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Louisiana Announces Privatization of Insurance Program

Leonard Gilroy
March 16, 2010, 6:59pm

In what's shaped up as a "Privatization Day" of sorts at Reason—with our new Reason.tv "Privatize It!" video and two new privatization policy briefs here and here—it seems fitting to report some good news from Louisiana on the privatization front.

The Louisiana Division of Administration has announced the privatization of their state self-insurance operation, primarily the management of all property and casualty claims and loss prevention services. Details from the press release:

Commissioner of Administration Angele Davis today announced the privatization of claims management and loss prevention services within the Division of Administration's office of risk management, a move that will result in estimated savings of at least $20 million over five years, instant access to technology improvements, and greater program flexibility.

Last year, Commissioner Davis embarked upon a department-wide efficiency initiative, conducting a sweeping review of activities for potential privatization and outsourcing opportunities.

"The point is not to privatize just for the sake of privatization, but where it makes sense, and only after a thorough evaluation demonstrates an ability to provide a high level of service at a better cost to taxpayers," said Davis. "During a period of fiscal challenges, today's announcement points to just one of the ways that the Division is leading the effort to streamline state government, in this case actually improving the effectiveness of services while also improving the cost-effectiveness of government operations."

After issuing a request for proposals last November, the Office of Risk Management (ORM) conducted a careful review of the proposals received, then evaluated the highest-scoring proposal in comparison with its internal operations. This process resulted in the decision to outsource the adjusting/management of all property and casualty claims and loss prevention services to FARA (F.A. Richard & Associates, Inc.), a Louisiana-owned company headquartered in Mandeville, Louisiana.

ORM director Bud Thompson said, "I commend my staff for their yeoman's work in the research, preparation and execution of this RFP, especially their commitment to evaluate the proposals objectively and analyze the advantages, disadvantages and projected cost-savings to our in-house program in the long-term best interest of the State."

Among the advantages to ORM's operations identified in this privatization effort:

• Provides instant access to state-of-the-art technology improvements that cannot be achieved in-house;
• Offers high probability for reduced claims costs and reduction in overall program cost;
• Provides for additional flexibility in managing the program, as changes can be made more quickly;
• Allows ORM to focus on enterprise risk management, as opposed to the day-to-day business of running a large claims and loss prevention organization.

The privatization will result in a reduction of approximately 85 ORM employees. However, due the specialized nature of ORM's work evaluating risk to government, the RFP included a requirement that the company awarded the service offer employment to all ORM employees displaced by the privatization, at a salary based on the company's pay scales for their existing employees, and providing immediate eligibility for enrollment in benefit plans and the establishment of local offices to service the state.

While states routinely operate their own self-insurance programs—which are essentially responsible for handling the state's property and casualty risks, as well as tort claims made against the state or its agencies—there's nothing inherently governmental about the tasks that operational staff perform. In fact, these same functions are performed at privately insurance companies as a matter of routine, and thus they are commercial in nature. So essentially, Louisiana has decided that the private sector can perform that same function for the state at a lower cost, in addition to the longer-term benefits of reducing the state workforce (and associated pension liabilities, etc.). And it should be noted that the private company is expected to save millions for the state while taking on 100% of the current state employees currently performing that function.

More from The Advocate here. And don't miss my interview with Commissioner Davis in Reason Foundation's Innovators in Action 2009, in which she discussed privatization and the numerous other "right-sizing" strategies Gov. Jindal's administration is advancing in Louisiana to proactively address their fiscal challenges. Other states should be following suit.

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» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary


Leonard Gilroy is Director of Government Reform


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