Recommendation 1: The department should consider the possibility of having a board that would oversee its activities that are related to insurance services.

Agency Position: Non-Concur.

Auditor's Comments: Recommendation 1 only indicated that the department should "consider the possibility" of having a board. We are disappointed that the department rejects even this possibility. We would hope that the department would at least consider the possibility of expanding the role of its current advisory committee.

Recommendation 3: The claims functions should be organized into units that include five to seven claims adjusters, clerical support, and a claims supervisor.

Recommendation 4: To the greatest extent possible, employers should be assigned to an individual claims adjuster.

Agency Position: 3) Non concur, and 4) partially concur.

Auditor's Comments: The current initiatives undertaken by the department are good and will improve service. They are, however, different from the suggestions we make here. We recognize that there may be some costs in implementing these but we would encourage the department to at least try them out on a small scale before rejecting the ideas completely.

Recommendation 5E: Claims adjusters should have sufficient support for clerical and investigative tasks.

Agency Position: Concur.

Auditor's Comments: The department would probably need some additional staff to implement this. It is very difficult to estimate the exact amount.

Recommendation 7: There should be less reliance on the formal claim closure process.

Agency Position: Partially concur.

Auditor's Comments: We are pleased that the department is willing to undertake a review of the claims closure process. We would suggest that this begin with a dialogue that includes the department, the attorney general's office, and representatives of workers and employers. The aim of the dialogue should be to define exactly what is meant by "closing a claim," what is the statutory basis for this, and what are the benefits of it? We would suggest that the dialogue carefully distinguish between assumptions that are based on repeated practices of the department and legal principles that are based upon statutory or case law.

Recommendation 8: There should be a compliance unit within the department which monitors the operation of the insurance services division and self-insured employers.

Agency Position: Partially concur.

Auditor's Comments: There are certainly similarities between a quality assurance unit and a compliance unit. There are, however, also many differences. For example, strengthening the quality assurance unit will not deal with the problem (or at least perceived problem) that the fund is held to different standards than self-insured employers.

Recommendation 10: Once the department has in place a compliance unit and a system of ombudsmen or mediators, the current oversight of the claims processes of self-insured employers should end.

Agency Position: Non-concur.

Auditor's Comments: We recognize that this is a sensitive and difficult issue. We believe, however, that the proposals we have made in this recommendation and Recommendation 8 and 15 (compliance unit and ombudsmen) would protect the interests of injured workers while allowing self-insured employers to manage claims in a more appropriate manner.

Recommendation 13: The department should collect and publish information about the performance of third-party administrators to the extent it becomes available through audits and otherwise.

Agency Position: Non-concur.

Auditor's Comments: We are not recommending that the department exercise regulatory authority over third-party administrators. We recognize that there may be some difficulties in implementing this. To a certain extent, however, the department must have available information about the performance of third-party administrators. To the extent it does, it should make this information available to the public.

Recommendation 15: The department should create a system of mediators or ombudsmen to provide assistance to workers and employers.

Agency Position: Non-concur.

Auditor's Comments: The initiatives launched by the department are good. They will solve some problems. We believe, however, that injured workers and small employers should have a place to go outside of the claims management division where they can get information and advice. They should not have to write a letter to the director's office. Instead, there should be an 800 number that is broadly advertised.

In states where benefits are paid by private insurers, workers can turn to a state agency for this type of assistance. A weakness of an exclusive state fund is that there is no separation of parties between the insurer and the state agency. This weakness could be remedied by an office of ombudsmen.

Recommendation 16: The department should adopt a policy that all protests and reassumptions are resolved within 30 days.

Agency Position: Partially concur.

Auditor's Comments: We are pleased that the department is willing to explore this issue. We are very disappointed; however, that it is not willing to set for itself a goal that is any better than that already allowed by the statute.

Recommendation 17: Superior court review of decisions by the Board of Industrial Insurance Appeals should be eliminated.

Agency Position: Non-concur.

Auditor's Comments: The board has pointed out that while this recommendation would result in the elimination of appeals to superior court, it might also result in an increased number of appeals to the board. In that case, the board points out that it would need additional resources. We agree that if the number of appeals increased, the board should be granted additional resources.

It is possible to interpret some of the comments from the board and the department to mean that the number of appeals are held down under the present system because it is formal and complicated and that it would be bad to reduce the formality and complexity because more individuals would exercise their right to appeal. We presume that is not the position the board or the department intends to take. We would certainly reject that approach.

Recommendation 18: The primary goal of vocational rehabilitation as formally stated and as observed in practice should be successful return to work of the injured worker.

Agency Position: Non-concur.

Auditor's Comments: We are glad that the department is open to evaluating these issues. However, we are disappointed that it will not at least agree that return to work ought to be the primary goal of vocational rehabilitation. We recognize that this cannot be achieved in every case and that not everyone is an appropriate candidate for these services. It nevertheless ought to be "the primary goal."

Recommendation 19: The standard for employability should be wages at the time of injury, not the federal minimum wage. (Note: In the proposed final report, recommendation 19 was revised to clarify its intent.)

Agency Position: Non-concur.

Auditor's Comments As we understand the current system in Washington, if a worker is formally determined to be employable at the federal minimum wage, then benefits will terminate. This standard is to too low. This automatic termination of further benefits should only occur if a worker is found to be employable at the wages that he or she was receiving at the time of injury.

We recognize the need for further criteria for determining which claimants should be referred for vocational rehabilitation and encourage its development. To some extent, however, this must always be done on an individual basis guided by the best practices of the rehabilitation counseling profession. There is also a need to determine what benefits a worker should receive when he or she does not return to work but is not eligible for VR, and when a case is referred for VR but his or her final wage is not equivalent (at some specified proportion) to the previous wage or VR does not result in placement at all.

We agree that negotiations with the various parties are an appropriate and probably necessary way to work out these issues.

Recommendation 24: We recommend that the department produce (either through its own actuaries or through an outside independent consulting company) a well-documented, exhaustive actuarial rate filing report detailing all assumptions and methods used. It should be similar to reports that are submitted to regulatory authorities by a licensed insurance company in states that use a "prior approval" rate filing procedure.

Agency Position: Non-concur.

Auditor's Comments: Our understanding is that the full complement of a rate report (as indicated in the recommendation) is not routinely packaged as such. The department had, at our request, put together a rate filing report for our audit. We did not mean to imply that required documentation could not be produced. The gist of our recommendation is that such package be prepared whenever rates are developed. We see this as expedient and responsive to stakeholder interest, and others who review the department rate recommendations. Reference to a prior approval setting is to offer a type of standard as an example.

Recommendation 25: Adopt a plan by which excess premiums are returned as dividends to prior contributors--both employers and employees--that generated the excess premiums, rather than to future policyholders/contributors as reduced rates.

Agency Position: Partially concur.

Auditor's Comments: We recognize that achieving equity is difficult in general and may be impractical in the case of the employee premium payers. However, since the department receives the individual employee's contribution to the Medical Aid Fund from their employers, the department could return the dividend to that employer for distribution to its employees. One way is to credit each dividend to premiums receivable and due from these employers so that they remit a net premium. Employees may be noticed of such dividend via poster in the employer's office.

Recommendation 26a: (No. 1 Appendix P) Adjust Accident and Medical Aid Funds premium rates the same percentage as for Retro.

Agency Position: Non-concur.

Auditor's Comments: The refund calculation is determined by using the combined experience of the Accident Fund and Medical Aid Fund. The refund is equal to the Standard Premium minus the Retrospective premium. Therefore the Medical Aid Fund does contribute to the size of the refund, even though paid from the Accident Fund. For example, in deriving the combined Retro premium, the Medical Fund losses will either increase or decrease the Retro premium. Except for the special case where the Accident Fund and Medical Fund premium and losses are identical, the Retro refund will be smaller if Medical Fund losses are higher than the Accident Fund and vice versa.

Recommendation 26b: (No. 2 Appendix P) Eliminate the adjustment for Retro refunds in the determination of classification rates.

Agency Position: Non-concur.

Auditor's Comments: We do not see the economic necessity of building back in the Retro refunds, as this ensures subsequent Retro refunds in the future, other things equal. In other words, by adding the Retro refund cost to the experience rate, there should be a similar refund next year. Assuming your retrospective rating plans are actuarially balanced, there is no need to adjust rates for the actual/anticipated refunds, since by definition, Retrospective plans would yield on the whole the appropriate premium, i.e., equivalent to the non-Retro premium. However, if a refund is the purpose, we have no problem.

Recommendation 26e (No. 4 Appendix Q) Incorporate an adjustment for the impact of experience rating by classification into a classification rate-making system.

Agency Position: Non-concur.

Auditor's Comments: We disagree. In rate making, the overall rate indication implicitly corrects for the off-balance created by the experience rating plan by using Standard Premium as a benchmark, i.e., the manual premium multiplied by the experience modification factor. This is equivalent to first performing the analysis on the manual basis, then adjusting the result for the (overall rate) off-balance produced by the experience rating plan. This is accomplished by dividing the manual loss ratio by the average experience modification factor.

What we have proposed is a refinement of this process to a classification level. Classification rates are currently produced on the manual (rate) basis which assume the ratio of standard to manual premium is the same for each and every classification. Our analysis showed that there are significant and consistent differences in this ratio by classification. Some classifications produced rates by this process that are consistently excessive or inadequate. This consistency suggests a systemic bias and other factors are not being equitably distributed to the classification rate. In essence, we suggest reducing the overall off-balance calculation experience rating to the classification level.

Recommendation 27: As explained in Appendix R, the department should adopt adjustments to its retrospective rating plan. These adjustments are designed to make the application more balanced actuarially.

Agency Position: Non-concur.

Auditor's Comments: The Retrospective Rating plans do not incorporate the latest or current expense figures in their formulation, therefore, they are not actuarially balanced as to the cost difference between prior and current expense figures.

The statement that the 5.6 percent calculation included the entire premium and loss figures for firms that were only partially enrolled in Retro plans, is apparently incorrect based on our discussions with the department, they said this situation only applies to partially enrolled accounts that had a subaccount retrospectively rated but not the balance of the account. In addition, we understood this was an infrequent occurrence and not material dollar wise. As regards including the interest payments in the retro return, the department rate making process included these interest payments treated as a retro return in computing the Accident Fund rates. Therefore, it is appropriate to include it in this analysis.

If the Retro program consistently has a net return-refund, this implies the standard rating method consistently charges too much for these employers.

Recommendation 29: As explained in Appendix R, the department should institute a dividend plan that applies to both retrospectively rated and non-retrospectively rated employers. A properly designed dividend plan would eliminate the need for the performance adjustment factor, or a loss conversion factor of less than 1.0, and also would provide an appropriate mechanism to release excess reserves equitably.

Agency Position: Non-concur.

Auditor's Comments: We did not mean to imply in our recommendation that the Retro program should be replaced by a universal dividend program. Rather we recommend a dividend program that applies to both Retro and non-Retro employers where standard pricing mechanisms consistently generated too much premium. For example, a non-Retro employer that implements loss control measures will receive some benefit (dividend) if his program is effective in controlling costs. Under the current system, the non-Retro rated employer must either become retrospectively rated or wait until his loss data are included in the experience period used for his experience rating modification.

Recommendation 32: As discussed in Appendix U, we recommend adjustments that are designed to more equitably distribute costs between Retro and non-Retro employers.

Agency Response: Non-concur.

Auditor's Comments: As explained for Recommendation 27, we offer the same response here. The Retrospective Rating plans do not incorporate the latest or current expense figures in their formulation, therefore, they are not actuarially balanced as to the cost difference between prior and current expense figures.

`The statement that the 5.6 percent calculation included the entire premium and loss figures for firms that were only partially enrolled in Retro plans, is apparently incorrect based on our discussions with the department, they said this situation only applies to partially enrolled accounts that had a subaccount retrospectively rated but not the balance of the account. In addition, we understood this was an infrequent occurrence and not material dollar wise. As regards including the interest payments in the retro return, the department rate making process included these interest payments treated as a retro return in computing the Accident Fund rates. Therefore, it is appropriate to include it in this analysis.

If the Retro program consistently has a net return-refund, this implies the standard rating method consistently charges too much for these employers.