This article challenges the standard story of the insurance crisis that led to the near-collapse and major reform of a number of states’ workers’ compensation programs in the 1980s and 1990s.
In the prevailing account, insurance costs rose due to expanding costs of benefits for injured workers’, much of which was blamed on wasteful or abusive "moral hazard" by workers and their lawyers and doctors. Because state regulators had substantial power to control insurance rates, this account claims governments tried to suppress prices in the face of rising benefit costs in a misguided attempt to avoid political trade-offs between labor and business. But this attempted "intervention" in the market failed eventually, as private insurance companies withdrew their business, pushing mandatory workers’ compensation coverage into "residual market" systems. Finally, looming deficits in semi-public residual markets (or public insurance funds) and the decline of private insurance suppliers forced states to accept the discipline of market price, which they did by cutting benefits (and access to benefits) for workers, and deregulating insurance rates. This story of "rate suppression and benefit reform offers a now-classic critique of government regulation and social welfare spending, rationalizing a system of retrenchment of labor and welfare programs due to "economic reality."
But a close examination of insurance regulation and its reform in Maine, singled out as the "poster child" for this story of insurance price suppression, reveals the opposite lesson. In this view, rising insurance costs resulted from what could be understood as "insurer moral hazard": wasteful and abusive practices by an insurance industry largely insulated from meaningful oversight and competition. Residual market structures in particularly were structured to produce short term gains at the expense of the long run viability of the system for both employers and workers. What solved Maine’s insurance cost crisis was not primarily benefit reform – reducing worker "moral hazard" -- but instead was the development of dramatically different insurance structures that solved some (but not all) of the problems of insurer moral hazard. Benefits to workers could be substantially expanded without burdening employers if insurance was better designed and regulated.
Employee Rights and Employment Policy Journal
Martha T. McCluskey,
Insurer Moral Hazard in the Workers' Compensation Crisis: Reforming Cost Inflation, Not Rate Suppression,
Emp. Rts. & Emp. Pol'y J.
Available at: https://digitalcommons.law.buffalo.edu/journal_articles/533