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excess

The State of Workers’ Comp in 2016

Over the last two years, employers and groups that self-insure their workers’ compensation exposures have enjoyed reasonably favorable terms on their excess insurance policies. Both premiums and self-insured retentions (SIRs) have remained relatively stable since 2014. This trend is likely to continue through 2016, but the long-term outlook for this line of coverage is less promising. Changing loss trends, stagnant interest rates, deteriorating reinsurance results and challenging regulatory issues are likely to have a negative impact on excess workers’ compensation insurance in the near future.

Predictions for 2016

Little direct information is available on the excess workers’ compensation marketplace even though written premiums well exceed $1 billion nationwide. Accurately forecasting changes in the marketplace is largely a function of the prevalent conditions of the workers’ compensation, reinsurance and financial marketplaces. But, based on available information, premium rates, retentions and policy limits should remain relatively flat on excess workers’ compensation policies for the balance of the 2016 calendar year. This projected stability is because of four main factors: positive results in the workers’ compensation industry over the last two years, availability of favorable terms in the reinsurance marketplace, an increase in the interest rate by the Federal Reserve at the end of 2015 and continued investment in value-added cost-containment services by excess carriers.

For calendar year 2014, the National Council on Compensation Insurance (NCCI) reported a 98% combined ratio for the workers’ compensation industry nationwide. In 2015, the combined ratio is projected to have improved slightly to 96%. This equates to a 2% underwriting profit for 2014 and a projected 4% underwriting profit for 2015. This is the first time since 2006 that the industry has posted positive results. The results were further bolstered by a downward trend in lost-time claims across the country and improved investment returns.

Reinsurance costs and availability play a significant role in the overall cost of excess workers’ compensation coverage. On an individual policy, reinsurance can make up 25% or more of the total cost. Excess workers’ compensation carriers, like most insurance carriers, purchase reinsurance coverages to spread risk and minimize volatility generated by catastrophic claims and adverse loss development. Reinsurers have benefited from underwriting gains and improved investment returns over the last three years. These results have helped to stabilize their costs and terms, which have directly benefited the excess workers’ compensation carriers and, ultimately, the policyholders that purchase excess coverage.

According to NCCI, the workers’ compensation industry has only posted underwriting profits in four of the last 25 years. This includes the two most recent calendar years. To generate an ultimate net profit and for the industry to remain viable on a long-term basis, workers’ compensation carriers rely heavily on investment income to offset the losses in most policy years. For the first time since 2006, the Federal Reserve increased target fund rates at the end of 2015. Although the increase was marginal, it has a measurable impact on the long-term investment portfolios held by workers’ compensation and excess workers’ compensation carriers. Workers’ compensation has a very long lag between the time a claim occurs and the date it is ultimately closed. This lag time is known as a “tail.” The tail on an excess workers’ compensation policy year can be 15, 20 and even as much as 30 years. An additional 0.25% investment return on funds held in reserve over a 20-plus-year period can translate into significant additional revenue for a carrier.

Excess workers’ compensation carriers have moved away from the traditional model of providing only commodity-based insurance coverage over the last 10 years. Most have instead developed various value-added cost-containment services that are provided within the cost of the excess policies they issue. Initially, these services were used to differentiate individual carriers from their competitors but have since evolved to have a meaningful impact on the cost of claims for both the policyholder and the carrier. These services include safety and loss control consultation to prevent claims from occurring, predictive analytics to help identify problematic claims for early intervention and benchmarking tools that help employers target specific areas for improvement. These value-added services not only reduce the frequency and severity of the claims experience for the policyholder, but excess carriers, as well.

Long Term Challenges

The results over the last two years have been relatively favorable for the workers’ compensation industry, but there are a number of long-term challenges and issues. These factors will likely lead to increasing premiums or increases in the self-insured retentions (SIRs) available under excess workers’ compensation policies.

Loss Trends: Workers’ compensation claims frequency, especially lost-time frequency, has steadily declined on a national level over the last 10 years, but the average cost of lost-time claims is increasing. These two diverging trends could ultimately result in a general increase in lost-time (indemnity) costs. Further, advances in medical technology, treatments and medications (especially opioids) are pushing the medical cost component of workers’ compensation claims higher, and, on average, medical costs make up 60% to 70% of most workers’ compensation claims.

Interest Rates: While the Federal Reserve did increase interest rates by 0.25 percentage point in late December, many financial analysts say that further increases are unlikely in the foreseeable future. Ten- year T-bill rates have been steadily declining over the last 25 years, and the current 10-year Treasury rate remains at a historically low level. A lack of meaningful returns on long-term investments will necessitate future premium increases, likely coupled with increases in policy retentions to offset increasing losses in future years.

Reinsurance: According to a recent study published by Ernst & Young, the property/casualty reinsurance marketplace has enjoyed three consecutive years of positive underwriting results, but each successive year since 2013 has produced a smaller underwriting profit than the last. In 2013, reinsurers generated a 3% underwriting profit followed by a 2% profit in 2014 and finally an underwriting profit of less than 1% in 2015. Like most insurance carriers, reinsurers utilize investment income to offset underwriting losses. As the long-term outlook for investments languishes, reinsurance carriers are likely to move their premiums and retentions upward to generate additional revenue, thus increasing the cost of underlying policies, including excess insurance.

Regulatory Matters: Workers’ compensation rules and regulations are fairly well-established in most states, but a number of recent developments at the federal and state levels may hurt workers’ compensation programs nationwide. The federal government continues to seek cost-shifting options under the Affordable Care Act (ACA) to state workers’ compensation programs. Later this year, state Medicaid programs will be permitted to recover entire liability settlements from state workers’ compensation plans – as opposed to just the amount related to the medical portion of the settlement. At the state level, there are an increasing number of challenges to the “exclusive remedy” provision of most workers’ compensation systems. Florida’s Supreme Court is currently deliberating such a challenge. Should the court rule in favor of the plaintiffs, Florida employers could be exposed to increased litigation from injured workers. A ruling against exclusive remedy could possibly set precedent for plaintiff attorneys to bring similar litigation in other states. Lastly, allowing injured workers to seek remedies outside of the workers’ compensation system would strip carriers and employers of many cost-containment options.

uncompensated

Time to Focus on Injured Workers

When WorkCompCentral released a report, The Uncompensated Worker, I wrote about how a work injury affects family finances. I applied several realistic work injury scenarios to each state. In 31 states, workers receive a reduction in take-home pay of 15% or more when they’re injured on the job. In half the states, households with two median wage earners—one on work disability and the other working full time—cannot afford to sustain their basic budget.

These findings confirmed what workers’ comp claims adjusters, attorneys and case managers already know: Many injured workers live on the edge of financial collapse.

But the findings are by no means conclusive.  The research done for “The Uncompensated Worker” was too limited. I know, because I did it. To really understand the financial experience of being on workers’ comp benefits, one should run not a handful but thousands of scenarios through a statistical analyzer and then compare the data results with actual cases researched through interviews.

The research agendas of the workers’ comp industry rarely involve looking at the worker her or himself.

Instead, the industry has funded research mainly to understand the drivers of claims costs, specifically medical care. This focus can be explained. Over the past 25 or so years, the workers’ comp industry has absorbed a huge rise in medical costs, more and more layers of regulation relating to medical treatment and even more specialties needed to deliver or oversee medical care.

To illustrate the extent of this industrial-medical complex: Nationwide spending on “loss adjustment expense,” a proxy for specialist oversight of claims, has grown annually on average by 9.4%  since 1990, while total claims costs have risen on average by 2.5%.

The quality of industry-funded research has improved, because of better data and strong talent pools in places like the Workers’ Compensation Research Institute (WCRI), the California Workers’ Compensation Institute and the National Council for Compensation Insurance. Their research focuses on cost containment and service delivery. These two themes often intertwine in studies about medications, surgeries or medical provider selection.

It’s time to pay more attention to the worker. Close to a million workers a year lost at least one day from work because of injury.  We hardly know them. Bob Wilson of Workerscompensation.com predicts that, in 2016, “The injured worker will be removed from the system entirely. … Culminating a move started some 20 years ago, this final step will bring true efficiency and cost savings to the workers’ comp industry.” Industry research, one might say, has left the worker out the system.

An example of how the worker is removed can be seen in how the WCRI did an analysis of weekly benefit indemnity caps. These caps set a maximum benefit typically related to the state’s average weekly wage. (The methodology has probably not been critiqued by states for generations, despite better wage data and analytical methods.) The WCRI modeled different caps to estimate the number of workers affected. But it did not report on what this meant to workers and their families; for example, by how much their take-home benefits would change.

As it happens, Indiana is one of the worst states for being injured at work; it has close to the stingiest benefits for a brief disability. You are not paid for the first seven calendar days of disability. Benefits for that waiting period are restored only if you remain on disability for 22 calendar days. Take-home pay for someone who is out for two weeks or less will likely be 83% less than what it would have been without injury. An Indianapolis couple, both at the state’s median wage, cannot afford a basic month’s budget for a family of three when one is on extended work disability. These poor results are partly because of Indiana’s benefit cap, which is one of the lowest in the country. The weekly benefit cap used in the report, a 2014 figure, was $650.

Les Boden, a professor at Boston University’s School of Public Health, read a draft of “The Uncompensated Worker.” For years, he has studied the income of injured workers and the adequacy of workers’ compensation benefits. He told me, “Studies have shown that many people with work-related injuries and illnesses don’t receive any workers’ comp benefits. I don’t think that the problem is too little research. It’s political. Unfortunately, workers are invisible in the political process, and businesses threatening to leave the state are not.”

I am not sure how the politics of this issue can change until the strongest research centers in the industry begin to pay attention to the worker.

This article first appeared at workcompcentral.com.

Legislative Preview for Work Comp in 2016

Common wisdom suggests that major workers’ compensation legislative activity won’t take place during an election year. For 2016, that would seem to hold true.

That is not to say, however, that various interested parties will be sitting idly by, waiting for the clock to turn to 2017.

CENTERS FOR DISEASE CONTROL ADD TO THE LIST OF CHRONIC PAIN GUIDELINES

On Jan. 13, the Centers for Disease Control and Prevention (CDC) closed the public comment period for its proposed Guideline for Prescribing Opioids for Chronic Pain. According to the CDC, the guideline is being proposed to offer “… clarity on recommendations based on the most recent scientific evidence, informed by expert opinion, with stakeholder and constituent input considered.”

The guideline goes to great lengths to address two important issues. The first is that current guidelines in many states – both public and private – are based on dated information. The second, which is critical, adds to the growing number of voices to say that best practices for providers include accessing physician drug monitoring programs (PDMP) to reduce the risk of doctor shopping and toxic – and sometimes fatal – mixtures of prescription drugs when the patient provides incomplete histories or none at all of their drug use (both prescription and illicit).

This need to access a PDMP before, and during, treatment with opioids is echoed by the Medical Board of California (MBC) and the DWC. Their comments also underscore a considerable problem facing California policymakers when trying to create incentives for providers to use the Controlled Substance Utilization Review and Evaluation System (CURES) without directly mandating access.

This dilemma is best summed up by the analysis of Senate Bill 482 by Sen. Ricardo Lara (D – Bell Gardens) that is at the Assembly Desk pending referral to committee. The bill, which would mandate participation in the CURES system as well as other measures to curb the abuse of opioids, has garnered opposition from medical associations and one medical malpractice insurer. The opposition, according to analyses by legislative staff, is based on two issues – the first being whether the CURES system is capable of handling the volume of inquiries a mandate would engender, and the second being concern that requiring CURES access will become a standard of care that could subject providers to malpractice liability.

As to the former, this issue arose during the campaign waged against the 2014 ballot measure Proposition 46. According to the non-partisan Legislative Analyst’s Office (LAO), “Currently, CURES does not have sufficient capacity to handle the higher level of use that is expected to occur when providers are required to register beginning in 2016.” This raises an important question – does the CURES system now have the capability to meet the demand that a mandate would create? If it doesn’t, then the legislature needs to understand why.

As to the second issue, it is difficult to comprehend the level of distrust that is subsumed in the position that opposing a mandatory review of possible prescription drug abuse by a patient would establish more potential malpractice liability than knowing that the CURES database exists and not checking it. In time, perhaps, it will be the appellate courts that resolve that issue.

There is no shortage of guidelines that address the appropriate use and cessation of use of opioids for non-cancer chronic pain. The DWC is finalizing its latest iteration on this issue as part of the MTUS. It will differ from both the CDC and the MBC guidelines to some degree, but the overall treatment of this issue is very similar. In addition, the division will be implementing a prescription drug formulary as required by Assembly Bill 1124 by former Assembly member Henry Perea (D – Fresno). That, too, will likely provide opportunities to address the proper use of opioids in the workers’ compensation context, preferably after the chronic pain guidelines are completed.

As noted by the CDC and the MBC, and implicit in the DWC’s guidelines, this is not just a question of UR. If all the work by the division is simply viewed as a more effective way of saying “no” regardless of the circumstances, then the public health issues associated with the abuses of opioids will continue.

Workers’ Compensation Insights is a bi-monthly publication of Prop 23 Advisors. Subscribers will receive in-depth analyses of pending California legislation and regulations, review of important WCAB and appellate court decisions and commentary on trends within the system in California and nationally. To read the rest of this newsletter, click here.

Novel Controls on Physician Dispensing

As you know, I’m not a fan of physician dispensing. In limited cases, there can be benefits from patient compliance and convenience and from immediate treatment. However, my opinion is that in most cases physician dispensing creates a motivation to continue prescribing (because revenue to the physician is at stake) and causes patient safety issues (by bypassing the people who really understand drugs — pharmacists and pharmacies — and possibly not taking into account drug interactions).

On top of that, physician dispensing can increase lost time by an injured worker, as documented in a study of Illinois. When evaluating the differences between physician-dispensed and non-physician-dispensed medications, the study found:

  • For physician-dispensed, non-narcotic drugs — medical costs ▲ 39%, indemnity costs ▲ 27%, lost-time days34%, average total claim ▲ 31%, # of prescriptions = 2.99
  • For physician-dispensed narcotic drugs — medical costs ▲ 78%, indemnity costs ▲ 57%, lost-time days ▲ 85%, average total claim ▲ 64%, # of prescriptions = 3.20

Several states have tried to combat inappropriate physician-dispensing over the past few years, using fee schedule and rules and even felonies as countermeasures. Some efforts have been successful, while others have just created a continuing cat-and-mouse game for repackagers and physicians vs. payers.

Well, effective Jan. 1, 2016, Nevada instituted its own type of reform, specific to workers’ comp. The bill does not appear to be ambiguous or up for interpretation. The bill (SB 231) was signed by the governor on May 27, 2015, but the intended (and unintended) ripple effects started last Friday. Read the entire act here. To highlight:

  • Section 1.1.a – A “provider of healthcare” can only provide an initial 15-day supply of Schedule II or III controlled substances to an injured worker. Note that this excludes pharmacists and hospitals, both reasonable carve-outs. Any subsequent such controlled substances must be dispensed by a pharmacy. Excellent.
  • Section 1.1.b – The “provider of healthcare” dispenser must include the original manufacturer’s national drug code (NDC) on bills and reports. Good. This doesn’t necessarily fix the issue of repackagers becoming “manufacturers” of unique (previously unnecessary) dosages and inflating prices, but …
  • Section 1.1.c – A repackaged drug must not be used. Booyah.
  • Section 1.1.d – For outpatient care, a non-prescription drug will not be reimbursable. Excellent.

While not all dangerous or clinically inappropriate drugs are Schedule II or III, these new rules should certainly make a dent in direct dispensing of those that are. This bill does not outlaw physician dispensing, but it does remove revenue motivation so a “provider of healthcare” will focus on the most clinically appropriate care (which may not be a drug). Working as a team, the “provider of healthcare” and the pharmacist should determine what, if any, drugs are clinically appropriate for the injured worker/patient.

It will be interesting to see how the repackaging industry responds. For an example of the state of the industry in Nevada, check out this website. (Nine uses of the word “revenue” on the repackager’s home page. Hmmmm.)

If you operate in Nevada, keep your eyes and ears open. And if you see reactions, please let us all know!

Healthcare’s Lessons for Workers’ Comp

The healthcare industry is going through seismic changes today as it tries to control costs while providing the best care possible to all patients. In workers’ compensation, the changes in healthcare are affecting us in ways we may not recognize. It behooves us to examine what’s occurring on the broader stage of healthcare and what we might learn from the great healthcare experiment that will help us improve workers’ compensation.

During the recent National Workers’ Compensation & Disability Conference (NWCDC) in Las Vegas, a panel of workers’ compensation professionals comprising me, Kimberly George (senior vice president and senior healthcare adviser of Sedgwick Claims Management Services) and Lisa Kelly (senior workers’ compensation manager for Boeing), discussed this very topic: healthcare transformation and how it can help workers’ compensation achieve better outcomes and risk management.

What is happening in healthcare that can affect workers’ compensation?

  • The drive to accountable care. This term refers to providers being “accountable” for the outcomes of the healthcare they deliver – not just for providing the services. “Accountable care organizations” of providers have been created and have also given rise to other configurations such as medical homes – centralizing patients’ care through the primary care physician.
  • Integration of care. There is broad recognition that when services are integrated between facilities, specialties and technology, it is finally possible to deliver truly coordinated care and reap the benefits of improved quality, safety and efficiency. With integrated care, from the onset of a patient’s health episode, all clinical teams are able to communicate, monitor and track the patient’s progress.
  • Pay-for-value versus pay-for-service. Healthcare payers are shifting to payment models that reward higher-quality care and better outcomes, vs. the old fee-for-service model that paid for each transaction.

While there is no indication that our state-mandated workers’ compensation system is moving toward a pay-for-value model at this point, there is a growing awareness and movement toward recognizing the value of integrating care with high-performing physicians and linking services through technology and care coordination to achieve a more efficient and effective treatment plan and a faster return-to-work. It is this area in which we can immediately move workers’ compensation medical management forward. Indeed, that movement is already occurring.

Curing the Patient, Curing the System

Traditionally, workers’ compensation focuses on getting injured workers to the closest provider, instead of the one that delivers the best patient experience and produces the best outcomes. For years, payers have wondered, “Who are the best doctors, and how do I get my injured workers to them?”

Physician scorecards (measuring the outcomes through the life of a claim tied to the treating physician) provide the answer.

Physician scorecards identify physicians who produce superior outcomes at less cost. During a five-year period, a Harbor Health Systems program found that physicians with superior outcomes reduced medical costs by an average of 20%. Previous studies have shown that treatment by these physicians also shortens the duration of the claim and reduces indemnity costs.

The discussion at NWCDC shared the latest data about the results from using these best-in-class physicians, and what we have discovered matters:

  • Recent results document that the higher-ranked physicians produce significantly lower duration of claims, lower claims costs, lower litigation rates, fewer TTD (temporary total disability) days, lower indemnity costs and lower reopening rates.
  • There is a striking difference between one-star physicians and five-star physicians within the workers’ compensation industry.
  • One-star primary care physicians (lowest score being one, highest score being five) had an average cost of $244,246 per claim, while five-star physicians had reduced the cost to $15,196 per claim. This data supports the concept that getting appropriate treatment faster and eliminating unnecessary care saves money on the claims side while getting an injured worker recovered and returning to work faster.
  • With primary care physicians treating injured workers, the average duration of a claim (in days) for five-star physicians was 263; for one-star primary care physicians, the average claim duration amounted to a staggering 2,389 days.
  • The difference in indemnity costs was eye-opening, as well: With five-star primary care physicians, indemnity costs were approximately $5,433. With one-star physicians, indemnity costs skyrocketed to $75,829.

What’s Next?

The ability to use the best physicians for injured workers and to link together superior providers throughout the continuum of care, integrated by technologically enabled communications, is the new goal for workers’ compensation.

The technology now exists to accurately and effectively measure claims outcomes by physician, to get injured workers to see these physicians quickly, to link rapidly with best-in-class ancillary providers and to power the systems to keep the care plan on track for a fast, safe recovery.

Mere cost containment is no longer enough. Workers’ compensation professionals can and must work together to achieve better outcomes – for our organizations and, most importantly, for injured workers. If we focus on curing the patient, we will cure the system, as well.