Workers’ Compensation: The Case for Prepaid Cards

Situational Analysis

There are over 128 million workers covered by workers' compensation policies within the United States. In 2005, these policies resulted in $55.3 billion paid in benefits and $29.1 billion paid out in cash for wage replacement.¹ Lost wage payments are typically made using a check as the payment vehicle.
There are several challenges associated with the use of checks for these limited frequency payments:

• Late Check Payments
• Stop payment costs
• Rush shipping fees
• Underbanked recipients must pay check cashing fees
• Check issuance expense
• Lost, stolen or fraudulent checks

Opportunity

Many industries have migrated away from issuing paper checks to a more cost-effective alternative - prepaid cards. A recent report from Mercator Advisory Group states that total funds loaded on cards in 2006 came to $197.94 billion. The report also notes the monetary value attached to network branded prepaid cards grew 82.5%, from just over $14 billion in 2005 to $26.75 in 2006. Prepaid cards have proven to be very effective tools in improving the efficiency of a variety of payment processes. Benefits of network branded (MasterCard®, Visa®, Discover®) prepaid cards can be found in other industries seeking efficiency, cost savings and brand recognition.

Examples

Corporate Rebate Programs – Rebate fulfillment companies are in the process of converting millions of paper-based rebates to prepaid card-based rebates. There are more than four hundred million rebates issued every year in the United States.

Consumer-Driven Healthcare - Consumers are using prepaid cards to access their tax-advantaged accounts to pay their healthcare expenses.

Payroll - Corporations are quickly adopting payroll cards to pay unbanked and underbanked employees, effectively eliminating high check-cashing fees for these workers.

With regard to workers compensation claims, Ron Hynes, MasterCard Global Head of Prepaid Products, offers the following: "The short-term, recurring nature of workers' compensation indemnity payments makes MasterCard® prepaid debit cards an ideal solution for the challenges presented by using checks. We have seen other industries greatly enhance their business processes by moving away from checks to prepaid cards. We are excited about a similar migration in workers compensation payments."

Opportunity

Prepaid cards are a logical fit for insurers who are currently issuing more than 1 billion checks per year. If insurers can make payment processes more efficient, they stand to create significant bottom line improvement. Due to the recurring nature of workers' compensation indemnity payments, re-loadable prepaid cards could save insurers as much as $60 per claim. (See the illustration that follows.)

Workers’ Compensation Value Proposition

Efficiency - Using ACH to fund the card will ensure timely processing of each payment while reducing the resources required in the existing check-issuing process.

Cost Savings - Insurer will issue one card at a cost of $10 and eliminate the expense associated with check issuance. There are also potential revenue opportunities tied to the usage of prepaid cards.

Brand -Branded cards with the insurance company's name will be provided to claimants instead of checks. The card will be used many times at the point of sale providing greater visibility for the insurer.

Tracking -Workers' compensation is an area where insurers are at risk with regard to fraud. The ability to track where the cards are used may serve to reduce the time spent researching fraud.

Reducing Theft or Loss – Prepaid cards can be canceled as soon as they are reported stolen or lost.

Illustration

Present Scenario (Checks)

It costs ABC company approximately $7 for each check it issues to workers compensation beneficiaries. ABC processes 10,000 claims per year where the worker is paid for lost time on the job. The average number of payments per claim is 10 and the average value of each payment is $600. In ABC's existing environment, the company spends approximately $700,000 per year to make payment to the beneficiaries in addition to the $60 million in benefits.

Future Scenario (Cards)

ABC has decided to convert from the check-based payment mechanism to a MasterCard branded pre-paid card to make payments to workers compensation beneficiaries. They have decided to make this change in large part due to the savings they will realize as well as the efficiency improvements they will gain. In moving to a pre-paid card, ABC will issue only one card at an expense of $10. This card will be reloaded at the designated payment time as long as the claim is open. If the claim is closed, these payments will immediately cease.

In changing the process, ABC will now send the existing daily file to the issuing bank to ensure that new cards are created and that existing claims are paid on time. The cost for each claim will drop to $10 for the issuance and processing fees tied to the card. This will be a one-time fee that is paid. Based on 10,000 claims, the cost to issue a pre-paid benefits card will be $100,000 compared to the expense to issue checks of $700,000.

Savings

In this example, the shift from checks to prepaid cards resulted in a benefit to the insurer of approximately $600,000 or $60 per claim.

Source for estimates - Ernst and Young 2006 study commissioned by BankFirst.

   

¹ Source: National Academy of Social Insurance