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If you are an employer in Texas in the workers’ compensation system, you might want to consider opting out and replacing it with private insurance. According to a recent study, opting out of the system could benefit both employers and employees.
Workers’ compensation was a legislative response to perceived problems in the Texas tort system more than 100 years ago that significantly prevented employees from being compensated for their work-related injuries. As originally envisioned in 1917, when the first Texas workers’ compensation law was passed, the system was intended to be a means to assure injured employees a salary and medical benefits. In exchange, employers were given broad immunity from civil lawsuits.
The law devised a “no-fault” system of compensation, which virtually guaranteed employees benefits for work-related injuries. Instead of filing civil lawsuits, disputes were handled by the Texas Workers Compensation Commission in administrative hearings.
Texas was the first state in the U.S. to allow employers an option to withdraw from the workers’ compensation system. This change in the law, which occurred in 1996, allowed employers to replace workers’ compensation with a private insurance plan.
The effect of this Texas law was the subject of a recent study by Stanford law professor Alison Morantz. Her findings suggest many companies, both large and small, would benefit from opting out of the system and replacing it with private insurance. Her findings were surprising — and a benefit for both sides.
Morantz, a senior fellow at the Stanford Institute for Economic Policy Research, analyzed claims made by employees of companies that had opted out of workers’ compensation in Texas between the years of 1998 and 2010. Instead of relying on the workers’ comp system, these companies relied on private insurance.
Based on Mortantz’s findings, the 1996 decision by Texas lawmakers appears to have been a good one. Companies that opted out and were part of the study were determined to enjoy an average savings of 44 percent. The average cost per worker under the Texas workers’ comp system was calculated to be about 14 cents per worker-hour, whereas private insurance costs were determined to be approximately 8 cents per worker-hour.
The savings appear to come from a number of areas: fewer serious claims and smaller costs per claim, including lower legal costs and lower insurance costs. However, it does not appear the employees obtained lower benefits, especially when more serious injuries were involved.
A significant factor explaining the cost savings might be that most employers who opt for private insurance in lieu of the Texas workers’ compensation plan require employees to sign arbitration agreements, significantly cutting legal costs when disputes occur.
Andrew Greenwell is a lawyer with a civil trial and appellate practice with a focus on commercial litigation. He was listed as a Super Lawyer in 2011-12 and 2014-15 and a Best Lawyer since 2005.
