Private Option Would Help Us Out of Worker Comp Mess

Wednesday, October 7, 2009 | 1

By Richard S. Davis

Nobody wanted this. The state Department of Labor and Industries last week announced a proposed 7.6% average increase in workers' compensation premiums for 2010. It's the equivalent of a $117 million tax hike on employment.

As Labor and Industries (L&I) Director Judy Schurke observed, the timing's lousy.

"We have pushed this proposed rate increase down to the lowest possible level," she said, "given the uncertain state of our recovery from this deep recession."

The proposal is well below the 19.4% increase actuaries estimate is needed for the state fund to break even. If nothing changes, the department's contingency reserve would have to make up the $150 million gap. Ideally, the department says, a stronger economy and improvements in claims management will reduce the need to tap reserves.

You can't operate at a loss for long without raising serious sustainability concerns - either another rate hike or a dangerous dip in reserves should the economy backslide before it rebounds.

Unemployment is high and rising. The premium hike makes it more expensive to retain and hire workers, prolonging joblessness.

Most families in the state are affected. Last year, the department insured 171,000 employers providing coverage for 2.6 million workers. (About 375 large employers, representing nearly a third of the state's work force, are self-insured.)

L&I will hold public hearings in October before setting the final rate. It brings to mind the health care town halls, when many voters turned out to oppose the public option - a government-run health plan to compete with private plans. They saw it as a move toward single-payer, with no market alternatives.

President Obama, implausibly, contends the public option will enhance competition. But while he has the policy wrong, he gets the rhetoric right.

"My guiding principle is, and always has been, that consumers do better when there is choice and competition," he told Congress. "That's how the market works."

Exactly. Which is why I suspect that the rate increase here may revive calls for a workers' comp "private option."

Workers' compensation insurance pays for medical care, rehabilitation and replacement of lost wages for injured workers. Washington's one of only four states - along with Ohio, North Dakota, and Wyoming - that operates an exclusive state monopoly, requiring employers to purchase their insurance from the government. About half the remaining states have a state fund - a public option - that competes with private insurers.

In the last decade, two states - Nevada and West Virginia - privatized their state monopolies. In both states, the systems were virtually bankrupt. Our state fund is in better shape financially. There's no crisis now. But we are also among the highest-cost states in the nation. For a time, it's possible to mask high costs by dipping into reserves and hoping for the best. Eventually there comes a reckoning.

Washington ranks second in the nation in benefits paid per covered worker. Multi-state employers routinely say their costs here are among the highest they face. In the coming legislative session, business groups will again promote sensible reforms, like settlement agreements used in 44 other states to speed claims resolution, to align Washington with national norms.

Some groups may also look to inject some choice and competition into our system. Market forces successfully drive innovation in states that have shed the public monopoly.

Nevada's 2000 privatization got the state out of a $2 billion liability, according to the Council of State Governments. Earlier this month, according to Associated Press, the head of the corporate successor to the state monopoly noted that "rates have gone down fairly consistently since the market opened." Competition works.

West Virginia began unwinding its monopoly in 2005. By 2008, the private system cut the state's $3.2 billion unfunded liability by 40%. Last March, the state insurance commissioner reported that "142 carriers are writing coverage . . . treatment of injured workers has improved and rates have been reduced over 30%." Again, competition works.

Rising premiums put jobs at risk. Policy reform is critically important to getting benefit costs under control. But, as experience elsewhere demonstrates, market forces are producing better outcomes for workers and employers. Don't expect the call for choice and competition to disappear anytime soon.

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Richard Davis is a principal with The Simeon Partnership and writes and consults on public policy, economics and politics. He is the president of the Washington Research Council and manages the Washington Alliance for a Competitive Economy, a coalition of state and local business associations and chambers of commerce. He may be reached at   rsdavis@simeonpartners.com
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