If Governor Engler has his way, a serious blunder of state government that dates back to 1989 will soon be undone: the Accident Fund of Michigan will cease to be a state-owned workers compensation insurer and become a private company.

Though established by enabling legislation in 1912, the Fund had operated for nearly eighty years with a degree of self-governance and independence that made it look and act as an essentially private firm, not a state agency. It was neither a mandated nor last resort insurer, the state assumed no liability, it was run by individuals elected by policyholders, and it competed with other insurers in the marketplace.

After years of legal wrangling, an unfortunate court ruling in 1989 determined that the Fund's loose connection with state government was sufficient to permit a total state takeover. For the first time, its employees became part of the state's civil service and its budget had to be approved by the Legislature. In a year that saw the collapse of socialism from Berlin to Bucharest, the State of Michigan jumped head first into the insurance business.

The results were predictable: political manipulation of rates and staffing, and reduced competition in the industry as private insurers began to withdraw from the market. Because of civil service rules, it has been difficult for the Fund to fill key positions with qualified experts. An unwarranted 20 percent rate cut ordered by the Blanchard administration and timed to impact the 1990 election resulted in a $53 million financial loss for the Fund that year.

Michigan is one of 13 states where employers may purchase their workers compensation insurance from either a state entity or a number of private carriers. Six states have their own monopolies and forbid employers from buying private insurance altogether, while in 31 states, employers buy exclusively from private firms because their state governments aren't in this business at all.

Now, at Governor Engler's direction, the Fund will be sold. If the Legislature approves, it will be the nation's first state-owned workers compensation insurer to be privatized. Michigan will then join the majority of states, which rely on the competition of private, cost-conscious firms and not a politicized and costly civil service bureaucracy to provide workers compensation insurance.

That the Governor's initiative is the right one is suggested strongly by the track record of state insurers. They are almost routinely subjected to political abuse and manipulation; they often run substantial operating losses; they have boosted insurance costs to employers; and they undermine effective competition from better-managed private providers.

To prevent that record from becoming Michigan's, The Mackinac Center for Public Policy urged total privatization in a 1987 report, when it could have been achieved quickly and easily--two years before the Court of Appeals seized upon legal fine points to permit the Fund's "nationalization."

The terms of the Fund's actual sale, including the price, remain to be settled. Those are matters of special concern to the 35,000 mostly small business customers of the Fund, but they also raise important points for sound public policy. Privatization could be achieved by spinning the Fund off as a newly-formed private company of its own (with new capital provided by many private investors through sale of stock), or the outright sale of the Fund to another private firm.

If the latter course (which seems to have the inside track in Lansing) is taken, then these guidelines should be followed:

  • Bids should be solicited from the broadest possible number of potential buyers. The winner, because it will be competing with private, taxpaying firms, must itself be a private firm and not another state or quasi-state agency. That would rule out at least one party known to be interested--Blue Cross/Blue Shield. Since the 1930s, the "Blues" have enjoyed a near monopoly status in the health care insurance field in Michigan because of special privileges that include tax exempt status and exemption from anti-trust law.

  • Just as the newly-constituted and privatized Fund should enjoy no special privileges from government, neither should it be burdened with any special obligations. Lawmakers should resist the temptation to attach mandates or unreasonable conditions to the sale. In another words, the objective of privatization ought to be to foster "a fair field and no favor" so that everyone competes evenly.

There really is no strong case for the state to be in the insurance business. Nothing in the Constitution requires it, and experience hardly suggests that government can run a business more efficiently than private enterprise.

Governor Engler is right. Let's undo a blunder and privatize the Accident Fund and let's do it right.