The largest sale of a state asset in Michigan history--in dollar terms--is only weeks away, as state government prepares to spin off a giant workers compensation insurance company.
The Accident Fund of Michigan is destined to become the nation's first state-owned insurance firm to be sold when the State Administrative Board decides in June which of three bidders should have it. If the Board remains faithful to the principles of privatization, Michigan will join more than 30 states which rely solely on the competition of private, for-profit firms instead of a politicized bureaucracy to provide workers compensation insurance.
Each of three bidders is willing to pay more than $200 million for the Fund. Michigan Insurance Partners (MIP) is a partnership of two private medical malpractice insurers. Acting on behalf of another group of Michigan investors is Charles Street Securities, a Wall Street firm that specializes in insurance company mergers and acquisitions. The third bidder is Blue Cross/Blue Shield of Michigan which, unlike MIP and Charles Street, is a quasi-public, non-profit firm that has enjoyed decades of favors from state government.
The case for privatizing the Fund was compelling enough to garner bipartisan support in Lansing. After an unfortunate 1989 court ruling declared that the Fund's loose connection with state government was sufficient to permit a total takeover, the state did just that. Previously run by individuals elected by thousands of private policyholders, the Fund became a civil service bureaucracy whose budget had to be approved by legislators. The result was political manipulation of rates and staffing and reduced competition in the industry as private competitors began to withdraw from the market.
Last year, Governor Engler won legislative approval to get the state out of the insurance business once and for all, but privatizers should not hasten to rejoice. The prospect of one of the bidders owning the Accident Fund is already giving privatization a bad name.
Blue Cross/Blue Shield enters the bidding process with substantial legal, economic, and public relations baggage. The Blues lost a $52 million contract to administer Medicare in Michigan when the federal Health Care Financing Administration switched to another provider in March. Officials charged the company with overbilling Medicare more than $68 million and are demanding the money back, raising the likelihood of rate increases to raise the funds.
The relationship between the Blues and MESSA, the teacher health insurance subsidiary of the Michigan Education Association, has also drawn fire. School districts have been threatened with strikes by the teacher union unless they purchase health insurance through MESSA, which in turn contracts with the Blues to underwrite the policies. Michigan Insurance Commissioner David J. Dykhouse informed the Blues that by delegating claims administration to MESSA, the company "abandoned one of the most important tools a health corporation can exercise to ensure that only proper claims are paid."
Under an order from Dykhouse, the Blues have promised to recover more than $70 million in unapproved surcharges from MESSA before June 30, an amount that represents a "substantial" excess cost to schools for teacher health insurance.
These concerns should carry weight with the State Administrative Board when it considers sale of the Accident Fund, but the wisdom of selling it to a quasi-public agency is the most important question. Are the interests of a healthy, fair, and competitive market really served by selling the Fund to a company that enjoys tax exempt status? If the State sold the Lottery Bureau to the University of Michigan, would we call it "privatization"?
Because the Legislature wanted to "level the playing field," the Blues would have to pay a fee in lieu of the state's Single Business Tax equivalent to what the company would pay if it were a taxpaying, for-profit firm. The Blues say that puts the fee in the neighborhood of $3 to $4 million, while more realistic analyses suggest the appropriate fee should be as much as 25 times that.
Even if the SBT matter could be resolved in a fashion that accurately reflects the Legislature's intent, the playing field would still hardly be "leveled." Besides the SBT, Blue Cross/Blue Shield is exempt from many other taxes paid by competing private firms. For 60 years, it has enjoyed more flexible financial requirements than its competitors and until 1986, anti-trust preferences as well.
If Blue Cross/Blue Shield purchases the Accident Fund, it would enter the workers compensation insurance market as a state-protected and artificially-advantaged giant, at the expense of a genuinely free and fair marketplace. The Legislature's goal of encouraging efficiency by removing politics and bureaucracy from the Fund's work would be thwarted, because the Blues (in spite of the advantages cited) are still subject to manipulation by the Legislature and state regulators. This would not be what any objective observer could call "privatization."
Clearly, the State Administrative Board is faced with important public policy questions in deciding who should buy the Accident Fund. Those questions go well beyond the dollar amount of any particular bid. The Board must ultimately decide if it really wants to privatize the Fund or if it wants to so dilute the intent of the whole exercise as to make it hardly worth anybody's time.