Lawmakers File opt-out Bill Modeled after Oklahoma with Eye toward 2016 Passage

“We’ve already slain the beast,” Knapp said. “Why are we going through this?”

May 21, 2015

By Ben Miller

A national coalition of employers has introduced legislation in the South Carolina House of Representatives that would create an alternative to workers’ compensation similar to the Oklahoma “Option.”

The ability to opt out of the workers’ compensation system exists only in Oklahoma and Texas, but the Association for Responsible Alternatives to Workers’ Compensation has sought to expand the idea to other states, beginning with Tennessee and now South Carolina. The idea is to allow employers to pay for wage replacement and medical costs associated with work injuries using their own self-contained systems.

The bill was introduced May 13, then resubmitted as House Bill 4197 on Tuesday with no intention of passage before the Legislature adjourns on June 4. Brent Buchanan, a spokesperson for ARAWC, told WorkCompCentral on Wednesday that the group wants to give stakeholders the opportunity to examine and discuss the bill in the legislative off-season before any votes are taken.

“The intention is to get the conversation started and to bring all stakeholders … to the table throughout the summer and fall break leading into the January 2016 second half of the session,” Buchanan said.

Stakeholders in the state noted on Wednesday that the bill has an immediate strategic advantage – one of its primary sponsors, Rep. William Sandifer III, R-Seneca, is the chair of the House Labor, Commerce and Industry Committee where HB 4197 was first introduced.

However, the bill faces some early challenges, as well. The Property and Casualty Insurance Association of America, Injured Workers’ Advocates and the American Insurance Association have opposed the bill, with the Small Business Chamber of Commerce expressing some unease about the idea as well.

Buchanan said the opt-out system the bill proposes is similar to the Oklahoma system: It requires benefits to be the same level or higher than under the workers’ compensation system. In some cases, it explicitly calls for benefits to be higher – for instance, permanent total disability benefits would have to be paid starting four days after the injury, compared with eight days under the South Carolina Workers’ Compensation Act. The benefits are a specified exclusive remedy for the worker, meaning they bar the claimant from suing the employer in tort, and there is no cap on medical benefits, as was proposed in the Tennessee bill earlier this year.

He described it as a “high-benefit, low-liability” system, as opposed to a proposal in Tennessee that had lower benefits and higher liability for the employer.

Buchanan said he hopes to see small business organizations offer support for the bill during the legislative off-season.

“The Small Business Chamber of Commerce … that’s just an education deal,” he said. “They need to be educated and their members need to be educated about how this type of program benefits employers – small, medium and large – whether they stay in the system or not.”

He said he doesn’t expect to win over claimants’ attorneys or insurance companies.

“Anybody who has financial interest in the workers’ comp system is probably going to be opposed to any changes in the comp system,” he said.

As for proponents, he said he doesn’t want to reveal just yet who is in support of the bill.

“I don’t think we’re to the point where we’re going to discuss the coalition to support it just because it’s so early,” he said. “The bill was just introduced (Tuesday).”

Frank Knapp, president of the South Carolina Small Business Chamber of Commerce, told WorkCompCentral that the idea of rocking the boat makes him uneasy when the state is in what he considers to be a comfortable position. The last round of reforms the state went through in the mid-2000s, he said, have kept costs down for employers without taking too much away from injured workers.

“We’ve already slain the beast,” Knapp said. “Why are we going through this?”

The organization has yet to take an official stance on the bill, he said, but Knapp doesn’t see himself supporting something that would benefit large employers at the expense of small ones – if that’s the way the option influences the system.

“(Small employers are) going to be staying in the workers’ comp system, but you’re going to have larger businesses that are going to opt out … so the question then is, if you pull 40 to 50% of workers out of the current system, what is going to be the consequences of that to the system? Are we pulling out employees that are less likely to be hurt on the job and therefore the pool of insured people is going to be a little higher risk in the voluntary market? And if that’s the case, then the end result might be something that is good for bigger businesses but might not be so good for the smaller businesses.”

The bill would allow any employer to opt out, as long as they demonstrate a financial ability to pay out benefits as the law requires.

The state chapter of the National Federation of Independent Business hasn’t taken an official stance on the bill yet either. State Director Ben Homeyer said it’s too early to pick a side, but that he will be looking into whether having an option in place would benefit small employers or if it would apply mostly to big business.

“If it’s a possibility that it will save my members and save (money for) small business folks across the state, but still provide the right protection, then it’s certainly something that we would be looking at,” Homeyer said.

According to the National Council on Compensation Insurance, Oklahoma has had two straight years of voluntary-market loss-cost decreases – a 14.6% decrease in 2014 and another 7.8% drop this year. Prior to that, the state experienced alternating years of increases and decreases of no more than 4.5% in either direction.

Ricci Welch, president of the South Carolina claimants’ attorney group Injured Workers’ Advocates, said she views the proposal as a cost-shifting measure. As larger employers opt out of the workers’ compensation system, she said more costs will fall on smaller businesses.

She said that the state has no need to consider such a reform right now.

“The South Carolina workers’ compensation system, as amended in 2007, is a fair system,” she wrote in a statement to WorkCompCentral. “It is fair to all involved parties – the injured worker, insurance carriers, employers, medical providers and taxpayers of South Carolina. The members of the IWA are proud to practice in this fair system and do not feel that the system is ‘broken.’”

Two national insurance organizations have thrown their weight against the bill as well. Trey Gillespie, senior workers’ compensation director for the Property and Casualty Insurance Association of America, told WorkCompCentral on Wednesday that opt-out plans under the Oklahoma system have given the employer unilateral control over claims without giving injured workers much recourse.

The South Carolina bill appears to do the same thing, he said.

“(It requires) similar or greater benefits, but once you’ve read these benefit plans, they’re chock full of conditions and limitations that aren’t found in the workers’ compensation act that basically allow the employer to prematurely shut down wage-replacement benefits and medical payments and basically shift costs to … (the public) in the form of Medicare plans,” he said.

One example is requirements that injured workers report injuries as soon as possible, which can leave employees without benefits if they are unable to make the report because of the accident, he said. Another potential pitfall in opt-out plans he noted is the ability to stop paying benefits to injured workers who are no longer with the same employer.

“If they’re fired or … leave the company, they may lose eligibility for benefits, even though they haven’t finished medical care, and may not have necessarily returned to gainful employment,” Gillespie said.

He also took exception to the portion of the bill that deals with guaranteeing that benefits will be covered, even if the employer is unable to pay. He said his understanding of the bill’s language is that injured workers who are employees of insolvent businesses that have opted out will receive their benefit payments through the South Carolina Property and Casualty Insurance Guaranty Association.

“That they want for the most part (an) unregulated product to have to be basically covered by regulated companies seems extraordinarily unfair,” Gillespie said. “They will be contributing very little to these guaranty funds but can dump all of their risks into these guaranty funds.”

Gillespie said PCIAA wouldn’t go so far as to say that there isn’t an agreeable way to build an opt-out system, but the South Carolina proposal doesn’t answer the organization’s concerns.

In contrast, the American Insurance Association opposes the concept of opting out altogether.

“Insofar as AIA’s policy is concerned, (differences in state opt-out legislation) make no difference because we oppose as a matter of principal these opt-out schemes and believe that they are injurious both to the interests of injured workers and to employers,” AIA Vice President and Associate General Counsel Bruce Wood told WorkCompCentral on Wednesday.

Wood sees such systems as an opportunity for employers who have had a lot of claims to wash away their losses and escape experience modification ratings.

“I think that sends a very poor message through the public policy system, because what it means is that you reward poor experience,” he said.

He said he also sees several potential pitfalls arising from the divorce of businesses from the existing systems that states have set up to deal with the concept of workers’ compensation. When employers opt out, he said, they no longer participate in the collection of data meant to ensure systemwide efficiency and they don’t have access to electronic reporting mechanisms.

“There will be a deterioration in the quality of the data that a workers’ compensation agency has to monitor performance,” Wood said.

Those employers also can’t use the workers’ compensation courts. Rather, he said, opt-out plans are governed under the federal Employee Retirement Income Security Act. So if an employee disputes that an employer’s opt-out plan provides adequate benefits, Wood said that the worker would have to file a case in federal court.

“Do employers … really want to defer to … litigation in federal courts to determine these issues?” Wood asked.

State Sen. Shane Martin, R-Pauline, has submitted a separate opt-out proposal in his chamber. Senate Bill 674 would adopt a system more similar to the one used in Texas than in Oklahoma – it would abolish the requirement of employers to offer workers’ compensation coverage and instead lay out the groundwork for the system that would exist for employers that choose to provide such coverage. That bill was sent to the Senate Judiciary Committee on April 16 and hasn’t moved since.

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