Monday, January 23, 2012

Why should we care about a privatization proposal for another workers’ compensation fund?

The idea of privatizing workers’ compensation state funds comes and goes regularly. West Virginia’s state fund (BrickStreet), and Nevada’s state fund (Employers Insurance Company of Nevada, Inc. or simply Employers), are recent examples of this trend. In Colorado, Pinnacol, the state workers’ compensation fund is the latest subject of a privatization proposal.

Pinnacol is a competitive state fund. Most state funds are “competitive” but North Dakota, Ohio, Washington, and Wyoming operate as “exclusive” (monopolistic) state funds. All Canadian workers’ compensation systems are similar to this latter group. Pinnacol has 55,000 employer/policy holders, covers about a million workers (57 percent of the market), and is the “insurer of last resort” in Colorado. Pinnacol is the fourth largest of the 25 state funds in the U.S.

At present, Pinnacol is a state entity. The proposal is for Pinnacol to separate from the state and become a “mutual insurance holding company”. The proposal was submitted to the governor in November with the support of Pinnacol’s board of directors and CEO. Under the plan, Pinnacol would be owned by its policyholders (the employers who pay the premiums) although it could be demutualized and become a shareholder-owned and traded corporation at some point in the future.

The advantages for Pinnacol include autonomy from government, the potential to expand market beyond the borders of Colorado, and (suggested) improved value to policyholders. For government, the positives include the creation of a taxpaying entity, a 40 percent stake in the new company, and dividends the state could use as much needed revenue. Denver Post blogger Tim Hoover has gone so far as to say that failing to privatize Pinnacol would be a costly mistake.
Reaction to the proposal is not all positive. A report in the Denver Business Journal suggests many businesses are reluctant to back the plan. According to the Northern Colorado Business Report, one obvious concern is over rates. Privatizing would change Pinnacol’s tax-free status and this alone could put upward pressure on rates.

I strongly believe every state has the right to determine what’s best for its own jurisdiction. There are many examples of well-performing private insurers, competitive state funds, Canadian workers’ compensation boards, and exclusive state funds that deliver excellent value to both workers and employers. That said I have seen no compelling study that shows private provision of workers’ compensation insurance delivers lower employer cost or better results for workers, than existing Canadian workers’ compensation boards or U.S. exclusive state funds, particularly over the long run. The one good study on the topic found a slight advantage in terms of employer cost when provided by exclusive funds (but because of data limitations, the study’s authors concluded there was no clear difference between exclusive and private provision).

Privatization is a one-way solution. While I can recall Hawaii (1996) and Maine (1993) creating new workers’ compensation state funds (HEMIC and MEMIC) in private workers’ compensation markets, I can’t recall any private insurers being bought out or taken over by a state (on an ongoing basis). The drivers in one jurisdiction may signal “coming attractions” for another.

Privatization is often proposed as a quick fix for what are usually more fundamental issues. Access to insurance, competitive rates (often related to funded status and sustainability), cost control, and improved service top the list of drivers behind many proposals to change models. Every workers’ compensation insurer — private, public, competitive or other model — needs to keep an eye on its performance on these important dimensions.

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