PRESS RELEASE

January 15, 2004

EFF parries L&I editorial

In an attempt to justify a recent workers' compensation rate increase, the Department of Labor and Industries (L&I) published an editorial accusing the Evergreen Freedom Foundation of spreading "misinformation." Circulating inaccurate information is a charge we take seriously, so we reviewed and re-verified our information. Having done so, we are even more confident that L&I must first eliminate the rampant waste and fraud in the workers' comp system before contemplating rate increases. The state auditor will be weighing in on this debate in mid-February when he releases his statewide accountability audit.

Below is a point-by-point response to L&I's 1/4/04 editorial which ran in the News Tribune (Tacoma).

Foundation is just flat wrong to say L&I system failed
January 4, 2004
by Paul Trause

State L&I needs to clean up its own act, not raise rates
December 23, 2003
by Jason Mercier

1) L&I: "Throughout his column, Mercier accuses L&I of mismanagement, implying that if the system were run better, the need for the rate increase would miraculously go away. In fact, our recent rate increases -- which came after eight years of no rate increases and $400 million in dividends to Washington employers -- were driven by the same economic factors that have caused other public and private insurers to raise theirs."

Response: The same economic factors exist for Oregon. However, in Oregon " . . . business fees used to pay for workers' compensation and workplace safety programs will be reduced next year, in part to reflect administrative cost savings by the agency that manages those programs. At the same time, the Oregon workers' compensation 'pure' premium rate for 2004 will remain flat, marking two years of stable rates after twelve consecutive years of rate reductions -- a national record worth billions in cumulative cost-savings to Oregon employers."

Bottom line: Oregon is facing the same economic conditions, yet they will have no rate increases. Washington had no rate increases for eight years before raising rates the last two years. Oregon has reduced rates for 12 years, and held rates steady the last two years.

2) L&I: "Our careful management of the state fund resulted in $400 million in dividends and some $1.4 billion in avoided premiums. Those numbers are truly significant compared to the $22.7 million that Mercier notes Oregon employers will save next year as a result of not raising its rates in 2004."

Response: In Oregon, "the cumulative cut in workers' compensation insurance costs since 1990 totals 57.4 percent, with resulting savings to employers of approximately $8.8 billion."

Bottom line: While Washington employers will be paying more, Oregon employers will save $22.7 million next year. Oregon employers have saved $8.8 billion since their reductions began.

3) L&I: "Despite two rate increases, Washington's workers' compensation insurance system provides a high level of benefits at a cost that continues to be well below most other states and equal to or lower than our neighbors in Oregon, Idaho, Montana and California."

Response: Washington's rates will be 14% higher than Oregon's in 2004. Since 2002, Washington's rates have increased faster than CA, ID and NV while Oregon's rates have held steady.

Rate changes since 2002: CA (+ 4.2%); ID (+ 3.4%); NV (<- 10.9%>); OR (no change); WA (+ 41.8%)

Idaho even took out a full page ad in the Wall Street Journal on 11/5/03 to compete with neighboring states: "Idaho employers pay some of the lowest workers' comp premiums in the country. In fact, our workers' comp rates for 2003 are 30% less than our 1994 rates. Idaho is open for business."

Bottom line: Despite facing the same economic circumstances as other western states, Washington's rates have increased faster.

4) L&I: "We implemented many of the JLARC recommendations. Some were not implemented because they were either unworkable within the existing state system or because business and organized labor were unable to agree on proposed solutions that would have required approval by the Legislature. Changes to the workers' compensation system usually can't be made in the Legislature unless both business and labor agree to them."

Response: "While the 1998 audit found Washington's [worker comp] system to be efficient, it also found many areas where improvements were needed . . . many important recommendations of the 1998 audit have yet to be implemented. Some of those potential changes are standard practices, and could generate substantial improvements in how L&I manages the system, as well as potential cost savings."

Some of the un-adopted audit recommendations:

• Employer reporting of injuries - Standard practice nationally which facilitates early reporting of claims, improved claims handling, and early return to work.
  
  
• Assign employers to individual claims managers at L&I - Standard practice nationally and could be done to greater extent in Washington.
  
  
• Improve early, three-party communication with employers, physicians, and injured workers - This is standard practice nationally and could be done in Washington.
  
  
• Performance-based referral system for vocational rehabilitation should: Define standards of quality and effectiveness; use measures of satisfaction of workers and employers; include a minimally acceptable threshold for referrals; consider the full range of a providers' activity in serving state-funded cases; be used in making referrals - L&I's system does not include all of the recommended elements and is not actually used to make referrals. The system may also create the wrong incentives.

Bottom line: The fact that business and labor can't agree doesn't mean the right thing shouldn't be done. Audit recommendations should be fully implemented.

In a subsequent JLARC Audit regarding L&I performance on vocational rehabilitation services for injured workers, JLARC found: "L&I has not been in full compliance with a statutory mandate to make referrals based on quality and effectiveness, and L&I does not require these indicators to be used in making referrals." (From JLARC October 22, 2003 minutes)

5) L&I: "Subsequent audits, including one done by the state auditor last year, also gave L&I high marks for its pursuit of fraud."

Response: Some of the "high marks" from the state auditor's last report include:

• Without adequate internal controls over the disbursement of industrial insurance benefits, the Department cannot ensure that benefits are being paid to eligible claimants. This weakness increases the risk that claimants are paid in error or in excess of the amounts to which they are entitled.
  
  
• The Department does not have procedures regarding verification of the number of dependents claimed on the initial application for temporary disability benefits.
  
  
• The Department does not require proof of dependents if the injured worker subsequently receives pension benefits.
  
  
• The Department has not initiated matches between claims data and marriage data. Therefore, it cannot detect when a claimant becomes ineligible due to a remarriage.
  
  
• Without adequate internal controls over cash receipting, the Department cannot ensure that all payments received are deposited.
  
  
• The Department does not perform a daily reconciliation between cash deposited and the records of the day's transactions.
  
  
• Security procedures over access to the employer accounts system are inadequate.
  
  
• The Department entered into eight personal service contracts with medical specialists and incorrectly classified them as client service, rather than personal service. This resulted in violations of the personal service contracting law requiring competitive bidding.

Bottom line: We concluded our oped with: "The bottom line is that many of the state's businesses can not afford L&I's latest rate hike, and they shouldn't have to scrape up the money or fold when the department has clear management problems. Before L&I talks to businesses about raising rates, it should first receive a clean bill of health in its next audit."

We stand by that position. We will soon know whether or not L&I officials have done all they say they have and are operating the department in a manner that warrants a rate increase. In fact, we're so confident of our facts that we will make a wager with L&I. Should the state auditor's report, due out in mid-February, give L&I a clean bill of health (i.e. no findings) we'll concede that they are operating efficiently. On the flip side, should L&I yet again have audit findings, they should back off their rate increase.

L&I has asked for our "constructive solutions." Here are a couple: pass your audits without findings and help advocate employee-owned workers' comp accounts. If workers have a vested interest and own their contributions, fraud can be all but eliminated. These accounts can be modeled after our suggestion for employee-owned unemployment insurance accounts.

Contact: Jason Mercier | Budget Research Analyst | 360.956.3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org