Underwhelming oversight leaves workers’ compensation in bind

Nevada's long tradition of marginal regulatory oversight generates compelling news stories any time there's a hepatitis C outbreak, rash of construction deaths, or a billion-dollar mortgage company bustout.

But by the time tragedy has struck, it's too late to do the state's hapless residents much good.

That's what intrigues me about the rumors rattling around the state's self-insured workers' compensation system, which is technically regulated by the Division of Insurance and Department of Industrial Relations. Providing workers' compensation insurance is mandatory, and years ago it was underwritten by the state. Now companies pool their interests and resources and are self-insured.

When Nevada's economic engine was roaring, those self-insured pools were nearly ideal: effective and affordable.

But what will become of them now that businesses are going bankrupt, the state's finances are bleeding out, and the economy has pancaked? The question isn't easy to answer. As usual, Nevada doesn't lead the nation in regulatory oversight in this area. State law requires self-insurance groups to undergo a compliance audit once every five years. In fat times, that was probably plenty.

"Look how things have changed in the last two years," local attorney Al Marquis says. "Absolutely five years is way too long a time."

In New York, nine self-insured workers' compensation groups have failed since 2006, according to Entrepreneur magazine, forcing the state's oversight board to infuse $66 million to keep the system afloat while it chases the remaining employers for their obligations.

What most employees and, I'm guessing, many employers don't understand is, if some businesses in a self-insured group falter, the healthy businesses could be called upon to pick up the slack. That's happening in New York.

In Minnesota and elsewhere, self-insured groups are the subject of workers' compensation fraud investigations after audits uncovered manipulations. The problems weren't visible to the casual observer; it took an audit to reveal the trouble.

Following the failures in New York, the California Assembly ordered a report on the state's self-insured groups. In a state with a self-insurance system far more regulated than the one in Nevada, the California study developed important findings and recommendations that might save our state some multimillion-dollar headaches.

While they have many benefits, "Self insurance groups also have the potential to drive up costs and disrupt the delivery of benefits when poorly managed," the report says. "At the least, the members or former members of an underfunded group may be exposed to unexpected costs to make up for the shortage. At worst, the responsibility for payment of a failed group's obligations may be shifted to employers who were not connected with the failed group, and benefits to injured workers may be interrupted and delayed during the collapse of the group."

Among the study's recommendations was preventing program administrators from doubling as claims administrators, and requiring groups to fund their reserves at a higher level.

Adding forensic auditors and requiring minimum qualifications for group administrators are among other recommendations. Group administrators, the report states, should be responsible for the performance of the group. And it also recommended expanding the pool of funds groups must set aside to pay claims.

Meanwhile, in Nevada, state employees are being asked to take salary reductions and cut back on their hours. There's no likelihood our Legislature will either authorize an in-depth study of Nevada's self-insured groups, or adopt the recommendations of our better-regulated neighbor.

"The overriding concern here is not to have the same thing that happened in New York happen here," says Las Vegan Dave Johnson of Self-Insured Solutions, a company that underwrites employer workers' compensation group coverage in California. "We don't want to do business here as a self-insured group administrator with the lax standards that we have."

Will the lack of institutional oversight come back to haunt us one day?

If the economy recovers steadily, Nevada might stroll past another trap made more possible by our lack of regulatory oversight.

But if our self-insured groups start to fail in the near future, at least you will have been warned. After all, those injured workers won't go without treatment; They'll probably end up in the emergency room at our cash-strapped University Medical Center.

One final question:

Should the state's self insurance program break down and employer groups falter, who will be on the hook to pay all those long-term workers' compensation claims?

I'll bet you already know the answer to that one.

John L. Smith's column appears Sunday, Tuesday, Wednesday and Friday. E-mail him at Smith@reviewjournal.com or call (702) 383-0295. He also blogs at lvrj.com/blogs/smith.