Benjamin W. Veghte, Vice President for Policy, National Academy of Social Insurance
Alexandra L. Bradley, Health Policy Analyst, National Academy of Social Insurance
As states work on the development of new paid family and medical leave systems, they face critical design choices with respect to system architecture, funding, and administration. With regard to system architecture, the main choices are between a social insurance approach and an employer mandate, although there are gradations between the two. In a social insurance approach, risk and resources are pooled broadly across virtually all workers in a state. In an employer mandate system, employers are required to offer insurance to their workers but can either self-insure, purchase insurance from a private carrier, or participate in a state fund, if one exists in their state.
Most state programs currently in place, and most programs in advanced economies around the world, have been structured as social insurance programs. In the U.S., this includes Rhode Island, California, and New Jersey, as well as the enacted but not yet implemented programs in the District of Columbia and Washington state. In social insurance programs, virtually all employees and/or their employers contribute a fixed percentage of wages to a dedicated state-wide fund. To maximize risk pooling, social-insurance paid leave programs are typically community rated, not experience rated. This means that all workers are treated similarly and are not subject to cost variations based upon age, gender, geographic location, or any other demographic factor that might predict the likelihood of requiring/taking family or medical leave.
In employer-mandate systems, employers who self-insure or purchase insurance from a private carrier have costs/premiums that are experience rated. This means that the level of premiums varies across employers based on the actual or projected claims experience of their employees. Employers who self-insure have the purest form of experience rating, because they pay all benefit costs directly. For employers who purchase insurance from a private carrier, premiums are tailored to the risk profile of each firm’s employees, or to the claims experience of the employer in the prior year.
Employer experience rating makes sense in Workers’ Compensation or Unemployment Insurance programs, because in these programs, experience rating gives the employer an incentive to manage its own costs by improving workplace safety and return to work (in the case of Workers’ Compensation) or strengthening employee retention (in the case of Unemployment Insurance). For paid medical leave, one could argue that a modest degree of experience rating could incentivize employers to offer modified work to employees with medical restrictions, thereby bringing some of them back to work earlier, both reducing the employer’s indemnity and improving the worker’s employment and medical outcomes. Applying employer experience-rating to paid family leave makes no sense whatsoever, though. Moreover, in neither case does the employer contribute to the causation of leave. “Punishing” the employer for an employee’s need for non-work related disability or family leave is unfair to the employer.
Most concerning is that experience rating paid leave insurance would incentivize hiring discrimination against any worker who an employer might perceive to be more likely to require medical leave or take family leave, e.g. young women, workers with disabilities, or older workers. Such workers could drive up premiums in an employer-mandate system, and some employers might take this into consideration when making hiring decisions.
For historical reasons, New York’s paid leave system is a hybrid between social insurance and an employer mandate. New York’s legacy paid medical leave (temporary disability insurance) system, dating from the 1940s, was based on an employer mandate for temporary disability insurance coverage, but the state also had a public social insurance fund which employers could take part in if they preferred it to purchasing private coverage. Employers also had the option to self-insure. Both the private insurance option and self-insurance were highly regulated, however, with strong enforcement provisions. When New York added paid family leave to its temporary disability insurance program in 2016, effective 2018, it built on the legacy system architecture or an employer mandate with highly regulated private options. But it also included some additional elements to encourage greater risk pooling, moving the system closer to a social insurance model. It set its paid family leave premiums through community rating, meaning premiums do not vary across employers based on the risk profile of its employees, and it gave the state’s regulatory authorities the discretionary power to apply a risk-adjustment mechanism, which pools risk across insurers by loss ratio (the ratio of claims paid to premiums collected).
One policy consideration that must be weighed is whether or not to allow employers, or employees, to opt out of a paid leave program. A pure social insurance approach would not allow opt outs of any kind, thereby achieving maximum risk and resource pooling. The state of Rhode Island, for example, covers all workers under the same, state-run program, and there is no possibility to opt out. Pooling risk across an entire state’s workforce allows the higher costs caused by those who need to take longer periods of leave—e.g., an individual undergoing treatment for cancer, parent caring for a newborn child, or person caring for a parent recovering from a heart attack—to be offset by the lower costs of those who need to take little or no leave in a given year. In general, the larger the risk pool, the more predictable and stable the premiums can be. In a larger risk pool, there is less uncertainty about the rate at which the insured event will transpire, so premiums are likely to be lower. When opt-outs are allowed, then employers who opt out experience variation in their benefit costs (if self-insured) or premiums (if they purchase from a private carrier) based on the risk profile of their employees. This makes their costs less predictable, and creates an incentive for hiring discrimination based on the perceived likelihood that a potential hire will require/take leave.
A social insurance system that allows employer opt-outs faces risks of greater costs unless it has a strong regulatory apparatus and limits opt-outs to a minimal level, as in the cases of New Jersey and particularly California. A state allowing employer opt-outs can experience higher premiums or benefit costs in their state fund if the employers opting out are “selecting against” the fund. “Selecting against” the fund occurs when these employers have employees that are, on average, less likely to take temporary disability and/or family leave. Moreover, if a system allows opt-outs, strong regulations and enforcement are required to make sure that employers who self-insure have sufficient assets to cover costs, and that employers opting out provide private insurance coverage of equal or better quality than the state fund to their workers.
Without strong protections, employees in a system with employer opt-outs or an employer mandate face greater challenges in access and equity than in a fully state-run program. Claiming paid leave benefits from one’s employer—which could potentially drive up their insurance costs—can incur stigma, particularly for workers with hard-to-observe medical conditions. In cases where an employer chooses to self-insure, workers may be required to provide sensitive medical information directly to their employer and supervisors—something many employees may be reticent to do. Employers who opt out of the system, particularly those who self-insure, have stronger incentives to engage in discrimination or intimidation tactics towards employees in need of paid family and medical leave—particularly with regards to low-wage, part-time, or otherwise vulnerable employees, who are often seen as more interchangeable. Moreover, even if a state adopts a strong appeals process, it may not meet the needs of vulnerable workers who lack the time or resources to endure an appeals process Furthermore, both employers and for-profit insurers have an incentive to interpret eligibility criteria restrictively. Removing the employer or the employer’s for-profit insurer from decisions about the existence and duration of disability avoids this problem. Even when employers do not discriminate, there may be a disproportionate economic impact of mandating employer self-financing of paid family and medical leave where the labor force is comprised primarily of women of childbearing age or older workers who are more likely to need temporary disability leave, or when above-average leave costs arise for other unpredictable, unexpected reasons.
Still another consideration, particularly in a social insurance structure funded exclusively by employees, is whether or not to include an employee opt-out provision. This would allow any worker to opt out of contributing, thus rendering themselves ineligible for benefits. Such a provision would likely lead to a strong adverse selection among workers. Those who plan to become parents and those who have reason to anticipate either a personal or family health care crisis requiring paid time away from the workplace to receive or provide care would have a stronger incentive to participate than those who are at a lower self-perceived risk to need to take family or medical leave. As a result, the proportion of workers paying into the system would be smaller, and their costs would be higher, raising contribution levels for those who do participate. Meanwhile, those who opt out of the program would be exposed to risk in the event of an unanticipated personal or family health need.
As states move forward with designing programs to protect workers who need time off to care for a family or personal health-related need, policymakers will need to weigh the pros and cons of a variety of different design options. Social insurance programs pool risk across a large group of individuals and/or employers, making the coverage of that risk as efficient and affordable as possible. For states adopting a social insurance approach, one of those considerations is whether or not, and if so to what extent, to allow employers or employees to provide coverage for their employees by either self-insuring or purchasing a private plan. While on the surface such an opportunity might appear to relieve some of the burden on the state government by shifting administration to the employer or private insurance company, such coverage will also require keen monitoring and evaluation to ensure that all employees are receiving adequate, sufficient access to leave that is compliant with the standards of the law. Decoupling administration for a state-run system also places employees at an increased risk for discrimination, intimidation, retaliation, or flat-out denial of a request from their employer. A universal state-run program removes the risk of such harmful effects on employees and streamlines administration for greater overall cost efficiency.