Public and Private Workers' Compensation Insurance

Abstract

We are grateful to Dr Rosenbloom for his careful reading of our article. Our purpose in writing it was to generate interest on comparing the efficiencies of state and private insurers. What we found appalling during the course of our study was the lack of data that would allow a thorough comparison. We used the best data that are available. If our article serves to spur others on to find or collect better data, our purpose will have been served. There are two responses to the first point about the kinds of businesses insured by state versus private funds. Dr Rosenbloom alleges that some state funds insure a disproportionate share of high-risk employers. First, although this may be true, we are not familiar with any studies supporting this allegation or demonstrating how significant the differences are between the injury rates for typical state fund clients and private fund clients. In any case, our claim was not that there were no differences in the populations served by state and private funds but simply that those differences were less than the differences between, for example, Medicare and private insurers of non-workers' compensation medical insurance. Second, Dr Rosenbloom alleges that private-sector funds eschew high-injury firms that, presumably, state funds insure. High-injury firms are "problem" or "high-cost" clients. But, in most businesses, "problem" clients require more, not less, attention. The fact that some state insurers are able to provide this greater attention while maintaining a low administrative cost speaks highly of the efficiencies of some state funds. Dr Rosenbloom's second point concerns definitions of "benefits paid" and "insured costs." His point is not a criticism of our comparison study, however, because the same definitions apply to state as well as private funds. Unless it can be demonstrated that, for example, "benefits paid" are better measures for state funds and "insured costs" are better measures for private funds, this second point is irrelevant. Dr Rosenbloom's third point concerns accounting for dividends and rebates. Economists view dividends as payment for capital. Whereas state funds do not pay dividends, they do have to pay for buildings, equipment, machines, and so on; that is, they do have capital costs. Moreover, some dividends undoubtedly leave the United States and go to foreign investors. Rebates may be provided by either state or private carriers. Dr Rosenbloom's rebate point is irrelevant unless he can demonstrate that the ratio of rebates to premiums is higher for the private carriers than for the public carriers. Dr Rosenbloom's fourth point concerns the claims load per examiner. We are not familiar with any study investigating these loads across state and private carriers. There is undoubtedly variation in ratios of claims to examiners across private funds, and it is likely that some private funds would exceed the 140 ratio. Mr Frank Floyd, manager of the Communication and Education Center at the State Fund of California, reports that the private sector average is about 150 in California and that the state fund's average is about 125 (personal communication, Frank Floyd, April 14, 1997). Dr Rosenbloom chooses to characterize claims management at private sector insurers as "aggressive." This is an important choice of words. It could be that "aggressively" managed claims could lead to legitimate claims being denied and could send a chilling message to other workers preparing to file legitimate claims. "Aggressively" managed claims might therefore result in passing on the cost of the job-related injuries to the employer's private general non-workers' compensation medical insurance company or onto the Social Security Administration if the worker becomes disabled. We are in complete agreement with the point about managed care. It further supports our general contention, which is shared by the majority of economists,1 that high benefit-to-premium ratios reflect efficiency in an insurance market. Dr Rosenbloom's point in the previous paragraph is that low benefit-to-premium ratios as desirable. Whereas that may be true from the standpoint of the private insurer trying to maximize profit, it is not true from the standpoint of maximizing efficiency for insurers, clients, and workers. Dr Rosenbloom suggests that state funds carry enormous unfunded liabilities but offers no evidence for his opinion. We are not aware of any state fund that has ever gone bankrupt or ever drawn funds from general state tax revenues. Yet bankruptcies do occur in the private sector, eg, Golden Eagle in San Diego, 1996 (personal communication, Frank Floyd). Because the law requires that workers always be covered, these bankruptcies in the private sector are typically "bailed out" by state government insurance departments, ultimately at the taxpayers' expense.