Conn. ‘Botched’ $80M Workers’ Comp Privatization, Charges AG

Connecticut officials “badly botched” a 2001 deal to privatize hundreds of workers compensation claims by state employees, Attorney General Richard Blumenthal has alleged following a multi-year investigation that faults both the consultant who advised the state on the deal and the regulatory agency that brokered it.

The investigation centered on a deal by the Department of Administrative Services (DAS) that paid Ace Financial Solutions — a subsidiary of insurance and reinsurance giant The Ace Group of Cos. — $80 million to assume up to $150 million in potential liability for 660 state employees’ workers compensation claims.

Westport-based MRM Consulting advised the state on the deal, and predicted savings of more than $13 million a year from it.

A review by the nonpartisan state Office of Fiscal Analysis concluded that although the state saved $13.5 million in 2002 and 2003, it was unlikely to save money over the long run as it paid down the cost of bonds used to pay part of the contract, Blumenthal said.

Blumenthal’s investigation found that MRM, which was hired without a competitive bidding process, made numerous critical mistakes in calculating the fair value of the claims.

Among those mistakes, Blumenthal alleges that MRM overestimated the number of claims that should have been included in the deal. MRM initially based the $80 million figure on Ace handling 726 claims. But the number of claims given to Ace decreased to 660 after last-minute revelations that some of the initial cases had already been closed, the investigation found. Despite the number of claims decreasing from 726 to 660, the total deal with Ace remained at $80 million.

Another disturbing finding was the reliance by MRM on college interns to perform much of complicated analysis — interns whose work earned the firm $105 an hour from the state.

When the DAS found out, it told MRM to label the students “junior staff” instead of “interns,” Blumenthal said.

MRM’s analysis was plagued by “misinformation and misadvice” that led to “unfounded overestimates and payments,” Blumenthal said. That bad information included a reliance on information from insurers and brokers that stood potentially to profit from any deal.

In all, MRM earned about $702,000 from state contracts, most of which involved performing analysis for the privatization deal.

The report does not accuse MRM of any criminal wrongdoing but it recommends the state look at “how MRM can be held accountable for its highly troubling performance.”

Blumenthal also blames the DAS for a “lack of scrutiny and oversight” and maintains that “cooperation or collaboration” with the insurance department or the attorney general “might have improved the process and the result.”

Blumenthal said the state should set up a settlement fund for the claims to be paid in-house. He also recommended better oversight and scrutiny of future privatization deals.

“Privatization spawned inefficiency, incompetence and increased costs,” Blumenthal said. “We must reform conditions — lack of funding and procedures — that led to this bungled deal.”

Ace has already paid about $60 million to settle 545 claims, leaving $20 million to settle the remaining 115.

The deal, which dates back to the administration of former Gov. John Rowland, has been the subject of scrutiny before. Ace has already paid $40,000 to settle a Blumenthal charge that it paid an illegal $50,000 commission to Marsh & McLennan to get the contract for the deal.

Material from the Associated Press was used in this report.

Topics Claims Workers' Compensation Connecticut