The History and Anatomy of the Workers' Comp Crisis in Texas: Does The Recession of the Mid-1980s – Plus $1 Billion in Assessments Against the Carriers – Explain What's Really Going on in the Texas Workers' Comp System?
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First Published: 01-26-05 Last Revised: 01-26-05
The recession of the mid-1980s hit the country hard. During these times, workers' comp carriers, quite understandably, began to decline coverage to certain employers. As they did so in Texas, they were assessed by the State for losses stemming from the non-covered employers. In four short years, between 1986 and 1989, carriers were "billed" for over $1 billion in assessments. Half of this amount was incurred in 1989 alone, representing an increase of 1150% as compared to the amount incurred in 1986. The carriers "trot from the State" began to turn into a stampede. Shortly thereafter, an another major event occurred: the Texas Employers Insurance association – a massive workers' comp carrier created by the State in 1913 – finally buckled under the strain and collapsed.
ProviderLAW's review of the history of the workers' comp crisis in Texas begins by looking at events which occurred nearly twenty years ago.
On December 10, 2004, ProviderLAW announced that it would begin publishing a series of reports on various workers' comp systems. Copies of this report, and all related reports, can be found in the public section of ProviderLAW's web site under "News."
The 1980s was a time of tremendous turmoil in the Texas and national economies. Massive unemployment across the country was exacerbated in Texas by the oil bust and savings & loan scandal. Later in 1994, it would be reported that during the 1980s, carriers across the country began to experience increases in work-induced, stress-related injuries, which may be where the claim that "medical costs are skyrocketing" first originated.¹
Compounding the situation, in 1984 and 1986, interest rates declined sharply, which according to one authority on the subject, increased the present value of the carriers' claim cost estimates during those years.²
Compounding the situation still further, one or more carriers reportedly applied for rate increases during this time frame, which requests were denied by "regulators in some states."³ Bear in mind that law in many states at that time, including Texas, gave the state executive branch the power to set or establish insurance rates.
Compounding the situation still further, in 1986 the State of Texas reportedly increased the carriers' IBNR ("incurred but not reported") reserve requirement from 10% of net claims to 15% of net claims, resulting in a total bulk reserve requirement of 40%. Arguably, the State may have increased the IBNR reserve requirement to ensure that the carriers had sufficient reserves to cover any increase in reported injuries in the future.
Arguably as a result, one or more workers' comp carriers in Texas began declining coverage to an increasing number of employers – particularly high-accident industries and small businesses – employers that the carriers previously had been willing to cover. Between 1984 and 1989, the number of "employers" in Texas unable to find coverage increased by over 300%.
Compounding the situation further, under law which existed at that time, the State "assigned" the non-covered employers to carriers doing business in the State (i.e., required the carriers to cover them) and began to assess the carriers (i.e., bill them) as a whole for any losses associated with those employers. In spreading out the loss costs, the State assessed each carrier based on that carrier's proportionate share of the "voluntary market" (i.e., employers voluntarily covered by the carriers), which in effect punished those carriers who voluntarily covered the greater portion of businesses in the State.
Compounding the situation still further, the State's method for calculating losses for assessment purposes reportedly increased the chances that the State would conclude that a loss had occurred with respect to any given employer who had been assigned.
Compounding the situation still further, under law which existed at that time, the carriers' ability to "pass through" the costs of the assessments to Texas employers was severely restricted.4
Between 1986 and 1988, the State assessed the Texas carriers in the amount of $537million. In 1989 alone, the State assessed the carriers in the additional amount of $551 million, bringing the total assessments to over $1 billion in just four years.5
The carriers' "trot from the State" was turning into a stampede.
Shortly thereafter, the massive workers' comp carrier, Texas Employers Insurance Association – established by the State in 1913 and once the largest workers' compensation carrier in Texas – buckled under the tremendous strain and collapsed.
The TEIA, however, was not the only casualty of the recession, assessments and other events. Between 1989 and 2001, the State implemented multiple changes. The following represents some of the major changes implemented by the State:
The State effectively abolished rate regulation (referred to by some as rate "suppression").
The State phased out the practice of assigning non-covered employers to carriers.
The State phased out the practice of assessing carriers for losses stemming from non-covered employers.
The State, in taking the foregoing actions, effectively abolished carrier subsidization of high-risk industries and small businesses in Texas. Such abolition raises the question – as rates increase for any given industry or fluctuate between industries, might such increases and fluctuations perpetuate the claim that "medical costs are skyrocketing?"
The State, "much to the surprise of some," started a new State-sponsored workers comp fund in the aftermath of the TEIA's demise, and resolved to build the new State fund as quickly as possible. Despite reports that premium rates decreased by over 50% following the legislative changes,6 and despite claims that "medical costs are skyrocketing," this new State fund quickly amassed an $800 million surplus in only 8 years after its formation.7 Arguably, the State fund – now called Texas Mutual – has positioned itself for rapid and extensive growth if, and when, the State reintroduces rate regulation.
Large employers were given the ability to self-insure. In other words, large employers are currently able to avoid paying premiums to insurance carriers.
The jury was effectively removed from the workers' comp system. Instead of jurors, State employees now serve as the "finders of fact."
The system was modified in various ways to significantly reduce the number of attorneys willing to represent injured workers and providers.
Through various means, the State placed significant control over medical decision-making into the hands of the insurance industry.
The State declared that in many cases, the health care provider – not the injured worker or carrier – must be the one who appeals any insurance claims denials. Added to this, the State required health care providers in many cases to post a bond of $450-$650 prior to appealing a denial by a carrier.
In reviewing the changes implemented by the State, it becomes clear that many of them diminished – not so much the statutory benefits owed to injured workers – but rather the ability of injured workers to receive care and to compel carriers to pay for those statutory benefits.
It is currently unknown whether the State actually collected any or all of the assessments levied between 1986 and 1989.
End of Document
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¹ "Disease and Employers Liability Insurance: Section 5 (Stress)," 1994 General Insurance Convention at p. 334, as of January 26, 2005.
² "Tort Liability, Insurance Rates, and the Insurance Cycle," Harrington, Scott E., at p. 11, as of January 26, 2005.
³ "Workers' Compensation Rate Regulation: How Price Controls Increase Costs," Danzon, Patricia and Harrington, Scott, as of January 26, 2005, at p. 2.
4 Appellants Brief, Counter Statement of Facts, Section I, filed in the case of Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co. et al., 319 F.3d 205 (5th Cir., 2003).
5 See, e.g., Texas Workers' Compensation Assigned Rick Pool Financial Statement, 21-31-99.
6 See ProviderLAW Advisory, 12-17-04: "Reportedly, Between 1990 and 1998, Workers' Comp Premiums in Texas Declined by Over 50% (Yes, Premiums)."
7 See ProviderLAW Advisory, 12-16-04: "If Medical Costs are ‘Skyrocketing' in the Texas Workers' Comp System, How is it That in 8 Short Years, Texas' Fund Was Able to Build up a Massive Surplus of $800 Million Dollars?"
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