Spillover effects of increased health insurance enrollment on workers’ compensation insurance

• Date: 01 March 2020
• Published date: 01 March 2020
• Author: E. Tice Sirmans,Cassandra R. Cole,Courtney B. Baggett,George Crowley
• DOI: http://doi.org/10.1111/rmir.12142

Risk Manag Insur Rev. 2020;23:53–74. wileyonlinelibrary.com/journal/rmir

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Received: 10 September 2019

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Accepted: 2 March 2020

DOI: 10.1111/rmir.12142

FEATURE ARTICLE

Spillover effects of increased health insurance

enrollment on workers’compensation

insurance

Courtney B. Baggett

1

|Cassandra R. Cole

2

|George Crowley

3

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E. Tice Sirmans

4

1

Department of Risk Management and Data

Analytics, Sorrell College of Business, Troy

University, Troy, Alabama

2

Department of Risk Management/

Insurance, Real Estate, and Legal Studies,

College of Business, Florida State

University, Tallahassee, Florida

3

Department of Economics and Finance,

Sorrell College of Business, Troy University,

Troy, Alabama

4

Department of Finance, Insurance, and

Law, College of Business, Illinois State

University, Normal, Illinois

Correspondence

E. Tice Sirmans, Department of Finance,

Insurance, and Law, College of Business,

Illinois State University, Normal,

IL 61790‐5500.

Email: etsirma@illinoisstate.edu

Abstract

The Patient Protection and Affordable Care Act

(ACA) was designed to increase the accessibility

and affordability of health insurance. While the

ACA did not contain direct provisions related to

workers’compensation (WC), because health‐

related coverage is a significant portion of WC

costs, the ACA could have unintentionally im-

pacted the WC market. Specifically, expanded

health insurance enrollment could reduce WC

losses and result in higher performance among

insurers participating in the WC market. Using

insurer‐state level data, we consider the impact of

increased health insurance enrollment on the

performance of property‐casualty (PC) insurers.

Utilizing multiple measures of performance, we

find that the post‐ACA period is generally asso-

ciated with greater profitability for PC insurers

operating in the WC market, a positive unintended

consequence of this federal regulation.

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© 2020 The American Risk and Insurance Association

Abbreviations: ACA, Patient Protection and Affordable Care Act; PC, property‐casualty; ROA, return on assets; ROE,

return on equity; WC, workers’compensation.

1|INTRODUCTION

Workers’compensation (WC) laws require nearly all employers to provide coverage to em-

ployees for work‐related injuries. This includes coverage for medical care and indemnity for

both lost wages and permanent disability. Like other lines of insurance in the United States, WC

is primarily regulated at the state level, with most state laws having been enacted in the early

1900s. Nonfederal employers can obtain coverage from private insurers or state funds, and

under certain circumstances, firms can also elect to self‐insure. Though there is substantial

variation in the regulatory environments across states, WC insurance covers the full cost of

medical treatment and typically two‐thirds of employees’gross wages.

1

Due to the mandatory nature of coverage, the number of jobs covered by WC has grown over

the years to more than 138 million (McLaren, Baldwin, & Boden, 2018). In addition, WC

insurance is a substantial portion of business for property‐casualty (PC) insurers, with com-

panies writing more than $40 billion in WC premiums during 2018. This accounts for ap-

proximately 7% of total net premiums written by PC insurers, making it the fourth largest line of

insurance (NCCI, 2019). Additionally, WC insurance has proved profitable for insurers, yielding

underwriting gains for the past five successive years (NCCI, 2019). In 2018, the combined ratio

of the PC industry, across all lines of business, was 104%, while the same measure for the WC

line was 83%, making it the lowest combined ratio across all lines of PC insurance and the

lowest WC combined ratio since the 1930s (NCCI, 2019).

Even though WC is written by PC insurers, there exists an interconnection between WC and

health insurance, particularly through group health plans (Kantor & Fishback, 1996). As such,

legislation intended to address health insurance markets may result in a spillover effect into WC

markets. Signed into law on March 23, 2010, the Patient Protection and Affordable Care Act

(ACA) is one of the most significant and widespread laws impacting health care and health

insurance markets in the history of the United States. The main objective of the ACA was to

increase the availability of affordable health insurance coverage to key populations of unin-

sureds. Evidence suggests that the ACA was successful, as the number of uninsured persons

dropped from 48.6 million in 2010 to 30.4 million in 2018 (Cohen, Terlizzi, & Martinez, 2019).

The reduction in the uninsured rate via expanded enrollments could have spillover effects into

the WC market in several ways. The ACA included a focus on overall wellness and preventive

care. A larger number of Americans having access to these services could lead to a generally

healthier population.

2

Additionally, an increase in access to health insurance may reduce in-

appropriate WC claims from those that previously had no other channel through which to

receive medical treatment (e.g., Heaton, 2012; Jones, 2013; Jacobs, 2014). Furthermore, spillover

effects are likely to exist given that parallel payment regimes between WC and group health

insurance are common (Fomenko & Gruber, 2017) and the phenomenon of certain types of

insurance being used as substitutes for others has been previously established (Fortin &

Lanoie, 1992).

3

1

To review the evolution of the WC market, see Gabel et al. (1999).

2

The medical care component of WC coverage is substantial, with approximately 60% of total expenditures arising from

medical costs (Arnautovic, Lipton, & Robertson, 2017). Additionally, because of its focus on overall wellness, the ACA

could have reduced the negative impact that comorbidities (e.g., obesity, smoking) have on the cost of treating

occupational injuries and diseases (Eaton, 2010).

3

These unintended consequences could result from changes in uninsured rates, claims shifting among providers, or

changes in claimant behavior.

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BAGGETT ET AL.