Amid Fiscal Pressures, States Move to Privatize Workers Compensation Programs

Several states aiming to get government out of the workers compensation insurance business

Ongoing fiscal pressures are prompting policymakers to pursue a wide variety of government streamlining strategies to cut costs. One of the less visible — but nonetheless intriguing — subcurrents of this streamlining trend involves moves in several states to get government out of the workers compensation insurance business.

For example, last month, Arizona Gov. Jan Brewer signed into law Senate Bill 1045, which sets in motion the privatization of SCF Arizona, the state’s workers compensation fund. The bill requires SCF Arizona to become a mutual insurance company, regulated by state insurance officials, by January 2013. SCF Arizona is the largest workers’ compensation insurance carrier in the state, covering 40,000 state businesses and receiving $191.8 million in direct premiums written last year. SB 1045 passed with strong, bipartisan votes in each chamber (House 37-19, Senate 26-1).

As noted in a recent Insurance Journal article, SCF Arizona was established via legislation in 1925, but for decades it has increasingly evolved into a “hybrid” enterprise that in most ways operates like a private company, yet still has a politically appointed governing board and statutory restrictions on its activities and products.

Leading the charge for privatization was SCF Arizona management itself, which expects SB 1045 to enable the company to broaden its services (previously restricted under state law), stabilize insurance rates and facilitate more responsiveness to its policyholders. As SCF Arizona senior vice president of sales and business development Rick Jones told Insurance Journal, “SCF Arizona policyholders will not notice anything different in their day-to-day dealings with the company,” adding that, “over time, what they will experience is a more diversified company that can better serve their needs in Arizona and elsewhere.”

Similar arguments have been echoed in Colorado and Oklahoma in recent months as well. In Colorado, a 2009 legislative proposal to raid over $500 million from the state-owned workers compensation insurer Pinnacol to keep the state budget afloat prompted the company’s management to offer legislators an alternative solution: a $330 million payment to the state by Pinnacol in return for turning it into a private mutual insurance company. Legislators ultimately failed to act this session, but the issue is almost certain to return in 2011. Similarly, Oklahoma legislators have considered a variety of bills that would have fully or partially privatized CompSource Oklahoma, the state-owned workers comp insurer, though none has yet to pass.

For some policymakers, the rationale for privatization revolves around unfair government competition with the private sector. In all three of the aforementioned states, the state-owned insurers account for over 30 percent of total workers’ compensation policies and compete directly against private insurers that operate under different rules.

For others — including the insurers themselves — the primary arguments for privatizing state workers’ compensation systems is that it would allow the new companies to offer stabilized rates, expand product lines and even expand into other states. Notably, these arguments are all borne out by the evidence from the most recent state workers— compensation fund privatization in West Virginia.

West Virginia Gov. Joseph Manchin signed a law in 2005 fully privatizing the state’s Workers’ Compensation Commission, transforming it into a private insurance carrier, BrickStreet Insurance. Since the completion of the process in 2008, workers’ compensation rates have declined an average of 30 percent statewide, translating to over $150 million in annual employer savings. The initiative also dramatically reduced the outstanding unfunded liabilities of the old state-run system (from $3.2 billion to $1.9 billion in the first two years), the number of protested claims (down 80 percent) and the amount of time required for a ruling on protested claims. Instead of one, state-run monopoly insurance provider, there are now over 140 competitors operating in the state, and BrickStreet — formerly the state monopoly — is now competing for business in other states.

Unlike West Virginia, the state-owned workers’ compensation insurers in Arizona, Colorado and Oklahoma are not monopoly insurers in those states. Rather, these have operated as quasi-public carriers with politically appointed governing boards and different rules than their private-sector competitors, despite being the largest workers— compensation insurers in those states. Still, there seems to be a consistent thread here. Policymakers under the fiscal gun are beginning to ask a serious question: Why is the state holding on to outdated workers’ compensation insurance businesses when there already exists a robust market of private providers?

Successful privatization case studies like that of West Virginia — as well as the forthcoming implementation of SCF Arizona’s privatization — may prompt more states to consider getting government out of the insurance business, both to right-size state government through eliminating non-core activities, as well as to remove unnecessary public-sector competition with the private sector in challenging economic times.

Leonard Gilroy is the Director of Government Reform at Reason Foundation, a nonprofit public policy think tank. This article was originally published on Governing magazine’s Better, Faster, Cheaper blog on June 21, 2010.