COVID-19 Should Force Rethink of Wisdom of Monopoly State Funds
But in Washington State—which was hit first by the virus and has remained, thus far, hit hardest—the only source of workers’ comp insurance is the State of Washington itself. Washington is one of just four states—Ohio, North Dakota and Wyoming are the others—to operate a “monopoly” state fund. While some of the state’s large employers may qualify to self-insure, the overwhelming majority of firms must instead purchase coverage from the Washington State Department of Labor and Industries.
In practice, what that means is that the Washington State Fund, which covers 3 million Washington State workers, is going to be strained to pay claims at precisely the same time that nearly all of the state’s agencies will be asked to do more with less. As a state that relies almost entirely on sales taxes (Washington has no state income tax) tax receipts will dry up quickly from the state-imposed closures. Meanwhile, the increased need for public health and safety agencies to respond to the crisis means even more potential exposure to the virus, flowing back to state government in form of more and more significant workers’ comp claims.
This is an example where private capital can and should do more to shoulder the load. By following the lead of other states that have successfully privatized their state funds, Washington, Ohio, North Dakota and Wyoming all can shift risk away from state government, leaving it better able to respond to future crises.
The textbook example in recent years is West Virginia, which as of 2004 had a monopoly state fund that was losing $1 million a day and had $3 billion of unfunded liabilities. That all changed in 2005, when then-Gov. Joe Manchin signed legislation to privatize the fund, now known as BrickStreet Mutual. Over the ensuring decade, the system’s costs fell by more than half.
Though BrickStreet remains the largest writer of workers’ comp in West Virginia, with roughly 45% of the market in 2019, it has been transformed into a fully private multiline, multistate entity, writing auto, commercial multiperil and homeowners across Pennsylvania, Illinois, Virginia and Kentucky. The West Virginia workers’ comp market, which once had just one insurer, now sees competition among 245 companies from 78 insurance groups.
All four of the remaining monopoly state fund states would stand to benefit by following West Virginia’s lead, but the value of competition and private capital would be most beneficial to Washington State. That’s because it is the only state in the union where workers themselves are asked to pay a portion of their workers’ comp premiums. The state requires employees to be assessed half the cost of a firm’s workers’ comp obligations, creating an unwise tax on unemployment.
Alas, when Washington State voters had an opportunity to begin the legislative process to privatize the state fund a decade ago with 2010’s Initiative 1082, they rejected the measure by 59.1% to 40.9%.
The COVID-19 outbreak has forced a lot of us to rethink how a lot of structures work, or don’t work, as the case might be. Already, there are calls for significantly more intervention in insurance markets, as the virus has revealed several areas where major protection gaps appear to leave businesses and consumers exposed. Those are worthwhile discussion to have. But so too should we examine areas where the private market could chip in to make government’s job during crises like this much easier. Phasing out the last remaining monopoly state funds should be high on that list.