Morantz: Empirical Analysis of Opting Out of Workers' Comp

Allison Morantz (Stanford) has just written and posted on SSRN the article I've been hoping to see ever since I practiced in Texas some 20 years ago -- Rethinking the Great Compromise: What Happens When Large Companies Opt Out of Workers' Compensation? Here's the abstract:

The “great compromise” of workers’ compensation, whereby workers relinquished the right to sue their employers in exchange for no-fault insurance coverage for occupational injuries, was one of the great tort reforms of the Twentieth Century. Because participation is usually compulsory, it is difficult to forecast what the real-world effects might be of making workers’ compensation voluntary. However, there is one U.S. state that has always permitted employers to decline workers’ compensation coverage, and in which a significant number of firms (“nonsubscribers”) have chosen to do so: Texas. This is the first empirical study to examine comprehensively the impact of Texas nonsubscription on large, multistate nonsubscribers. I analyze highly granular data from fifteen large, multistate companies that provided their Texas employees with customized occupational injury insurance plans (“voluntary plans”) in lieu of workers’ compensation coverage between 1997 and 2009. As economic theory and common sense would lead one to expect, nonsubscription generates considerable cost savings, reducing total programmatic costs by an average of about 29%. These savings were driven by a drop in the frequency of injury claims – especially more serious claims involving replacement of lost wages – combined with an decline in costs per claim. The drop in cost per claim arises from a fall in both medical and wage-replacement costs. Although the decline in wage-replacement costs is larger in percentage terms, the drop in medical costs is more financially consequential since medical costs constitute such a large share of total costs. The paper finally explores whether several common attributes of workers’ compensation regimes that voluntary plans typically forgo – compensation for permanent partial disabilities, uncapped total benefits, chiropractic coverage, unlimited choice over medical providers, and lengthy injury-reporting windows – are likely to account for the observed cost disparities. Surprisingly, the first three of these features account for little of the observed variation. Although it is much more difficult to isolate the empirical impact of provider choice and reporting windows, my analysis provides some intriguing, albeit highly tentative, evidence that state-level variation in injury-reporting windows could have a significant effect. Overall, my findings suggest the urgent need for policymakers to examine the economic and distributional effects of converting workers’ compensation from a cornerstone of the social safety net into an optional program that co-exists alongside privately-provided forms of occupational injury insurance.

This article deserves a close read. National employers doubtless noticed some time ago that their workplace-injury costs are lower in Texas than elsewhere, and Allison makes the point that these employers are now starting to push other states to reconsider the Great Compromise underlying workers' compensation law. Will this beget a "race to the bottom" as states scramble to attract employers by allowing them to opt out of workers' compensation programs, and employers respond by opting out and leaving injured workers in the cold? Or is a self-insured, nonsubscriber system a net benefit to employers and workers by incentivizing employers to invest more heavily in workplace safety and to more carefully control health care costs? Allison's article answers a lot of questions, but also opens up a broad field fertile for future research.

rb