Reform Retro!

To understand how the Retro Scandal happened, it is important to understand what the Retro program is and how it is different from the “Non-Retro” program.

 

It has long been a priority of government to provide employees a safe work place and to protect employers from lawsuits by injured workers.   State law therefore requires that all companies provide Workers Compensation Insurance for each of their employees in case the employee gets injured on the job.

 

There are three Workers Comp insurance options. Each insures about one third of Washington’s three million workers.

 

The first option is Public Workers Comp Insurance Plan.

Since 1911 the State of Washington has operated an insurance company, through the Department of Labor and Industries (L & I), to compensate workers who were injured on the job and to provide appropriate medical care so they can return to work as soon as possible.  In return for this insurance policy, workers gave up their right to sue for unsafe working conditions. The program is supposed to be self supporting with employers paying 75% and employees paying 25%. The intention was that no obligations would be transferred to the tax payers. This option is commonly called the “Non-Retro” option. It can also be thought of as the “Non- Refund” option. This program is slightly larger than the other two programs, making up about 53% of the non-self insured workers who are enrolled in the “State Fund.”  .

 

The second option is Employer Self Insurance

In 1970, the legislature began to allow very large employers, those with assets over $25 million, such as Boeing and the Seattle Times, to “self insure.” If anything happens to the employee on the job, the employer agrees to foot the bill for medical costs and lost wages just as if the employee worked for a normal Workers Comp employer.  There are about 400 self insured companies in Washington State with about 800,000 employees.

 

The third option is a Public-Private partnership called “Retro”

In 1980 the legislature created a third option called the Retrospective Rating program, or Retro. This new option was supposed to be a public private partnership to give employers an incentive to find ways to increase job safety and thus reduce workers compensation claims.  At the time, policy makers believed that private market managers might be more successful than public managers in initiating and administrating worker safety programs. This option has about 47% of workers enrolled in the “State Fund.” 

 

To get into the Retro program, employers join an insurance agency, such as the Building Industries Association of Washington (BIAW), which charges them an administration fee.  They then get back whatever the difference is between what they paid in premiums and what the Department of Labor and Industries (the public insurance company) had to pay out in claims.

 

The incentive is to give employers a rebate equal to the amount of savings –if any - over what the state would have had to pay if the business had been enrolled in the public insurance company. The difference in pay-outs is determined by a “retrospective look” at the claims performance of both the public and the private insurance programs to determine what would have been paid in claims but for the safety programs initiated by the private insurance agencies and their members.

 

An important condition of this new program was rebates were to be set according to how well Retro programs did in comparison to Non-retro programs. Rebates were only supposed to be issued if Retro programs saved money compared to Non-retro programs. The amount of the rebate is determined by the difference in “loss ratio” (or claims divided by premiums) of retro versus Non-retro programs to reflect the return any savings to Retro programs. But in addition, if Retro loss ratios were higher than non-retro programs, they were supposed to have been assessed an additional premium to make up for whatever they extra costs were compared to non-retro programs.

 

There are 57 retro insurance agencies and about 300 additional employers using the retro option without belonging to one of the 57 Retro agencies. BIAW is just one of these 57 retro insurance agencies. But it is the biggest with 30% of all retro premiums, claims and refunds.

 

Unfortunately, private market experiment did not work as expected. Retro did not save money or improve workplace safety. Even worse, the Retro program has suffered from private insurance agencies, such as BIAW, diverting millions of public tax payer dollars to purposes other than what the subsidies were intended for. Retro has also suffered from hundreds of millions of dollars in undeserved “subsidies” being paid out – often more than 40 times greater than the difference between claims and premiums. These overpayments have cost State tax payers more than one billion dollars per year.

 

It has been known since a 1994 Retro to Non-Retro cost comparison study (after 14 years experience with Retro), that that this private option does not save either employers, employees or tax payers any money. However, the Department of Labor and Industries has continued to send hundreds of millions of dollars in “refunds” to private insurance companies based on a formula which supposedly misled them to believe that Retro programs were saving money.

 

In 2005, a second study done by the research staff at the Department of Labor and Industries concluded that long term retro claims costs were higher than non-retro programs. Still the Department of Labor and Industries continued to send out over $100 million dollars a year in tax payer subsidies to retro agencies.

 

Finally, in January 2009, an actuarial firm, Wyman Actuarial, hired by the State legislature to examine the policies of the Department of Labor and Industries, discovered a computer coding error which had artificially inflated the estimate of Non-retro claims since 1994 thus causing over payments to retro programs. The Department of Labor and Industries, the public partner in the Retro program, claimed that this computer error only resulted in $150 million dollars in Retro program over-payments.  In reality, the loss might be closer to a billion dollars. 

 

Then in the summer of 2009, Wyman Actuarial reported that two more practices of the Department of Labor and Industries used to calculate Retro subsidies were “actuarially unsound.”  One, a miscalculation of occupational disease claims resulted in $300 million in Retro over-payments. The other, a 45 month limitation on claims adjustments, resulted in about $50 million dollars in Retro over-payments. Thus, the total over-payments have been more than $500 million dollars.

 

In late September, 2009, the Department of Labor and Industries (L & I) announced it is requiring Retro programs to pay back $30 million of the $500 million. But despite the fact that Retro programs do not save money, L & I plans on giving away another $100 million in Retro subsidies in 2010. To pay for all of these tax payer subsidies to Retro agencies, L & I has proposed an 8 to 10% increase in Workers Compensation rates for all employers and all employees effective January 1, 2010.

 

The failure of the Retro Program is another in a long list of good intentions “gone bad” in spite of the initial noble goals of providing better, more cost-effective claims management and a safer workplace.  The private sector claimed that it could manage better and achieve a better safety record.  And they expected to be compensated for this better, safer management.  

 

But instead the privatization merely led to yet another private fleecing of the tax payers money.

In addition, the problems with direct Retro subsidies (commonly called “refunds” ) the retro program has several other more hidden problems such as gutting the State Contingency Reserve Fund (also tax payer money) to support inflated retro refunds. Combined, there factors have greatly exploded the cost of Retro Refunds during the past 10 years to more than $100 million dollars PER YEAR and have exploded the total tax payer cost of retro programs to more than $1 billion dollars per year.

 

This failed and costly Retro program has been allowed to continue for three reasons:

1.      First, many of the most powerful people in our State get millions of dollars in political kickbacks from Political Action Committees funded by Retro Agencies (this topic is covered in the section “Political Consequences of Retro Corruption”).

2.      Even honest legislators and other community leaders have a hard time understanding the complex and arcane tools of actuarial statistical analysis. For example, the three coding errors listed above caused mis-calculation of what L & I calls a “Performance Adjustment Factor” (PAF) which in turn was used to calculate the amount of refunds due to private insurance companies. The PAF allowed Retro agencies to get “refunds” even when their claims exceeded their premiums by millions of dollars.

3.      Lack of adequate oversight: Too much trust has been placed in the hands of a few “experts” who in turn have hidden much of their calculations from public view.  While there has been many “reviews” and audits of the Retro program, nearly all have simply “rubber stamped” what they were told by the experts. (this topic is covered in the section “The Devil is in the Details.”)

4.      There have been deliberate efforts by the BIAW and other Retro agencies to confuse and mislead the public about the costs and claimed benefits of retro programs.  (This is a topic we will cover next).