Illinois lawmakers pass legislation to create state-based workers’ compensation insurance company
House Bill 2622 would create a state-run workers’ compensation insurance company using a $10M loan from the Illinois Workers’ Compensation Commission Operations Fund.
A bill mandating the creation of a public workers’ compensation insurance company to compete with private insurers was sent to Gov. Bruce Rauner’s desk after having been passed by the Illinois General Assembly on May 26.
House Bill 2622 authorizes the creation of the Illinois Employers Mutual Insurance Company, or IEMIC, using a $10 million loan from the Illinois Workers’ Compensation Commission Operations Fund. This fund is financed through state-imposed fees on insurance carriers and self-insured employers. The bill requires the IEMIC to repay the loan in full, with interest, within five years of the company’s creation, and does not authorize additional state funding outside of this initial start-up loan. Under the legislation, the governor, with Senate approval, appoints the IEMIC’s board, which then hires the company’s CEO.
This push for more government interference in the workers’ compensation insurance market is politics parading as reform.
Amid the state’s ongoing budget stalemate, Democrats in the General Assembly tout the bill as proof of their willingness to compromise on business-friendly reforms. However, the legislation offers the wrong solution to rein in Illinois’ sky-high workers’ compensation costs and fails to address the system’s real cost drivers, such as failure to tie the medical fee schedule to Medicare or private insurance reimbursement rates, overly generous minimum and maximum wage replacement rates, and financial incentives for physicians to overprescribe.
Illinois already has a highly competitive workers’ compensation insurance market
Proponents claim a state-based, nonprofit workers’ compensation agency would make costs more affordable. Indeed, the trial bar and its political allies have insinuated Illinois insurers are colluding to drive up prices in order to reap excess profits. The solution to that problem, Democrats allege, is a nonprofit workers’ compensation company.
But there’s no evidence to suggest such cartel-like collusion – which would violate the principle of federal antitrust law – exists in Illinois’ workers’ compensation insurance industry. In fact, Illinois’ insurance market has high competition and low profit rates.
Illinois has 332 insurance companies writing workers’ compensation insurance – more than any other state, according to a 2016 “Workers’ Compensation Insurance Oversight Report” by Illinois’ Department of Insurance, or DOI. It’s implausible to assume those 300-plus companies are scheming together to inflate costs. That’s because a competitive market provides companies incentives to lower prices to undercut competitors and grow their own market shares. The fact that prices are not falling suggests that insurance companies have no more room to lower prices given Illinois’ regulatory climate.
What’s more, the profit rate for workers’ compensation insurers in Illinois is unusually low. Illinois’ highly competitive market seems to actually drive down providers’ profit margins. In fact, Illinois insurers had a profit rate below the national average for each year from 2010-2014, according to the most recent DOI data. Illinois insurers’ average annual profit rate over that five-year period was 2.7 percent – much lower than the 7.1 percent national average.
Despite a lack of evidence, the trial bar perpetuates the collusion myth because its members profit off the current system. And politicians promote this myth for political leverage.
Government interference in workers’ compensation insurance markets could create more problems, and fails to remedy what ails the system
The idea of inserting government into the workers’ compensation insurance market isn’t a new one, but such systems do not necessarily benefit purchasers of insurance.
For instance, Ohio has a state-operated workers’ compensation company, and it engaged in six and a half years of litigation before reaching a $420 million settlement in 2014 over allegations it provided artificially low prices to group employers while inflating premiums for non-group employers. Although Ohio’s system differs from that proposed in HB 2622, this case underscores that more government interference in the private sector introduces opportunity for corruption.
Illinois’ proposed government interference in the workers’ compensation insurance market addresses a made-up problem, while letting the system’s actual issues, such as failure to tie the medical fee schedule to Medicare or private insurance reimbursement rates, overly generous minimum and maximum wage replacement rates, and financial incentives for doctors to overprescribe, fester. And if created, IEMIC could have undesirable effects in historically corruption-plagued Illinois, such as sweetheart deals for favored businesses.
Illinois businesses are hit with the highest workers’ compensation costs in the region, and among the highest in the nation. But that’s because costs per claim hover above those of other states – not because of collusion.
Businesses won’t wait around for Illinois to fix its broken system: Manufacturing employers are already leaving for lower-cost states, and job-seeking residents are following the work across state borders.
Gov. Rauner should veto HB 2622 and demand real reform that tackles known cost drivers. Blindly blaming alleged insurance profiteering only sidetracks substantive changes necessary to lower costs and make Illinois more competitive for businesses and workers.