State Compensation Insurance Fund (SCIF) is moving to radically reshape its group insurance program by dropping stand-alone safety groups and weeding out trade associations that don’t meet new standards drawn up by the carrier. State Fund’s group programs were at the epicenter of scandals broken by Workers’ Comp Executive. They rocked the quasi-governmental carrier nearly four years ago and prompted an ongoing investigation. State Fund says these changes are part of the evolution of that program. And indeed it appears to be removing questionable practices that allowed the abuses and that nearly everyone criticized.

These are more of the substantial management changes new State Fund CEO Tom Rowe and his team are making.

Over the holidays, State Fund sent a letter to all trade associations and safety groups participating in its group insurance program, warning that new standards will be rolled out beginning January 1, 2012. The decision puts tens of thousands of workers’ comp policies in play as other carriers begin to figure out whether and how to pick up the groups, and if so, which ones.

“State Fund has decided to phase out its Safety Group program…This decision was not based on the performance of the Safety Groups as a whole or individually and simply reflects a change in  our group insurance business model.”
—State Fund letter

While the groups say they were caught off-guard by the letter and the scope of the planned changes, some already have decided that it will not make economic sense for them to reshape their operations to stay in the program. Others won’t even have that option under the rules State Fund is adopting. Trade associations will have the year to come into compliance to remain in the program, but safety groups are out unless they transform themselves into bona fide trade associations as defined by State Fund.

The letter states: “State Fund has decided to phase out its Safety Group program…This decision was not based on the performance of the Safety Groups as a whole or individually and simply reflects a change in our group insurance business model.” State Fund officials confirmed to Workers’ Comp Executive that after the effective date, State Fund will go forward with only trade associations in its group program.

 Nearly One-Third Reduction

Overall, 84 safety groups are in State Fund’s group insurance program. The number of policies has declined to approximately 25,000. Trade association groups number nearly 200 and represent an equal number of policies, says State Fund spokeswoman Jennifer Vargen. How all of these individual policies will be affected is still to be seen.

“Approximately 25,000 policies are currently insured in a safety association. For most of these policies, we do have current trade associations they may choose to participate in. If they don’t wish to participate, or we don’t have a trade association covering a classification, policyholders can be converted into individual policies,” she tells Workers’ Comp Executive. “Our new pricing structure gives us a better ability to offer accounts appropriate pricing, making this a good time to implement this refinement in our group business strategy.”

But employers that do fall out of the groups will lose one of the key benefits of the program — the 6% discount they receive on their workers’ comp coverage. Observers note that a 6% increase on top of State Fund’s regular premium hike will cause serious consideration of the alternatives.

As for the trade associations themselves, Vargen says State Fund expects little change: “We expect the vast majority of the trade associations insured with State Fund now will be eligible under the new requirements.”

Groups Cry Foul

But that’s a far more optimistic viewpoint than that of some of the groups themselves, that things will remain status quo. Some even concede that under the standards elucidated by State Fund, they will be eliminated for noncompliance when their 2012 policies go to renew.

“The way this has been rolled out is pretty harsh. They’re going to lose a lot of associations, aside from safety groups,” says attorney Mark Alcorn, who represents some of the groups. “We think it’s an overreaction. We’re hoping we’ll be able to work with them to come up with something so that everybody comes out better, including State Fund. Some of the groups would very much like to make whatever adjustments they have to make to continue to run the programs — the loss minimization programs and to continue to do this business.”

“This will really impact some of these nonprofits. It’s a hard time for them. They’re voluntary membership organizations by and large, and times being as tight as they are, a lot of employers have dropped their memberships in anything that is voluntary.”
—attorney Mark Alcorn

Whether that will come to pass is still to be seen, as many are still reviewing how the guidelines will affect their participation in the group program. According to the letter that State Fund sent to the groups, trade associations will have to verify in writing that, among other things, they have a physical office and staff, and conduct regular membership meetings. And they will have to prove they are financially viable without participating in State Fund’s group insurance program and have a membership base that extends beyond those members who participate in the group insurance program.

State Fund says that at least 25% of an association’s annual membership dues have to come from non-participants in the group insurance program. Additionally, no more than 75% of the association’s annual revenues can come from the group insurance program.

“This will really impact some of these nonprofits. It’s a hard time for them. They’re voluntary membership organizations by and large, and times being as tight as they are, a lot of employers have dropped their memberships in anything that is voluntary. So financially they’re pressed right now,” says Alcorn. “Some are going to go down; they’re going to collapse. You take $40,000 to $50,000 away, for example, and that will mean they will be officially unable to operate.”

Others who are less vested in the group insurance program say the benefits of participating won’t offset the economic impact of complying with the rules put out by State Fund.

Stanley “Rob” Gustafson, CEO of the Woodwork Institute of California, says that after 30 years in the State Fund group program, his association is likely to drop out next year as a result of the changes. He notes that most of the 56-year-old association’s revenues are tied to other services for their members, and that making the necessary changes for the 45 to 50 firms that take part in the group insurance program would not be economically feasible.

“We weren’t expecting this. There have been a lot of changes over the years, but for the last three years it’s been stable,” he tells Workers’ Comp Executive. “We’re probably going to have to discontinue the program because we don’t meet their requirements. There are three or four items in there that we don’t comply with, and it wouldn’t be worth it economically to do so, like holding an annual meeting. We could do what they’re asking us to do, but it’s not economically sound. It’s not worth it.”

Click here  for a copy of the letter that State Fund sent to its group program members.

(Filed in San Francisco by Brad Cain)