Recalling the Crisis of 1991

The late 1980s and early 1990s saw an upheaval in workers' compensation with losses rising rapidly. In some states the private sector markets for workers' compensation insurance came close to collapsing. Legislative reforms and redirections in employer and claims payer practices ensued. Even today, the forces unleashed in those years are still making their impact known in our markets.

By Peter Rousmaniere

These changes, as they worked their way through the states, bent the cost curve. Some states experienced a 40 percent reduction in costs. Critics of statutory reforms assert that the worker has born the brunt of these changes.

The year 1991 was perhaps the peak of the crisis. The combined loss ratio in that sector of private insurers reached 123. This means that before investment income was taken into account, these insurers on average were seeing underwriting losses of 23 percent.

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This situation was due not only to rising claims costs but also extensive price controls on premiums. As a result of the controls, insurers exited markets and assigned risk pools swelled. In Maine, before the realization of 1992 reforms, 90 percent of premiums had found their way into the pool.

Oregon was probably the first state to attempt to break the negative momentum. A reform law enacted there in 1990 allowed employers to choose medical providers within certified managed care provider networks. It also mandated worksite safety committees and beefed up standards of medical evidence for litigation. The crisis provoked four broad kinds of changes: smarter employer practices; statutes that tightened claiming and judicial process; managed care both statutory and voluntary; and the risk transfer innovations.

One statistic shows that employers responded. Between 1986 and 1994, the incidence of alternative work assignments to injured workers nationally rose by more than 300 percent.

Legislative reforms were pushed by business coalitions. According to John Burton, a professor emeritus at Rutgers University, over half the states passed major legislation between 1989 and 1997. These changes narrowed the list of compensable injuries and illnesses by proscribing them outright or building evidentiary and procedural hurdles. And they brought into workers' compensation managed care as promoted at the time by health maintenance organizations. The first managed care laws were in fact passed in states with relatively high HMO enrollments: Oregon, Massachusetts and New Hampshire.

The two main kinds of managed care provisions were authorization of utilization review and provider networks that met some standard of care in provider selection.

Through an incremental interleaving of private-sector initiative and legal mandates, other managed care strategies took hold. They included medical bill review, medical treatment guidelines, extensive use of case managers and duration of disability guidelines.

States then undertook to revitalize their insurance markets. They gradually did away with price controls. And a number of them created state-sponsored monoline insurance companies, or competitive state funds. These funds today dominate their in-state market, and some, like Maine's, have expanded into others states.

Self-insurance also grew in the form of deductibles, captives, and self-insurance groups.

The legacy of this crisis of 20 years ago is pervasive.

PETER ROUSMANIERE is an expert on the workers' compensation industry. He can be reached at riskletters@lrp.com.

November 1, 2011

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