1 Employer Participation in the Texas Workers’ Compensation System: 2006 Estimates Texas Department of Insurance Workers’ Compensation Research Group October 2006

2 Brief History of Non-subscription in Texas Private sector employers have been allowed the option of purchasing workers’ compensation (WC) insurance since Texas is currently the only state that allows any private-sector employer the option of becoming a “non-subscribers” to the state WC system. Several states’ laws have numerical exceptions that allow small private sector employers to be “non-subscribers.” The first study in Texas to estimate the percentage of employers that are “non-subscribers” to the Texas WC system took place in 1993 with five follow-up studies conducted in 1995, 1996, 2001, 2004, and recently in 2006.

3 Presentation Overview Employer non-subscription rates and employee WC coverage rates; Reasons why employers purchase workers’ compensation coverage or become non-subscribers; Employer experience with premium costs; Nonsubscribers’ medical and wage replacement benefits; Impact of HB 7 on employer business decision; and Satisfaction levels of subscribing and non-subscribing employers.

4 Survey Sample and Administration TDI made slight modifications to the survey instrument first developed by the Research and Oversight Council on Workers’ Compensation (ROC) TDI pulled a random probability sample (stratified by industry and employment size) of Texas employers from Texas Workforce Commission (TWC) data During June –August 2006 TDI and the Public Policy Research Institute (PPRI) at Texas A&M University interviewed 2,800 year-round private sector Texas employers Employer non-subscription estimates have a +/- 2.4% margin of error at the 95% confidence interval

5 Overall Non-subscription Estimates

6 Percentage of Texas Employers that are Non-subscribers, Source: Survey of Employer Participation in the Texas Workers’ Compensation System, 1993 and 1995 estimates from the Texas Workers’ Compensation Research Center and the Public Policy Research Institute (PPRI) at Texas A&M University; 1996 and 2001 estimates from the Research and Oversight Council on Workers’ Compensation and PPRI; and 2004 and 2006 estimates from the Texas Department of Insurance Workers’ Compensation Research and Evaluation Group and PPRI.

7 Percentage of Texas Employees that are Employed by Non-subscribers, Source: Survey of Employer Participation in the Texas Workers’ Compensation System, 1993 and 1995 estimates from the Texas Workers’ Compensation Research Center and the Public Policy Research Institute (PPRI) at Texas A&M University; 1996 and 2001 estimates from the Research and Oversight Council on Workers’ Compensation and PPRI; and 2004 and 2006 estimates from the Texas Department of Insurance Workers’ Compensation Research and Evaluation Group and PPRI.

8 Percentage of Texas Employers that are Non-subscribers by Industry, 2004 and 2006 Estimates Note: Industry classifications were based on the 2002 North American Industry Classification System (NAICS) developed by the governments of the U.S., Canada and Mexico, which replaced the Standard Industrial Classification (SIC) system previously used in the U.S. As a result of this change in industry classifications, industry non-subscription rates for 2004 and 2006 cannot be compared to previous years. Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group. Industry Type Non-subscription Rate Agriculture/Forestry/Fishing/Hunting39%25% Mining/Utilities/Construction32%21% Manufacturing42%37% Wholesale Trade/ Retail Trade/Transportation40%37% Finance/Real Estate/Professional Services32%33% Health Care/Educational Services41%44% Arts/Entertainment/Accommodation/Food Services54%52% Other Services Except Public Administration39%42%

9 Percentage of Texas Employers that are Non-subscribers by Employment Size, Note: * Non-subscription estimates for 1993 were based on different employer size categories than were used in later years so they are not directly comparable. Source: Survey of Employer Participation in the Texas Workers’ Compensation System, 1993 and 1995 estimates from the Texas Workers’ Compensation Research Center and the Public Policy Research Institute (PPRI) at Texas A&M University; 1996 and 2001 estimates from the Research and Oversight Council on Workers’ Compensation and PPRI; and estimates from the Texas Department of Insurance Workers’ Compensation Research Group and PPRI. Employment Size1993* EmployeesN/A55%44%47%46%43% 5-9 EmployeesN/A37%39%29%37%36% EmployeesN/A28% 19%25%26% EmployeesN/A24%23%16%20%19% EmployeesN/A20%17%13%16%17% EmployeesN/A18%14% 20%21%

10 Reasons Why Employers Purchase WC Insurance or Become Non-subscribers

11 Top Five Primary Reasons Why Subscribing Employers Said They Purchase Workers’ Compensation Coverage Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group. Primary Reasons Given by Surveyed Employers Percentage of Subscribing Employers Surveyed in 2006 Employer thought having workers’ compensation was required by law 21.7% Employer provided WC coverage through health care network 20.0% Employer was concerned about lawsuits19.7% Employer needed workers’ compensation coverage in order to obtain government contracts 6.3% Employer had confidence in the administration of the Texas workers’ compensation system 4.7%

12 Top Five Primary Reasons Why Non-subscribing Employers Said They Did Not Purchase Workers’ Compensation Coverage Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group. Primary Reasons Given by Surveyed Employers Percentage of Non-subscribing Employers Surveyed Workers’ compensation insurance premiums were too high 37.9%35.4% Employer had too few employees 21.1%21.3% Employers not required to have workers’ compensation insurance by law 9.8%9.0% Medical costs in the workers’ compensation system were too high 4.9%4.1% Employer had few on-the-job injuries 4.7%8.8%

13 Top Five Primary Reasons Why Large Non-subscribing Employers (i.e., 500+ Employees) Said They Did Not Purchase Workers’ Compensation Coverage Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group. Primary Reasons Given by Surveyed Employers Percentage of Large Non- subscribing Employers Surveyed in 2006 Employer felt they could do a better job than the Texas WC system at providing injured employees with appropriate medical and wage benefits 41% Workers’ compensation insurance premiums were too high24% Employer had concerns about the administration of the Texas WC system 7% Medical costs in the workers’ compensation system were too high 5% Employer needed to cut costs in order to be competitive9.0% Employer had few on-the-job injuries 7.6%

14 Reasons for Not Carrying Coverage in the Texas WC System as Rated by Employer Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Note: * Important was defined as an assigned rating of 4 or 5 on a scale of 1 to 5, where 1 means Not at all Important and 5 is Extremely Important Reasons for Not Carrying WC Coverage Percentage of Nonsubscribing Employers Rating Reason as Important* Small (1-49 Employees) Medium (50-99 Employees) Large (100 or more employees) Workers’ compensation insurance premiums were too high 61%77%76% Medical costs in the workers’ compensation system were too high 46%58%64% You had concerns about the administration of the Texas workers’ compensation system 18%25%31% You were not required to have workers’ compensation coverage by law 52%37%34% You had trouble finding health care providers who would treat injured workers under the workers’ compensation system 12%11%12% Your company had too few employees 60%11%10% Felt your company could do a better job than the Texas workers’ compensation system at providing occupational benefits 33%47%69% Your company had few on-the-job injuries 59%42%35% You had concerns about workers’ compensation fraud 18%38%44%

15 Reasons for Carrying Coverage in the Texas WC System as rated by Employer Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Note: * Important was defined as an assigned rating of 4 or 5 on a scale of 1 to 5, where 1 means Not at all Important and 5 is Extremely Important Reasons for Carrying WC Coverage Percentage of Subscribing Employers Rating Reason as Important* Small (1-49 Employees) Medium (50-99 Employees) Large (100 or more employees) Workers’ compensation insurance rates were lower 30%33%29% You were concerned about lawsuits 56%62%52% You thought having workers’ compensation coverage was required by law 45%48%42% You were able to provide your injured employees with medical care through a workers’ compensation health care network 56%65%66% You were dissatisfied with your non-subscriber program or your insurance rates for your non-subscriber program were too high 13%10%9% Your industry is considered high risk 21%33%36% You were able to reduce your workers’ compensation insurance costs through deductibles or other premium discounts 29%38%48% You were able to self-insure through the Texas Department of Insurance Certified Self-Insurance or Group Self-Insurance program? 19% You needed to have workers’ compensation coverage to obtain government contracts 22%25% You had confidence in the administration of the workers’ compensation system 44%48%43%

16 Texas Employers’ Experiences with Workers’ Compensation Insurance Costs

17 Percentage of Subscribing Employers that have Experienced a Change in Their Workers’ Compensation Insurance Premium Compared to Previous Policy Year Source: Survey of Employer Participation in the Texas Workers’ Compensation System, 1996 and 2001 estimates from the Research and Oversight Council on Workers’ Compensation and the Public Policy Research Institute (PPRI) at Texas A&M University; and estimates from the Texas Department of Insurance Workers’ Compensation Research Group and PPRI.

18 Percentage of Subscribers That Indicated They Experienced a Premium Increase by Employment Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

19 Average Premium Increase for Employers that Reported a Recent Increase in Their Workers’ Compensation Premiums, 2004 and 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Size of Recent WC Premium Increase Percentage of Subscribing Employers Surveyed In: Less than 10 percent50% percent14%30% percent12%11% percent8%6% percent4%1% percent5%1% More than 50 percent7%2%

20 Average Premium Decrease for Employers That Reported a Recent Decrease in Their Workers’ Compensation Premiums, 2004 and 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Size of Recent WC Premium Decrease Percentage of Subscribing Employers Surveyed In: Less than 10 percent60%45% percent16%34% percent5%8% percent8%4% percent5%3% percent6% More than 50 percentLess than 1%

21 Percentage Increase in Premiums Subscribing Employers Say Would Cause Them to Seriously Consider Dropping Workers’ Compensation Coverage, 2004 and 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Size of Potential WC Premium Increase Percentage of Subscribing Employers Surveyed in: Less than 10 percent20%6% percent16%10% percent17%15% percent13%15% percent5%6% percent2%3% More than 50 percent3%6% Would never consider dropping WC insurance24%39%

22 Percentage Decline in Premiums Non-subscribing Employers Say Is Required To Induce Them to Purchase Workers’ Compensation Insurance, 2004 and 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Size of Potential WC Premium Decrease Percentage of Non-subscribing Employers Surveyed in: Less than 10 percent8%6% percent5% percent5% percent11%7% percent6%7% percent7%10% More than 50 percent21% Would never consider purchasing WC insurance 37%39%

23 Basic Information Regarding Benefits Provided by Non-subscribers

24 Percentage of Non-subscribers That Pay Occupational Benefits and the Percentage of Non-subscriber Workforce Covered by Occupational Benefit Plans, 2001, 2004, and 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, 1996 and 2001 estimates from the Research and Oversight Council on Workers’ Compensation and the Public Policy Research Institute (PPRI) at Texas A&M University; and estimates from the Texas Department of Insurance Workers’ Compensation Research Group and PPR, 2006I.

25 Percentage of Non-subscribers that Pay Occupational Benefits and Percentage of the Non-subscriber Workforce Covered by Occupational Benefit Plans, by Employer Size, 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

26 Waiting Period for Workers to Become Eligible for Non-subscriber Occupational Benefits, 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

27 Duration Caps on Medical Benefits for Injured Workers Employed by Non-subscribers with Medical Plans 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

28 Duration Caps on Wage Replacement Benefits Paid to Injured Employees by Nonsubscribers with Wage Replacement Plans, 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

29 How Nonsubscribers Finance Occupational Benefits to Injured Workers by Employer Size, 2006 Estimates Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

30 Medical Benefits Paid by Non-subscribers Of those non-subscribing employers that said they pay occupational injury benefits, 71 percent cover medical costs Of those non-subscribing employers that pay medical benefits 53 percent said that they pay medical benefits for as long as medically necessary. Approximately 25 percent of non-subscribers that pay medical costs have their employees pay co-payments or deductibles. Of those non-subscribing employers that cap medical benefits, 41 percent cap these benefits based on the amount of money spent on the medical treatments received by the injured employee, 13 percent cap these benefits based on the length of medical treatment provided to the injured employee, and 46 percent use a combination of both duration and dollar amount to cap benefits.

31 Approximately 72 percent of non-subscribing employers with occupational benefits said they pay wage-replacement benefits to injured employees. Approximately 67 percent of non-subscribing employers with wage replacement benefits said that their injured employees are immediately compensated for lost wages while 33 percent said there is a waiting period before wage benefits begin. More than half (56 percent) of non-subscribing employers with wage replacement benefits said that they pay those benefits for the entire duration of an injured employee’s lost time. Of those remaining non-subscribing employers that cap wage replacement benefits, 34 percent cap these benefits based on a certain amount of time, 8 percent cap these benefits based on the dollar amount of benefits paid to the injured employee, 51 percent cap those payments based on a combination of both time and dollar amount, while 7 percent use some other method. Wage Replacement Paid by Non-subscribers

32 Impact of the 2005 Workers’ Compensation Reforms

33 Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employer Knowledge of 2005 HB 7 Networks and the Impact on their Business Plans

34 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decisions Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employers’ Decisions Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Employer’s plan to hire more employees4.6%2.6%92.8% Employer’s plan to expand business operations in Texas 6.8%2.3%90.9% Employer’s decision to purchase or maintain its workers’ compensation coverage 2.2%10.4%87.4% Employer’s decision to become or remain a non-subscriber to the Texas workers’ compensation system 2.7%5.7%91.6%

35 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to Hire More Employees by Employer size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employers Size Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Small4.5%2.8%92.7% Medium7.1%1.9%91% Large3.9%2.5%93.6%

36 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to Expand Business Operations in Texas, by Employer size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employers Size Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Small6.6%2.6%90.8% Medium9.2%1.1%89.7% Large7.7%2.8%89.4%

37 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to Purchase or Maintain workers’ compensation coverage, by Employer size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employers Size Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Small9.9%2.5%87.6% Medium12.0%1.5%86.5% Large14.9%2.0%83.1%

38 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to become or remain a non- subscriber to the Texas workers’ compensation system by Employer size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, Employers Size Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Small5.5%2.8%91.7% Medium8.3%2.6%89.1% Large8.7%2.0%89.3%

39 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to Hire More Employees by Industry Industry Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Agriculture 4.0%3.1%92.9% Arts/Accommodation 6.5%2.1%91.4% Education/Health 4.8%6.4%88.8% Manufacturing 3.2%3.8%93.0% Mining/Utilities/Cons 7.9%0.5%91.6% Other Services 5.3%1.7%93.0% Professionals 4.0%2.5%93.5% Wholesale/Retail/Transportation 2.7%2.5%94.8% Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

40 Impact of the 2005 Workers’ Compensation Reforms on Texas Employers’ Decision to Expand Business Operations in Texas by Industry Industry Type of Impact and Percentage of all Employers Surveyed in 2006 PositiveNegativeNo Change Agriculture 3.2%4.5%92.3% Arts/Accommodation 9.4%1.5%89.0% Education/Health 3.7%6.9%89.3% Manufacturing 6.5%5.3%98.2% Mining/Utilities/Cons 9.5%0.5%90.0% Other Services 10.6%2.8%96.6% Professionals 5.2%1.7%93.1% Wholesale/Retail/Transportation 5.7%1.1%93.1% Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

41 Satisfaction Levels of Subscribers and Non-subscribers

42 Satisfaction Levels of Subscribers and Nonsubscribers with Their Workers’ Compensation Experience, 2006 Estimates Workers’ Compensation Areas Percentage of Employers Indicating that They Were Extremely or Somewhat Satisfied SubscribersNon-Subscribers Overall satisfaction56.2%69.5% Adequacy/equity of occupational benefits paid to workers 53.2%66.1% Whether workers’ compensation or occupational benefits plan is a good value for company 53.7%72.6% Ability to manage medical and wage replacement costs 50.2%63.1% Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

43 Overall Satisfaction of Subscribers and Non-subscribers by Employment Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group.

44 Satisfaction of Subscribers and Non-subscribers with the Benefit Adequacy and Equity of Their Plans by Employment Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

45 Satisfaction of Subscribers and Non-subscribers with the Value of Their Plans, by Employment Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

46 Satisfaction of Subscribers and Non-subscribers with Their Ability to Manage Injury and Wage-replacement Costs by Employment Size Source: Survey of Employer Participation in the Texas Workers’ Compensation System, Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers’ Compensation Research Group, 2006.

47 Summary Overall, the percentage of Texas employers that do not have workers’ compensation (WC) insurance fell one percentage point since 2004, but is still the second lowest level since it was first measured in The percentage of Texas employees employed by non-subscribing employers also fell one percentage point, but is at the second highest level seen since these figures have been tracked by the state. This appears to be the result of a higher percentage of larger employers deciding not to purchase WC insurance than found in previous years. Texas employers that subscribe to the Texas WC system do so primarily because they believe it’s required by law, are interested in healthcare networks, concerned about lawsuits, need insurance for government contracts, and have confidence in the administration of the WC system.

48 Summary, continued However, the primary reasons why non-subscribing employers decided not to purchase WC insurance included high WC premiums, the perception that employers’ have too few employees or few on-the-job injuries to warrant WC insurance, the understanding that WC insurance is not required by law, and the concern over high medical costs in the Texas WC system. Large non-subscribing employers felt they could do a better job than the WC system in providing injured employees with appropriate medical and wage benefits. Compared to 2004, a significantly higher percentage of subscribing employers experienced WC premium decreases and significantly lower percentage of subscribing employers experienced premium increases since their last policy renewal. For those employers that experienced an increase in premium, 80 percent said the increase was less than 15 percent, while 21 percent of employers who experienced a decrease in premium said the decrease was more than 15 percent. Approximately 31 percent of current subscribers indicated that they would consider dropping WC coverage if premiums increased by up to 20 percent, while 16 percent of non-subscribers indicated that they would consider purchasing WC insurance if premiums decreased by up to 20 percent.

49 Summary, continued Approximately 65 percent of Texas employers said that they have no knowledge at all about the 2005 HB 7 reforms. However, employers who are extremely knowledgeable about the HB 7 reforms are about three times as likely to say that the reforms had positive impacts on their business decisions than employers with no knowledge about the reforms. Approximately 39 percent of non-subscribers said that they would not consider purchasing WC insurance regardless of WC premium reductions. While 37 percent of Texas employers do not have WC insurance, more than half of these non-subscribing employers (56 percent, employing 84 percent of the non-subscribing workforce) indicated that they pay medical and/or wage replacement benefits to injured employees.