Texas Monitor, 1:3 (Fall 1996)
- Depopulating the Facility: the Employer Experience
- First Annual Research Symposium
- Enhancing Workers' Compensation for Small Employers in Texas
- Updates on SIBs Disputes
- Potential Impact of Mandatory Workers' Compensation on Texas Employers and Employees
The information contained in this article summarizes the results of a study of employers formerly insured through the Texas Workers' Compensation Insurance Facility. Copies of the full report, Depopulation of the Texas Workers' Compensation Insurance Facility: A Survey of Employers, are available via our electronic order form.
The profitability of the Texas workers' compensation (WC) insurance market went into a downward spiral in the late 1980s due to rapidly escalating costs, state-set insurance rates that the insurance industry considered to be woefully inadequate, and a growing residual market burden that all insurance carriers writing business in the voluntary market were forced to share. In response to this situation, the 71st Legislature passed a number of insurance-oriented reform measures in Senate Bill 1 (1989), including the creation of the Texas Workers' Compensation Insurance Facility (the Facility) to replace the Assigned Risk Pool, which was being run at a large annual deficit.
In 1991, the 72nd Legislature passed House Bill 62, which called for the Facility to stop writing new business at the end of 1993 and be fully phased out by 1999. House Bill 62 also created the Texas Workers' Compensation Insurance Fund (the Fund), which was designed to add competition to the insurance market, assist small employers with obtaining WC coverage, and assume responsibility of the residual market effective January 1, 1994.1
This article summarizes what happened to employers after leaving the Facility (e.g., obtained coverage with the Fund, obtained coverage with another carrier, opted to become a nonsubscriber to the WC system, went out of business) and explores the experiences of these employers with regard to the relative cost and availability of WC coverage. The results presented here are based on 1,251 completed interviews with employers who were insured through the Facility in 1993.
Where Did the Former Facility Accounts Go?
During the late 1980s and early 1990s, the residual market (i.e., rejected risks 2 insured through the Facility) grew tremendously, accounting for 31 percent of the written premium volume in 1991. After the Fund began operations in 1992, the percentage of the market of rejected risks dropped drastically. In 1994 and 1995, rejected risks written through the Fund's START Program accounted for only one percent of the written premium volume in Texas. The question remained : Where did all these employers who left the Facility end up?
The answer to this question is graphically depicted in Figure 1. The largest percentage (43 percent) obtained coverage with the Fund, and another 37 percent obtained coverage with another insurance company in the voluntary market. Fourteen percent were presumed to have gone out of business 3 and 6 percent decided not to continue their WC coverage and became nonsubscribers.
The Fund has three insurance programs in place: the Voluntary Over $5,000 Program is reserved for employers with annual premiums of $5,000 or more; the Small Business Injury Protection Program is reserved for smaller employers with less than $5,000 in annual premiums; and the START Program is reserved for high risk employers who are unable to obtain coverage in the voluntary market.
The majority of the 1993 Facility accounts absorbed by the Fund were written through its Voluntary Over $5,000 Program, which offers the lowest rates of the three programs. This program accounted for 83 percent of the 1993 Facility accounts written by the Fund.
The Small Business Injury Protection Program (SBIPP) accounted for 12 percent of the 1993 Facility accounts absorbed by the Fund, and the remaining 5 percent were written through its START Program.
As the figures reflect, it is clear that the Fund played a major role in the depopulation of the Facility. Though 43 percent of the employers insured through the Facility in 1993 were covered by the Fund in 1996, 78 percent of the former Facility accounts obtained a quote from the Fund. When asked how they heard about the Fund, the resounding majority (94 percent) said they were told about the Fund by their insurance agent.
Rate of Continued Coverage for Former Facility Accounts
The percentage of employers continuing their WC coverage after leaving the Facility is quite high (9 4 percent). This high subscription rate is reflective of the employer population being examined in this study. These employers made the decision to obtain coverage through the Facility in the early 1990s, despite the fact that they could not obtain coverage in the voluntary market and were forced to pay the highest rates in the state. Thus, their decision to continue their coverage either with the Fund or another insurer is not surprising because, by and large, they have always been in the system.
The subscription rate remained high for former Facility accounts regardless of employer size. However, as expected, there was some variation in the rates when size was considered. The smallest employers (1 to 4 employees) had the lowest rate of continued coverage (84 percent) while larger employers had higher rates (93 to 98 percent) of continued coverage. (See Figure 2).
Availability of Workers' Compensation Coverage
Survey results indicate that employers had very little difficulty in obtaining WC coverage immediately after leaving the Facility. Seventy-four percent said it was "very easy" to obtain WC coverage and 21 percent said it was "somewhat easy."
The availability of insurance for these employers did not change much over time. When asked about their experience in obtaining their current policy, 72 percent said it was "very easy" and 22 percent indicated that it was "somewhat easy."
This ease in obtaining coverage was uniform for employers of all sizes. Regardless of employer size, between 90 and 96 percent of the employers surveyed indicated that it was either "very easy" or "somewhat easy" to obtain WC coverage.
Relative Cost of Workers' Compensation Coverage
When asked to compare their current premiums to those paid at the Facility, over half (52 percent) of the employers indicated that their current premium is lower than what they were paying in 1993. Forty percent said they saw no change in premiums and 8 percent said their premiums increased.
Of those employers who indicated that their current premiums declined, 19 percent said the drop was less than 10 percent; 40 percent said their premiums dropped by 10 to 24 percent; 18 percent cited a drop of 25 to 34 percent; and the remaining 23 percent noted a decline of 35 percent or more.
The following were the most often cited reasons for why current premiums are below 1993 levels:
- No longer had to pay Facility surcharge (81 percent);
- Insurance company lowered rates (77 percent);
- Fewer WC claims filed resulting in a lower experience modifier (66 percent); and
- Better efforts to contain fraud (53 percent).
Over two-thirds (68 percent) of the employers who were insured through the Facility in 1993 indicated that they felt their business experienced a savings as a result of the WC reforms that took effect in 1991. When employer size is taken into account, it is clear that large employers are much more likely to perceive that there was a savings than small employers. Eighty-seven percent of large employers with 100 or more employees indicated that they experienced a savings as a result of the reforms compared to 59 percent of small employers with 1 to 4 employees. (See Figure 3).
In conclusion, it is apparent that the 1989 and 1991 workers' compensation insurance reforms were highly successful. The Facility was efficiently depopulated, with the Fund playing a major role. Nearly all of the employers insured through the Facility in 1993 decided to continue their WC coverage and were subscribers in 1996. The majority of employers indicated that they are paying less for WC insurance now than they were in 1993 and many attribute these savings to the reform efforts of the legislature. It is, however, quite clear that large employers have benefited from the reforms more than small employers, and that this latter segment of the market is still in need of further assistance.
The ROC's First Annual Texas Workers' Compensation Research Symposium took place August 21-22, 1996 in Austin. It was held in conjunction with the Texas Workers' Compensation Commission's Sixth Annual Educational Conference.
The purpose of the symposium was to provide an "issues and answers" forum in which participants could engage in a give and take discussion with recognized experts in workers' compensation (WC). Three separate sessions were held, covering managed care in WC, monitoring the WC system, and fraud issues.
Managed Care in Workers' Compensation
The panelists for the first session were Roger Thompson of Travelers Insurance; Ann Clayton of the Workers' Compensation Research Institute (WCRI); and William Johnson, of Arizona State University. June Karp, the ROC's executive director, served as moderator for all three sessions.
After defining what managed care is, the group discussed the fit between managed care principles and WC. One of the key issues noted was the unique need in WC of speedy return to work in addition to general medical recovery. Also discussed was the problem of applying the technique of capitation -- the payment of a fixed amount for a specific injury for a certain period of time -- to WC claims that frequently involve long pay out periods. Other impacts of the use of managed care in WC include the shifting of risk-bearing from insurers to health care providers and employers, as well as the emergence of new kinds of malpractice liability as more entities (insurance companies and employers) are involved in medical decisions.
Monitoring the WC System
Panelists for the second session were Mike LeFever, director of the South Carolina Workers' Compensation Commission; Ann Clayton of WCRI; and Bobby Gierisch of Texas House Speaker Laney's office.
Monitoring the WC system is crucial to keeping it running well (administrative control) and for fixing problems (reform). It was also noted that most system problems are not violations per se, but overuse and abuse of legitimate procedures (e.g., controverted claims, late payments).
Basic goals for the system are that it be fair, fast, and promote safety. The panelists agreed that a performance-based system is easiest to monitor, because it focuses on outcomes that can be measured. Some of the key measures discussed included: frequency of injury (safety); cost of a claim; timeliness of reporting and payment; medical outcomes; return to work; and dispute resolution.
A common problem in monitoring a system is the tendency to measure what is easiest to measure, and setting system goals based on those measures; panelists agreed that it should be the other way around. Some aspects of WC are especially difficult to measure, such as patient satisfaction, return-to-work outcomes, adequacy of benefits, and the total economic cost of a claim.
Another challenge to monitoring is the problem of collecting the right data. It was agreed that effective monitoring required comparisons to what other states are doing; this in turn requires common data points and access to cross-state data. Texas is considered a leader in the area of data collection and system monitoring. The desire was expressed that other states follow Texas' lead in committing the resources to make sure that the system stays on track.
Investigating WC Fraud
Panelists were Casey Young, director of the California Workers' Compensation division, and Jack Else of the Texas Workers' Compensation Insurance Fund.
Fraud was defined as the willful misrepresentation designed to obtain or deny benefits. There are three main types: claim fraud, provider fraud, and premium fraud (the attempt to camouflage company payroll or scope of operation in order to get a lower premium). While claim fraud gets most of the headlines, it is a smaller problem than provider fraud or premium fraud, which are costlier problems.
Casey Young described an innovative program in California in which funding for fraud investigation and prosecution is split between the Department of Insurance and individual counties. The state, in effect, partners with the county district attorneys, who devise aggressive plans to investigate and prosecute WC fraud.
Issues such as deductible options, group self-insurance, and other miscellaneous programs for small employers are discussed in the full report, Enhancing Workers' Compensation for Small Employers in Texas, are available via our electronic order form.
Although 61 percent 4 of Texas employers are purchasing workers' compensation (WC) insurance in today's market, small employers still find it difficult to obtain affordable coverage in Texas. The ROC recently examined this issue by looking at the programs and policies other states presently use to assist small employers in acquiring WC coverage, as well as programs that currently exist in Texas for this purpose. A small employer is defined here as an employer with an estimated annual WC premium of less than $5,000.
Information presented here is based on responses from a total of 44 states that responded to a national canvass of state funds, insurance departments or WC commissions. 5 Since every state, other than Texas and New Jersey, require that employers purchase WC insurance coverage, there is not an emphasis on distinguishing between the needs of large and small employers. For states that do make this distinction, programs designed to service the needs of small employers vary widely.
States Without Programs Designed Specifically to Assist Small Employers
A number of states do not have any programs/provisions specifically designed to help small employers obtain (or retain) WC insurance coverage. These states include:
Many of these states, though, offer programs that benefit all employers, both large and small.
Premium Discounts for Small Employers
Premium discounts are often available to employers who are experience rated.6 Since most small employers are not experience rated, the number of discounts or credits available to them is limited. A few states, however, have modified their discount/credit programs to include smaller employers. These programs are featured below.
Maryland. Maryland's state fund allows companies to become experience rated if their premium is as low as $260.
Missouri. Missouri's state fund has a scheduled rating plan for small amounts of $1,000 to $5,000 with a maximum credit/surcharge of + or - 15 percent.7 Although scheduled rating arrangements are usually reserved for larger accounts, Missouri's program permits smaller employers to take advantage of these additional premium discounts.
Texas . Texas has a merit rating plan for small employers. To be eligible, an employer must have an annual WC premium of less than $5,000 and must not be experience rated. Discounts and surcharges are assigned as follows:
- No compensable lost-time injury in the most recent one-year period -- a 10 percent premium discount.
- No compensable lost-time injuries in the most recent two-year period -- 15 percent premium discount.
- One compensable lost-time injury during the most recent one-year period -- no premium discount.
- More than one compensable lost-time injury during the most recent one-year period -- a surcharge of 10 percent on the amount of the premium.
Safety Programs for Small Employers
Unlike large employers, small employers often have neither the time nor the resources to create and maintain active safety programs. Key programs highlighted below have tried to bridge the safety gap between large and small employers.
Colorado. Colorado's state fund has a small policyholder program which flags small employers who have at least one lost-time claim within any given month. Safety representatives from the fund then phone these employers and encourage them to put together a safety program with the fund's assistance.
Maine. Maine's state fund holds small business safety workshops and roundtables several times a year to encourage small employers to come together and share ideas on safety.
Texas. The Texas Workers' Compensation Commission (TWCC) offers several programs to help small employers create and maintain a safe working environment. These programs include a "how to" guide on creating an accident prevention plan, access to free safety materials and videos, and access to the Occupational Safety and Health Consultation program (OSHCON).8
After analyzing programs available in Texas and in other states, it appears that more can be done to make WC insurance attractive to small employers in Texas. Suggestions to consider are listed below.
Make it easier for a small employer to be experience rated. Because a Texas employer must have an annual WC premium of at least $5,000 to be experience rated, many are unable to qualify. Lowering this threshold would make WC premiums more reflective of a small employer's actual loss experience.
Create a proactive small employer services program at the Texas Department of Insurance. This program would provide a central resource for WC information. Services might include:
- Customized comparisons of WC insurance rates currently charged by the largest carriers in Texas;
- Identification of cost-cutting alternatives available (e.g., purchasing groups, deductible programs);
- Referral to TWCC's Occupational Safety and Health Consultation program (OSHCON) and other safety services provided by TWCC. In addition, referrals to TWCC's ombudsman program to assist unrepresented employers in dispute resolution proceedings;
- Assistance in developing customized cost containment strategies which may include utilizing techniques employed by other businesses;
- Publishing brochures and other informational materials designed to inform small employers of their rights and responsibilities in the system;
- Conducting workshops for small employers on the process of filing a claim, reporting injuries, and resolving disputes;
- Testifying in legislative hearings on measures that affect small businesses in WC; and
- Monitoring the marketplace by keeping a list of insurance carriers who write small employer policies and the programs they offer for smaller employers.
Supplemental Income Benefits (SIBs) are designed for injured workers suffering the most serious job-related injuries. They provide a "safety net" benefit to help severely injured workers who have exhausted temporary and impairment income benefits.
Entitlement to SIBs is determined quarterly and paid monthly. If entitlement to SIBs is disputed by either the insurance carrier or the injured worker, the burden rests on the injured worker to prove that he/she has met the appropriate criteria for entitlement to SIBs. To qualify, an injured worker:
- Must have an impairment rating of 15 percent or higher;
- May not elect to receive his/her impairment income benefits in a lump sum;
- Must not have returned to work or has returned to work earning less than 80 percent of his/her average weekly wage as a direct result of an injury; and
- Must have made good faith effort to obtain employment commensurate with his/her ability to
This article focuses on the rising number of disputes over entitlement to SIBs. It also examines who requests dispute proceedings on entitlement issues.
SIBs Disputes are Growing
Many 1991 and 1992 workers' compensation claims are now mature enough to be eligible for SIBs payments. As a result, the number of new SIBs cases and disputes have increased greatly in the past 18 months.
From the first quarter of 1995 through the second quarter of 1996, the percentage of SIBs entitlement issues disputed at a benefit review conference (BRC) grew 56 percent (from 5.7 percent of all issues disputed in the first quarter of 1995 to 8.9 percent in the second quarter of 1996).9
At the contested case hearing level (CCH), SIBs entitlement issues accounted for 4.9 percent of all issues disputed during the first quarter of 1995 compared to 10.6 percent during the second quarter of 1996. This represents a n increase of 116 percent in just over one year. Figure 4 illustrates the upward trend of SIBs entitlement disputes.
Who Requests Dispute Proceedings on SIBs Issues
The percentage of SIBs-related BRCs and CCHs requested by insurance carriers is steadily increasing while the percentage of SIBs-related BRCs and CCHs requested by injured workers is decreasing.
At the BRC level: The percentage of SIBs-related BRCs requested by insurance carriers increased from 66 percent in the first quarter of 1995 to 74 percent in the second quarter of 1996. Meanwhile, the percentage of SIBs-related BRCs requested by injured workers decreased from 34 percent in the first quarter of 1995 to 26 percent in the second quarter of 1996. (See Figure 5).
At the CCH level: The percentage of SIBs-related CCHs requested by insurance carriers increased from 65 percent in the first quarter of 1995 to 73 percent in the second quarter of 1996. At the same time, the percentage of SIBs-related CCHs requested by injured workers decreased from 35 percent in the first quarter of 1995 to 27 percent in the second quarter of 1996. (See Figure 6).
SIBs disputes will continue to increase as more claims reach the maturity level to qualify for SIBs payments. Future Monitor articles will look at the number of claimants whose SIBs entitlement is disputed every quarter.
The information contained in this article is excerpted from a study that compares Texas' statutory benefits with those of other states. Copies of the full report, Workers' Compensation Benefit Levels: Comparison between Texas and Other States, are available via our electronic order form.
Texas is currently the only state in the nation with sizable employer (39 percent) and employee (20 percent) populations not covered by workers' compensation (WC). As of January 1, 1996, only three states (Texas, New Jersey, and South Carolina) had an elective WC law which allowed employers to opt out of the system. South Carolina 10 passed a compulsory compensation law in May 1996 which requires employers to purchase WC coverage by July 1, 1997, and New Jersey's law is structured in such a way that all employers in the state have opted to carry WC coverage.11
As of January 1, 1996, thirty-four states required all private employers to have WC coverage. Thirteen states had mandatory WC laws which allow small employers to be exempt:
- Seven states (Arkansas, Georgia, Michigan, New Mexico, North Carolina, Virginia, and Wisconsin) allow businesses with less than three employees to be exempt from the workers' compensation law;
- Two states (Florida and Rhode Island) allow businesses with less than four employees to be exempt from the workers' compensation law; and
- Four states (Alabama, Mississippi, Missouri, and Tennessee) do not require businesses with less than five employees to carry workers' compensation coverage.
Both the Texas Joint Select Committee on Workers' Compensation Insurance in 1988 and the National Commission on State Workmen's Compensation Laws in 1972 strongly recommended that WC coverage be mandatory for all private employers. The National Commission's recommendation went one step further and suggested that all employers carry WC coverage regardless of number of employees.
Table 1 below provides a breakdown of the percentage of employers and employees in Texas that would be affected by a mandatory WC law which set an exemption at different employment sizes. The nonsubscription rates used in these calculations are derived from a 1996 survey of Texas employers.12
For example, if the law were changed to require WC for all private employers with five or more employees, an estimated 33 percent of the nonsubscribing firms would be affected and 87 percent of the employees working for nonsubscribing firms would then be covered by WC. As a result, the estimated employer coverage rate would increase from 61 to 74 percent. Because most of the employees working for nonsubscribers are concentrated in the larger firms, the estimated coverage for the Texas workforce would increase even more dramatically from 80 percent to 97 percent. Similar comparisons can be made for employment size cutoffs of 3, 10, 15, 25 and 50 employees.
- The Fund began writing workers' compensation insurance for the voluntary market in 1992 and for rejected risks in 1994.
- Rejected risks refer to employers who are not able to obtain coverage in the voluntary market.
- It was presumed that an employer had gone out of business if it was able to be matched to Texas Workforce Commission data (by its Federal Employer Identification Number) in 1993, but not in 1995.
- See Annual Nonsubscription Survey: 1996 Estimates, Research and Oversight Council on Workers' Compensation, 1996 for more detail on nonsubscription estimates by industry and employment size.
- Five states (California, Kentucky, Minnesota, Nebraska and Nevada) did not respond.
- Experience rating is a method of adjusting an employer's premium based on that employer's own loss experience compared to the loss experience of others in the same industry. Presently in Texas, an employer must have an annual WC premium of at least $5,000 to qualify for an experience rating.
- A scheduled rating plan is simply another way for an insurance carrier to lower the rates of a business with a good safety record, encouraging that business to purchase the carrier's WC insurance coverage.
- The OSHCON program is designed to identify hazardous workplace conditions and recommend possible solutions.
- The Texas workers' compensation dispute resolution process is comprised of three levels: the Benefit Review Conference (BRC), an informal proceeding designed to explain rights, mediate and resolve disputes; the Contested Case Hearing (CCH), a formal hearing to resolve issues that were not resolved at the BRC level; and the Appeals Panel (AP), a review by a panel of three administrative law judges who can affirm, reverse, or remand the earlier decision back to the CCH level. After the Appeals Panel, an unresolved dispute can be taken to district court for judicial review.
- As of April 1996, there were 936 employers in South Carolina without workers' compensation coverage.
- New Jersey has a single law which includes two alternatives: 1) the typical workers' compensation statute; and 2) a form of employers' liability based on traditional common law remedies. It is required that every employer chose one of the two options, however, all employers in the state have thus far opted for the workers' compensation statute.
- For more information on the most current trends in nonsubscription, see Annual Nonsubscription Survey: 1996 Estimates (Research and Oversight Council on Workers' Compensation, 1996).
This page was last updated on December 9, 2002.
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