Carve-Outs in Workers' Compensation: An Analysis of the Experience in the California Construction Industry

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Carve-Outs in Workers' Compensation: An Analysis of the Experience in the California Construction Industry, by David I. Levine, Frank W. Neuhauser, Richard Reuben, Jeffrey S. Petersen, and Cristian Echeverria, 2002, Kalamazoo: W.E. Upjohn Institute for Employment Research

Although the term "crisis" has been much overused in reference to workers' compensation, the description had particular resonance in 1992. Benefits as a percentage of payrolls peaked at $1.68 (the most recent figure is less than $1.10); the combined ratio had jumped 7 points to 116 in one year. Among the many states in trouble, Maine notoriously stood out for insurers' unwillingness to write new business.

At a time when systems everywhere were desperate for innovation, Bechtel and the Pioneer Valley Building and Construction Trades Council negotiated a "carve-out," or special arrangement operating outside Massachusetts workers' compensation legislation. The results seemed almost too good to be true: claims fell by 80 percent and litigated cases dropped to zero, with overall costs falling by more than 50 percent.

Not surprisingly, the Bechtel example attracted the attention of other states. California, with the most litigious of workers' compensation systems, adopted enabling legislation in 1993. Three years later, eight carve-outs were operating in the state. Another eight had been added by 2001, at the time when the W.E. Upjohn Institute for Employment Research was completing its analysis of California's carve-outs.

California's own studies show that carve-outs reduce both litigation and overall costs. A recent California Department of Insurance document claims that "several carve-out programs, specifically those with an ombudsman, have had demonstrated success in reducing the level of litigation, returning workers to work more quickly, and reducing the overall cost burden on the system." Consequentially, California's "Garamendi Plan" for workers' compensation reform features legislation making it easier to form carve-outs.

What constitutes a "carve-out," and which of its features are responsible for this apparent success? Stripped to essentials, a carve-out is a special agreement between unions and contractors, operating outside a state's workers' compensation system. In practice, carve-outs incorporate a broad and varying range of reforms. Cost-control measures adopted by the eight agreements examined in this study include special medical arrangements, modified work programs, joint labor-management safety committees, medical evaluators, and preferred providers. In addition, the carve-outs may include arrangements tied to the collective agreement but unrelated to workers' compensation, such as no-strike provisions and restrictions on nonunion labor.

If carve-outs have one distinguishing characteristic, it is their emphasis on alternate dispute resolution and the central role of the carve-out ombudsman in reducing attorney involvement and friction costs. Even so, we find inconsistencies. While the California state system requires workers to pay their own attorney fees, the largest agreement (NECA/IBEW) reimbursed attorney fees on top of claim awards.

It's hard to reconcile this jumble of reforms with the miracle remedy described by Garamendi and the Bechtel reports. As the Upjohn research makes clear, enthusiasm for the carve-out model rests on slim evidence. The Bechtel results were published without reference to a control group, at a time when workers' compensation results were improving. …