Joseph Shields and D.C. Campbell
 

Research and Oversight Council on Workers´ Compensation
February 2002

Since the Texas workers´ compensation (WC) law was enacted in 1913, private sector employers have been allowed to opt out of the state´s WC system.1  Elective WC systems, like the one currently in place in Texas, were fairly common until the mid-1970s.  During the 1970 to 1975 period, 21 states changed their WC law to require employers to carry WC coverage.2  Texas is currently the only state with a truly elective WC system for private sector employers.3

Previous studies by the Research and Oversight Council (ROC) and its predecessor, the Research Cen ter, found that a substantial number of Texas businesses have exercised this option not to carry WC coverage.4   Because of the propensity of many Texas businesses to become nonsubscribers to the WC system, it is critical to understand the potential impact they can have on workers, businesses, and the insurance market in Texas.

This study represents the fourth major employer-based nonsubscription study conducted in Texas, and is based on a telephone survey of 2,808 Texas employers completed between August and October 2001.  Previous nonsubscription reports were released in 1993, 1995 and 1996.5   The current project follows the same general format as earlier studies, by analyzing the WC coverage experience of year-round Texas employers.

Key findings from the study are presented below.

Overall Nonsubscription Rates
Since the first study of employer participation in the WC system was completed in 1993, nonsubscription rates have dropped modestly but steadily, with the 2001 estimates being the lowest recorded to date.  In addition, significant variation in nonsubscription rates is observed across employers of different sizes and industries.  Key findings related to statewide rates of nonsubscription are as follows:
 

• In 2001, an estimated 35 percent of year-round Texas employers (approximately 114,000 firms) were not covered by WC insurance, and they employed approximately 16 percent of the Texas workforce (approximately 1.4 million workers).  These estimates represent a decline in the nonsubscription rate from 39 percent in 1996 (the last time it was measured), when nonsubscribers employed 20 percent of the workforce. Nonsubscription was first measured in 1993, when an estimated 44 percent of Texas firms employing 20 percent of the Texas workforce had opted out of the WC system.
• Among industry types, nonsubscription rates are highest among emplo yers in the retail trade (48 percent), services (38 percent) and manufacturing (36 percent) sectors, and lowest among firms in the mining (12 percent) and wholesale trade (25 percent) sectors.
• Larger firms are significantly less likely to opt out of the Texas WC system than smaller employers.  Almost half (47 percent) of the smallest employers in the state (one to four employees) are nonsubscribers to the WC system versus just 13 percent of companies with 100 to 499 employees and 14 percent of firms with 500 or more employees.
• Most employers in Texas have either always had WC coverage (60 percent), or have always been nonsubscribers (26 percent).

Key Drivers for Purchasing WC and for Opting out of the System
It is clear from this study that a wide variety of factors enter into an employer´s decision whether or not to purchase WC coverage.  As the findings presented below indicate, it is also apparent that the key decision drivers expressed by nonsubscribers vary significantly by the size of the employer.

• When subscribers were asked for the primary reason why they purchased WC coverage, the three most frequently cited reasons were as follows:  1) "company philosophy to provide occupational benefits" (36 percent); 2) "fear of lawsuits" (21 percent); and 3) "need WC coverage to obtain government contracts" (9 percent). These responses are fairly consistent across subscribers of varying size.
• There appears to be a significant increase in employer awareness that Texas has a voluntary WC system since the last survey was conducted in 1996.  In 1996, almost a quarter of the survey respondents (23 percent) said that the primary reason they purchased WC coverage was because they erroneously thought the law required that they do so, compared to only 7 percent in 2001.
• "Quoted premiums were too high" was cited as the primary reason fo r opting out of the WC system by 31 percent of nonsubscribing companies.  Since most nonsubscribers are fairly small companies, it is not surprising that "too few employees" was the second most common primary reason for not having WC coverage (26 percent).
• Reasons for not having WC coverage vary substantially across firms of different sizes.  For small firms (i.e., those with less than 50 employees), "too few employees" (67 percent), "few on-the job injuries" (61 percent), and "quoted premiums were too high" (60 percent) were the most frequently cited as "important" decision drivers.6   Conversely, for large nonsubscribers (i.e., those with 100 or more employees), the following were most frequently cited as important reasons for not having WC coverage:  1) "quoted premiums were too high" (87 percent); 2) "alternative occupational benefits plan was a better value than WC" (80 percent); and 3) "wanted more control over choice of medical providers" (78 percent).

WC Insurance Costs
Since cost is an important factor that employers consider when they make decisions regarding WC coverage, it is critical to understand the current experience of employers as it relates to recent changes in WC insurance premiums.  It is clear from the findings presented below that employers are currently facing rising WC insurance costs, and that they would consider dropping their coverage if rates climbed to unacceptable levels.  Specific findings are as follows:
 

• Overall, 42 percent of current subscribers indicated that they observed an increase in their most recent WC insurance premium, compared to 30 percent that reported such an increase in 1996.  Thirty-eight percent said the premium increase was less than 10 percent, and one-third (33 percent) noted that the premium hike was between 10 and 19 percent, and 29 percent reported a recent premium increase of 20 percent or more.
• Larger firms were more likely to report a recent premium increase in 2001.  Approximately two-thirds (67 percent) of large subscribers (those with 100 or more employees) reported an increase in their most recent WC premiums, compared to 54 percent of companies with 50 to 99 workers, and 40 percent of employers with less than 50 workers.7   This increase in premiums, particularly among large employers, is likely the result of carriers cutting scheduled credits previously offered to policyholders, less negotiation of experience modifiers, and perhaps rate hikes filed by some insurance carriers.
• Almost half (48 percent) of current subscribers indicated that they would consider dropping coverage if premiums increased by some increment up to 20 percent (12 percent would consider dropping with a 1-9 percent premium increase; 17 percent with a 10-15 percent increase; and 19 percent with a 16-20 percent premium increase).  This propensity of employers to seriously weigh the possibility of opting out of the system in the event of higher costs holds across employers of all sizes.

 
Alternative Occupational Benefits Plans
While over a third (35 percent) of Texas employers have chosen to opt out of the WC system, this does not necessarily indicate that medical and income replacement benefits are not provided to their employees.  Specific findings related to the propensity of nonsubscribing firms to pay occupational benefits are provided below.
 

• Over half of nonsubscribers surveyed (56 percent) indicated that they pay occupational benefits to employees injured on-the-job.  Since larger firms are more likely to pay benefits, the vast majority of the nonsubscriber workforce (80 percent) is employed by companies that pay occupational benefits.
• A lower percentage of all nonsubscrib ers (20 percent) have a written occupational benefits plan; however, because they tend to be larger firms, they employ the majority of Texans working for nonsubscribers (59 percent).8
• Of the nonsubscribers that indicated they pay occupational benefits to injured workers, 82 percent said that medical expenses related to the injury were covered, and 69 percent noted that income benefits are paid to injured workers during their period of recovery to compensate for lost wages.
• Sixty percent of nonsubscribers that pay medical benefits for on-the-job injuries indicated that these expenses are covered as long as is medically necessary.  Just over a quarter (27 percent) indicated that medical payments are capped by a dollar amount and 13 percent said that medical benefits were capped at a specific treatment duration.
• Contrary to the Texas WC system, which provides the injured worker with choice of health care provider, the majority of nonsubscribing firms indicated that either the employer has first choice of health care provider (43 percent) or that the injured worker must choose from an employer´s list of providers (16 percent).  Since large nonsubscribers are more inclined to have employer-choice based medical arrangements, 76 percent of the nonsubscriber workforce are employed by firms that choose the health care provider.
• Almost three-quarters (73 percent) of nonsubscribers with employer-choice medical plans said that the employee may change health care providers if they are not satisfied with the initial provider of health care services.9

 
Litigation and the Use of Liability Waivers
Nonsubscribers can be sued for damages based on negligence for work-related injuries suffered by their employees; however, a relatively small proportion of nonsubscribers report being sued by an employee over an on-the-job injury.  Liability waivers of negligence typicall y involve an agreement in which the employee agrees not to sue their employer over a work-related injury in exchange for benefits provided through an alternative occupational benefits plan.  Recent legislation (HB 2600, 77th Texas Legislature, 2001) prohibits the use of pre-injury waivers by nonsubscribers.  Key findings related to litigation and the use of liability waivers are presented below.
 

• Only 3 percent of nonsubscribing employers surveyed reported that they have been sued over a work-related injury in the past five years.  This is the same overall litigation rate reported in 1996.
  
•  The majority of nonsubscribers (65 percent) indicated that they were comfortable with the level of risk of lawsuit for work-related injuries their company assumes by opting out of the WC system.
• The use of liability waivers by nonsubscribers surveyed was fairly uncommon.  Only 7 percent of nonsubscribing employers indicated that they asked their employees to sign waivers of negligence.  Since waivers were more common among larger employers, an estimated 18 percent of the nonsubscriber workforce were employed by firms that requested liability waivers.
• Though the majority of nonsubscribers indicated that there was no financial incentive (e.g., an enhanced benefits plan) offered to employees who signed the waiver, most nonsubscribers (77 percent) said that over three-quarters of their workforce signed the agreement.
• Almost a quarter of current subscribers (24 percent) said that they would be likely to drop WC coverage if they could have employees sign pre-injury liability waivers, an option that is now clearly prohibited by law (Article 16, HB 2600, 77th Texas Legislature).

Satisfaction with Subscriber/ Nonsubscriber Experiences
Since Texas is the only state with a significant number of employers operating without workers´ compensation coverage, it is important to look at satisfaction levels of both subscribing and nonsubscribing firms as one measure of how well the elective WC system is working.  Satisfaction with subscribing and nonsubscribing employers´ respective experiences are presented below.
 

• The majority of subscribers (60 percent) and nonsubscribers (68 percent) indicated that they were satisfied with their respective experiences in and out of the WC system.
•  Interestingly, satisfaction with their experience outside of the WC system increased with employer size for nonsubscribers (85 percent of large firms satisfied vs. 67 percent of small firms). Just the opposite was true for subscribing firms: satisfaction with their experience in the WC system decreased with employer size for subscribers (48 percent of large firms satisfied vs. 60 percent of small firms).
• Subscribers tended to be less satisfied with their ability to manage WC claim costs than nonsubscribers.  Just over half of subscribers (54 percent) indicated satisfaction with their ability to effectively manage claims costs versus 74 percent of nonsubscribers.

Differences in satisfaction levels observed between subscribers and nonsubscribers are not surprising since employers who have made a conscious decision to opt out of the WC system may feel a stronger sense of ownership over their alternative occupational benefits program than subscribers do about the statutorily-based WC system.  Thus, higher overall satisfaction levels, as well as a greater degree of satisfaction with specific aspects of their programs, can be reasonably expected from firms that choose to opt out of the system.

Concluding Observations
While Texas remains the only state in the country with a truly elective WC system for private sector employers, it appears from this study that satisfaction levels are relatively high among employers both in and out of the WC system.  Estimated alternative occupational benefit coverage rates demonstrate that most employees working for nonsubscribers are paid some level of medical and income benefits after experiencing a work-related injury.  In addition, previous ROC and Research Center studies suggest that injured workers employed by nonsubscribers are generally satisfied with their post-injury treatment.10

However, over a third (35 percent) of nonsubscribers who pay benefits to injured workers do not have a written benefits plan - suggesting a degree of variability in benefit delivery.  Further research is needed to gauge the adequacy of the benefits provided by nonsubscribers to their injured workers, dispute resolution options, return-to-work patterns, employee satisfaction levels, and the degree to which cost shifting may be occurring into other payer groups or social systems (e.g., community hospitals, Social Security, etc.).

This study also points out an area which may be of concern for insurance regulators and policymakers: the current state of insurance rates and the propensity of employers to consider leaving the WC system if rates continue to rise.  As previously noted, increasing numbers of employers are reporting recent increases in WC premiums, and almost half of current subscribers indicated that they would seriously consider dropping their WC coverage if insurance premiums increased by some increment up to 20 percent.11

Notes
1  Governmental employers in Texas are currently required to provide workers´ compensation coverage to their employees.  This provision was not, however, effective in 1913.
2  This sudden shift to mandatory WC may have been related to the work of the National Commission on State Workmen´s Compensation Laws, which included mandatory WC coverage as one of it´s 19 essential recommendations. See The Report of the National Commi ssion on Workmen´s Compensation Laws (Washington D.C., July 1972).
3  New Jersey is the only other state that currently does not require employers to carry WC coverage.  However, due to the restrictive nature of its statute, all employers in New Jersey have thus far chosen to carry WC coverage.
4  Texas employers who opt out of the WC system are commonly referred to as "nonsubscribers." The terms "nonsubscriber" and "subscriber" will be used throughout the report.
5  In addition to the four employer studies conducted in 1993, 1995, 1996 and 2001, surveys of employees working for nonsubscribers were administered in 1994 and 1997.  All studies were conducted by the Research and Oversight Council on Workers´ Compensation, or its predecessor, the Texas Workers´ Compensation Research Center.
6  Important is defined as assigning a rating of 4 or 5 on a 5-point scale where 1 means "Not at all Important" and 5 means "Extremely Important."
7  In 1996, only 15 percent of firms with 50 or more employees reported an increase in their most recent WC premium.  In fact, the majority of these larger firms (55 percent) said their WC premium actually decreased in 1996.
8  Just over a third (35 percent) of nonsubscribers that pay benefits indicated that they have a written occupational benefits plan.
9  It is not known whether the employee must choose another doctor from the company list, or is free to select a health care provider of his or her own choosing.
10  See Texas Workers´ Compensation Research Center, A Study of Nonsubscription to the Texas Workers´ Compensation System: The Employee Perspective (1994), and Research and Oversight Council on Workers´ Compensation, Exp eriences of Injured Workers Employed by Nonsubscribing Employers (1997).
11  It is impossible to know the percentage of employers that would actually drop their coverage.  However, since the majority of current subscribers have always had coverage and the primary reason why subscribers have WC coverage is "company philosophy," it can be assumed that the number dropping coverage would be significantly smaller than the number seriously considering such a move.

For further information, contact: PIO@tdi.state.tx.us .
This page was last updated on December 9, 2002.