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Curing The State Insurance Fund

New State Insurance Fund Administrator Nicolas Lopez Peña wants to be the miracle cure for the SIF’s financial headaches


August 9, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Can Lopez Peña be SIF’s superhero? The new administrator plans to put the State Insurance Fund back on track. His plans include increasing income from 15% of employers who don’t pay.

The State Insurance Fund (SIF) has long been a headache for officials trying to breathe new life into the ailing agency. The new SIF administrator, Nicolas Lopez Peña, plans to cure SIF’s financial ills and make it not only solvent but vibrant.

"In fiscal 1999, the SIF had operational losses of $40 million," said Lopez Peña, adding that 1997 was the last year in which the SIF had any profits, totaling $9 million. Fiscal 2001’s losses are approaching the $40 million range.

Yet Lopez Peña is convinced that SIF will yield modest profits by fiscal year 2003. To meet this goal, Lopez Peña and his team have developed several strategies to revamp SIF’s precarious financial situation.

To start with Lopez Peña plans to win over the estimated 15,000 to 20,000 employers who skirt the law and don’t pay into the workers’ compensation system.

At present, SIF provides medical treatment to more than 160,000 injured workers and issues about one million prescriptions a year. In FY 2000, SIF collected $511 million in premiums and endured operational expenses of about $586 million including some $180 million paid out in workers compensation benefits.

"There are about 150,000 employers complying with worker’s compensation in Puerto Rico, but there are about 10% or 15% of employers who don’t comply," Lopez Peña explained. Part of the problem is the number of employers operating in the underground economy who don’t pay SIF, Social Security, or their share of employee benefits and taxes as required by law.

SIF’s current budget is $565 million. "This budget is not assigned by the government, it is generated from the premiums collected from employers," added Lopez Peña. So collecting from even half of those not paying could make quite a difference. Even given the fact that many of these non-complying employers are likely to be small shops with few employees, their compliance could represent at least $25 million additional income by conservative estimates.

But instead of only hunting down employers who don’t pay, the SIF will publicly praise employers who do and ensure that everyone knows the benefits of compliance.

Of course, this doesn’t mean that scofflaw employers will get off scot-free. Lopez Peña plans to implement surprise inspections to encourage all employers to pay up. After all, both employers and employees benefit through compliance, he said.

It is important for all employers to comply because the SIF helps injured workers, even if their employers are not paying into the worker’s compensation fund, according to the SIF chief. Non-complying employers aren’t charged for services until after an injured employee is given medical attention. Another benefit of complying is avoiding a heavy 22% administrative penalty fee that the SIF imposes on delinquent employers, he said.

An employer census to check on the rate of compliance has not been performed in more than 10 years, said Lopez Peña. So the number of non-complying employers is merely an educated guess at this point.

The new administrator

Lopez Peña, who became SIF administrator in January, has to unravel the agency’s fiscal nightmare. While he works to bring in more revenue, he will rely on his proven expertise in trimming excess fat to save money in large corporations for the same results at SIF.

His experience includes working as a top executive with Banco Santander, the island’s second largest bank, where he was executive vice president and corporate controller. (See related story.)

In these positions, he helped the bank save millions of dollars. Now he is applying his know-how to cure SIF from its financial malaise without having to resort to privatizing the government corporation, and he believes he can accomplish this by 2003.

When Lopez Peña became SIF’s administrator, he knew the job wouldn’t be easy, but he is confident that he can achieve his objectives. And he is trying to spread this feeling of confidence to the more than 4,000 employees at SIF.

SIF was created in 1935 as a government corporation to provide workers compensation insurance, and also to provide medical services and rehabilitation to injured workers at its Industrial Hospital. At the time Lopez Peña took over, he said the SIF had operational losses of almost $30 million in fiscal year 2000 and its financial resources were in a critical stage.

Savings opportunities galore

Lopez Peña has taken a magnifying glass to the agency to find any cuts he can make. For one, he said $40 million were used to purchase and install an information system (IS) that ended up being unable to communicate with its different components, basically rendering it useless. Now, he is investing $6 million to make the IS work as it should, to make the agency more efficient, centralizing information and reducing duplication of efforts.

Once all the IS components are centralized and able to inter-communicate, SIF and its Industrial Hospital will be able to make appointments efficiently. Lopez Peña said this will allow employees to tell their employers precisely when they will be at SIF, and when they will be back at work. Currently, employees visiting SIF must wait for hours before they’re helped, which means they usually lose a full workday, something that affects them as well as their employers.

Lopez Peña also found weaknesses in internal controls and the monitoring of bank account statements. "Bank account statements were reconciled only once a year, and this is a situation that should never, ever happen. Now we do it every month."

But another former SIF official who preferred to comment anonymously said there was no such weak monitoring, because a group comprised of the board of directors, union leaders, the Secretary of Health, and the Secretary of Labor, among others, were in charge of that process.

Lopez Peña also found the SIF suffering from superfluous expenses. The past administration was spending almost $2 million on unnecessary items, he said. "There were 200 beepers and cellular phones being used and we have reduced that to 20 beepers and 15 cellular phones," he said, adding that even he turned in a beeper. With this measure, the SIF will save an estimated $250,000 per year.

Last week, Lopez Peña signed an agreement to provide Automobile Accident Compensation Administration (AACA) beneficiaries medical services. In the early stages, the services will be limited mostly to radiology, on which AACA currently spends some $10 million. The change is expected to save AACA money while contributing an as yet undetermined amount to SIF’s coffers.

Lopez Peña recently announced a plan to cut $1.3 million in salary to trust–or politically appointed–employees, along with renegotiation of contracts for medical services.

But an austerity plan and its potential to save an estimated $8 million is not enough to heal the SIF’s financial condition. Capital investments must be made to improve infrastructure, expand profitable medical services, and offer better service to injured workers.

First, the band aid

Due to its shaky financial situation, Lopez Peña had to obtain permission from SIF’s board of directors to use $10 million in restricted funds--from the money market accounts in the corporation’s investment portfolio--and a $60 million loan from the Government Development Bank (GDB) to cover operational expenses. However, according to Lopez Peña, the $70 million was not used in fiscal 2001, which ended in June, because the savings he implemented helped lower expenses. SIF’s regular income stream contributed to covering costs, he said.

"The $10 million we took with the permission of the board of directors was put back into the restricted funds because we saw that we didn’t need them at the moment," said Lopez Peña. On the other hand, the $60 million in funds from the GDB loan will be used in fiscal 2002 to cover operational expenses and also to improve SIF’s infrastructure, he said.

Lopez Peña said the $10 million was taken as a short-term solution before SIF asked the GDB for a loan. After the GDB approved the $60 million loan, the $10 million was returned to the restricted funds.

The GDB loan will be used for capital investments.

Putting the package together

"I don’t understand how we can have a central office building that’s valued at about $75 million and have a hospital--where our injured workers come to receive medical attention--that is practically falling apart," said Lopez Peña, referring to the SIF’s Industrial Hospital. The plan is to expand and improve specialized services offered at this hospital, particularly those of the Burn, Lower Back, and Spinal Cord Trauma Units, which Lopez Peña said have great potential to become profit generators because they are unique in the Caribbean.

Lopez Peña is also pondering whether to expand alternative medicine treatments such as acupuncture, which is already being offered at the Industrial Hospital. "This type of treatment is enjoying a lot of demand from the public," he said.

He also plans to shift medical services from specialized to multi-disciplinary. This means that injured workers will not receive attention by one professional alone, but will instead have a team of professionals from different areas evaluating and helping them recover faster so they can get back to work.

Support groups are also on Lopez Peña’s wish list. For example, he envisions support groups for amputees, so that rehabilitated injured workers can share their experiences with new patients enduring similar injuries. This will help them cope with their new lifestyle effectively, and will also enable them to return to work and continue producing. "I have a lot of hope for this," he said.

Lopez Peña also sees the SIF offering its services beyond the island’s frontiers through alliances with other organizations, such as the recent agreement with AACA. "This means we will have to employ more people, but in the end it will all translate into profits."

A change in the wind

As part of the changes being implemented by Lopez Peña, SIF’s investment portfolio will also be revised. "Right now, we have about $1 billion in restricted funds," said Lopez Peña. "But in calendar year 2000 our investment portfolio showed a loss of $50 million."

Those $50 million were not really "lost," but were what in investment parlance is called an "unrealized loss." A shareholder has an unrealized loss when he or she buys a share for $100 but its value drops to $50, for example. The loss is not "realized" as long as the shareholder doesn’t sell the share because its value could increase to $120 the next day, as it also could plummet to $10.

Marielli Moro, deputy administrator of finance at the SIF told CARIBBEAN BUSINESS that in the course of the current year, SIF’s investment portfolio’s value has increased by an estimated $9 million.

The SIF chief said he is working hand in hand with the corporation’s money managers, establishing criteria to follow when allocating resources for investments. This way he hopes to improve the investment portfolio even further. "Now, money managers are not the people making investment decisions, we (the top management) are making those decisions," Lopez Peña said.

SIF money managers will be reduced from the current eight to a maximum of six. The agency’s current money managers include companies such as Wellington, Invesco, and Solomon Smith Barney. A portfolio manager at one of these companies told CARIBBEAN BUSINESS that a possible overlapping in money managers’ work could be the reason for eliminating some of them.

The SIF’s investment portfolio will be redesigned so that it is less volatile, something that is key, considering that the economy is not at its best. "Today, stocks--which are very risky--comprise 15% of our investment portfolio and they don’t have a stop-loss mechanism. We want to reduce stocks to 10% and we will be monitoring those stocks very closely every single day because we don’t want to incur in any loss," said Lopez Peña.

Fixed income investments will comprise 80% of the SIF’s redesigned investment portfolio, including U.S. Treasury Bonds and 30-Year Bonds, which have different maturity rates.

The remaining 10% will be invested in money market products and Lopez Peña and his team are also considering investing in hedge funds. "We are analyzing how we should invest in these at the moment." A local portfolio manager, who spoke on condition of anonymity, said hedge funds generally have enjoyed good results, but losses could be greater if they’re used for speculation. Basically, hedge funds protect investors against a future drop in stock value.

Add it all up and Lopez Peña’s plan is major medicine for an ailing patient.

This Caribbean Business article appears courtesy of Casiano Communications.
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