A Review of the South Carolina Second Injury Fund
March 2007

Members of the General Assembly requested an audit of the South Carolina Second Injury Fund (SIF). The requesters wanted to know if the fund is meeting its goals and whether it should be continued. They also wanted to know whether the SIF has handled claims efficiently and in compliance with the law.

The Second Injury Fund is a component of the workers’ compensation system. The fund seeks to protect employers from potential higher costs of insurance they could incur by employing an individual with a prior disability. State law requires the SIF to reimburse employers or their insurance carriers for workers’ compensation benefits paid for an employee who has an injury that is substantially greater because of the employee’s prior disability. The SIF is funded by an annual assessment paid by insurance carriers and self-insured employers. The SIF’s goals are to advance the hiring and retention of disabled employees and protect employers from increased workers’ compensation costs. We found that the Second Injury Fund is not needed and should be phased out. Our findings are summarized below.

Advancement of the Disabled

We found no evidence that the Second Injury Fund has an effect on promoting the hiring and retention of the disabled.

• Most claims to the SIF have been based on “unknown conditions,” in which the injured employee did not know that he had a previous disability. Unknown conditions cannot have an effect on employers’ hiring decisions.
• Since 1990, the Americans with Disabilities Act (ADA) has protected potential employees and prohibits employers from questioning potential employees about their disabilities or previous injuries. At least 75% of employees in South Carolina are covered by the ADA.
• Arthritis is the most common disability for which the SIF provides reimbursement, cited in 80% of claims over the past three years. Arthritis is also widespread in the population, reported by 21% of adults. It seems likely that the SIF is paying for claims for arthritis that were not related to hiring decisions.
• We found no evidence that the majority of employers are aware of the SIF and its potential benefits.

Effects on Workers’ Compensation Costs

We found that the Second Injury Fund does not protect employers from increased workers’ compensation costs. The SIF primarily redistributes or shifts costs within the workers’ compensation system and does not lower the overall costs of workers’ compensation. Because of the SIF, the overall costs of workers’ compensation are somewhat higher than if there were no SIF. Individual employers may have their costs reduced or increased because of the SIF.

• For larger employers who purchase insurance and have experience ratings, SIF reimbursements should lower their costs directly. However, some claims are accepted for reimbursement long after the injury occurred, and employers’ rates are not adjusted because the adjustment period has expired. Also, there are inadequate controls to ensure that insurers adjust their estimates of claim costs and report these adjustments correctly to allow employers to obtain premium reductions.
• Smaller employers and those who belong to self-insurance pools, which account for the majority of claims, do not receive direct benefits from SIF reimbursements. SIF reimbursements lower their overall losses, which in turn lower overall insurance rates. However, increases in SIF reimbursements increase the assessments that employers pay to fund the SIF; lower rates are offset by increased assessments.
• There are 181 individual self-insured companies, accounting for 10% of claims, for which SIF reimbursements are direct revenues and assessments are a direct cost.

Cost Effects of SIF Phase Out

Although there would be a short-term increase in workers’ compensation costs, phasing out the SIF would yield long-term savings.

• As there are fewer SIF claims, employers have to pay those losses and overall losses would increase, leading to increased rates. Costs will increase in the beginning because employers must continue to pay assessments for claims already in the system until they are paid in full.
• The phasing out of the SIF would provide savings through the gradual elimination of administrative costs. These include the SIF’s costs of operation, which average $1.6 million annually, and costs to handle SIF claims. Recovery agencies charge fees ranging from 7% to 15% of reimbursements to assist in identifying and submitting claims to the SIF. We estimated that S.C. insurance carriers and self-insurers spent from $7 – $11 million in FY 05-06 for fees to recovery agencies.
• Insurance department and other insurance industry officials stated that claims would cost less if there were no SIF to reimburse claim payments. Insurers and employers do not have as much incentive to minimize the amount paid on a claim if most of the payments are being made by the SIF.

Other States’ Funds

Our review of other states’ second injury funds did not identify any reason that the SIF should be continued. We identified 24 active second injury funds in other states and found that other states have been phasing out their second injury funds. We also identified some significant differences between S.C.’s Second Injury Fund and funds in other states. If the SIF is continued, it should be changed to reduce its size and scope.

Claims Handling

Our review of the SIF’s claims management did not identify problems. We reviewed a random sample of 100 accepted and 25 denied claims and concluded that the SIF has adequate internal controls for processing claims. Also, we found no material problems with how the claims in our sample were handled.

Evidence indicates the SIF is efficient in claims handling. Compared to states with similar funds, the SIF processes claims more quickly and at a lower average cost.