Rethinking the Great Compromise: What Happens When Large Companies Opt Out of Workers' Compensation?

Posted: 11 Jul 2015 Last revised: 16 Oct 2015

Date Written: October 15, 2015

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 study examines the impact of Texas nonsubscription on fifteen large, multistate nonsubscribers that provided their Texas employees with customized occupational injury insurance plans (“voluntary plans”) in lieu of workers’ compensation coverage between 1997 and 2010. As economic theory would lead one to expect, nonsubscription generates considerable cost savings. My best estimates from the first stage of the empirical analysis suggest that total programmatic costs decline by about 29%. These savings are driven by a drop in the frequency of injury claims, especially more serious claims involving replacement of lost wages, as well as a decline in costs per claim. The drop in costs per claim reflects 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 just as financially consequential since medical costs comprise such a large share of total costs. The second stage, comparing the effect of nonsubscription across different types of injuries, finds that nontraumatic injury claims are more responsive to nonsubscription than traumatic injury claims. This disparity suggests that the filing and/or processing of claims may be susceptible to moral hazard on the part of employers and/or workers. The third stage, examining the effect of nonsubscription on the subset of severe, traumatic injuries that are the least susceptible to over- and underreporting, suggests that the decline in claim costs and frequency is probably not purely a reflection of moral hazard effect(s), and that nonsubscription likely lowered the (true) frequency of workplace accidents among the study participants. The final stage probes whether several common attributes of workers’ compensation regimes that voluntary plans typically eschew – compensation for permanent partial disabilities, uncapped total benefits, chiropractic coverage, unlimited choice over medical providers, and lengthy injury-reporting windows – might explain the observed cost disparities. Surprisingly, the first three 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 tentative, evidence that state-level variation in the length of reporting windows could have a significant effect on total programmatic costs. Overall, my findings suggest an urgent need for policymakers to examine the economic and distributional effects of converting workers’ compensation from a cornerstone of the social welfare state into an optional program that co-exists with privately-provided forms of occupational injury insurance.

Suggested Citation

Morantz, Alison D., Rethinking the Great Compromise: What Happens When Large Companies Opt Out of Workers' Compensation? (October 15, 2015). Available at SSRN: https://ssrn.com/abstract=2629498

Alison D. Morantz (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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