Private Claims Firm Saves Louisiana’s Risk Management Agency $1.4M in First Year

A private company based in Mandeville contracted to run much of the claims processing and management handled by the state’s Office of Risk Management has been producing results ahead of schedule, legislative auditors said.

Emily Wilson, performance audit manager for the state’s legislative auditor office, said F.A. Richard and Associates Inc. saved the state a net amount of $1.4 million in its first year. Those savings are ahead of schedule for the 2011 fiscal year.

FARA’s contract guarantees $50 million in claims and litigation payment savings to Louisiana during its five-year contract and the risk management office estimates the company has achieved about $6 million, or 12 percent, of those savings so far.

Additionally, ORM had achieved about $2.5 million, or 6.3 percent, of the $40 million of the administrative and other cost savings it needed to achieve its projection of a net program savings of $22 million. The audit says those savings will come from reduction in some budget items like salaries, benefits, and office rent.

If FARA fails to achieve the $50 million savings, it will then owe the state a 3 percent refund of the shortfall, or up to $1.5 million.

J.S. “Bud” Thompson, the state risk director, said his office actually expected to see a net increase in costs of around $659,000 in the first year, but ended up exceeding their original expectations by more than $2 million.

“When ORM began the privatization of claims administration of its lines of insurance, the goal was to harness instant access to technology improvements and program flexibility to provide continued quality of service while achieving taxpayer savings,” he said in a letter to Legislative Auditor Daryl Purpera in June.

Wilson said Louisiana hired FARA for $68 million over five years, ending in June of 2015. In April 2011, ORM increased the contract amount by approximately $6.8 million to $74.9 million.

The risk management office is a self-insurer for the state, with agencies paying premiums for lines of insurance covering areas like medical malpractice and worker’s compensation cases. It was created within the Division of Administration to provide a complete risk management system for Louisiana, and provides workers’ compensation coverage to all employees working for the state. It also includes coverage for property, crime, comprehensive general liability, road hazards and automobile liabilities.

By March, six of the nine lines of insurance and associated services such as general liability, loss prevention services and workers’ compensation had been privatized by FARA.

According to the audit, ORM is funded primarily through premiums paid by state agencies for coverage and in 2010, ORM’s actual operating costs were around $361 million. In 2011, the agency’s operating costs dropped by 43 percent, largely because Hurricane Gustav claims were paid in the 2010 fiscal year. The recommended budget for 2012 is about $227 million.

As of May, the agency had reduced its staff by 52 people to 88 employees. According to the audit, once all the lines of insurance have been transferred to FARA, the staff will drop to 50 employees. The contract requires that FARA offer jobs to all displaced state agency employees for at least one year and 27 have accepted. The others retired, joined the private sector or transferred to other state agencies.

The privatization contract was sought by Gov. Bobby Jindal’s administration in 2010 and originally estimated it would save the state $20 million over five years.