Last month, voters in Washington state defeated a business-backed ballot initiative that sought to privatize their state-run insurance program. Initiative 1082 would have required employers to purchase workers’ compensation insurance from private companies rather than the state. The measure was defeated by a 58 to 42 percent margin.

Workers’ Compensation Insurance is mandatory in Washington and elsewhere (see sidebar), and the market is a lucrative one for the insurance industry. In Washington, as in other states, very large employers (Boeing, Microsoft) avoid the advertising, administrative and profit costs of insurance companies by insuring themselves, agreeing to pay the state-mandated level of benefits.

Origins of No Fault Workplace Insurance

In the early years of the 20th century, unions were still weak and most industrial employers considered workers interchangeable and expendable. In general, work was more dangerous, and, if a worker was seriously injured on the job, he was dismissed and replaced. Rarely were disability benefits provided, and doing so or not was entirely the employer’s prerogative. As a result, employers faced a steady onslaught of lawsuits alleging negligence and demanding compensation.

Broad reform came after 1917 when the Supreme Court ruled that compulsory participation in workers’ compensation programs did not violate employers’ due process rights. States widely adopted compulsory programs, requiring employer participation in a “no fault” system in exchange while eliminating workers’ rights to sue for damages.

By 1949, all states and the federal government had adopted programs under which injured workers are entitled to medical payments for treatment and, in most states, monetary compensation for temporary or permanent disability that prevents work.

The remaining market in Washington, however, is huge, covering about 70 percent of all employees at an annual cost of about $1.125 billion. It is an attractive prize for the nation’s insurance industry. Business interests spent more than $5 million on Initiative 1028, but their argument – that more competition would result in lower insurance costs for employers – was undermined by the fact that, despite competition, insurance costs across the country are rising sharply due to the increase in the underlying cost of health care itself.

Moreover, premium costs for employers in Washington are already among the lowest in the country. Washington is the only state in which workers pay a portion of the premium, currently about 28 percent. The deduction of the worker portion means that employers in only four states pay lower premiums than those in Washington. Initiative proponents sought to obscure this fact by asserting that Washington’s unique method of setting premiums – based on hours of risk exposure rather than dollars of payroll – made cost comparisons inaccurate. However, the Washington State Labor Council and other independent financial analysts produced effective comparisons.

Since Washington employers already pay low rates and privatization – by adding insurance industry costs and profit – is more likely to increase rates rather than lower them, observers might wonder why the state’s business community got behind this initiative in the first place. The answer to that question goes to the long-running “power struggle” between in-state business interests and the Washington State Department of Labor and Industry (L&I). L&I is among the more active state labor departments when it comes to on-the-job safety and health (for instance, it is the only state with a research program aimed at identifying and addressing the causes of injuries), but business interests find it generally too intrusive.

This ideological struggle plays out on many workplace issues in Washington – a successful ballot initiative to overturn an L&I ergonomics rule in 2003 stands out – and was behind this year’s initiative as well.

As the Washington State Labor Council pointed out during the campaign, the state’s workers’ comp insurance program is one of the nation’s few low-cost, high benefit programs. Because private insurance is not involved and, therefore, “overhead” as a percentage of total benefits paid is only 14.8 percent – compared to 55.4 percent nationwide – Washington is able to provide a higher benefits per premium dollar than elsewhere.

For years, however, business interests have dismissed the benefits of this efficiency and, instead, demanded that L&I cut benefit levels so that still lower premiums can be obtained. Because L&I officials resisted this demand, business groups decided to pursue Initiative 1028, even though it was doubtful that private insurance would achieve any savings. Speaking of the state’s power to delineate benefit level requirements, Chris Tefft, General Counsel for the Association of Washington Business, said, “In order to break the political monopoly, we felt we had to break the financial monopoly the state has on the system.”

The situation in West Virginia, which was heavily cited by 1028 supporters, is insightful.  There, employers enjoyed significant cuts in the cost of their workers’ compensation premiums after privatization in 2008.  However, Rutgers professor John Burton, who led a National Academy of Social Insurance study of the West Virginia situation, undermined their argument when he said the state’s lower premiums “coincided with them substantially scaling back benefits.”

Apparently, Washington voters sorted through the debate and realized that the cost of workers’ compensation insurance is directly and primarily related to the level of state-mandated coverage. Voters concluded that the only real way to achieve lower premiums is to lower benefits. In defeating Initiative 1028, they seemed to express satisfaction with present benefit levels and with the efficiency and effectiveness of the state’s established system.

[Steve Clark]