Monopolistic State Fund What it Means How it Works
Monopolistic State Fund: What it Means, How it Works
What Is a Monopolistic State Fund?
A monopolistic state fund is a government-owned and operated fund that provides insurance coverage in specified states and territories. Employers must purchase coverage from the state fund and no private parties may compete for the business. The states monopolistic fund states for workers’ compensation insurance are North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the U.S. Virgin Islands.
Key Takeaways
– A monopolistic state fund is a government-owned and operated fund that provides insurance coverage in specified states and territories.
– Each employer located in a state with one of these funds must purchase coverage from the state fund, with no private parties able to compete for the business.
– The most common kind of monopolistic state fund is workers’ compensation insurance.
– Monopolistic state funds compensate for problems in workers’ compensation insurance markets created by state mandates.
– There are four monopolistic states remaining in the U.S.—North Dakota, Ohio, Wyoming, and Washington.
Understanding Monopolistic State Funds
A monopolistic state fund is simply a government-owned fund. States that run monopolistic state funds are monopolistic states. In these states, private insurance companies are not allowed to sell competing funds.
Workers’ compensation insurance is the most common type of state fund. It covers employees and their families if an employee is injured or sickened on the job. However, in monopolistic states, workers’ compensation policies do not include employers’ liability coverage. Employers must attach an endorsement amending the policy to a policy of general liability to receive this coverage.
Workers’ compensation helps employees recover lost income, as well as cover medical treatments, rehabilitation, and training for a new career.
Each employer located in a state with one of these funds is required to contribute to it. For states that allow pricing out of their own workers’ compensation policies, employers must make payments directly to private companies or third-party administrators. Workers’ compensation is different from short-term disability insurance, which has different qualifying events and can sometimes be purchased directly by an employee.
Companies with facilities in multiple states may need stop-gap insurance products to meet coverage needs not covered by state funds.
Monopolistic state funds are not bound by the procedures of the National Council on Compensation Insurance.
Economics of Monopolistic State Funds
Monopolistic state funds overcome problems in insurance markets caused by information asymmetries. Insurance markets are vulnerable to moral hazard and adverse selection.
For example, without state regulation and mandates, adverse selection may prevent a market for workers’ compensation insurance from functioning. Low-risk employers may skip purchasing coverage, leaving only high-risk employers in the market.
Private insurers might be unable to serve the market with only high-risk buyers, leading to bankruptcy or a refusal to sell workers’ compensation insurance. This, in turn, may cause high-risk employers to leave the state, impacting the local economy and tax revenue.
To address adverse selection, most states mandate that all employers purchase workers’ compensation coverage. This forces low-risk employers to purchase coverage, allowing insurers to pool risks and making it easier for high-risk employers to operate in the state.
However, mandating workers’ compensation coverage may discourage low-risk employers from doing business in the state due to increased costs. Instead of losing high-risk employers, the state may lose low-risk employers along with the jobs and tax revenue they generate.
A monopolistic state fund provides workers’ compensation coverage through a publicly owned monopoly. It offers below-market rates to all employers, without making low-risk employers subsidize high-risk employers. The fund is backed implicitly or explicitly by taxpayers.
Special Considerations
North Dakota, Ohio, Washington, and Wyoming, along with Puerto Rico and the U.S. Virgin Islands, operate monopolistic state funds.
Some states, previously monopolistic, now allow additional parties to sell insurance after their funds experienced financial insolvency. These are competitive funds operating for profit. Nevada became a competitive fund state in 1999, while West Virginia ceased being a monopolistic state in 2008.
Texas is the only state that doesn’t directly mandate employer coverage of workers’ compensation. However, Texas law strongly incentivizes employers to obtain workers’ compensation coverage by limiting legal defenses against personal injury lawsuits from employees of uninsured employers.
Failure to provide workers’ compensation coverage in states that require it can result in civil penalties and large fines. To determine coverage and estimated benefit amounts, visit the United States Department of Labor website.
