Rate Regulation of Worker's Compensation Insurance: How Price Controls Increaee Cost

This sharp, data-driven study reveals how workers' compensation rate regulation, meant to control costs, can backfire, subsidizing high-risk firms at the expense of low-risk ones and fueling the very medical cost growth it aims to prevent, with Patricia Danzon and Scott Harrington offering essential insight for policymakers and insurers navigating residual markets and labor policy. 

The authors demonstrate how regulation intended to control costs can exacerbate cost growth by subsidizing high-risk activities and firms at the expense of low-risk activities and firms.

In the 1980s and the early 1990s, America's system of workers' compensation insurance was in trouble. As medical costs grew and benefits and compensable injuries expanded, costs of this insurance skyrocketed. In response, the states imposed price controls, but those controls caused unforeseen--and negative--consequences. The authors define the problems, trace the regulatory responses, and analyze the effects of rate regulation.