Germani - Government Insurance

Question 1

What area the reasons for Government Involvement in Insurance

FCC(ES)

Answer 1

• Filling Needs unmet by private insurance. Coverage not offered
• When Insurance is Compulsory. Goverment requires insurance, but not offered by private insurance.
• Convenience: Goverment may already of structures in place to provide insurance
• Efficiency: eliminates agent commissions -> lower expenses -> lower price.
• Social Purposes: private market is motivated by profit at expense of social purposes (think medicare)

Question 2

What are the 3 levels of Goverment Participation in Insurance?

Answer 2

• Sole Provider: Goverment is only provide, such as Social Security
• Partnership with Private Insurance: Think National Flood Insurance Program
• Competition with Private Insurance: WC competitive state funds in some states

Question 3

What are the criteria for evaluating government insurance programs?

W/I SEAN

Answer 3

• is the program one of WELFARE or INSURANCE
• does it achieve SOCIAL purposes
• is it EFFICIENT
• is it ACCEPTED by the public
• is it NECESSARY

Question 4

What are the characteristics of a social welfare system?

How is different from insurance?

Answer 4

• payments are based on need not on reimbursement for covered losses
• funding is through taxation not policyholder premiums

Need based, not covered event. Taxation no premium

Question 5

What are the social costs to unemployment insurance and a potential solution??

Answer 5

social cost:
- lengthens period of unemployment
solution:
- reduce benefits to encourage return to full-paid work

Question 6

What are 3 Federal WC Insurance Programs?

Answer 6

• Black Lung Benefit Act (BLBA)
• Federal Employee Compensation Act (FECA)
• Longshore and Harbor WC Act

Question 7

What is the Black Lung Benefit Act, why is it needed, & how is it funded?

Answer 7

• WHAT: Provides wage replacement & medical benefits to totally disabled coal-miners (for black lung disease)
• WHY: Since Coal miners change employment regularly it is difficult to assign responsibility to a particular employer or state
• FUNDED: federal excise tax on coal miner operators, but can also borrow from government

note that federal compensation is reduced by amount of state compensation

Question 8

What is the Federal Employee Compensation Act (FECA), why is it needed, & how is it funded?

Answer 8

• The Act is the exclusive remedy for federal civilian employees who suffer occupational
• provides compensation benefits to non-military, federal employees for disability due to personal injury sustained while in the performance of duty and for employment-related disease.
• Since it is designed as non-adversial system, costs are reduced.

Question 9

What is the Longshore and Harbor WC Act?

Answer 9

• for workers (other than seamen) injured on/near navigable waters
• it was created because it wasn’t always clear which state’s WC program would apply
• considered EFFECTIVE: fills a coverage gap (& reduces benefits if state funds are available)

Question 10

How does Multi Peril Crop Insurance work?

Answer 10

Multiple Peril Crop Insurance policies are a public-private partnership:

• Private insurers market, write, and service crop insurance policies
• Federal Risk Management Agency (RMA) sets rates for policies and acts a reinsurer to private insurers
• Federal government reimburses private insurers for expenses and insurers can ceded losses back to government
• Private insurers must sell coverage to any farmer at the federally set rates
• Hail is not a part of the federal program so some private insurers offer crop hail insurance to farmers

Question 11

How does the Federal Multi-Crop Program encourage participation and reduce adverse selection?

Answer 11

• Prevent Adverse: A farmer must elect to purchase multi-peril coverage prior to planting.
• Prevent Adverse: If purchasing coverage for a crop, must insure all fields growing that crop in county.
• Lower Costs: Premiums paid by farmers are subsidized by the federal government to reduce the cost to farmers and encourage participation
• Disaster Relief: if choose to forego crop insurance are not eligible for payments for crop loss from federal disaster relief programs

Question 12

What are the pros of the Multi-Crop Program?

Answer 12

• provides stability to an important sector of the economy
• Would be potentially be more expensive or worst case inaccessible due to the risk catastrophic losses
• A higher participation in the program provides better protection to farmers and may reduce requests for disaster assistance, but it also increases costs to
  taxpayers.

Question 13

What are some arguments against the Federal Crop Insurance Program

Answer 13

• It encourages over-production
  
  • Change: Could Limit Coverage
• It encourages farming in marginal or risky areas
• Private insurers make money while government (taxpayers) subsidize the losses
  
  • shift balance of loss-sharing more towards private insurers (to relieve taxpayer burden)

Question 14

What are the two coverages for crop insurance?

Answer 14

Low Yields - Protection if crop yields are low (below a certain baseline)

Low Price - Protection against low prices for crops (below a certain baseline)

Question 15

What are the 3 levels of state participation in WC?

and their features

Answer 15

PARTNERSHIP: state defines benefits, but private insurers write policies
* more choice for consumer, but still assured of minimum statutory benefits

COMPETITIVE STATE FUND: state competes with private insurers
* state funds provide a stable source of coverage & competition can help keep costs of private WC down

EXCLUSIVE STATE FUND: state is sole provider, no private WC is permitted

• no advertising or agent commissions means lower cost → pass savings to consumer

Note the overlap with 3 levels of goverment participation in insurance

Question 16

Why were/are WC State Funds created in the first place?

Answer 16

• Creating of WC Coverage and employers would go out of business if couldn’t provide coverage
• If premiums were excessive then companies would have to reduce hiring and/or go out of business (affecting state economny)
  
  • Premiums could soar due to inelasticity of demand

Question 17

If there are State Funds for WC, why are residual markets needed?

Answer 17

• Not all states operate a state fund and if insurance is compulsory states need to offer opportunity for coverage
• Not all of the state funds are an “insurer of last resort”, which means coverage can still denied in the private market.

Thus residual market functions as the “insurer of last resort”

Question 18

What are the types of WC residual market structures?

Answer 18

Similar to Personal lines auto strucutre

• state assigns applicants to carriers based on WC market share (insurers then service policies as if they were voluntary)
  
  • Essentially this ARP
• state uses a reinsurance pool (profits & losses are shared among all insurers in proportion to voluntary market share)
  
  • Similar to reinsurance facility
• state authorizes a JUA or Joint Underwriting Association (profits & losses are shared among all insurers in proportion to voluntary market share)

Question 19

What are the advantages of state funds?

Answer 19

• lower cost for consumers (no advertising or commissions for state funds)
• provides coverage for high-risk customers (if insurance is mandatory, government should ensure coverage is available by being an insurer of last resort)

Question 20

What are the disadvantages of state funds?

Answer 20

• private markets are more innovative (and private competition drives prices down)
• private markets can operate efficiently (about half of states don’t have state funds so state funds may not be needed to fill unmet needs)

Question 21

How do Worker’s Compensation and Medicare interact?

In principle

Answer 21

Long story short WC is primary and Medicare is secondary

This reduces the cost to Medicare and the government would want that.

Question 22

What have been the issues with WC and Medicare interaction?

Answer 22

• When Congress enacted medicare in 1965 they said WC is primary and medicare is secondary.

However:
* It was easy for WC insurers to shift the cost burden back to Medicare when the injured worker turned 65…..they simply didn’t tell Medicare.

Question 23

What have been actions the government has taken to fix the WC and Medicare interaction?

Answer 23

• In 1989 governement introduces MSA’s (Medicare Set-Aside Allocations)
  
  • These funds are set up to pay for medical for injuries before medicare eligibility and act as primary.
  • However, Medicare often didn’t know about them and often be stuck as the primary.
• In 2001 Medicare said you must file the MSA (see criteria) for approval with the CMS (Center for Medicare Services)
  
  • Medicare can refuse payment for any future medical care if the MSA is not approved.

Increased costs to get MSA approved. See criteria for filing

Question 24

What is the current criteria for needing to report MSA with the CMS

Answer 24

All workers compensation claims will be reviewed by CMS where:

• The claimant is a Medicare beneficiary and the settlement > $25,000

OR

• The claimant will be Medicare eligible within 30 months of settlement and the settlement > $250,000

Note: The CMS thresholds do not create a safe-harbor, so even smaller medical settlements should consider Medicare’s interests.

CMS can reject or revise MSA proposals (rating age, etc.)

Question 25

What are the requirements of the injured worker to ensure medical payments?

Answer 25

Claimants must agree to pay their workers compensation related medical bills, using an interest-bearing account, and to complete reporting of their payments before Medicare will make any payments for claim-related conditions.

Short version: Reporting of payments and interest bearing account