There are those who argue that a monopolistic state workers' compensation system—in which the writing of policies by private insurers is illegal—yields public policy benefits. Michigan's leading labor unions have long supported a monopolistic state system, as have many politicians. Private insurance companies in Michigan have watched the state's efforts to control the Accident Fund with increasing alarm, viewing those efforts as a first step toward creating a state-run monopoly. Indeed, as early as 1983, Michael Shpiece, then deputy director of the Department of Licensing Regulation, urged Department Director Elizabeth Howe to act to contradict "a fear ...of a 'secret plot' to establish a monopolistic state fund...rampant among insurance companies [and] some legislators."
Despite its growing surplus, the Accident Fund is not now large enough to serve as a monopolistic fund. If this course were pursued, the state would have to be willing to use its general assets to back claims. Any effort to convert the fund to a state monopoly would undoubtedly be subject to a lengthy court battle, even if the state wins current lawsuits with the Fund. Still, private insurers are watching the growing market share of the Accident Fund and the Placement Facility, and state efforts to control the Fund, with trepidation.
1. Workers' compensation costs in a state monopoly fund.
A 1981 report by the United Auto Workers inspired support for a monopolistic fund. This study found that Ohio ranked 11th (with 1st being highest) in workers' compensation benefit levels among the 50 states, yet ranked only 39th in costs. Ohio voters rejected by a four-to-one margin a 1981 referendum to allow private insurers to write workers' compensation business in the state. Five other states—Nevada, North Dakota, Washington, West Virginia, and Wyoming—also have monopolistic state funds.
The UAW report in fact offers a very superficial look at the Ohio fund. In states with private insurance systems, insurers are required by law to be actuarially sound—that is, a given year's premiums are expected to be sufficient to pay for the total amount of all claims arising from that year, not simply for the benefits payable in that year. The distinction is crucial, since the nature of workers' compensation leads to particularly long "tails" on claims. Some occupational diseases are not manifested for years, and disability income payments can continue for decades.
The opposite of a system based on actuarially sound rates is a "pay-as-you-go" system, akin to social security, in which current year's receipts pay current year's payable benefits. This does not eliminate the costs of future benefits due from claims incurred in the current year—it simply shifts them to other employers in the future. The evidence strongly suggests that Ohio's state fund is not actuarially sound, but rather is operated at least partially on a pay-as-you-go basis. This fact was not taken into account in the UAW study. A 1977 audit by Booz-Allen concluded that Ohio's fund had a $1.3 billion actuarial deficit, and was not collecting enough to cover claims incurred that year. Booz-Allen recommended a 25 percent rate increase to put the fund on sound financial footing. A 1980 audit by Arthur Anderson again found Ohio's funding insufficient. In 1981, it was Coopers & Lybrand who found the Ohio fund to be inadequately funded.
Ohio's workers' compensation costs seem low only if one pretends that future employers will not have to pay for today's inadequate funding. Given the present uncertainty and fear over the future of social security, it seems doubtful that injured workers would be comforted to know their future benefits were being funded in the same manner.
The definitive work comparing the cost efficiencies of monopolistic state funds and private insurers was written by John Burton. In a 1984 study comparing costs in Ohio, Pennsylvania, and other states, Burton concluded that "differences [in cost] appear to be much more influenced by factors such as relative levels of benefits than by the particular form of insurance arrangement used to provide these benefits."
Burton feels much more strongly about competitive, open rating. "The evidence indicates open competition significantly lowers rates. Open competition had a significant impact on lowering costs in Michigan," he says. Burton also feels Michigan's open competition system is quite efficient, adding "Michigan's benefits-to-cost ratio certainly looks fine. The bottom line is Michigan gets a lot of bang for the buck."
Those who would urge a change to a monopolistic state fund, then, would trade a proven cost-saving mechanism—open competition—for a government mechanism that has not proven itself able to keep true costs below those charged by private insurers.
2. Control of assets in a state monopoly fund.
One issue that must inevitably arise in any proposal to create a state-controlled workers' compensation insurance fund concerns control of its assets and reserves. The most commonly held view is that assets should be held for the benefit of policy holders in the fund, as is the case with a mutual insurance company. In this view, surplus exists to assure the solvency of the fund and to avoid large rate increases following a year of abnormally high losses. Surpluses beyond those needed to support future growth and loss can be returned periodically to policy holders through dividends. Most states with state-controlled funds provide that assets and surplus are to be held for the benefit of fund policy holders. This protection is not only best for the policy holders, but it also helps to keep politics out of fund management, assuring well run, actuarially sound programs.
Inevitably, however, the presence of a large sum of money, at least nominally belonging to the state, will prove a tempting lure for state politicians. Again, we can find an interesting example in the Oregon experience.
Like Michigan in 1982, Oregon's primary industries were riddled by recession, and unemployment rose and state revenues dropped sharply. Unwilling to increase taxes or reduce spending, the Oregon state legislature found an escape in the form of SAIFCO. In 1982, the legislature appropriated $81 million of SAIFCO's surplus for the state's general treasury, a move challenged but eventually upheld in court. Coupled with SAIFCO's decision to write workers' compensation at below-market rates, this appropriation resulted in the inadequate surplus that has caused SAIFCO to increase rates by 50 percent since 1984.
Michigan officials have, from time to time, cast longing eyes on the Accident Fund's surplus. Accident Fund officials have claimed that in 1982 the attorney general offered to cease efforts to gain control over the Fund if Fund officials would turn $25 million of its surplus over to the state's general fund. Judge Stell's 1986 decision temporarily quieted talk of appropriating the Accident Fund's surplus, but if the state gains control of the Fund, this issue is likely to resurface the next time state government faces a budget crisis.
The availability of surpluses for appropriation by the general treasury remains for some a prime attraction of a state-controlled fund. In effect, however, such an appropriation would amount to a discriminatory tax imposed, retrospectively, on employers who bought insurance from the Fund. Further, as the Oregon experience illustrates, the long-term negative effects on rates and availability can quickly offset any temporary gain.
Even if a state fund's surplus and assets could not be spent for other purposes by the state, proponents of a state fund are often attracted by the possibility of state control of the fund's investments. Tax increases enacted by the Blanchard administration have eased Michigan's financial situation, and such talk has quieted. But in the early days of that administration, the Accident Fund surplus was mentioned as a possible source of investment dollars for a variety of public programs.
While this type of political investing is not so threatening as outright state appropriation of funds, it is still inconsistent with the fund's responsibility to manage investments in the best interests of policy holders. It is questionable whether a private insurance company would be allowed to make unsound investments to meet political goals, and the same logic should apply to state insurance funds.
One of the problems with any state-controlled fund, whether competitive or monopolistic, will be the constant pressure to use the fund’s assets for purposes other than benefiting injured workers and employers who buy insurance from the fund. Court decisions in Michigan have temporarily eased this pressure. It is not far-fetched, however, to imagine the issue arising again. While such actions can yield short-term benefits, they violate policy holder’s trust and will tend to increase costs in the long run.