ProPublica and NPR recently published a comprehensive investigation into the rise of so called “opt-out” workers’ compensation plans in Texas and Oklahoma. Opt-out plans allow employers to provide state mandated benefits to employees through their own workers’ compensation systems instead of purchasing traditional workers’ compensation insurance, leading to a reported 40 to 90 percent reduction in costs to employers. TX and OK are currently the only states allowing opt-out plans, but nearly 1.5 million workers across 120 corporations are covered by these plans. The TX Non-Subscriber System and the OK Option are substantially different, with more limits on litigation and greater state oversight in OK. The Workers’ Compensation Acts in TX and OK include subtitles stating that employers may choose to elect coverage, which would make them subject to state regulation. In contrast, the Workers’ Compensation Acts in other states require employers to elect insurance coverage.

Advocates of opt-out plans say that they diminish the adversarial nature of bringing claims under traditional workers’ compensation systems. Because employers are more involved in the employee’s medical care, sometimes choosing doctors and even accompanying employees on doctors’ visits, both the employee and employer are incentivized to speed recovery. While some construe this as intrusive, proponents of opt-out plans view these provisions as ways to ensure that the injured employee gets faster medical care, and can return to work as soon as possible, serving the interests of both the employee and employer. The employer who opts out also has a greater incentive to ensure a safer workplace than one using traditional workers’ compensation insurance because opt-out plans do not provide immunity from lawsuits as traditional systems do.

The significant differences between traditional workers’ compensation plans and opt-out plans generally are as follows:

• Opt-out plans can have a reduced timeframe for reporting injuries. For example, TX employees of a non-subscriber must report injuries within 24 hours of an incident as opposed to 30 days under traditional systems.
• Employers may not cover medical care for an employee’s lifetime. In TX, coverage is limited to two years after an injury.
• Traditionally, employees waive the right to sue. Under opt-out plans, employers can face liability in tort.
• Employers can terminate benefits under opt-out plans if employees do not comply with care guidelines.
• Employees are free from income and payroll taxes on benefits under traditional plans, whereas benefits under opt-out plans are subject to taxation.
• Non-subscribing employers may be subject to less state regulatory oversight than employers using traditional workers’ compensation insurance.

The increased exposure to litigation under an opt-out plan may be less of a concern to employers than it may appear. Protection from tort liability is a key benefit to employers from traditional workers’ compensation systems. However, the costs of litigation could be outweighed by the yearly costs of a traditional workers’ compensation insurance policy. Either way, it appears that such litigation is uncommon. A 2010 survey by a Stanford law professor found that 81 percent of employers with opt-out plans reported very few or no lawsuits resulting from their choice to forego traditional workers’ compensation insurance. While this is likely due in part to the arbitration agreements that are common to most opt-out plans, these data suggest that opt-out plans may provide sufficient coverage most of the time. Nevertheless, employers may value the certainty of a traditional workers’ compensation plan as compared with the unpredictability arising from the shifting number of lawsuits from year to year under an opt-out plan.

In contrast with the momentum across the country to reform workers’ compensation laws, Maryland’s legal framework has not seen any major changes since 2002. Opt-out legislation has been slow to spread, with Tennessee and South Carolina being the only states currently considering such bills. When such a choice arises, employers will have to weigh the value of stability against the value of having greater alignment between the incentives of employers and employees.

Click here to explore ProPublica’s interactive app comparing the benefit plans of employers using opt-out plans against minimum federal regulations.

Nicole Whitecar, a law student, assisted in the preparation of this blog post.