What is the Rationale for an Insurance Coverage Mandate? Evidence from Workers’ Compensation Insurance

There is ongoing policy debate about whether government insurance coverage mandates are necessary to effectively address market failures in private insurance markets. This paper investigates market failure rationale for coverage mandates in the setting of workers' compensation insurance. Workers’ compensation is a state-regulated insurance program that provides employees with income and medical benefits in the event of work-related injuries or illnesses. Historically, nearly all states have mandated workers’ compensation insurance coverage, with the exception of Texas. Recently, lawmakers in several states have begun to re-evaluate their workers’ compensation coverage mandates and consider systems based on the Texas model. These recent legislative actions have revived the ongoing debate about whether workers’ compensation insurance should be mandated.

The debate over coverage mandates in workers' compensation raises several unanswered questions. What would be the prevalence of workers' compensation take-up in the absence of government mandated coverage, and how responsive is take-up of workers' compensation to the price of coverage? What are the potential rationale for workers' compensation coverage mandates or hypothetical other alternative interventions such as subsidies? Despite the importance of these questions to the emerging policy debate over workers' compensation coverage mandates, evidence on the determinants of the demand for workers' compensation coverage and the rationale for coverage mandates is extremely scarce. In this paper, we empirically examine the demand for workers' compensation coverage within the context of the voluntary Texas Workers' Compensation system, with the aim of providing evidence on these questions.

Using unique administrative data on workers' compensation coverage, we exploit variation in insurance premiums resulting from regulatory updates to analyze the demand for workers' compensation insurance. Like other state workers' compensation systems, the workers compensation system in Texas is heavily regulated by the state, both in terms of the form of polices and the premiums insurers can charge. In particular, the structure of relative premiums is set by the government. We utilize idiosyncratic regulatory updates to these relative premiums in a differences-in-differences framework to estimate demand. Exploiting this variation, our baseline demand estimates suggest that a 10% increase in the premium results in a 3% decline in coverage.

Motivated by the ubiquity of coverage mandates in the setting of workers compensation insurance, we then investigate various potential rationale for government intervention to increase coverage (through mandates and/or subsidies) in this market. We employ administrative cost data to investigate the degree of selection in this market leveraging the premium variation used to estimate demand. Our estimates suggest no adverse selection is present in this setting, indicating that adverse selection is not a motivation for mandating coverage in this market. Further, we explore alternative rationale for a mandate such as market power and externalities.