Workers’ Comp Reform: Ten Years from Ground Zero

It’s been 10 years since legislation revamp the Texas workers’ comp system. Most insurers, regulators and legislators agree that the system has improved dramatically, but they also say there is still room for improvement.

The big fix
In 1987, the Texas Legislature appointed a committee to study the state’s workers’ comp system and make recommendations for change. The idea was born out of growing public complaints about high insurance costs and low benefit rates. The committee completed its study in 1989, and its findings were appalling.

The study found that work-related fatalities in Texas were among the highest in the nation; work-related injury rates were believed among the highest in the country; benefit rates and payment durations were low compared to other states; nearly 50 percent of all compensable lost-time claims were filed with the help of attorney, regardless of whether a claim was disputed; workers’ comp-related medical costs were higher than in other states; a higher percentage of claim disputes were resolved in the courts; insurance rates had more than doubled over the previous five years and were among the highest in the nation; and Texas was one of only three states that did not allow private employers to self-insure.

The legislature responded to the report in 1989 with SB 1, ensuring that injured workers are compensated fairly and appropriately for workplace injuries; consolidating and strengthening workplace health and safety programs; establishing a new benefits system; enacting an administrative dispute resolution system; limiting attorneys fees to time and actual expenses; providing the Texas Workers’ Compensation Commission the ability to monitor system participants and assess administrative penalties for noncompliance and develop medical fee and treatment guidelines to control medical costs.

According to figures provided by the Texas Department of Insurance, the reforms reduced total claim costs in Texas by more than 50 percent between 1990 and 1994. And workers’ comp premiums fell from $4.56 per $100 of payroll in 1990 to just $2.19 per $100 in 1998. Also, the residual market in Texas has dwindled from 17,898 policies written in 1993 to fewer than 1,000 in 1997.

These dramatic changes stem, in part, from the creation of a more effective workers’ comp administration through the TWCC. The TWCC provides more services and regulatory duties than its predecessor, the Texas Industrial Accident Board ever did. In addition, the Legislative Oversight Committee on Workers’ Comp Insurance and the Texas Workers’ Comp Research Center have added to the effectiveness of the system.

Benefit adequacy has also played a key role in turning around the once-ailing system. More injured workers are receiving between 80 and 100 percent of their after-tax pre-injury wages since the reform (91 percent in 1999 compared to just 34 percent prior to reform), and injured workers also receive their benefits in a more timely manner.

The multi-tiered dispute resolution system has reduced litigation and associated costs significantly. Under the old law, attorney representation of injured workers was high.—over 90 percent of injured workers were represented by attorneys during prehearing conferences and approximately 40-45 percent of all claims had attorney representation. Today, fewer than 10 percent of all workers’ comp claimants are represented by an attorney.

The Fund
In 1991, the Texas Workers’ Comp Insurance Fund was created through HB 62 in an effort to help ensure competition in the workers’ comp insurance market. In 1994 it also took the place of the Texas Workers’ Compensation Insurance Facility as the insurer of last resort.

Tony Korioth, a former member of the Industrial Action Board, the predecessor
of the Texas Workers Compensation Commission, helped draft the legislation that created The Fund.

“Texas was the only large state that did not have a fund at all,” he said. As a result, the workers’ comp market was not as strong as it could have been, Korioth said. The Fund was created to operate like a private insurance company, receiving no state funds and providing no state benefits to employees. It is also required to remain actuarially sound, which it has done, reporting a surplus of more than $800 million in 2000.

Workers’ comp insurers have nevertheless complained that The Fund undermines their ability to compete in the market, a justified “screaming and hollering” according to Korioth.

“Of course it’s justified,” he said. “Because of their surpluses, they can write so far below the market that other companies can’t compete. But they’ve recognized the screaming and they’ve pulled back.” Still, Korioth believes The Fund’s direct effect on the marketplace has not been that great.

Of the 105 groups and 275 companies with direct written premium in Texas in
the second quarter of 2000, The Fund maintained a 15.04 percent market share. Its nearest competitor, Liberty Mutual, held 8.02 percent and CNA held 6.66 percent. At the bottom of the top 25 carriers in the state was Atlantic American Group with 1.01 percent of the market.

Despite the fact that The Fund dominates the market, The Herfindahl-Hirschman Index, or HHI, an indicator of market concentration, shows that the insurance market in Texas has become increasingly competitive since 1993, with market share among the top 20 insurance groups falling from 87.8 percent of the market that year to 74.7 percent in 1997. Likewise, The Fund’s market share declined over that period from an all-time high of 27.8 percent in 1995 to just 13.4 percent in 1997.

Increased competition has resulted in increased availability, though costs are still somewhat high. Korioth blames that on Texas being the only state without mandatory workers’ comp, saying if the market were larger, the risk could be spread more evenly, resulting in lower premiums. But the number of employers that do carry workers’ comp has increased since reforms went into effect, rising from just 56 percent in 1993 to 61 percent in 1996.

Korioth believes that, despite the complaints from other insurers, The Fund
will be especially appreciated as the market turns, which many indicators suggest is already happening.

“It may turn out all for the good just because it all turns out bad,” Korioth said. The Fund could help get Texas through the tough times as the state tries to determine what to do about the mounting problem of continued increases in claims costs.

What’s still broken
While addressed in the 1991 reforms, medical costs in Texas have continued to soar. It is considered perhaps the most pervasive problem in the workers’ comp system today. Homer Borgstedte, recently retired president of GBS Insurance Agency in Houston, said medical costs have risen an estimated 15 to 20 percent each year over the last five years. “That’s an awful lot of money,” he said. “We’re seeing premiums go up more than 15 percent this year.”

It’s an issue that may need to be revisited by the Texas Legislature according to Sen. Robert Duncan, R-Lubbock, who worked as an aide in the House of Representatives when the reforms were put in place in 1989.

“What has gotten out of control is the medical costs,” Sen. Duncan said. “There are significant abuses and no control on rates. We’re seeing this problem throughout the country…that costs are out of control, but it’s particularly bad in Texas.

A nine-state comparison completed earlier this year showed that Texas had the highest one-year post-injury costs in 1997, outpacing New Jersey—the state with the second-highest costs—by almost 18 percent. Texas topped Kentucky, the state with the lowest costs in the study, by more than 60 percent, a dubious honor.

The study, conducted by the Research and Oversight Council on Workers’ Compensation under the direction of the 76th Legislature, compared workers’ comp costs in Florida, New Jersey, Colorado, Georgia, Oregon, Minnesota, Kentucky and Texas. The cost differences found were the result of “over-utilization of certain medical treatments and services such as surgery, physical medicine (massage, therapeutic exercises, work hardening/conditioning), diagnostic tests and prescription drugs” according to the study.

The study also found that Texas workers’ receive medical care for longer periods of time than similarly injured workers in other states.

While there are guidelines implemented by workers’ comp reform that could keep medical costs under control in Texas, Duncan said “the commission has failed to enact new fee guidelines. These models have not been implemented and the Legislature may need to deal with that.”

Newly emerging problem
Another matter the legislature may have to deal with soon regarding workers’ comp is the issue of waivers. Last year, three court cases were sent to the Texas Supreme Court. Those cases, two from Amarillo and one from San Antonio, put to test whether employers who don’t provide workers’ comp coverage can still require employees to waive their right to sue for on-the-job injuries. The cases in the Amarillo Seventh Court of Appeals upheld an employers’ right to use waivers while the San Antonio judge hearing a similar case ruled that allowing workers outside the comp system to waive their rights to sue “would signal the end of workers’ compensation.”

Sen. Duncan agrees with the latter ruling and has introduced a bill this
session to address that very matter. As proposed, SB 624 would prohibit the use of waivers in the workers’ comp system by non-subscribing employers. It is awaiting debate in the Senate. Meanwhile, the cases are pending in the Texas Supreme Court.

Duncan also said a problem lies in the makeup of the Texas Workers’ Compensation Commission. The board is currently made up of three employer representatives and three employee representatives, meaning split decisions end up on the commission floor. “As it is there’s no incentive to reach compromises and tough decisions,” Duncan said. “It’s not a criticism of the current board members, it’s a criticism of the structure.”

That is why Duncan has lent his support to HB 1205, introduced by Rep. Kim Brimer, R-Arlington, to change the name and structure of the commission. Under current law, the governing body of the Texas Workers’ Compensation Commission is comprised of six board members and an executive director who oversee the commission’s daily operations. HB 1205 changes the name of the commission to the Texas Department of Workers’ Compensation, abolishes the board of directors and the executive director’s position in favor of a single commissioner structure, specifies the qualifications of the new commissioner and deputy directors, and establishes that the commissioner position is filled by a two-year gubernatorial appointment.

That’s a move Homer Borgstedte sees as unnecessary. “They’ve introduced one of these bills every year trying to change the structure of the commission,” he explained. “There’s nothing wrong with the commission the way it’s structured now. They need to just leave it alone. It’s working the way it’s supposed to.”

The future
Regardless of who is right about how to fix the system, one thing remains unargued: workers’ comp in Texas is in need of another, though smaller, overhaul.

A recent study completed by the Research and Oversight Council on Workers’ Comp titled Effect of Reforms on the Texas Workers’ Compensation Insurance Market shows that while legislation enacted in 1991 and 1994 made drastic improvements, the trend over the last few years has shown a growing backward slide.

Total premium volume decreased from $2.3 billion in 1993 to $1.8 billion in the fourth quarter of 1998; 85 percent of insurance carriers who responded agreed that underpricing is occurring in the workers’ comp market; the combined ratio for the market in 1997 (the latest available figure) was 110.6 percent compared to 101.0 nationally; and the average Texas insurance carrier had an overall profit of 8.5 percent in 1997 compared to 12.8 percent nationally. The report recognizes that “many carriers have been able to offset the lower premium volume with investment income and the release of reserves from earlier accident years to maintain profitability. However, it is unclear how much longer insurance carriers can rely on investment income to remain profitable.” Anyone who has taken a look at the stock market in recent months certainly knows how true that statement is. Companies have already seen the handwriting on the wall, resulting in rising premiums throughout the state—an issue employers don’t like and one that could lead to widespread support of the waiver concept.

Texas is not alone, however, in rising premium costs. Prices have firmed considerably over the last several years and premium volume has continued to steadily decrease. As a result, reinsurers have begun withdrawing from some of the more volatile markets, such as California, which is considered by many to be in a virtual state of crisis. And reinsurers across the country have become more stringent. Borgstedte said that while comp coverage is still “alright” in Texas, “the companies are looking at it a lot harder now—they’re not budging.”

Sen. Duncan, meanwhile, is eyeing the future cautiously. “If we don’t get all of these fixed, there’s going to be a movement toward mandatory workers’ comp in this state, and I don’t want to tell employers they have to use the workers’ comp system,” he said. “I prefer to encourage them to have it.”

Topics Carriers Texas Legislation Workers' Compensation Market