Louisiana Legislative Auditor
Daryl G. Purpera, CPA, CFE

September 14, 2015

Five-Year Office of Risk Management Privatization Contract Shows Progress on Savings with One Year Left on Contract

Four years into a five-year contract to privatize the way Louisiana handles its insurance and loss prevention, the Office of Risk Management (ORM) is reporting that the private contractor has so far saved $43.3 million in management of claims and litigation payments alone, resulting in $16.6 million in net program savings overall.

These findings in a performance audit Legislative Auditor Daryl Purpera released Monday measure ORM’s progress leading up to the final year of a contract in which the private company, F.A. Richard & Associates (FARA), promised to deliver $50 million in claims payment savings by the end of the fifth year. ORM projects an overall $22 million in program savings for Louisiana over those five years.

“It is as yet unclear,” Purpera said, “taking into account what ORM might pay FARA in contract fees in the final year of the contract, and what total savings ORM might realize in claims and in other administrative areas, precisely how much in savings this five-year privatization contract will deliver to the state at the end of the day.”

In June 2010, ORM awarded FARA a $68.1 million contract to privatize the state’s lines of insurance and loss prevention services. The amount ORM is authorized to pay FARA over the life of the five-year contract has since been increased to a maximum of $74.9 million. However, at the end of the fourth year of the contract on June 30, 2014, ORM had paid a total of only $47 million to FARA in contract fees. With FARA contracted to produce a base amount of $50 million in claims payment savings alone, and ORM originally committing to paying as much as $68.1 million in contract fees to FARA, the state auditor in past audits has noted that this requires ORM to show at least $40 million in “administrative and other cost savings” in order for ORM to reach its projected $22 million in net savings overall as a result of the privatization.

Monday’s audit notes ORM has so far in the first four years of the contract produced a little more than $20 million (or 50.1 percent) of that $40 million in “administrative and other cost savings.” However, it should be noted that the final savings number produced at the end of the five-year contract could be impacted by the final amount FARA realizes in claims payment savings (which may be higher or lower than $50 million) and by whether or not ORM ends up paying more or less than the originally-authorized contract fee amount of $68.1 million to FARA.

The legislative audit further notes that fiscal year 2014 is the second year in which ORM included workers’ compensation claims settled in its estimated savings calculations. A focus on settling more workers’ compensation claims in fiscal year 2013 increased the number of settlements by more than 100 percent from fiscal year 2012. By the end of fiscal 2013, this increase in workers’ compensation settlements alone had contributed $13.5 million to the total running tally of savings to the state under the FARA contract. However, the audit notes that state budgetary constraints in fiscal year 2014 prevented ORM from allowing FARA to continue to settle these workers’ compensation claims as aggressively during that year, prompting a $5.5 million deficit in those settlements during that year, for a cumulative savings in workers’ compensation settlements of $8 million through the fourth year of the contract.

The FARA contract ended June 30, 2015, so ORM is currently analyzing cumulative cost savings to determine whether FARA met the $50 million guarantee. The Legislative Auditor will then review ORM’s analysis and report on the final savings tally under the FARA contract.

For more information contact:

Legislative Auditor
225.339.3800



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Office of the Louisiana Legislative Auditor | www.LLA.La.gov