John F. Burton, Jr.
Mr. Burton is Director, Institute of Management and Labor Relations at Rutgers University, Piscataway, New Jersey. Some of the ideas expressed in this article are further developed in his "National Health Care Reform and Workers' Compensation" in the November-December 1993 issue of Workers' Compensation Monitor, a newsletter that he has published for seven years.
California is one of the last states to move away from minimum rates and toward more competitive pricing of workers' compensation (WC) insurance. Until four or five years ago, minimum rates in California were set more or less at a level that provided a comfortable profit margin for insurance carriers. Since then, however, the state insurance commissioner has been resisting rate increases.
Past WC losses tended to be greater in southern California, so that carriers writing more policies in the north generally fared better. Under the new system, there will probably be explicit premium rate differences within the state reflecting this long-standing variance. Even under minimum rate systems, though, carriers were always figuring out ways to offer differing rates through specially created subsidiaries and by other measures. So the new deregulated order in California may not actually display much more geographical variation than the regulated one did. Location-related factors, however, will continue to be important.
The first wave of WC deregulation in the early 1980s did bring down rates and costs. Michigan was among the states where reductions were greatest. By the late eighties, however, insurance commissioners in still-regulated states were in effect anticipating deregulation by delaying or denying proposed rate increases. If they had been approving these increases, ensuing deregulation might well have resulted in rate rollbacks for these states, too. But after so many stalled rate increases, deregulation presented carriers with an opportunity to adjust their rates upward and recoup some of the revenues foregone when commissioners denied their earlier requests. Thus the unintended result of deregulation in some states was an increase in rates.
Other deregulated states have benefited from centralized compilation of databases on loss experience. The widely varying rates that deregulated carriers came up with in Michigan, for example, prompted a scramble to develop better data on the relationships between these diverse rates and actual losses.
The rapid rise in workers' compensation expenses nationwide has been driven largely by increases in health care costs. In the eighties, WC costs rose even more rapidly than health care costs generally. The non-occupational health care "system" had also been getting squeezed on costs - and reacting to that squeeze. WC had lagged behind in the use of cost containment strategies such as health maintenance organizations and preferred provider organizations, which made it easier to shift costs into the WC system.
A slowdown in WC cost increases over the last couple of years may be attributable to carriers getting a better handle on medical expenses. There clearly has been a step-up in efforts to contain costs through disability management and making greater use of health maintenance organizations. Unfortunately, the statistical data continue to lag experience, and this keeps the WC industry from adjusting rates right away in response to new claims cost realities.
In whatever form the Clinton national health plan ultimately emerges, the workers' compensation system will certainly be affected, and the industry has to be concerned. From the industry's viewpoint, the worst case would be a complete merger of all health care programs - which is not in current versions of the plan, although study of its potential has been called for. Carriers fear that under such merging they would lose their ability to manage rehabilitation programs and ensure quick returns to work, which would then jeopardize their control of medical costs. These fears may be exaggerated.
At the other end of the scale of possibilities, leaving the workers' compensation system intact and completely separate from non-occupational insurance would entail sizable risks as well. Health care insurance carriers might feel even greater pressure to look for WC deep pockets and any other means for diverting or displacing costs into the WC system. WC programs based on fee-for-service providers would be especially vulnerable to such cost shifting.
Between these two extremes could be various compromise plans linking WC and other health care. Almost certainly, however, coordination and control of any such plan would come up for prolonged debate.