Rejecting the Grand Bargain: What Happens When Large Companies Opt Out of Workers’ Compensation?

Abstract

Texas is the only state where employers can, and frequently do, opt out of workers’ compensation. Focusing on multistate firms that swapped workers’ compensation for private insurance (“nonsubscribers”), I compare outcomes across the two regimes. I find that nonsubscription induced a roughly 35% increase in minor claims, partly offset by a 28% decline in lost-work claims, a 42% fall in cost per claim, and a 36% decline in cost per hour. I find no evidence that nonsubscription increased firms’ investments in worker safety or medical care for recently injured workers. The elimination of permanent partial disability (PPD) and chiropractic care seem to partly explain the declines in cost per claim, while PPD’s elimination may explain a portion of the fall in hourly wage-replacement cost. Yet other plan features that reduce worker welfare—including weak protections against retaliatory discharge, myriad grounds for claim denials, and 24-hour reporting deadlines—are also probable drivers of the observed cost savings. In short, although nonsubscription can help firms cut costs, it may also leave many injured workers, particularly those with serious injuries, worse off. My findings also suggest that eliminating chiropractic care from workers’ compensation would likely have little impact on wage-replacement cost per hour.