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Tennessee considering workers comp opt-out

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Backers hope Tennessee becomes the third state to allow employers to opt out of the state's workers compensation system, but experts expect most employers would stay in the system to realize savings from recent reforms.

Tennessee legislators in February introduced the Employee Injury Benefit Alternative, a measure to allow private employers to provide injury benefit plans that are less comprehensive than state-mandated workers comp insurance.

The legislation, introduced simultaneously in both chambers as S.B. 721 and H.B. 997, comes one year after Oklahoma permitted employers to provide alternative comp coverage under its Employee Injury Benefit Act, and nearly eight months after significant changes to Tennessee's comp law.

The Tennessee law stiffened requirements for work-related injuries to be compensable, mandating that they arise “primarily” from employment. The law also moved the state from a court-based adjudication system to an administrative process.

The opt-out legislation, under consideration by a Republican-controlled Legislature and governor's office, could face opposition.

At least three employers have expressed an interest in opting out, but “more than a handful” say they “don't think there's been enough time to see what (the already approved reforms) can do,” said Abbie Hudgens, administrator for the Workers' Compensation Division of the Tennessee Department of Labor and Workforce Development in Nashville.

Companies doing business in Tennessee are still adjusting to changes that went into effect last July, said Fred Baker, member of law firm Wimberly Lawson Wright Daves & Jones P.L.L.C. in Cookeville, Tennessee.

The law aims to make workers comp more efficient and cut costs for payers by changing the way permanent partial disability benefits are calculated and creating a medical advisory committee in an effort to reduce medical costs, among other changes, Mr. Baker said.

Of seven national employers that have opted out in Texas and Oklahoma, “all but one have Tennessee operations and have expressed an interest” in opting out, said Bill Minick, president of Dallas-based PartnerSource, an alternative workers comp consultant unit of Arthur J. Gallagher Risk Management Services Inc.

National employers that have opted out in Texas and Oklahoma include retailers Big Lots Inc. and Dillards Inc. and Regis Corp., the global hair salon chain.

Opt-out bills in Tennessee and Oklahoma are based on Texas' 100-year-old nonsubscription system. In Oklahoma, which passed opt-out legislation and other reforms in 2013, 33 employers have elected to provide alternative benefit programs.

Bruce Wood, Washington-based vice president and associate general counsel at the American Insurance Association, criticized opt-out efforts.

“We think (opt out) is a bad idea,” Mr. Wood said. “(Oklahoma) improved their system, but then at the same time they gave a conflicting message that said, "Despite all the work we're doing, all the improvements here, we're now telling employers you can leave it,'” he said. “It's sort of the same message in Tennessee ... Now we have legislation that says to employers, "You know all that work you did to improve the system? Now we think you ought to be able to abandon it.'”

It takes several years for cost savings to be realized and reflected in workers comp rates, Mr. Wood said. “But to the extent that the workers compensation system is delivering as intended, there is less of an incentive for employers to opt out.”

Mr. Minick said he expects rate cuts as a result of last year's legislation to “slow interest in the option during the first year.” In time, however, “employers who want more employee accountability and more predictable claim outcomes will begin to move to the option.”

He said the opt-out legislation in Tennessee could further reduce workers comp premiums, whether companies opt out or not, if workers comp insurers reduce rates to compete with alternative products. In addition, Mr. Minick said, “employers that have significant claim frequency will elect the option, which leaves a better risk pool in the workers compensation system.”

Cities and counties in Tennessee already can forgo traditional workers comp insurance and set up their own injury benefit plans.

Still, “about 98% of municipalities have opted into workers comp,” while counties that have not opted into the state system offer similar benefits, Ms. Hudgens said.

Concerns about provisions included and not included in the legislation raises questions, with sources saying there's no mention of permanent disability benefits and no minimum death benefit. Employers also have the final say on settlements, which sparked recent legal challenges to Oklahoma's law, sources said.

“Until the constitutional landscape is clarified (in Oklahoma) ... you're not going to see a lot of employers opting out (anywhere),” Mr. Wood said.

Supporters in Tennessee are probably “aware that there could be constitutional challenges if it's passed,” but Mr. Baker said he's not sure whether the bill will remain in its current form.