This post was contributed by Paul D. Clouser. While Paul has over 25 years of experience representing clients in workers' compensation matters and employment litigation, Paul is new to McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Lancaster, Pennsylvania.
Employers in Pennsylvania can often benefit from self-insuring their workers' compensation plan, rather than simply opting for carrier based coverage year after year. The advantages of self-insurance include the following:
- Reduced Cost: Self-insured employers bear the costs, but also keep any profits that are normally "built into" traditional insurance premiums. Per claim costs are usually reduced in self-insurance arrangements, as the employer has a direct and vested interest in reducing costs through a "hands-on" approach to managing claims.
- Cash flow: Self-insured employers also appreciate cash flow advantages, as medical bills and wage loss benefits are paid when these items are required to be paid, rather than when the insurance carrier decides that premiums or special assessments are due.
- Ability to select counsel and claims management vendors: Self-insured employers have the freedom to select their own legal representatives, nurse case manager, IME physicians, and investigators, and to reduce the risk of "spin off" ADA, PHRC, FMLA, wrongful discharge or other costly lawsuits that are often not on the radar of carrier-appointed defense counsel.
- Cost control: Self-insured employers are able to control risk and financial exposure through the purchase of specific and aggregate reinsurance. In addition, self-insureds enjoy the benefit of investment income on funds that are set aside to pay claims.
The path to becoming self-insured typically involves a multi-step process including preliminary review, a more detailed feasibility study, a plan implementation phase, and fine tuning or monitoring the program, once it is in place.
Since self-insurance is not a suitable option for all companies, the first step, or preliminary review, should address some very basic questions. What does the company currently spend, on an annual basis, for its workers' compensation coverage? As a general rule of thumb, self-insurance can become cost effective once annual workers' compensation expenditures exceed $500,000. In which states does the company do business? Most states permit self-insurance in the workers' compensation realm, but the requirements and timeline for achieving self-insured status will vary from state to state. What has the loss experience been for the specific business and for the industry in general? Does your business consistently pay out more premiums than it had paid in claims?
Once these initial questions have been addressed, the company can move on to a more detailed feasibility analysis, with respect to possible self-insurance. A capable risk management consultant will typically gather the necessary data, perform the financial and actuarial analysis, and review the specific state requirements to guide the company in its final decision making process. Key to this study will be the decision as to whether day-to-day claims should be handled internally or assigned to a third party administrator. A third party administrator (TPA) arrangement is generally preferable, at least in Pennsylvania, as the workers' compensation statute and regulations are quite complex, with many traps for the unwary. Some newly self-insured employers opt for initial TPA coverage, with the goal of attaining "self-administration" status after several years.
The implementation phase includes obtaining approval from the state to self-insure and meeting any state statutory regulatory requirements. Section 305 of the Pennsylvania Workers' Compensation Act, for instance, provides that an employer desiring to be self-insured must submit an application to the Department of Labor and Industry demonstrating its ability to pay compensation. The application process is now done on the Bureau's new computer platform, WCAIS (Workers' Compensation Automation and Integration System). A business applying for self-insurance must meet 3 basic requirements under the Pennsylvania statute:
1. The company must have been in business for at least three consecutive years;
2. It must provide proof of incorporation or organization under the laws of a state within the United States; and
3. It must have an adequate accident and illness prevention plan.
A $500 application fee is required and the primary focus of the department's review will be on the company's ability to pay claims and its ability to provide security for the ability to pay in the future. The employer seeking self-insurance status must also demonstrate that it has ample facilities and competent personnel to adjust and pay its claims. As noted, the employer may contract with a registered claims service or third party administrator, to provide these services.
An employer wishing to self-insure or a group of employees wishing to pool their liabilities, must "post a bond or other security, including letters of credit drawn on commercial banks with a Thompson Bank Watch rating of B/C or better or a Thompson Bank Watch score of 2.5 or better for the bank or its holding company or with a CD rating of BBB or better under "Standard and Poor's." Pennsylvania Workers' Compensation Act, Section 305(a)(3).
Finally, once implemented, the employer will need to "fine-tune" or monitor its self-insurance program, to make sure that the expected cost savings are realized and that the program is running smoothly. Regular quarterly meetings between the employer, TPA, legal counsel, broker, and nurse case manager are an important step toward transparency and keeping the program "on track." The company and its TPA must have an accurate system for tracking claims and monitoring losses, in addition to allocating costs to the appropriate company subsidiaries or departments. Regular auditing and actuarial reserve analysis will be necessary to ensure that there are no unknown financial liabilities lurking beneath the surface and to give the excess carrier the requisite assurance that the program is running smoothly.
Despite the effort needed to establish and monitor a self-insurance workers' compensation program, our clients routinely report that the process is well worth it. Controlling ones' own destiny is frequently mentioned as the key reason why others may wish to chart a similar course.
If you have any questions regarding this article or workers compensation liabilities in general, please contact Paul Clouser or Denise Elliott in our Lancaster Office.