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 is set up to provide 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 that are monopolistic fund states for the most common insurance fund, workers’ compensation, are North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the U.S. Virgin Islands.

Understanding Monopolistic State Funds

A monopolistic state fund is simply a fund on which the state has a monopoly. States that run monopolistic state funds are known as 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. The purpose of this insurance is to cover employees and their family members if an employee has been injured or sickened on the job. However, in monopolistic states, workers’ compensation policies do not include policies for employers’ liability. To receive employers’ liability coverage, an endorsement amending the policy is attached to a policy of general liability. 

Workers' compensation helps to keep the employee from experiencing a total loss of earnings during the time needed to heal or recover. Additionally, the claim may cover more than just missing income. Other benefits include medical treatments, rehabilitation, and, in some instances, training for a new career.

Each employer located in a state with one of these funds is required to pay into it. For the states that have the option to price out their own workers’ compensation policies, the employers are required to make payments directly to the private companies or to a third-party administrator on behalf of the company. Workers’ compensation is not the same as short-term disability insurance, which has different qualifying events and can sometimes be purchased directly by an employee.

Companies with facilities in more than one state may have to purchase stop-gap insurance products to meet the coverage needs that aren’t covered by the funds in each state they operate in. 

Economics of Monopolistic State Funds

Monopolistic state funds are designed to overcome the problems created by regulating insurance markets in the face of information asymmetries. Economists believe that insurance markets are particularly vulnerable to the problems of moral hazard and adverse selection.

With workers' compensation insurance, for example, in the absence of state regulation and mandates, the problem of adverse selection can occur to an extent that it may prevent a market for such insurance from functioning. Low-risk employers would have an incentive to skip on purchasing such coverage, leaving only high-risk employers in the market.

With only high-risk buyers in the market, private insurers might be unable to profitably serve the market and go bankrupt or decline to sell workers' compensation insurance at all in the first place. Thus, unable to obtain coverage, high-risk employers might leave the state, depriving the local economy of jobs and the state of tax revenue.

To overcome the problem of adverse selection in workers' compensation insurance, most states mandate that all employers purchase workers' compensation coverage. This policy resolves the problem of adverse selection by forcing low-risk employers to purchase workers' compensation insurance that they may not need nor otherwise choose to purchase. This allows insurers to serve the market by pooling risks across high- and low-risk buyers, making it easier for high-risk employers to attract workers and operate in the state.

However, mandating workers' compensation coverage may, in turn, discourage low-risk employers from doing business in that state because it increases their costs. In effect, the mandate forces the low-risk employers to subsidize high-risk employers. Instead of losing high-risk employers, that state might lose low-risk employers, along with the jobs ad tax revenue that they generate.

A monopolistic state fund is intended to overcome this problem by providing workers' compensation coverage through a publicly owned monopoly that can offer below-market rates to all employers. Rather than making low-risk employers subsidize the workers' compensation costs of high-risk employers, the monopolistic state fund can offer subsidized rates to both classes of employers, backed implicitly or explicitly by the general taxpayers.

Special Considerations

North Dakota, Ohio, Washington, and Wyoming, in addition to the U.S. territories of Puerto Rico and the U.S. Virgin Islands, operate monopolistic state funds.

There used to be more monopolistic states, but some states decided to allow additional parties to sell insurance after their funds experienced financial insolvency. These are known as competitive funds and they operate strictly for profit. In 1999, Nevada, which was previously a monopolistic state, began allowing private insurers to sell workers’ compensation insurance to employers. West Virginia stopped being a monopolistic state in 2008.

Texas is the only state that doesn’t require any employer coverage of workers’ compensation by direct mandate. However, Texas law strongly incentives employers to obtain worker's compensation coverage by prohibiting many common legal defenses against personal injury lawsuits by employees of employers who do not subscribe to workers' compensation coverage.

For the remaining states that required workers' compensation, failure to provide coverage can result in consequences ranging from civil penalties to large fines. To determine if an injury or illness is covered by the state workers’ compensation insurance policy, and what the estimated benefit amount would be, visit the United States Department of Labor website.