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Why Self-Insurance Is the Answer to Our Health Care Mess

Despite its current problems, the U.S. economy is still the envy of the world, largely because it is still more or less governed by an entrepreneurial spirit. The idea that a person with a new idea or a better idea can, as a general principle, succeed through hard work and yes, luck, is still a vital component of what used to be called “The American Dream.”

It’s also in danger of becoming extinct. Thanks to the heavy hand of government and the rapacious nature of the lawsuit brigade, individual initiative is being taxed, regulated and sued – if not out of existence – then into the backseat of the American economy. Big business, in partnership with big government and big law, is attempting to level the playing field among existing actors and push the little guy, the future competitor, out of the way.

Health care reform is one example of that idea in practice. The efforts underway by the Obama White House, by Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi  to force a government-run health insurance system on working Americans will be a job killer. The public option provision requires billions in new tax dollars gathered from fines and assessments on businesses as well as outright federal levies to be funded. And it would allow big business to rid itself of future legacy costs by abandoning its current health insurance programs. Such a move would require them to pay a substantial penalty but, say more than a few analysts, that penalty would likely cost a company less than it would to maintain its current plan.

One real loser in such a move would be the workers, who would then be forced into a public option, government-run program long on waiting time and rationing and short on quality care. Another would be American small business, who would be saddled with the mandate and the expense and, in effect, handed a competitive disadvantage against the bigger companies.
It doesn’t have to be this way. Even now, small business is showing that there are sensible, market-friendly alternatives to government-run plans, even with mandates in place, which represent a better deal for employers and their employees.

Like health care may soon be, most every American employer carries a mandate to purchase workers’ compensation insurance, which they typically do through the traditional insurance market. For employers, despite what the trial bar may allege, such insurance is at the heart of small business because it means employees are taken care of in the event of accidents on the job. Contrary to the odd example that often makes news, an injured worker is an unproductive worker, meaning that is it not just the employee who suffers economic damage when someone is hurt on the job.

In the government-run, government-mandated model, employers are left mostly on the sidelines once they sign the check putting the policy in force. An employer with an injured worker is left out of the equation once an accident occurs, leaving them at the mercy of the insurance company administering the plan, the state – which may or may not investigate – and their attorneys, who may or may not hammer out a settlement in which the employer has little or no say.

In such a system, which already sounds like what the Obama administration is proposing for health care, the affected parties have little to do and, as a result, have little incentive to improve on the system. But there is an alternative, already in place, in certain parts of the country in which small- and medium-sized businesses are banding together into co-ops called self-insured groups, which are proving to be a good deal for employers and employees.

These self-insured groups, in which businesses pay in to a fund that is used to administer the program and to pay out claims, give employers more control, and more responsibility, over what goes on in their warehouses, on their shop floors and in their plants. The process of self-insurance requires, for economic reasons that business owners make safety work for them. By sharing risk, the businesses that participate in the self-insurance process can deliver the benefits mandated by law in ways that help rather than hurt the company’s bottom line. And, unlike the government model, in a way that helps keep costs under control.

In California, where problems with the workers’ compensation system are legendary, recent reforms pushed by Gov. Arnold Schwarzenegger helped reduce costs in the short-run by nearly 60 percent. As soon as the reforms went into effect, however, the trial lawyers and other who benefit financial from the government model immediately started to put pressure on the politicians to start raising the costs again. Rather than buckle to the pressure, State Insurance Commission Steve Poizner, who wants to follow Schwarzenegger into the governor’s mansion, pointed to the self-insurance model as an instructive lesson of ways to make the government program work.
Critics say the self-insurance model is loaded with risk and that workers could suffer as a result. Those who utilize self-insurance disagree.

David Mitchell, who chairs the California Restaurant Mutual Benefit Corporation – the state’s largest self-insurance group – acknowledges the Schwarzenegger reforms were “invaluable.” But what has really made the difference for CRMBC, he says, is that “our employers are more involved.”

“We have reduced claims frequency, fought and won against fraud, helped employees in crisis and developed new technologies,” he says, adding that is makes for a better workplace all around. The government model, by contrast, does not really serve anyone well. Rising costs hurt businesses and that, in turn, hurts workers. The self-insurance model, because it operates based on real risk in which plan participants have an ownership stake, simply makes better sense – which makes it a model, not just for workers’ compensation reform, but for other types of insurance as well.

Peter Roff is a senior fellow at the Institute for Liberty.

 

Peter Roff is a senior fellow at Frontiers of Freedom, a group promoting consumer choice throughout the marketplace.