State prepares to dismantle workers’ comp monopoly

Kiley Russell

Thursday, March 18, 1999 | 5 a.m.

CARSON CITY -- After 86 years of near-total market domination, the state of Nevada is easing its grip on workers compensation insurance coverage - and no one is quite sure what's going to happen next.

Since 1913, most Nevada companies have only been able to purchase their workers' compensation insurance from the State Industrial Insurance System, now called the Employers Insurance Company of Nevada. As of July 1, 1999, the state will open up the market to competition from private companies.

"We don't know what's going to happen because anybody who tells you they can read the future is lying to you. What we can do is, we expect those basic fundamentals of a competitive system to operate," says Senate Commerce and Labor Committee Chairman Randolph Townsend, who has helped manage the transition.

One reason no one is sure what exactly will happen is that no other state has made a similar shift to market competition in over 30 years, Insurance Commissioner Alice Molasky-Arman said.

State governments first mandated workers' compensation in the early 1900s when the industrial revolution was in full swing and people were flocking to factory jobs. As machine production techniques became more widespread, and as increased demand for goods drove increased industrial output, the number of workers injured on the job also began to grow.

To meet the mandates, large companies either paid workers' medical bills out-of-pocket or bought insurance - but smaller companies couldn't foot the bill themselves and so were at the mercy of a sometimes predatory insurance market.

And if a company refused to pay a claim, a worker's only recourse was in the courts.

States soon created non-profit industrial insurance funds to provide stable sources of insurance for any company who paid into the system. Many states, including Nevada, went to a state-only industrial insurance system.

"The history of this issue in this state is that an agreement was made to have insurance for those who were injured in exchange for a prohibition on suing in the state. There was a prohibition on suing your employer in exchange for your employer paying for your insurance," said Townsend, R-Reno.

After that, Nevada's system remained unchanged for 64 years.

"There was a major change in this state in '77, when for the first time employers could leave the state insurance system, known as a one-way system, then we became a two-way state by allowing large employers to self-insure," Townsend said.

Self-insurance rules allow companies to leave the state system to either pool their resources or individually develop their own industrial insurance associations.

Nevada officially becomes a "three-way" system when private insurers begin offering workers' compensation policies in July.

"The most important thing is that the Legislature sets the benefits for all companies. And that changes periodically depending on the will of the Legislature," Townsend said.

That dependence worries many Nevada workers, according to Nevada AFL-CIO lobbyist Danny Thompson, whose organization helped kill three-way insurance reform twice before it finally passed in 1995.

"At the time, our experience with other states was that once you get into three-way there were more problems for workers - it is harder for workers to get claims approved," he said.

"But after self-insurance started in this state I think three-way was a moot issue for us. While we don't oppose three-way now, our concern is benefit levels. In 1993, workers gave up 23% of benefits overall all under the guise of a $2.1 billion deficit," Thompson said.

That deficit was what the industry refers to as an unfunded liability and it nearly destroyed the state system. It was partially the result of the large employers leaving the state system to self-insure.

The unfunded liability is determined by comparing premium income with the amount the system eventually must pay out in benefits to workers who suffer on-the-job injuries.

"There was no adjustment for their leaving as far as price. In other words there was a subsidy going on by large employers for small employers and unfortunately (the state system) did not make an adjustment at that time in order to cover the rest of the employers who were left in the system," Townsend said.

The problems were exacerbated by skyrocketing medical costs in the 1980s and by a rebate given to all policy holders when the state should have been increasing rates instead, according to Townsend.

The financial crisis became so severe that even opponents of "three-way" conceded they had few options but to pass the law. The state system has since recovered financially and is operating with nearly $2 billion in assets.

Once the market is opened, all the players - the self-insured, the state system and private companies - will compete for $440 million a year in premiums paid by employers to private companies, self-insurance associations or the state system.

The state's share of that has amounted to $385 million in premiums for 46,000 employers. The self-insured account for only a small fraction, less than 1,500 companies, said Doug Dirks, chief of the Employers Insurance Company of Nevada.

Nevada's insurance commissioner has cut premiums by 14 percent to pave the way for coming market changes. All companies will initially be required to charge the same lower rates, but price controls will gradually be removed in subsequent years. By 2003 the companies will be allowed to charge whatever the market will bear.

So far, more than 200 companies have signed up with the state to begin selling workers' compensation insurance in July.

"It's the usual suspects who write workers comp in other communities: Travelers, Aetna, Liberty Mutual - all the big guys who write it in other jurisdictions," Townsend said.

And state officials expect these companies to dominate the market.

"If you look at other states - there are 22 in competitive markets similar to what Nevada will be shifting to - typically (the state systems) will write anywhere from one-third to half of the policies," Dirks said. "I'm excited about this next change. But there will be, I fear, a fair amount of confusion because we are changing almost overnight a workers compensation system we've only known since 1913," he added.

Despite the uncertainties, lawmakers and bureaucrats are convinced that the free market should be allowed to operate in Nevada's industrial insurance arena.

"The benefits of competition are not just economic, they are also better service and greater developments of technology. The state system as well as the self-insured will now have strong competition from the private sector. Which means the first two components are going to have to be financially sound and competitive. Their customer service is going to have to improve. And they're going to have to offer better products," Townsend said.

But the AFL-CIO's Thompson is still lukewarm about the idea.

"Given all that, if the Legislature doesn't change the rules, it won't make a difference," Thompson said. "All competition will do is that these people will cut up the premium dollars among the companies and it won't matter."