Privatizing in Nassau County: A Good Idea, But…

April 7th, 2008 by

Nassau County in New York is currently paying about $10 million a year for the partial disability claims of former county employees. They would like to settle these claims, but as with most municipalities, their budget process offers no opportunity for fronting the costs of settlement. It’s cheaper to keep paying the claims from year to year, pushing the problem onto future tax payers.
The county is now exploring the idea of borrowing $55 million to off-load about 1,000 claims to a private insurer. In return for the one large payment, the insurer would accept responsibility for all the claims. We think Nassau County is moving in the right direction, but there are some significant pitfalls. (Perhaps county officials should read our February blog on Connecticut, which encountered serious problems in attempting the same off-loading procedure back in 2001.)
A Well-Dressed Gorilla
Any municipality seeking to privatize the handling of workers comp claims has to deal with the 800 pound gorilla, in this case appropriately dressed in a three piece suit: what is the true value of the claims being privatized? No one really knows. Because municipalities operate on annual budgets, they pay claims from year to year, presumably until the recipient dies. While actuaries could project with reasonable certainty the ultimate cost of each claim, no such projections have been made. In Connecticut, the projections were performed by untrained college students. Their guesses wildly overstated the value of the claims, resulting in grossly overstated “paper savings.” Instead of saving CT taxpayers money, privatization became a collosal rip off.
The fact that the county is spending about $10 million a year on these claims tells you very little, if anything, about the ultimate value. In fact, the only way to determine the real value is to secure a professional review of the claims, preferably before the county issues its RFP. That way tax payers will benefit from real savings and carriers will understand the actual risk of the undertaking.
Of course, the carriers are salivating at the $55 million upfront payout. They are probably so confident in their ability to make the cash grow, they could care less how accurately the county claims are reserved. Given today’s market (subprime mortgages, anyone?) a little caution is certainly in order.
We’ve been down this road many times before: county officials dreaming of million dollar savings; private carriers dreaming of healthy profits. That’s a lot of dreaming, which quickly turns into a nightmare if the process is not approached with an appropriate appreciation for the complexity of the task. A word to the wise is (presumably) sufficient.