Sharp divide on workers' compensation initiative

Homebuilder Rob Carlisle is carefully managing costs for materials and labor these days to keep his small Seattle company profitable, but he's frustrated by what he pays for workers' compensation insurance.

"My rate increases have been pretty ridiculous, and we're a pretty safe company," Carlisle said. "If it was privatized and private companies were allowed to come in and compete, I feel I could get the same coverage for my employees for less."

Carlisle plans to vote for Initiative 1082, which would open up the workers' compensation system to private insurers and end the exclusive role of the state Department of Labor & Industries (L&I).

While Carlisle sees I-1082 as good for his business, others are alarmed.

Molly Moon Neitzel, owner of Molly Moon's Handmade Ice Cream, said I-1082 provides no guarantees that rates will be lower, and no limits on rate increases.

"The initiative asks small-business owners to just trust big insurance companies, which is just ludicrous," she said.

Neitzel points to health insurance, one of her fastest-growing costs. Even though small businesses in Washington state can shop around for this coverage, Neitzel said her company's premiums have increased 10 to 20 percent annually.

"There's no way private insurance companies are going to be able to offer my workers fair workers' compensation benefits at less cost than L&I does," Neitzel said. "They're for profit, and L&I is not."

Workers' compensation covers injured workers for lost wages, medical treatment and vocational rehabilitation. Employers, except for self-insured ones, pay three-quarters of the insurance premiums collected by L&I. Workers pay the rest but I-1082, if passed, would eliminate most of their contribution.

For the past three years, L&I has raised rates: 3.2 percent in 2008, 3.1 percent in 2009 and 7.6 percent this year. These rate increases have been below the break-even rates recommended by actuaries, and many businesses expect a double-digit rate hike next year.

If the initiative passes, there likely would be dozens of insurers entering the state to sell coverage.

In theory, greater competition leads to lower prices and greater efficiency.

But in practice, "unfettered competition can lead to some serious unintended negative consequences," said Harry Shuford, chief economist for the National Council on Compensation Insurance, which is owned by insurers and establishes rates for workers' compensation in 32 other states.

The benefit levels set by the Legislature and the investment income earned by insurers play the biggest roles in determining rate premiums, Shuford said. Whether a state has a monopoly is a much smaller factor, he said.

Kris Tefft, general counsel for the Association of Washington Business, which supports the initiative, acknowledges that I-1082 doesn't address what's really driving workers' compensation costs up: the medical and pension benefits available to injured employees under current law. I-1082 would maintain existing benefits.

But the power of labor unions and trial lawyers over the Legislature has stalled systemic changes for years and left the trade group and its business allies with no other choice, he said.

"In order to break that political monopoly, we felt we had to break the financial monopoly the state has on the system."

Impact of I-1082

After failing to win votes in the Legislature last spring to open up the market, the state building industry and its allies gathered enough signatures in April to bring I-1082 to the ballot box.

If the initiative passes, Washington would join 46 other states that allow employers to buy coverage from private insurers. The state Office of Financial Management estimates that by 2014, just over half of the workers' compensation premiums paid in the state would be collected by private insurers.

I-1082 also would immediately shift the entire cost of premiums for medical benefits for work-related injuries to employers. Workers now pay about 18 percent of this cost through payroll deductions, state officials say.

But I-1082 would have other workplace effects that aren't spelled out on the ballot: For example, L&I's program that enforces minimum-wage, child-labor and other employment standards is fully funded by workers' compensation premiums, as is a state apprenticeship program.

L&I has no contingency plan to cover the cost of these programs if I-1082 passes, said Victoria Kennedy, an L&I senior policy adviser. The department would have to seek additional money from the Legislature, she said.

I-1082 would allow big trade associations to partner with private insurers and offer group coverage. These associations now administer "retrospective rating" programs, also known as retro, through which employers with good safety records get rebates on their workers' compensation premiums from the state, with the groups taking a fee.

The Building Industry Association of Washington and the Washington Restaurant Association run some of the largest retro programs in the state.

Campaign-finance reports show that through Oct. 15, supporters of I-1082 had raised more than $3.3 million, of which 77 percent came from five donors — the BIAW and four insurance-industry players. Boeing contributed $100,000 to the campaign.

Opponents of I-1082 have raised $5.4 million. Backers are less concentrated: 53 percent of this total comes from the five biggest donors, which represent lawyers and union members.

State Insurance Commissioner Mike Kreidler says one reason he opposes the initiative is there's no guaranty fund for workers and employers if their insurers charge too little and become insolvent.

Tefft responds that "the business community will have a strong interest in seeing there's solvency protections for the insurance companies it buys from."

Comparisons are tricky

Comparing Washington's systems with those of other states can be useful but also misleading.

Supporters of I-1082 point to steady insurance rates for employers in Oregon for two decades while rates in Washington keep rising.

But those rates are apples and oranges.

Rates in Oregon and most other states are set as a percentage of payroll — a funding base that typically grows as wages rise.

Washington's rate is set on a per-hour basis — an average 67 cents per hour this year. So without increases in that rate, total funding doesn't keep up with rising wages or medical costs.

A study by Oregon officials found that per $100 of payroll, employers in Washington and Oregon paid about the same in premiums.

I-1082 supporters also say Washington state ranks second in the nation in benefits paid to injured workers as a percentage of total payroll. Oregon ranks far lower in benefits.

But Rutgers professor John Burton, who led the National Academy of Social Insurance study cited by I-1082 supporters, said it's the benefits mandated by each state that largely determine those rankings, not whether a state has a monopoly on workers' compensation.

One costly benefit is lifetime pensions for some injured workers. Such pensions account for one-quarter of compensation costs in the Washington state fund, and Washington's rate of permanent disability claims is highest in the nation, according to a recent Upjohn Institute study paid for by the state.

Most of these pensioned workers are unemployable because of a combination of their work-related injury, age and skills, L&I's Kennedy said. Washington law gives L&I managers only two choices, a strict benefit based on medical impairment and a lifetime pension, rather than giving them more choices in between, she said.

Another comparison made by supporters of I-1082: In West Virginia, insurance rates have dropped significantly since that state privatized its workers' compensation fund two years ago.

But Burton said competition isn't the only reason West Virginia's costs declined.

"It coincides with them substantially scaling back benefits," he said.

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com