Thursday, July 11, 2019

Workers’ Compensation Insurance Arrangements: Does the model make a difference? Part 1


For more than a century, governments have pursued a social policy objective:  to protect workers from work-related injury, disability, illness and death in a compassionate and sustainable way that still allows the economic activity and innovation necessary for societies to operate and thrive.  Requiring employers provide financial compensation to workers or their families for work-related injury, illness and death is central to achieving this objective.  In the US, Canada, and Australia (and New Zealand, in a comparable manner), workers’ compensation insurance arrangements meet that requirement, with each jurisdiction determining which insurance arrangement is most appropriate to its context.

The market for workers’ compensation insurance is far from a free market place.  Government interventions alter the market.  The most common interventions make workers’ compensation insurance compulsory and more or less universal.  Actions by the state determine not only who must carry workers’ compensation insurance but who may provide insurance in the jurisdiction.

Workers’ compensation insurance, like other insurance, transfers financial risk associated with specific losses from the insured to the insurer in exchange for a premium.  Where workers’ compensation coverage is mandated, insurance coverage must be available; if insurers are unwilling to underwrite the risk or the risk premium is greater than insured employers are willing or able to pay, businesses cannot operate.  If too few insurers are willing to enter, remain, and underwrite work-related risks in the workers’ compensation insurance market, the price of workers’ compensation and its availability may inhibit economic activity and growth, frustrating achievement of the public policy objective.

To address these and other actual or anticipated market failures, governments intervene in a variety of ways [see post, “What is the connection between market failures and workers’ compensation?, Workers’ Comp Perspectives, August 9, 2016].  Government interventions range from implementing rate-setting regulation to creating assigned risk pools to establishing “state funds” to fill some or all of the workers’ compensation insurance needs in a jurisdiction.  Interventions into the workers’ compensation insurance market through either regulation or the creation of a state fund alters the marketplace, changes the incentives, and influences costs (profit margins, administration, oversight and overheads)—all of which have consequences for system outcomes. 

Each jurisdiction determines which insurance arrangement best meets the public policy objectives in its own social, political, economic and historical context.  There is no one “right way” or “best” insurance arrangement.  The choice of a particular insurance arrangement is a jurisdictional decision; as long as the legislation enabling the arrangement is constitutional and supported by the society it serves, the choice of one model over all other arrangements is strictly a jurisdictional issue.  With that in mind, the purpose of this discussion is to provide a framework for describing, organizing and categorizing workers’ compensation insurance arrangements that exist in the US, Canada, Australia and New Zealand. 

Workers’ Compensation Insurance:  Arrangements and Markets

Insurance arrangements for workers’ compensation coverage are arrayed along a continuum between completely private provision by insurers (with varying degrees of regulation and oversight) to exclusive “state funds”, where a single, government-created, controlled, or mandated agency is the sole provider of workers’ compensation insurance within the state or province.  Competitive state funds, non-competitive state funds, and certain mutualized former state funds are in between these two anchor points (private insurance underwriting and exclusive state funds). 




The market for workers’ compensation typically covers all employers either mandatorily compelled to carry workers’ compensation insurance or voluntarily opting in to coverage where statutes allow.  In markets served by private insurance or competitive state funds, employers unable to obtain coverage from competing workers compensation insurers constitute a residual market.  Jurisdictions may designate a particular insurer, a rotation of insurers, or other mechanism to serve this residual market (often through an “assigned risk pool”).  A state fund may be required to serve this market segment as the “insurer of last resort”.  In exclusive state fund jurisdictions, the sole insurer must insurer all employers requiring (or qualified to opt in to) coverage. 

Governments may restrict public employers’ options for providing workers’ compensation coverage to a state fund.  Self-insurance pools in a particular sector or “carve outs” allowing employers and unions to negotiate an alternative to workers’ compensation also restrict the market for workers’ compensation insurance.  In jurisdictions other than those with exclusive state funds, these arrangements remove segments from the overall marketplace for workers’ compensation insurance.

Ancillary agencies or state guarantee funds may be created to ensure work-related injuries to workers of employers with no insurance or lapsed coverage still receive compensation. Second injury funds may be created to encourage employment of persons with previous disabilities [for example, see Missouri Department of Labor and Industries Second Injury Fund]  and state guarantee funds may protect both workers and employers in the event of carrier failures or bankruptcies [for example, see California Insurance Guarantee Association (caiga.org)].
  
Categorizing Workers’ Compensation Insurance Arrangements by jurisdiction

Legislators in the US, Canada, Australia and New Zealand have mandated workers’ compensation coverage across most if not all sectors (including government and quasi-governmental agencies) in their respective jurisdictions.  The coverage for work-related injury, illness, disease and death is typically mandated at the state or provincial level but with some exceptions; the coverage is provided through a variety of insurance arrangements. Workers in some sectors such as agriculture and small businesses may not be covered in all states (see NASI, Workers’ Compensation: Benefits, Costs and Coverage, 2018 Table A.1, columns (3) and (4)).  There are other exceptions, exemptions and “carve outs” in various jurisdictions. 

Jurisdiction may be grouped under three main headings that describe the primary workers’ compensation insurance arrangements allowed or in place for most employers:

·          Exclusive:  Jurisdictions with a single, legislatively-created provider of workers’ compensation insurance (with or without provisions for self-insurance and/or self-administration)
·         Competitive state funds and private insurers: Jurisdictions with a legislatively-created provider of workers’ compensation insurance that mandatorily and/or competitively insures a portion of the market for workers’ compensation insurance.  This category includes state fund insurers that act as the “insurer of last resort” within the jurisdiction.
·         Private and mutual insurance only:  Jurisdictions where privately held or mutual insurance companies provide workers’ compensation insurance where there is no exclusive state fund.  Mutualized former state funds may be present in the market.   


Categorizations jurisdictions by workers’ compensation insurance arrangements

The American Association of State Compensation Insurance Funds (AASCIF.org), lists the types of workers’ compensation insurance arrangements in the US and Canada in four jurisdictional clusters.  According to their website, workers’ compensation insurance is offered by the following arrangements:
  • Exclusively by state fund: North Dakota, Puerto Rico and Wyoming.
  • Exclusively by workers' compensation board: each Canadian province.
  • By either state fund or authorized self-insurance: Ohio and Washington.
  • By private insurance, state fund, or authorized self-insurance: California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas and Utah.
Federal governments in Canada, the US and Australia have many employees.  These are employed directly by governments and indirectly through a multitude of agencies and quasi-governmental entities that have employees.  To provide insurance for these employees, most federal governments have decided not to engage private insurance to fill the workers’ compensation insurance needs of their employees. 

The workers’ compensation coverage for US federal employees does not fall easily into these three categories.  US federal government employees are covered under the Federal Employees Compensation Act (FECA), administered by the Department of Labor’s Office of Workers’ Compensation Programs (OWCP).  There are arguments for this to be considered as a state-fund analogue or as a form of self-insurance with self-administration by the government for its employees. For the purposes of this analysis, the similarities to state funds with a mandate to cover employees of government and quasi-governmental agencies favour inclusion as a state fund.   

Federal employees in Canada have workers’ compensation under the Government Employees Compensation Act (GECA)—again, something that could be considered as self-insurance or analogous to a state fund.  However, administration of workers’ compensation claims is carried out under contract with the provincial workers’ compensation boards in the respective provinces where injured federal workers are employed.  The variety of agencies and quasi-governmental entities covered by the federal statute suggest it is most like an exclusive state fund insurer for all employees under its jurisdiction.

In Australia, federal employees and employees in federally statutory agencies and corporations are covered the Safety, Rehabilitation and Compensation Act 1988 (SRC Act).  The Act is administered by ComCare—essentially an exclusive state-fund insurer, although there is some competition within certain sectors particularly with former federal corporations now privatized. 

Australian and New Zealand workers’ compensation systems include exclusive, centrally funded and privately underwritten workers’ compensation “schemes” [a term used in Australian/New Zealand, analogous to insurance system or arrangement].  There are no jurisdictions with competitive state funds.   New Zealand’s ACC is technically an “accident compensation system” but maintains data and accounts related to claims attributable to work injuries comparable to workers’ compensation scheme.   

The states of South Australia, Victoria and New South Wales are also exclusive, centrally funded schemes and primarily outsourced claims administration.  The states of Tasmaina, Western Australia, Norther Territory and the Australian Capital Territory are private markets.  Queensland operates a monopolistic scheme as a government owned statutory agency, WorkCover Queensland.  Federal employees and employees in federally regulated sectors are covered by ComCare, essentially an exclusive insurer although there is some competition with certain sectors.  There is also a national Seacare scheme of occupational health and safety (OHS), rehabilitation and workers' compensation for seafaring employees.  While legislatively mandated, the workers’ compensation component is privately underwritten by authorized Seacare scheme insurers. 

Self-insurance may be present in any jurisdiction that allows it but there are two sub-types: 
         
  • Self-insurance with self-administration
  • Self-insurance without self-administration. 

The self-insurance with self-administration is typically allowed for larger, stable entities (governments, large corporations).  Administration may be in-house or contracted to a third-party administrator (TPA). Entities that are self-insured with self-administration may still be subject to oversight and reporting requirements to ensure compliance with workers’ compensation requirements guidelines.  In the exclusive state fund states and provinces where self-insurance is allowed without self-administration, claims administration is conducted by the exclusive state fund. 

Available data from the National Academy of Social Insurance (NASI.org) are recorded by jurisdiction and include the worker benefits and employer costs on a state by state basis.  The dataset includes the District of Columbia and federal workers but excludes Puerto Rico and other US territories.  Estimates for self-insurance are included on a state by state basis.  Exclusive state fund jurisdictions, by definition, represent the full insured data for the state.  NASI identifies the following state funds:

·       Exclusive State Funds:  North Dakota, Ohio, Washington, and Wyoming

·      Competitive State Funds:  California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maryland, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Utah.

·       Non-competitive State Funds:   South Carolina

The South Carolina State Accident Fund (SCSAF) covers employees of state and local government entities and agencies mandated by legislation and competes with private with private insurers to cover “quasi” state government businesses for workers’ compensation purposes.  The existence of this legislatively created entity reduces the competitive market for workers’ compensation.  In the absence of SCSAF, the 700 employers it covers would have to seek coverage in the voluntary or residual workers’ compensation market place.  For this reason, South Carolina may be classified as a  jurisdiction with a semi-competitive state fund.   

The classification of jurisdictions by workers’ compensation arrangements is not static over time.  [for an overview, see  “The Life Cycle of a State Workers Compensation Fund: Change, Challenge and a Review of Mission,” Emphasis 2013/4, TowersWatson,  pages 16-19].  Jurisdictions have switched from state fund to private provision (Nevada, Arizona), created, mutualized entities (Utah’s state fund, WCF, is currently in the process of converting to a mutual insurer; see legislation at https://le.utah.gov/~2017/bills/static/SB0092.html), created private not-for-profit mutual insurer (Maine and Hawaii in the1990s),  and even privatized their state funds (Maine) allowing for shareholders or policy holders to share in profits.  

In some cases, despite essential privatization or mutualization, governments retain influence or control through legislation.  In the case of Maine, legislation mandates the Maine Employers Mutual Insurance Company (MEMIC) to insure Maine employers and provides that the governance of MEMIC include two public interest directors appointed by the governor.  Beginning in 2013, Maryland’s Injured Workers’ Insurance Fund converted to essentially a private insurer and rebranded as Chesapeake Employers’ Insurance.  The change move this formerly competitive state fund towards the private end of the spectrum of insurance arrangements but it retained its exemption from corporate income taxes, governor appointed board of directors, and mandate to insure Maryland employers as the insurer of last resort.  These unique hybrid arrangements complicate the taxonomy and categorization of state funds.

The delineation between a state fund and a private insurance entity is often decided on the basis of federal tax status.  National Association of Insurance Commissioners (NAIC.org) includes some state fund data in its presentations.  Entities that pay federal taxes are considered private while those entities reporting to NAIC that do not pay federal taxes are included in the state fund category.  NAIC does not have data on exclusive state funds but has data on the following states with state funds:
 
Arizona (to 2012), California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maryland, Missouri, Montana, New Mexico, Oklahoma, Oregon, Rhode Island, Texas, and Utah.

The Association of Workers’ Compensation Boards of Canada (AWCBC.org) provides similar data to the NASI report for each jurisdiction’s exclusive fund on a provincial or territorial basis with one exception.  Data from the Northwest Territories and the territory of Nunavut are reported together; although each territory has its own legislation, all workers’ compensation claims are administered by a single workers’ compensation authority, the Workers’ Safety and Compensation Commission (wscc.nt.ca) 

Consolidated List of Jurisdictions by Workers’ Compensation Insurance Arrangement

To simplify the range of workers’ compensation insurance arrangements, jurisdiction may be grouped under three main headings that describe the workers’ compensation insurance arrangements allowed or in place:

·      Exclusive:  jurisdictions with a single, legislatively-created provider of workers’ compensation insurance (with or without provisions for self-insurance and/or self-administration)
·      Competitive state funds and private or mutual insurers: Jurisdictions with a legislatively-created provider of workers’ compensation insurance that mandatorily and/or competitively insures a portion of the market for workers’ compensation insurance.  This category includes jurisdictions with state fund insurers that act as the “insurer of last resort” within the jurisdiction or serve as the workers’ compensation insurer for employees of the public service or quasi-governmental entities.
·      Private and mutual insurance only:  Jurisdictions where privately held or mutual insurance companies provide workers’ compensation insurance where there is no exclusive state fund or competitive state fund.  Mutualized former state funds may be present in the market but operate and are federally taxed as private insurers.


Workers’ Compensation Jurisdictions by Insurance Arrangement Category


Exclusive “State” Fund Jurisdictions
Exclusive: No Authorized Self-Insurance
North Dakota
Puerto Rico
Wyoming

Exclusive: Authorized Self-Insurance with Self-administration
Ohio
Washington State

Exclusive: Federal
US Federal Employees (administered by the Department of Labor, Office of Workers’ Compensation Programs

Exclusive: Provincial Board or Commission with some authorized self-insurance but no self-administration
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut (Territory)
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon Territory

Canadian Federal Employees
Government Employees Compensation Act  (GECA) administered under contract by provincial workers’ compensation boards

Australian public, centrally funded
New South Wales (outsourced claims admin)
Queensland
South Australia (outsourced claims admin)
Victoria (outsourced claims admin)

Australian Federal Employees (and some others)
Comcare

New Zealand ACC

State Fund and Private Insurance Jurisdictions
California
Colorado
Hawaii
Idaho
Kentucky
Louisiana
Maryland
Minnesota
Missouri
Montana
New Mexico
New York
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Texas
Utah

Private and Mutual Insurance Only Jurisdictions
Alabama
Alaska
Arizona
Arkansas
Connecticut
Delaware
District of Columbia
Florida
Georgia
Illinois
Indiana
Iowa
Kansas
Maine
Massachusetts
Michigan
Mississippi
Nebraska
Nevada
New Hampshire
New Jersey
North Carolina
South Dakota
Tennessee
Vermont
Virginia
West Virginia
Wisconsin

Australian Capital Territory
Western Australia
Tasmania
Seacare




This categorization is based on the workers’ compensation arrangements permitted by government and available to the majority of employers found in most jurisdictions.  This categorization ignores any residual market, market exclusions or alternatives, and specialized state funds or similar entities that may be permitted by government and operational in the jurisdiction. 

Insurance Arrangements:  Pros, Cons, and Bureaucratic or Regulatory Failures

As noted in the introduction, governments alter the market for workers’ compensation insurance through a broad range of interventions including regulation and alternative insurance arrangements such as state funds.  These interventions have advantages and disadvantages, are subject to their own incentive-shifting, and carry risks including market failures, bureaucratic failures, and corporate failures (insolvency). 

Competition within a market can produce certain efficiencies particularly in the transfer of dollars to those who suffer work-related injury, illness, disease or death.  Although the quantum is set by legislation, the collective efficacy of administration, oversight and enforcement will be reflected in the proportion of expenditures that are paid out in compensation and benefits to those who suffer work-place injuries.  Competition among private insurers and/or state funds may provide market pressures toward improved service and efficiency; however, competition may also lead to rate under-cutting, and discounting to gain market share. 

Regardless of the workers’ compensation arrangement in place, political decisions to suppress rates while worker benefits are rising can inadvertently jeopardize the sustainability of public and private insurers.  Actions or market conditions that limit profitability or deplete reserves may generate huge unfunded liabilities, lead to private carriers exiting the jurisdiction, and even bankruptcy.  

Jurisdictions that allow self-insurance with self-administration may fail to adequately ensure worker rights are protected against cost shifting and human resource actions to effectively suppress work-injury reporting and data.

Competitive state funds face similar pressures to their private and mutual counterparts.  All other things being equal, an established competitive state fund’s operational and competitive context reflects that of private insures. Competitive state funds face cost pressures for personnel, office space, medical services, and claims expenses reflective of the overall market.  For governments, this provides an important insight into the market for regulatory and legislative purposes. 

Exclusive state funds have the added advantage of population-level data on work-injuries that can lead to rapid action on prevention and detection of serious trends.  They also have the potential to exploit economies of scale in terms of systems and automation that smaller insurers could not access.  The purchasing power of a single-payer workers’ compensation insurer may result in lower medical services and equipment costs.  Having one, universal insurer in the workers’ compensation space generally eliminates the need for ancillary agencies and structures such as Second Injury funds, guarantee funds, and uninsured employer funds.   Oversight may be direct by government (if the agency in is a department of the executive branch), government appointed leadership (as in an arms-length quasi-governmental agency), a separate insurance regulator, or through legislative committee. Historical data on employers and injured workers is centralized and may result in better information and outcomes.   On the other hand, the risks associated with any monopoly require administrative willingness to guard against waste, inefficiency and bureaucratic paralysis.  Exclusive state funds risk losing touch with and being responsive to both their employer and worker stakeholders without constant leadership and administrative efforts to the contrary—efforts that carry their own costs. 

Exclusive state funds can also be subject to political manipulation and pressures that distort costs and benefits or threaten reserves for short-term political gain.  For this reason, many state funds are established as statutory authorities operating at arm’s length from government, limiting (if not fully eliminating) political interference.  Nevertheless, state funds are often constrained by other public policy considerations and initiatives of governments in a way that private insurance entities would not be constrained.    

Tax structures can also create cost differentials.   The competitive and other state funds structured as not-for-profit entities or publicly underwritten insurers have a tax advantage over their private and mutualized counterparts.  This tax advantage may result in lower premium costs for state funds (assuming benefits, industrial mix, medical costs, etc. are equal).

Private carriers have certain advantages including autonomy regarding decisions about entering, remaining, expanding, contracting, and leaving a particular market or insurance line.  Smaller carriers may be more responsive to their chosen client base and multi-line carriers may offer economies of scope and scale.  Competition may help check potential excesses in premium pricing; the freedom of employers to change carriers can be an incentive to greater service to both employers and their injured employees.  On the other hand, the less favourable tax status, underwriting costs, switching costs, and advertising expenses to attract, retain and grow market share are higher than for exclusive and many other semi-competitive state funds.  Regulation and oversight of private markets imposes monitoring costs for government and complicate data acquisition and modeling required for analysis and legislative reforms.  Unless these costs are fully reflected in the premiums or assessments, they may be externalized to taxpayers. 

Concluding comments

Each insurance arrangement in the workers’ compensation world has its own advantages and disadvantages.  The variety of existing arrangements provides legislators and stakeholders with insights into alternative solutions necessary to achieve the social policy objective.  Understanding how other jurisdictions have designed their workers’ compensation insurance arrangements can inform outcome evaluation, allow for more appropriate comparative performance monitoring, and provide an important set of alternatives for consideration. 

In my next post, I will look more closely at the association between the three main categories of workers’ compensation insurance arrangements, worker paid benefits, and employer costs.