The workers’ compensation industry has acquired an appetite for public self-criticism. It searches for ways to renew or replace old practices. For many and often contradictory reasons, trust in the system has eroded badly. 

Peter Rousmaniere

So why is opt out, a fresh idea with an actual track record, broadly received with skepticism? 

In the 2000s, reputable national employers such as Safeway and Costco embraced opt out in Texas. Their endorsement provided the bridge for the concept to the rest of the country. Advocates began in about 2010 to proselytize beyond Texas.

Bypassing states with opt-out laws on the books, they focused on getting Republican-dominated state capitols to enact privatization laws. They proposed to privatize, within limits, state mandatory benefit systems. For their efforts, they have one success, which is imperiled by constitutional challenge and a cool reaction from many people unhappy with the status quo. 
 
It’s time to give the efforts of the advocates a grade. They blew key opportunities to build coalitions, strengthen their brand, gain trust and refine their design for the rest of the country. They failed, in sum, to adapt.

This assessment arises from reading the most recent review of opt out, published in May by the International Association of Industrial Boards and Commissions. Author Gregory Krohm, who has studied opt out for some years, analyzes many of the key aspects of opt out, comparing them with workers’ comp. It is available here www.iaiabc.org. Krohm’s study reveals that opt out’s basic design and message are the same as six years ago.   

Opt-out advocates aim to leverage a model in Texas and plant it in other states. The model employs federal laws, ERISA and (less well known) federal arbitration law. The question the advocates never asked themselves is how Texas' experience might be viewed elsewhere. They see unqualified success. Others see combination of Jekyll the visionary and Hyde the opportunist.

Opt out is credited with reducing employer costs by half. The before-and-after reports on opting out Texas employers typically start in the 2000s. (Alison Morantz of Stanford Law School has written two such studies.) But legislative reforms begun in 2005, plus impressive reductions in injury frequency, have since lowered workers’ compensation insurance costs by half for the average employer.

At the March 2016 conference of the Workers Compensation Research Institute, an employer representative described how her company used opt out to lower claims costs. Anyone in the audience who understood how employers manage injury risk would have noted that she repeated as if by rote an old formula for employers, codified at least as far back as 1991 in the Qualified Loss Management Program of Massachusetts, and available today from consultants and conferences. 

The advocates have refused to share ERISA plans and arbitration agreements, and to explain carefully how they actually work. (I and Jack Roberts tried to do it in Workers’ Compensation Opt-Out: Can Privatization Work?, available here.) Krohm’s review of Oklahoma plans, and Pro Publica’s review of plans, show that injured workers receive sharply reduced wage replacement. 

To grasp this shortfall takes a minute of arithmetic. A review of state wage replacement laws, federal and state income tax, and payroll deductions shows that, on average, a worker earning the median wage will, if injured, take home about 15% less than she would have if uninjured, after tax and payroll deductions. If she earns $700 a week, her take-home uninjured pay might be about $560; her tax-free indemnity check, $470. That’s about a 15% cut. The majority of ERISA plans set wage replacement at 70% of the pre-injury wage, which is taxable. Take-home would be about $390, a 30% cut. How many households can endure a 30% cut in take-home pay?

Opt-out advocates assert that workers come out ahead. Some history helps to explain their confidence in their message. In Texas, the opt-out industry has never been subjected to a well-documented critique. The most likely authors, the state AFL-CIO, the Austin-based Workers Defense Project and daily newspapers never challenged the opt-out community with an in-depth investigation. The advocates shut down every legislative effort to increase transparency. They never had to engage in and gain from informed public debate, until they went nationwide. 

Ironically, many workers’ compensation professionals share with opt-out advocates an enormous frustration with state oversight of workers’ compensation. An elephantine mass of regulation has evolved in the past 20 years with no evident improvement in claims outcomes. 

The Alliance of Women in Workers’ Compensation is unhappy with the industry’s compliance mindset. Bob Wilson hosted a "summit" in May, which produced a wide-ranging assessment of current problems. (The papers are available at http://workerscompsummit.com, username “attendee,” password “wcsummit.”) The IAIABC itself is hosting a “conversation” about the system. Opt out is supposed to remove these several frustrations. 

And the conversation is alive over benefit adequacy. None other than Mark Walls, a respected and widely followed executive at an insurer, recommended recently that states expand coverage of disease claims. ERISA plans offer a golden opportunity to improve benefits to workers. It is easy to see how opt out can increase benefits to injured workers while lowering overall claims costs. 

The advocates blew an opportunity to tap into a wave of employee benefit innovation sweeping the country. Krohm noted that ERISA plans must include a benefit besides a work injury benefit, to be eligible for ERISA coverage.

As work injury frequency continues to decline (by about 2.5% a year), work injury fades into the broader fabric of employee absence benefits, which are pervasively increasing. Occupy Wall Street demanded a revolution, but instead it is getting paid leaves. The opt-out advocates could have made a Nixon-to-China leap by promoting other benefits that employers are likely to offer anyway. 

This is how opt out fizzled. After five-plus years to proselytizing, the advocates have yet to garner any lasting trust within a workers’ compensation community that is ready for innovation.

Peter Rousmaniere is a consultant for workers' compensation claims administrators and vendors, and a veteran observer of workers' compensation industry trends.