How Privatization Affects Workers’ Compensation Programs

Heading into 2018, many statehouses remain interested in reform of workers' compensation (WC) programs. WC is highly variable between the states, with different payer regulations, benefits limitations and coverage requirements from one jurisdiction to the next. Such variability and decentralization - there are basically 50 separate sets of rules - mean change happens much more frequently than with partially federalized programs such as Supplemental Security Income (SSI) and Medicaid. Privatization has emerged as one solution to curb the costs of workers' compensation on state funds. From West Virginia to Arizona, legislatures and governors have successfully worked in tandem to privatize some WC functions. These privatization efforts have often provided relief to cash-strapped states while shifting some beneficiaries to other payers, including SSI, Medicaid and employer- or marketplace-provided private plans.

What Does WC Privatization Entail?

For a WC program to be privatized, its claims payments must have been partially or wholly administered by the state government in the past. True privatization is only possible in states in which there is a publicly managed fund. As we have discussed in previous entries on this topic, a handful of states run exclusive funds, which are the only permissible payers for their WC claims. Others maintain competitive funds that exist alongside commercial options. Depending on the setup, privatization might entail the allowance of competition or the dismantling of the fund altogether. In most states, the trend for decades has been toward further WC privatization, lower premiums for employers and fewer workplace injuries, according to various reports from ProPublica and the Occupational Safety and Health Administration (OSHA). It is not possible to definitively attribute these results to any one cause, but major WC reforms coupled with elevated regulatory oversight by OSHA have likely contributed to at least some of the mostly positive long-term shifts.

How WC Privatization Has Been Implemented in Specific States

The total scope of relatively recent WC reforms is vast, covering everything from Pennsylvania's limits on benefits based on impairment ratings evaluations (IREs) to California revamping definitions for pre-existing injuries. Many of these adjustments have also included low-key privatization efforts (e.g., entrusting IREs to a specific partner in the private sector). Let's focus instead on higher profile efforts, namely the fund-related and regulatory ones in West Virginia, Arizona and Washington.

West Virginia

During the early 2000s, West Virginia was paying approximately $1 million every day from its central WC fund; it also had a $3 billion unfunded liability for the program, according to the West Virginia MetroNews Network. Reform efforts began in 2004 with a high-level review of the state's claims management. The following year, state legislature passed a bill privatizing WC in West Virginia. The ultimate success of their efforts stemmed from several mismanagement issues that loomed large in the public consciousness:

• The state was awarding more than 1,000 total permanent disability assignments each year, at a six-figure cost apiece.
• Employer premiums were widely seen as excessive, to the tune of millions of extra dollars annually.

Following the overhaul, the state's WC system became much more cost-efficient and appealing to employers. Its effects continue to be felt. In August 2017, West Virginia's Governor projected a $21 million reduction in WC premiums in the coming year. Since privatization became law in 2006, employers have saved $373 million while there has been a cumulative decrease of more than 72 percent in that time, according to Insurance Journal.

Arizona

In 2010, in the wake of a budget crisis, Arizona moved to privatize its workers' compensation system. Prior to reform, the Arizona State Compensation Fund (SCF) had provided coverage to 40,000 Arizona businesses, making it the largest WC payer in the state, according to Business Insurance. The change was touted for its effects on rate stabilization. At the time, state lawmakers also considered the possibility of the SCF becoming a competitive private insurer. It has since successfully rebranded as CopperPoint.

Washington

Privatization bills have been floated a few times by the Washington State Senate. The specific proposals there have included new tests for occupational conditions, reclassification of more workers as contractors (who are generally ineligible for WC benefits) and more independence for self-insured employers from state WC regulations.

The Effects of WC Privatization

Privatization of WC in West Virginia and elsewhere has often resulted in increased competition in their insurance marketplaces and reduced WC-related costs for employers. These can be important benefits for these states, along with the employers and insurers who serve them. A state legislator in Oklahoma stated that high WC premiums had once been the top deterrent to starting a business in the Sooner State. There's no doubt that these efforts can reduce specific costs, particularly the ones shouldered by employers, payers and states for WC premiums claims. However, it's possible for declining WC expenses to be offset or exceeded by expenses distributed elsewhere around the healthcare system. Many patients resort to other payers and options, including SSI and Medicaid, both of which have seen their expenditures grow dramatically in the last few decades. All participants in the WC programs around the country need to consider who will pay for on-the- job injuries if WC funds and plans will not.

Is Privatization the Best Approach?

Consider the vast differences in payouts for specific injuries between states. A lost eyeball might trigger a tenfold higher claim in one state versus another, but it's fundamentally the same injury and it will be expensive to treat no matter where it happens or who ultimately foots the bill. There are high financial and medical stakes for how states administer their WC benefits. Many statehouses currently feel privatization is the best way to balance the numerous political, financial and medical interests that intersect in WC. West Virginia and Arizona offer interesting models for how such privatization can reimagine WC programs for 2018 and beyond. Any revamping of WC should be done with care and consideration for beneficiaries, employers, payers and the public as represented by the government. Trusted partners can make all the difference in whether WC reform implementation is ultimately a net positive for a state.