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Pay a lot, receive very little

State Insurance Fund known for high operating costs and inefficient services

By MARIELLA PEREZ SERRANO of Caribbean Business

June 30, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

In sickness and in health

Commonwealth’s State Insurance Fund turns 70 with over 4,200 employees

It’s that time of the year again, when employers of all sizes—both public and private—throughout Puerto Rico prepare to pay their insurance premiums to the Commonwealth’s State Insurance Fund Corp. (SIF), widely known as El Fondo. This year, SIF turns 70 and, with the July 20 deadline for payment of insurance premiums rapidly approaching, employers on the island are questioning whether the benefits and services received are worth the high costs of SIF’s premiums.

Created in 1935, SIF is an insurance monopoly controlled exclusively by the commonwealth government and is in charge of all compensation and medical services related to injuries in the workplace or caused by occupational hazards. For the past seven decades, SIF has been the sole provider of insurance for employers seeking protection against employees who experienced work-related injuries. It is also the only provider of compensation and medical services to workers seeking to be reinstalled in the workplace.

SIF collects more than $600 million a year in compulsory-insurance premiums from over 100,000 private-sector employers and more than 267 government agencies, public corporations, and municipalities for workers’ insurance policies.

A financially sound public corporation

While many government agencies are struggling with deficits and fiscal crises, SIF is financially well-off. As of June 30, 2004, the public corporation’s financial statements reflected a net income of $177.1 million for the fiscal year and retained earnings of almost $400 million.

In addition, SIF has accumulated over $1.1 billion in investments, all of which are invested outside Puerto Rico by at least six money managers under the supervision of Consultiva Internacional Inc., a local investment-consulting firm.

"SIF is doing well financially, and our portfolio is solid," stated SIF Administrator Salvador Rovira. "SIF has a consulting contract with the local firm Consultiva Internacional Inc. They deal exclusively with our investment portfolio and determine who the money managers will be." SIF’s current money managers include Wellington, Invesco, Credit Suisse, Merrill Lynch, UBS, Stein Roe, and the Government Development Bank.

SIF doesn’t have any local stocks or commonwealth bonds in its investment portfolio. "We don’t take risks in our investments, or at least we try not to make risky investments," Rovira explained to CARIBBEAN BUSINESS.

According to the SIF money-manager’s report, as of June 30, 2004, the public corporation’s investment portfolio market value was $1.2 billion. SIF had a return from these investments of $71 million for fiscal 2004; a return on investment of almost 6% is considered excellent in today’s investment market.

SIF not as efficient with services

While the SIF insurance monopoly is efficient at collecting funds and investing them, it isn’t as successful when it comes to providing the necessary services the public corporation was created to provide, say sources who spoke with CARIBBEAN BUSINESS. Several thousand employees, a high payroll, and poor services have come to symbolize El Fondo in Puerto Rico.

Most of SIF’s $439.3 million operational budget in fiscal 2005 was spent on payroll for 4,316 employees, of which 3,148—or 72%—are described as administrative personnel. Although SIF is restricted by law not to spend more than 22% of its premium revenue on administrative expenses, it managed to spend 34% of its budget on such expenses, according to the reports prepared by Gov. Aníbal Acevedo Vilá’s transition committee. Payroll and related expenses represented almost $300 million, 69% of the fiscal 2004 budget and 72% in fiscal 2005.

The average cost per employee at SIF is $67,000 a year and is expected to increase to $70,000 in the next year, a feat Rovira is proud of. "Our employees are well-compensated; we are arguably one of the best paying governmental agencies," he commented.

"SIF is a government powerhouse with all that characterizes big government agencies: lots of employees, slow service, and high cost," said Pavía Health Inc. Executive Vice President Alfredo E. Völckers.

In 1992, SIF, a component unit of the Commonwealth of Puerto Rico, became a public corporation. The provision of law conceding power to SIF also is known as the Workers’ Compensation Insurance Act. "That provision turned SIF into an exclusive provider of insurance coverage for work-related accidents, deaths, and illnesses suffered by workers in Puerto Rico," Rovira explained.

"SIF has dual functions. It is first and foremost an insurance provider for employers. Secondly, it provides medical assistance to injured or disabled employees who have suffered physical damages due to negligence of the employer and the labor conditions," Rovira pointed out. "An insurance policy from SIF ranges from $75 to over a $1 million a year. The premiums depend on the company’s size, type of labor, risks involved, and number of employees."

Every employer, regardless of what type of business he or she performs, is required by law to pay the insurance coverage. Once a private company, small business, public corporation, or any government agency is covered by SIF, employees are entitled to receive compensation and medical benefits, including medical care at the Industrial Hospital.

The workers’-compensation insurance extends protection only to salaried employees and excludes independent contractors and the self-employed. SIF provides two basic services: medical services to employees and monetary compensation. Medical services include access to the Industrial Hospital and clinics. In addition, SIF also has nine regional offices in San Juan, Ponce, Mayagüez, Carolina, Caguas, Bayamón, Arecibo, and Aguadilla.

Although SIF is supposed to provide employers with a comprehensive insurance policy at a reasonable rate and provide workers with expedited services, SIF documents show the average time it takes for a worker to receive the first payment from SIF is 129 days, which is over four months. It also takes a worker 18 days to obtain the first interview with a SIF case analyst.

If SIF determines a worker is temporarily incapable of returning to the workplace, he or she is entitled to a weekly compensation from SIF that is no higher than $65 per week and not less than $20 a week. The right to this compensation is terminated once SIF determines the employee can return to work. If the employee is permanently incapacitated, he or she will receive a monthly compensation no higher than $150, up to a lifetime maximum benefit of $12,000.

Higher premiums for fewer services

Although premiums collected by SIF have increased from $513.3 million in fiscal 2000 to $629.8 million in fiscal 2004, an increase of over $100 million, payments from compensation were reduced from $169.1 million in 2000 to $131.4 million in 2004. In fiscal 2003, SIF collected $608 million in insurance premiums.

Rovira told CARIBBEAN BUSINESS that in 2004, SIF approved an injured-worker-benefit-compensation increase for an estimated $60 million more in employee benefits. Many employers, however, particularly small businesses, feel they are being financially squeezed by SIF.

"SIF premium is expensive and increases every year," said Völckers. "Government shouldn’t monopolize services; there is nothing wrong with government providing services, but in the case of SIF there is no room for competitiveness, it is a monopoly."

"For Pavía Health and its 830 employees, we pay up to $391,000 in SIF premiums every year," said Völckers. "Yet, there are no more than 45 cases a year of our employees in SIF; most employees are reluctant to go to SIF because they claim the service is poor, slow, and they get paid late," he added.

Bartolomé Gamundi, executive vice president of ElectroBiology, also says SIF isn’t cost-effective. "There are 180 employees at ElectroBiology, and we pay almost $10,000 per employee, of which not even six go to SIF annually," explained Gamundi. "The cost of the premium is excessive. It is based on payroll, among other considerations, and employers have to pay for vacations, nonwork-related sick days, holidays, etc.," he said, adding that employers even have to pay SIF premiums on those bonuses given to employees based on performance or seniority. "Since it is based mainly on payroll, SIF charges for everything," he added.

Yet, Gamundi notes his company already has an excellent comprehensive medical-insurance plan. "Our medical plan covers everything from medical services, to pharmacy, to even a doctor who visits the company once a week. We pay approximately $5,000 a year for our medical insurance, whereas we pay $10,000 for the SIF insurance policy," said Gamundi.

To make matters worse, the vice president of ElectroBiology added, employees are reluctant to go to SIF for services, saying they are inefficient and unreliable. "My employees all want to go back to work; some even hide their illness or injuries for fear of being sent to SIF. Sending an employee to SIF is like a punishment," Gamundi stated. "SIF should retain normative functions, but shouldn’t be the sole provider of services."

A sample of claims submitted by workers and obtained by CARIBBEAN BUSINESS helped shed light on SIF’s inner workings. A case presented July 20, 2004, where an employee claimed SIF took too much time before granting her the first visit, claims she had to wait nine weeks for her initial visit and only received one payment and no treatment. Still in pain and without having received any treatment, SIF gave her a CT scan, a permit to return to work under certain restrictions, such as no overtime, and was subject to case-by-case analysis. She had the CT scan performed a year ago and still hasn’t heard from SIF.

In more recent cases, workers claim SIF medical staff has been rude and the waiting period for treatment or therapy endless. For example, one employee spent a month waiting for the first evaluation; the doctor prescribed painkillers to treat his back pain and recommended he see a therapist. That was in January, and the employee is still waiting for SIF to schedule an appointment with a therapist and remains unable to return to work.

It shouldn’t come as a surprise that the number of claims filed with SIF has been decreasing. In fiscal 2004, there were 68,070 claims filed, down from 74,296 in fiscal 2000. Most of the decline is attributable to the private sector, where the number of claims dropped by 8,263, or 17.1%, from 48,423 in fiscal 2000 to 40,160 in fiscal 2004. During the same period, however, claims from the public sector increased by 2,037, from 25,873 to 27,910.

Referring to the declining number of patients from the private sector, Rovira pointed out that private-sector employees are hesitant to present claims to SIF. "Another factor for the decline in the number of cases coming from the private sector can be attributed to the closing of several private companies over the past four years," he added.

Nevertheless, insurance premiums continue to increase, and some critics contend private-sector premiums subsidize public-sector SIF insurance as a hidden corporate tax.

SIF’s industrial hospital

The Industrial Hospital, located within the Medical Center complex in Río Piedras, began providing services to injured workers in 1967. For fiscal 2004, the SIF overall medical-service program had a budget of $284.4 million. Operational expenses were $274.6 million. SIF’s overall medical services include 2,227 full-time employees, of which 270 are specialized full-time physicians.

This SIF-managed institution provides surgery, health services, hospitalization, and rehabilitation to workers with occupational-hazard illnesses or injuries. The Industrial Hospital operated with a $65 million budget and 680 employees. In addition to the Industrial Hospital, SIF has eight clinics that provide medical services. The Industrial Hospital is expected to undergo renovations at a cost of over $23 million.

"Most hospitals on the island are for acute and critical care, whereas the Industrial Hospital is a specialized hospital. It deals exclusively with labor-related injuries," said Völckers. "Still, the Industrial Hospital refers cases to some private hospitals, which can provide better medical services."

"The Industrial Hospital has 125 beds, divided into seven clinical areas," said Rovira. The areas include clinical medicine, surgery, burn unit, physical and rehabilitation program, acute back-pain unit, trauma unit, and intensive care. The hospital has a full-time staff of 68 physicians, ranging from urologists, internists, radiologists, family-medicine specialists, to psychiatrists and other health-care physicians. It also offers rehabilitation services through the Department of Family.

The SIF medical-services program, including the Industrial Hospital, has a staff of 416 nurses, 136 physical therapists, 38 physical therapists assistants, 16 social workers, 270 doctors, and 1,351 administrative personnel.

Administrative personnel represent 60.7 % of the medical-service program and 86% in the insurance program at SIF. "Parameters for hospital administration establish that per occupied bed there shouldn’t be more that four or five hospital personnel, including physicians and administration," explained Völckers. "For example, Pavía Health has 4.2 employees per occupied hospital bed. There are approximately 160 beds," he added.

Völckers pointed out the number of personnel per occupied bed in a government-run hospital is probably a bit higher than in a private hospital, but shouldn’t be higher than six.

The Industrial Hospital, however, is recognized for having the only burn-treatment unit in Puerto Rico and the Caribbean. "It is the only burn-treatment unit and, although there aren’t significant amounts of burn cases, it is necessary to have the facilities to care for these types of injuries," said Völckers.

SIF’s inner workings

SIF decides if the employee is a beneficiary of its services or not. Employers are required to inform the agency of any change affecting the worker’s insurance, and "send written notification, within 10 days, of any partial or total business transaction, sale, transfer, cessation, or payment concerning their business, company, or agency."

The workers’ insurance-policy premium is prepaid. "Employers pay twice a year," explained Rovira, "on July 20 and then on Jan. 20. Each employer has to present a payroll disclosure form every year in July along with the premium payment."

Premium rates vary according to the number of employees, company payroll, percentage of nonprofessional services, number of claims reported, number of claims awarded compensation, and type of business involved. For example, the higher the risk involved in employee duties, the higher the premium employers must pay.

The Employer’s Census is a government-sponsored census established in 2001 by the Commonwealth to determine and identify the number of employers operating without the SIF workers’-insurance policy in Puerto Rico. Data obtained from the census helped generate 2,348 new workers’-insurance policies, and SIF collected $4.3 million in additional insurance premiums.

Employers rights, responsibilities, and benefits

SIF provides employers with total immunity in any given lawsuit filed against them for illnesses and other injuries related to the workplace. There are exceptions, however, to the employer’s immunity. The Puerto Rico Supreme Court has determined in cases where an employer intentionally has violated a company policy or has discriminated against the employee, there will be no immunity even if the employer has paid the premium.

According to Rovira, employers ignore the benefits the SIF insurance policy offers. It offers employers absolute immunity against any lawsuit an employee can have against the employer, for any given accident, wrongful death, or illness. "Immunity means the employee can’t sue the employer. This represents a great benefit to the employer," explained Rovira. "We spend over $200,000 in public campaigns to educate employers about the benefits we offer them."

Private-sector employees recognize the protection SIF provides against lawsuits. "Puerto Rico has a lawsuit culture, this way our judicial system isn’t clogged with frivolous claims against employers," said Gamundi. "Unfortunately, SIF isn’t providing the necessary medical assistance or compensation that comes with the insurance policy," he added.

"Employers who don’t pay their insurance premiums run the risk of being sued by employees. That is the biggest difference between a state-controlled insurance company and a private one. In state jurisdictions, where insurance funds are privately owned, employers don’t benefit from such immunity," explained Rovira. "Only the government can provide employers with immunity."

Any employee who is allegedly injured has to file a petition or a complaint with the employer. The employer is required by law to notify SIF using the employer report within five days of the alleged workplace injury. The SIF administrator then will decide if the employee is a beneficiary of the insurance. Employers can appeal the SIF administrator’s decision to the Industrial Commission, a quasijudicial commission responsible for upholding and revising SIF public policy regarding accidents in the workplace.

"Each employer has the duty to inform employees about protection through SIF insurance," said Rovira. Employers must keep paying the insurance premium and present SIF with a copy of their payroll. Also, employers need to keep a public record of each employee as well as their age, sex, salary, and type of work performed. Each employer is responsible for providing a detailed classification of the risk involved in performing employee duties, from the most risky to the least.

Challenges of reforming a monopoly

Rovira, who arrived at the SIF from the private sector with over 11 years of experience in health-law consulting, corporate health-law actions, medical-malpractice suits, and the island’s health-law reform cases, faces the challenge of improving SIF’s efficiency and services while luring more employers to pay insurance premiums. "The new administrator has the desire and willingness to reform SIF. Yet, despite his best intentions, SIF can only increase efficiency if it decentralizes and competes with other insurance companies in providing workers’-compensation insurance," stated Völckers. By law, SIF is the only insurance company operating on the island providing protection against labor-related injuries or accidents in the workplace.

According to Völckers, who has spent over 20 years in the business of hospital administration, if SIF outsourced to other hospitals, referred patients to private doctors, and paid for those services, the cost of operating the Industrial Hospital and medical-service program would be greatly reduced. "Why have SIF if there are plenty of health insurances, why not allow those insurance policies to also cover labor-related injuries and allow employers to choose the one that best suits the company’s employees’ needs?" said Völckers.

The head of Pavía Health added that SIF could monitor, create, and evaluate public policy relating to employers and employee relations and work-related accidents and injuries, but allow the private sector to compete to provide the necessary health services.

SIF Administrator Rovira faces the challenge of improving the agency’s image, efficiency, and services, and expediting the employees’ claim process.

NYSIF & CSF: A look at state insurance funds on the U.S. mainland

Unlike the Puerto Rico State Insurance Fund, the insurance funds in the states of New York and California aren’t a monopoly and were created as an alternative for employees seeking workers’-compensation-insurance coverage at competitive rates.

The New York State Insurance Fund (NYSIF) is a nonprofit state agency consisting of two separate funds—the Workers’ Compensation Fund, created in 1914, insuring employers against their employees’ occupational injury and disease, and the Disability Benefits Fund, established in 1949, which insures against disabling off-the-job sickness or injury sustained by employees.

The California State Fund (CSF) also is a nonprofit, public enterprise fund that operates like a mutual-insurance carrier. Created by law in 1914, the same year as the NYSIF, the CFS utilizes unused premiums in excess of operating expenses and claims costs, and necessary surplus is returned in the form of dividends to policyholders. CSF has returned in excess of $4.8 billion to its policyholders since its founding, far and away the largest premium return among carriers.

New York voters approved a referendum, which led to the Workers’ Compensation Act of 1914. Since the employer was to assume the cost of benefits, the Legislature opted for a competitive-insurance system that gave the employer the option of one of three means for obtaining workers’-compensation insurance: through self-insurance, a private-insurance company, or the newly established NYSIF.

NYSIF was created as part of the act to guarantee the availability at all times of workers’-compensation protection at the lowest-possible cost for any employer seeking coverage. The law requires "such premiums in NYSIF shall be fixed at the lowest-possible rates consistent with the maintenance of a solvent fund and of reasonable reserves and surplus."

The law’s purpose was to establish a compulsory method of protecting workers and their dependents from hardship in case of a job-related injury and to ensure they receive reasonable wage-replacement benefits and unlimited medical, hospital, and rehabilitation services to speed their recovery. The law’s intent remains to provide prompt, equitable relief to injured workers and, in return, to protect their employers against catastrophic losses.

The law was spurred by two significant events in U.S. history: the 1909 Wainwright Commission findings, which reported the woefully inadequate and unsatisfactory treatment of injured workers, and the Triangle Shirtwaist factory fire of 1911, one of the deadliest in New York City history.

The laws provide for NYSIF and the New York State Workers’ Compensation Board to arbitrate claims. The New York Compensation Insurance Rating Board sets the rates for all carriers.

From 1996 to 2004, rates were reduced an average of 35% as a result of workers’-compensation reforms passed by the New York State Legislature. Major points of the reform bill, known as the New York State Employment, Safety & Security Act of 1996, include:

  • Repeals Dole v. Dow, a court-imposed standard that permitted New York employers to be sued by manufacturers of injury-causing equipment, except for grave injuries.
  • Creates a "Safety First" mandate, requiring all employers with poor safety records to adopt safety programs or face tough new sanctions.
  • Creates a new workers’-compensation inspector general with broad investigative powers and makes workers’-compensation fraud a felony punishable by jail time.
  • Expands use of managed care to treat workplace injuries.
  • Ensures a faster claims process by reducing excessive paperwork.

Employers benefit from immunity in cases in which employees can’t demonstrate a substantial or grave injury. Employees can’t sue employers in a court of law for regular illness, tort accidents, or any other work-related mishaps unless it is grave. The court will decide on a case-by-case basis.

By statute, NYSIF is allowed to offer discounts and charge differentials over the standard premiums. Approximately 186,000 employers hold NYSIF workers- compensation-insurance policies, constituting about 37% of the market.

NYSIF specializes only in workers’-compensation and disability-benefits insurance. By law, it is required that workers’-compensation premiums offered by NYSIF are fixed at the lowest-possible rates sufficient to maintain solvency. NYSIF is a competitive insurance carrier available to any business with employees in New York State.

NYSIF and CFS provide timely and appropriate indemnity and medical payments to injured workers. Also, it drives down the cost of workers’-compensation insurance for businesses operating in New York and California.

The goal of NYSIF and CSF is to ensure all New York and California businesses have a market for workers’-compensation insurance available to them at a fair price, to maintain a solvent state-insurance fund that is always available for New York and California businesses, and to be a competitive force in the marketplace and an industry leader in price, quality, and service.

NYSIF and CFS are nonprofit agencies of New York and California. Both have been providing services for over 90 years and provide workers’-compensation-insurance coverage at the lowest-possible cost to employers in New York and California. NYSIF and CSF are self-supporting insurance carriers that compete with private insurers in workers’-compensation and disability benefits. NYSIF is the largest provider of workers’-compensation insurance in New York, 37% of all employers opt for NYSIF insurance. NYSIF and CFS have more than $10 billion in assets.

This Caribbean Business article appears courtesy of Casiano Communications.
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