Reflecting the New Economy: Culture and Opt-Out

How much does a company's culture affect the business' workers' compensation experience? I'd venture to say a whole lot more than most people give credit.

At the National Workers' Compensation and Disability Conference and Expo at the Las Vegas Convention Center last week columnist and author on workers’ compensation issues, Peter Rousmaniere, previewed a 100-page analysis and research report on “The Texas Experience and the Oklahoma Proposal.”

While his overall conclusion was that the ability to opt out of the Texas workers’ compensation system “has produced significant results,” such an option is not for everyone, and in fact is for very few - those who's cultures are already vested towards a strong employee benefit system.

"For employers with well-developed employee benefits programs, an opt-out program will fit into the culture of these programs," Rousmaniere said. "The ability to choose private or public workers’ compensation means that the employer gets the solution that fits their needs."

"Customization of work injury benefits can match the needs of the employer’s workforce and location – something that’s impossible with statutory workers’ compensation," Rousmaniere said.

But, "a strong opt-out program requires special expertise especially from workers’ compensation administrators, benefits consultants, claims managers, brokers and excess insurers, and medical providers" Rousmaniere said. "The old ways won’t work."

And there's the rub: the old ways won't work. Culture is deeply rooted into the ability of any employer to deliver benefits effectively and economically, whether via non-subscription or traditional workers' compensation. So an opt out program is only going to work for those employers who already have workers' compensation systems that are timely, expedient and efficient.

I think Texas makes a great case study because it offers not only a comparison between an ERISA backed non-subscription system versus a traditional work comp insurance program from the employer-employee perspective, but it also gives us a glimpse how market reactions can foster overall change.

ERISA backed non-subscription has been around in Texas for several decades now, and participation has waxed and waned with the fluctuations in the traditional work comp market.

The "Survey of Employer Participation in the Texas Workers’ Compensation System" for 2010 showed the percentage of employers that are nonsubscribers decreased from 33% in 2008 to 32% in 2010. The survey, conducted by the Texas Department of Insurance’s Workers’ Compensation Research and Evaluation Group, shows the nonsubscription rate peaked at 44% in 1993 and 1995. 

The percentage of Texas employees working for nonsubscribers fell from 25% in 2008 to 17% in 2010. The lowest rate shown in the study was 16% in 2001. The Research and Evaluation Group is to release a new study updating the 2010 study by Dec. 1. I don't know how many of these non-subscribers have alternative benefit plans in place.

According to the  Insurance Council of Texas, workers' compensation premium rates have dropped 49% since 2005, the year that the state's big reform bill, HB 7, came into effect introducing numerous changes that significantly affected the cost of medical delivery and indemnity benefits. This correspondes, albeit not by a large amount, to the decline in non-susbscription.

But I think this shows that employers speak with their wallets, essentially introducing market competition in an alternative of a traditional system.

It can't be said that opting out in itself forced the changes to Texas' work comp market, but certainly the ability of large employers to do so does affect the economics of the system. With the diversion of all those premium dollars, carriers, and those who provide support to the system, are going to look towards changes that increase efficiency in order to compete for those insurance dollars that may otherwise get diverted to ERISA backed plans.

A similar market based pressure may occur in California. While the Golden State is far from ever embracing an opt-out program, SB 863 introduced significant changes to the self-insured program that is going to result in huge savings to those employers that are big enough to host such programs. The more businesses that go for self-insurance means the more premium dollars that are diverted from traditional insurance providing some market competition.

But self-insurance is not the same as ERISA backed opt out programs because self-insureds still need to play by the same game rules as those under traditional insurance.

Still, I think that at least the large employer market is speaking loud and clear: make changes to corral medical and indemnity expenses or we'll take our premium dollars elsewhere.

Now that I think about it, perhaps ERISA backed opt-out is not so far from a reality in a big state like California. It sure came awfully close to reality in Oklahoma on the first try and that is a radical departure from tradition in a single legislative session.

While a Texas style opt-out program is not the panacea for issues within the industry, companies with strong employee benefit cultures, like those in California who pushed for self-insurance reform in SB 863, are going to look at Rousmaniere's report, and look at what happens in Oklahoma. If it appears beneficial, we may see the next wave of reform following this radical departure as business-worker relations evolve to reflect this new economy.

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