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The market, laws and outlays, and a growing epidemic of opioid abuse—will these and other factors wreak havoc on workers’ compensation?
Workers’ compensation has always been beset by financial twists and turns. Because it is a long-tail insurance line, workers’ compensation requires forward-looking assumptions about the economy, legislation, cost trends and other factors.
Reforms that impact workers’ compensation can take years to affect system results. Anticipating what could happen requires more than a close eye on the nation’s 50 state jurisdictions. Federal legislation—such as the Patient Protection and Affordable Care Act (PPACA), The Terrorism Risk Insurance Act (TRIA) reauthorization and potential changes to Medicare set asides—are also affecting the nation’s oldest form of social insurance.
Evaluating the status of the workers’ compensation line always depends on access to quality data and its interpretation. From a national historical perspective, workers’ compensation is not in crisis, but there are lingering issues that affect its financial predictability.
Premium increases have been the norm across the market during the last three years, said Bruce R. Hockman, executive vice president/specialty client development manager of JLT Re Inc.’s North America division. These increases are continuing. MarketScout, which monitors pricing, reports that workers’ compensation premiums have been going up about 3 to 4 percent in recent months. Workers’ compensation rates went up 4 percent in January 2014 compared to the same month in 2013, according to PropertyCasualty360.com. (See the February 5, 2014, article by Phil Gusman.)
Despite premium increases, the combined ratio shows the line is not profitable, said Nancy R. Treitel-Moore, FCAS, director of workers’ compensation product management for Liberty Mutual Insurance.
According to the Insurance Information Institute (III), the workers’ compensation line produced an average return on net worth of 6.2 percent for 2011, the most recent year available. The industry needs to earn about 9 to 10 percent to be financially healthy, said Steven Weisbart, III’s senior vice president and chief economist. “It is an industry trying to reach profitability that it can sustain,” he added.
The combined ratio for calendar year 2013 is 106, according to estimates available at press time from the National Council of Compensation Insurance, Inc. (NCCI), the largest workers’ compensation rating bureau in the United States. This mirrors the average of 105.9, for the past 10 years, which is down from 108 for 2012, according to NCCI. The A.M. Best Company reports a higher combined ratio than NCCI’s for 2012 at 110.3, which is the first decline since 2006.
Profitability has always related to underlying claim costs. But this is not the only issue. The industry has not had to operate in a low interest rate environment before, said Treitel-Moore. As a result, for insurers to be profitable, they need a combined ratio in the mid-90s, which represents an industry “mind shift.”
“Interest rates drive what we can afford to write workers’ compensation at,” she said. While premiums have been increasing, she is concerned they will not increase enough to make up for the income shortfall.
This has also changed the dynamic for writing large deductible policies, said Treitel-Moore. Higher reserves drive need for more surplus (a.k.a. capital) to support holding the reserves, she explained. But due to the low interest rate environment, insurers are not getting much investment income, while still needing a lot of surplus to support reserves on deductible business. “Insurers need more underwriting profit to generate adequate returns (for these policies),” she said.
Additionally, interest rates will not be going up soon since the Federal Reserve recently announced its intention to keep rates low for the next 10 to 24 months, according to Harry Shuford, NCCI’s chief economist.
Shuford also commented on approved loss costs, noting that the lost cost changes filed by NCCI for calendar year 2014 are estimated at minus 0.6, the first decline since 2010. Loss costs across NCCI’s 36 states are flat, with about half the states seeing small increases and the rest experiencing modest decreases.
There is continued modest growth in the residual market in NCCI states as well. From 2011 to 2012 policy years, the market rose $300 million, from $500 million to $800 million in premium. This growth continued in 2013.
While the voluntary market has shown signs of tightening over the last three years, Shuford does not expect the overall market to harden in the near future for NCCI states.
Meanwhile, net written premium has increased to $37.2 billion for calendar year 2013, according to NCCI, but it has not reached its pre-recession high from calendar year 2006. A.M. Best, which uses other data to reach its conclusions, estimates net written premiums rose 9.5 percent from $41 billion in 2012 to $44.3 billion for 2013.
Rising Claim Costs
Workers’ compensation indemnity and severity costs for lost-time claims are going up steadily in NCCI’s 36 states, but declines in frequency are helping to keep total costs at bay.
Frequency of claims resulting in seven or more days lost from work for NCCI states declined 5 percent for accident year 2012 following a 3.9 percent decline in 2011. Other than the 10.8 percent frequency uptick in 2010, frequency numbers have been declining since 1998. In fact, since 1991, only three years have shown frequency increases. “Indemnity/severity levels in many states are essentially flat after considering wage increases,” Shuford said.
Average indemnity per claim for accident year 2012 rose a mere 1 percent and returned to 2009’s amount of $22,400 per claim. Returning injured workers to some form of work helps keep indemnity costs down, but employers are struggling to offer jobs to the workforce in general, let alone those on workers’ compensation. “As long as that is the situation, indemnity costs are going to increase,” Hockman said.
Another challenge, said Treitel-Moore, is that there are states changing benefits retroactively, “and of course we are not allowed to adjust our premiums retroactively.”
Curbing Medical Costs
Medical costs per claim, which began surpassing indemnity costs in the 1990s, continue to rise, albeit at a slower pace than in the past. For accident year 2012, NCCI estimates that the cost per claim for medical was about $28,500, up 3 percent from $27,700 in 2011.
Medical treatment for workers’ compensation cases has been higher than that for group health for decades and the challenge continues. Multiple studies by the Workers Compensation Research Institute (WCRI) confirm this is still a problem. One study last year, based on data from 22 states, revealed that non-hospital prices paid for common surgeries were two to four times higher than the same ones covered by group health insurance in almost all states in the study.
Returning injured workers to some form of work helps keep indemnity costs down, but employers are struggling to offer jobs to the workforce in general, let alone those on workers’ compensation.
Since 2009, workers’ compensation medical costs have risen nearly 3 percent per year, Shuford said. Workers’ compensation, however, has a history of much higher, even double-digit medical cost increases that began more than 20 years ago. And the industry does not want to see that again.
“What is making workers’ compensation actuaries nervous are the rates of change in medical severity,” Shuford said. He also noted that actuaries are concerned because it is unclear as to why the rate of medical costs has tapered and if this will continue.
The question is whether these modest increases were the result of the Great Recession or a more permanent trend. Medicare actuaries, he said, attribute the decline to the recession. Others believe pre-recession structural changes in the health care industry—such as doctors giving up sole practices and hospital consolidation—caused permanent reductions.
“Such changes suggest that at least some of this decline is due to permanent changes as opposed to lower employment or contracting health care coverage,” Shuford said.
Pharmaceutical costs have been the most quickly rising segment of workers’ compensation medical costs in recent years, Hockman said. According to a study by NCCI, drug costs make up about 18 percent of claim costs.
Since it is more difficult in today’s economy to find return-to-work jobs, disability periods for injured workers are extended and extensions of medical treatment normally follow. “Very often the only way to mitigate such rising costs is, when and where possible, to negotiate a claims settlement,” added Hockman.
The insurance industry is aggressively addressing part of those costs. “The most urgent issue facing workers’ compensation nationally remains the costs of prescription drugs—especially opioids,” said Bruce C. Wood, associate general counsel and director, workers’ compensation for the American Insurance Association (AIA).
“We have situations where we have to pay for opioids even though we’ve raised concern about injured workers becoming addicted to them. Then they get addicted and then we have to pay for the drug rehab program.”
It is urgent because injured workers on opioids might never get back to work. “Think about the reserves that would have to be posted,” he added.
Opioid abuse is being confronted and addressed in many jurisdictions, Wood said. Because the issue has been getting a lot of attention lately, the industry “might be reaching the peak when it comes to the severity of the problem,” said Mark Walls, market research leader of Marsh USA’s Workers’ Compensation Center of Excellence. Thanks to the attention the issue is getting, physicians are more hesitant to prescribe opioids for workers’ compensation and otherwise, he added.
There is another wave of potential costs associated with the opioid epidemic, Walls said, in covering injured workers suffering the long-term side effects of being treated with opioids. “As an industry, we are just starting to see those side effects come up,” he added. Walls predicts that these costs will grow much worse going forward, affecting claims and legal expenses for both workers’ compensation and the health care industry.
If injured workers can tie long-term negative effects of the drugs back to the work-related injury, then insurers may have to cover them, said Treitel-Moore. As a simple example, she added, “We have situations where we have to pay for opioids even though we’ve raised concern about injured workers becoming addicted to them. Then they get addicted and then we have to pay for the drug rehab program.”
The other urgent issue is physicians dispensing medication, Wood said, which is another medical cost driver. A study released last year by the California Workers’ Compensation Institute showed that the cost of physician dispensing, in repackaging and ancillary costs, generated higher medical and indemnity costs. “The AIA objects to physician dispensing, period,” Wood said.
There is evidence that addressing this issue does save money. The Workers Compensation Research Institute (WCRI) reported that new regulations in Georgia reduced prices paid for physician-dispensed drugs by 22 to 36 percent. Additionally, many physicians continued to dispense medication to injured workers despite the resulting price caps.
Treitel-Moore is also concerned about the rise of comorbidities in injured workers, such as obesity and diabetes, which can interfere with treatment for work-related incidents. NCCI released a study in 2012 that shows the claim duration of obese claimants on temporary total and permanent total benefits is more than five times that of the non-obese. For injured workers on permanent partial benefits, the indemnity benefit duration is more than six times as much.
Besides legislative measures, there is more good news for addressing claim costs. Ensuring that the right doctors treat injured workers as soon as possible does save on medical costs. “We have some internal studies to show this is true,” Treitel-Moore said.
Anecdotal evidence shows upfront investment in medical care does save money. For example, A.I.M. Mutual Insurance Companies experienced increases in client acquisition, premium growth and persistency after applying this and other best practices with The Best Doctors Occupational Health Institute (BDOHI).
These practices included a software tool to identify high-risk workers at time of injury, utilizing nurse patient advocates to help injured workers get access to occupational health centers and medical specialists with proven clinical expertise, and a willingness to treat their patients as industrial athletes.
As a result, the insurer saw the incidence of lumbar fusions decrease by 50 percent, said Michael Shor, managing director of BDOHI. The amount of prescriptions written, including opiates and “me too” brand name medications, also declined annually.
Ensuring the best medical care immediately and other best practices are important for managing workers’ compensation costs. Hockman is worried these important initiatives could get lost if the Affordable Care Act begins to affect workers’ compensation.
Impact of The Affordable Care Act
Granted, any prediction about the impact the Affordable Care Act will have on workers’ compensation is speculation. Since it continues to change, its potential effect on comp is a “moving target,” Wood said.
But Hockman sees danger ahead if the Affordable Care Act reaches into workers’ compensation medical treatment. It’s not a far-fetched concern. Many experts believe that it is just a first step to nationalizing health care completely.
He points to the state of Vermont, which already has universal health care. Last year, he said, workers’ compensation medical care was folded into the state’s health care plan. Workers’ compensation best practices for health care fell away with it.
Timely access to quality care with appropriate diagnostic capabilities are critical requirements of successful disability management, Hockman said. It is not at all certain that these are clear objectives of the Affordable Care Act, Medicare, Medicaid or any other governmental medical system anywhere.
More immediately, Walls is concerned about cost shifting since workers’ compensation is the “last bastion” of first dollar medical coverage. The higher costs associated with the Affordable Care Act could give workers incentive to claim an injury is work-related.
Access to care is another concern, Walls said. Since the Affordable Care Act increases the insured population and there is a limited supply of physicians, workers’ compensation payors need to ensure that injured workers have access to the best medical providers. This means payors need to move away from traditional physician network models, which focus on discounts. Instead, Walls noted, they should identify medical providers who produce the best outcomes for injured workers.
Other legislation in Congress can improve workers’ compensation health care costs. A bill is being considered that would improve Medicare set-aside procedures for settled workers’ compensation claims. Called the Medicare Secondary Payer and Workers’ Compensation Settlement Agreements Act, the bill, if enacted, would establish a predictable and efficient process while also providing reasonable protection for injured workers and Medicare.
“The bill would provide certainty about the method of determining future medical amounts and reduce the risk of workers’ compensation plans having to carry unnecessary reserves,” said Doug Holmes, president of UWC Strategic Services. This would have a positive actuarial effect on premiums and amounts reserved, he added.
There is evidence that settlements became more prevalent as interest rates fell, Hockman said. “It was less advantageous for an insurer to place potential loss dollars into reserves given the relatively low investment income potential in doing so,” he added. Giving carriers greater settlement capabilities—to the extent they are provided for by law, and where the rights of injured workers are protected, will play a large role in the claims mitigation process. Hockman noted that this should save loss valuation and administrative costs.
Chances of Congress passing the bill depend on remaining time on the legislative calendar and opportunities for the issues to be addressed. “I think we have a better chance of passage this year because of the increased attention being paid to Medicare and Centers for Medicare and Medicaid Service policy,” Hockman said. Wood added that the bill’s provisions could also be amended to other legislation to assure passage.
Terrorism Risk Backstop
Congress is also considering whether to extend the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). This legislation extended the Terrorism Risk Insurance Act of 2002 (TRIA), which provided a reinsurance backstop from the federal government in the event of large-scale terrorist attacks.
TRIPRA is in effect until December 31, 2014, so supporters are urging Congress to act this year. “Failure to extend TRIA would have a significant impact on workers’ compensation,” Wood said.
Ultimately, Shuford of NCCI said, this would expand the residual market.
Although senior executives of insurance companies believe it will be reauthorized, Shuford sees this as a concern. “It seems to be the right thing to do, but Congress has this tendency to wait until the last minute, so we probably won’t know until the end of this year.”
Conclusion
Determining how the economy and this year’s workplace injuries, illnesses and deaths will affect future claim costs will not be known any sooner than how state and federal legislation will leave their mark in the years ahead. But workers’ compensation actuaries are always dealing with the unknown.
What is known, however, is that the industry has kept itself going for more than 100 years. And if the past is a predictor of the future, workers’ compensation will remain resilient in the years to come.
Annmarie Geddes Baribeau has been writing about workers’ compensation and actuarial issues for more than two decades. Find her musings at annmariecommunicatesinsurance.wordpress.com.