May 8, 2014
Is Paying Small Work Comp Claims Out of Pocket Ever Smart?
by Kory Wells
In all the scenarios I've constructed, paying out of pocket is hard to justify.
Many of you are well-versed in the importance of medical-only claims to the experience modification rating process. In the vast majority of states, these claims, also known as injury or IJ code type 6 losses, are reduced by 70% for the purposes of the mod calculation. This reduction is known as the experience rating adjustment (ERA).The ERA was first implemented in many states in the late ’90s to encourage employers to report all losses, not just those involving lost-time claims. At that time, it was common for companies to pay, rather than report, their small claims to avoid having those claims count against the mod. NCCI and other stakeholders were interested in collecting all possible data for statistical actuarial purposes, so the ERA was introduced. More than 15 years later, a reduction of medical-only losses now applies in 38 states, but within the industry I still hear a fair amount of talk about employers self-paying small workers’ compensation claims — even in ERA states. The many responses to the March 9, 2014, question “Do Employers Have to Report First Aid Claims?” on the Work Comp Analysis Group on LinkedIn illustrate how complex this issue can be. (Claims designated as “first aid” often have a different connotation from “small medical-only claims” in some states and to some carriers, but the discussion definitely overlaps with this article.)
All of this talk raises the question of whether we can analytically show that it saves– or costs — the employer to pay small med-only claims “out of pocket.” With the help of ModMaster, that’s what I examine in this article. Before we look at some scenarios, let’s not forget the following points.
Key factors to keep in mind
- Self-payment of small claims is not legal in all states, or may be subject to fines or penalties. Specific rules are determined by state workers’ compensation statutes. For example, the Missouri Department of Insurance specifically suggests taking advantage of the state’s Employers Paid Medical Program to reduce the cost of work comp coverage. Clearly, it’s important to know the rules in your state.
- Self-payment of claims also has implications at the federal level if injured employees are eligible for Medicare.
- Employer access to state or “reasonable and customary” fee schedules is an important consideration in the cost of self-paid claims.
- Perhaps most important, employers paying small claims out of pocket may risk liability if those claims should develop into something more costly.
A sample scenario in states where ERA is approved
For this analysis, I’ve imagined a relatively small business, Mike’s Machine Shop, operating in Missouri and Indiana (both ERA states) with these attributes:
- An effective date of 1/1/2014
- Approximately $1.7 million to $1.8 million in payroll each year, in codes 3632 and 8810, generating a minimum mod of 0.73
- Three itemized losses, all type 5: $8,000, $12,000 and $45,000
- The assumption that the shop had one $1,000 med-only claim per month in 2012, for a total of $12,000 in type 6 losses. (I chose $1,000 as a value that’s clearly med-only and yet above what might be considered a first-aid-only claim in some states.)
The good news is that self-paying creates a lower mod and therefore a lower premium. In 2014, Mike will save three points on his mod and $1,500 on his premium if he doesn’t report those 12 small claims. And, because those claims aren’t hanging around on his mod for two more years, he’ll save about $1,500 in 2015 and 2016, too. But we’re not done with the story! The bad news is that the self-paid claims costs add considerably – in this case $12,000 – to Mike’s Year 1 total cost of risk.
Let’s look at Year 2 of this scenario and imagine that Mike has instituted some safety improvements so that the shop has had just one small claim per quarter in 2013, for a total of $4,000 in type 6 losses. Let’s also imagine, for the sake of this analysis, that payroll and the other itemized losses have stayed exactly the same, as have rating values.
If Mike is not reporting small losses, then his mod and premium are the same as in 2014. If he is reporting the small claims, then the new claims in 2013 drive his mod to 0.99 — one more point than the 2014 mod. Cumulatively, the 2012 and 2013 small reported claims are responsible for four points, or approximately $2,000 in premium. Because Mike’s self-paid claims costs are considerably lower this year — $4,000 — then the Year 2 total cost of risk differs only by $2,000 between reporting and not reporting losses. Still, though, Mike has a financial advantage to report claims, especially when considered over the cumulative two-year total cost of risk.
The same scenario in a non-ERA state
If Mike were operating in a state that has not approved the ERA reduction, then the impact on the mod of small med-only claims is certainly more significant, and it’s easier to see how the scales could tip in favor of not reporting. However, in this example, using all the same assumptions as above, the overall cumulative cost savings still favors reporting of claims.
In states that have not implemented the ERA reduction, the total cost impact of paying work comp claims out of pocket requires especially close analysis.
These, of course, are just a couple of scenarios, and there are myriad reasons that ultimate costs could vary from these simple examples. However, in all the scenarios that I’ve constructed (many more than discussed here), paying small claims out of pocket seems hard to justify in ERA states. Even in non-ERA states, deciding whether to pay small claims out of pocket demands a detailed analysis that accounts for all associated costs, such as any fines and applicable medical fee schedules. In all cases, knowing your state rules is imperative. Refer to your state’s Department of Insurance or to the NCCI’s Unit Statistical Reporting Guidebook for more information.
As an analytics enthusiast, I tend to believe that claiming all losses results in better data — not just for the bureaus or insurance carriers but also for employers. And better data, of course, leads to more meaningful analysis opportunities. If an employer is working with an agent, broker or other risk management professional to analyze and act on their mod data, then why not have the complete picture and reveal all trends and drive the most appropriate operational initiatives toward improvement?