State L&I needs to clean up its own act, not raise rates

JASON MERCIER - Editorial
The News Tribune

12/23/03

Olympia, WA - In what may be a death blow for some businesses in Washington, the state Department of Labor & Industries is raising workers' compensation premium rates yet again, this time adding a 9.8 percent increase to a 29 percent increase adopted earlier this year.

In its haste to increase these rates, L&I officials are ignoring the fact that financial shortfalls in the system can be traced to their own mismanagement.

Though designed as a system to help those injured on the job, Washington's workers' compensation program continues to endure fraud and abuse. Numerous audits have revealed L&I has problems managing its claims and funds. The department does not have an adequate process in place for verifying eligibility, leaving the system vulnerable to fraud and abuse. Also, staff members have admitted the department has been diverting workers' compensation premiums to cover expenses that aren't related to the program.

In Dec. 5 testimony before the state's Senate Commerce and Trade Committee, L&I Director Paul Trause acknowledged that businesses are concerned with the amount of fraud occurring in the system and said the department is in the process of drafting legislation to strengthen its ability to combat fraud.

This ignores the question: Why does the Department of Labor & Industries need new legislative authority to prevent fraud? Why doesn't it already have adequate systems in place for this purpose?

Trause also confirmed as "valid" the concerns of businesses that premiums are being diverted for expenses not related to workers' compensation, meaning the dollars are not there to be claimed when needed. Why should businesses have to pay twice?

The state auditor's office addressed this issue in a recent report: "Using the workers' compensation accounts to support other programs ... results in employers and employees paying more than their fair share in industrial insurance premiums. Instead, the users of these programs and/or government should bear the burden of supporting the costs of the programs, including indirect costs."

Meanwhile, state audit reports from both the state auditor and the Joint Legislative Audit and Review Committee continue to highlight problems in claims management and eligibility verification that started as early as 1998.

Among multiple findings, the state auditor recently reported: "Without adequate internal controls over the disbursement of industrial insurance benefits, (L&I) 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 ineligible recipients discovered by the auditor included some who were collecting workers' compensation while incarcerated and, in a few cases, payments were going to persons who were deceased.

Instead of resolving these serious management problems first, L&I is making businesses pay the cost. Department staff claim they understand the plight of businesses, pointing to the fact that the initial proposals for rate hikes to businesses sought increases of 40.5 percent and 19.4 percent.

After recession-plagued businesses expressed outrage, these were ultimately reduced to 29 percent and 9.8 percent respectively. Not much of a consolation.

It also appears that taxpayers will bear an additional burden of paying for state agencies' increased premiums. The governor's supplemental budget requests an additional $4.4 million ($7.5 million including other state funds) to help pay for L&I's increased rates.

Labor and Industries has also been criticized for its methods of establishing rates and reserve levels.

In response to the most recently proposed increase, the Building Industry Association of Washington commissioned an accounting company, Price Waterhouse Coopers, to review L&I's process. The company reported a lack of transparency in L&I's methods. L&I retorted by accusing Price Waterhouse Coopers of using a "crude methodology" to make its report.

The accounting firm restated its findings. Rather than scoff, L&I should fully implement these reforms before adopting rate increases.

The new increase means that Washington's rates will be 14 percent above Oregon's, and Oregon Gov. Ted Kulongoski is openly advertising the advantage.

Washington's rates were lower than Oregon's as recently as 2002, but while we have increased rates over the past couple of years, Oregon has either reduced rates or held them steady. Oregon's governor boasts that these reductions will save employers in his state $22.7 million in workers' compensation costs next year.

The bottom line is that many of the state's businesses cannot 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.

Jason Mercier is a budget research analyst for the Evergreen Freedom Foundation, a nonprofit public policy research organization "dedicated to individual liberty, free enterprise and limited government."