Tuesday, November 10, 2015

Wildrose proposal to private WCB lacks evidence

This weekend is Alberta’s Wildrose Party’s policy convention. One of the proposals from the Innisfail-Sylvan Lake constituency is to have the government consider privatizing the Workers’ Compensation Board (WCB).

Now there are lots of things that need change at the WCB. For example, I heard last week that the WCB recently amended its contracts with occupational medicine physicians to preclude them from offering opinions on occupational disease to workers.

Workers use these opinions to gain compensation for occupational diseases. The WCB using its economic influence to deny workers access to Alberta specialists means the workers must look out of province (or out of country) if they want compensation—a very expensive proposition for injured workers who have no income. If this is true, it is pretty douche-y.

But back to the Rosies. Wildrose members will be voting on a proposal asking the Government of Alberta to:
59. ... Investigate the feasibility and manner in which the current Workers Compensation Board (WCB) system can be opened-up to become a transparent and competitive system with the cost and service benefits such a system could deliver in the provision of this vitally important protection of Alberta’s workers.


The WCB is a monopoly provider of on-the-job accident insurance for many working Albertans. And like all monopolies, it is vastly inefficient, insensitive to its clients - both workers and employers. Removing the monopoly and creating a market for the provision of the mandated coverage would create the much-needed competition and the efficiencies, service and accountability to the employers and employees (and Albertans as a whole) free markets deliver.
Now, to be clear, the WCB is sometimes pretty tough for workers to deal with. The question, though, is the degree to which eliminating the public monopoly would address these concerns. Borrowing liberally from my 2010 book on workplace injuries, let’s look at the simplest claim in the Rosies’ rationale: privatizing the WCB would drive down costs (i.e., create efficiencies).

What precisely is meant by ‘privatization’ varies and can mean one or a mixture of the following:
  1. for-profit insurance companies competing with a non-profit WCB, 
  2. for-profit companies assuming total responsibility for providing insurance within (or without) guidelines established by the state, 
  3. for-profit companies providing insurance but a WCB remains as the insurer of last resort (for those companies no insurance company will take on). 
These approaches form the mainstay of American workers’ compensation systems, in which private companies manage claims, while government determines such matters as eligibility for compensation, benefit levels and provides the processes for appeals.

The basic argument underlying the cost savings rationale is that competition incentivizes private providers to reduce costs. It is useful to first look at this argument from a theoretical perspective. Assume publicly provided workers’ compensation systems have administrative costs of approximately 15%. This means that a private-sector company operating even 10% more efficiently than a public-sector WCB would only see a cost savings of 1.5%.

Private-sector companies, however, must also generate a profit for their investors, something that is sure to negate some or all of the efficiency gains that are assumed to come with privatization. To avoid increasing rates in order to make a profit (and thus invalidating the key argument for privatization—that it will be cheaper), insurers will need to find some other way to reduce costs.

Private insurance companies may try to get employers to reduce accident rates by increasing premiums for unsafe employers. More likely, though, is that private insurers will turn to decreasing benefit levels, reducing the duration of claims, or shifting costs to other programs, such as the health care, the welfare systems, or the workers’ families. These approaches create the appearance that private insurance is less expensive, but in fact represent a cost transfer from industry to workers and the state.

An interesting question is who chooses the insurer in a privatized system with multiple potential carriers. It seems safe to assume that, in choosing an insurer, workers and employers would pursue their own interests.

Furthermore, it appears fair to assert that the adjudication of claims is complex enough that each insurer must exercise some discretion in accepting and managing claims. Thus, if the employer selects the insurer, the employer would likely seek the insurer with the lowest premiums. Low premiums most likely mean the insurer is shifting costs to the injured worker or the government.

By the same token, if the worker selects the insurer, the worker will likely seek the insurer with the most generous track record. This would increase employer costs and thus undermines the purpose of privatization—saving money.

It is also possible that the complexity of the tasks performed by a workers’ compensation system may render the regulation of privatization by the state so complex as to minimize or even eliminate the projected cost savings.

So what does the research about the US systems say?

Terry Thomason compared the experience of per employee assessment of workers’ compensation in Canada and US between 1961 and 1989. Overall, the difference was small (between $2 and $50 per employee) with no particular pattern to the difference. This conclusion finds support in subsequent research which indicates that the costs of publicly provided workers’ compensation are not higher, and may even be lower, than privately provided workers’ compensation. This suggests that privatization does not result in cost savings.

Thomason also notes that, despite similar overall costs, Canadian programs offer more generous benefits and more extensive coverage than the American system. An earlier study by Thomason also indicates that American workers’ compensation systems result in much more litigation, and that administrative costs are twice as high.

A third study in New York State found that claim management by private insurers, and in particular the cost of disputing claims, appears to reflect economic considerations, rather than genuine concern over causation and disability. Furthermore, certain claims were more likely to be disputed and/or adjusted by private insurers in this system.

These more disputed claims included claims by non-English speakers, younger workers (whose greater life expectancy yields higher claim costs), and workers claiming occupational disease or internal injury. This also held true where the claim value was small, and not as likely to be pursued by the worker via litigation.

A further problem with privatization is that of ‘creaming’. Creaming occurs where insurers will only insure low-risk companies (i.e., the ones potentially most profitable to the insurer). Avoiding creaming requires a significant degree of government regulation.

Most damaging to the notion of privatization is that there appears to be no significant research that supports the proposition that privately provided workers’ compensation is less expensive than its public counterpart.

An analysis of workers’ compensation in 48 states from 1975 to 1995 designed to determine (in part) which set of arrangements (public, private or mixed provision) provided the most effective form of delivery concluded there were no clear differences in costs between jurisdictions with exclusively public and exclusively private systems.

Where there is mixed delivery (i.e., public and private providers), employer costs appear to be higher. The overall impression arising out of this research is that privatization does not yield a less costly system for employers or a more equitable system for employees.

-- Bob Barnetson

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