Tag Archives: workers compensations

How Health Rebates Affect Workers’ Comp

In a popular article published earlier this year, Mark Walls examines the complex relationship between the Affordable Care Act (ACA or PPACA) and workers’ compensation. While I recommend the entire article, today I want to focus on one point that Mark highlights. In preparing for the effects of the fully implemented ACA, Mark advises that employers should:

“Carefully manage the approach to healthcare premium rebates, which could affect how payroll is calculated under workers’ compensation.”

I’ll be honest – until I read Mark’s article, I was happily leaving all of Zywave’s ACA discussions to our own Erica Storm, an attorney who’s been monitoring and writing about healthcare reform for several years. But the words payroll and workers’ compensation jumped out at me. If workers’ comp payroll can be affected by the rebates, then so can experience mods and workers’ compensation premium. How much impact are we talking about? With Erica’s help on the ACA side of things, I delved deeper into the topic.

Premium rebates introduced by healthcare reform
The concept of health insurance premiums affecting workers’ compensation payroll is not new, but ACA-mandated rebates, which began in 2012, have introduced a new level of complexity in the accounting. ACA requires insurers with a certain medical loss ratio (MLR) to issue a rebate to employers. Guidance to employers on rebate options is vague, but options may include

  • passing along MLR rebates to employees,
  • applying rebates to future premiums, or
  • applying rebates to benefit enhancements.

Whatever option is chosen, the plan sponsor must follow the fiduciary duties of prudence, impartiality and acting for the exclusive benefit of plan participants. When employers pass along any portion of the rebates to employees, such rebates must be counted as payroll for the purposes of workers’ comp. Note that this rule applies as long as the rebate to the employee is through the employer and not directly from the insurance provider. The rule also applies regardless of whether the rebate distribution is taxable or non-taxable.

Payroll rules in more detail
Payroll for the purposes of workers’ compensation is defined in the applicable bureau manual; the majority of states use NCCI’s Basic Manual for Workers Compensation and Employers Liability Insurance. Rule 2-B-1 lists payment types included and rule 2-B-2 lists payment types excluded for the purposes of calculating workers’ compensation payroll. But most helpful with regards to rebates is a separate NCCI article, The Patient Protection and Affordable Care Act and Workers Compensation Premium Determination. Be sure to check out the handy tables to make sense of how both insurance premiums and rebates can be included or excluded from payroll.

A sample scenario
An employer’s decision on what to do with a rebate can be complex, depending on the type of group health plan and whether the rebate is considered a plan asset.  The workers’ compensation aspect is admittedly almost an aside. Yet as we all know, even small impacts add up. For an employer that passes along a rebate to its employees, how much impact might that employer experience on its mod and premium as a result?

To answer that question, it’s first important to note that the state and insurer matter. In many states, the average rebate paid in 2013 (for 2012 premiums) was less than $100 per family. Clearly, for many employers, that isn’t going to significantly affect payroll through rebates. However, in some states and for some plans, the average rebate was much higher. According to government data on 2012 premium rebates, 10 states (excluding territories) had large group rebates averaging from $340 to more than $1,250; eight states had small group averages of $300 or more.

Using that information as a rough model, I constructed a sample “high rebate” scenario to test its effects on workers’ comp premium. I imagined:

  • a 100-employee manufacturing business in Illinois
  • an average hourly wage, including most benefits, of $35.00 (roughly based on June 2013 Employer Costs for Employee Compensation data for goods-producing occupations from the Bureau of Labor and Statistics). For simplicity’s sake, I’ve assumed that all costs are reportable for workers’ compensation purposes.
  • 80% of the workers in payroll code 2797 – manufacturing
  • 20% of the workers in payroll code 8810 – office work
  • a relatively high level of losses that has driven the company’s mod to 1.20, while the minimum mod, based on zero losses, is 0.61 (these values were determined using ModMaster)
  • two rebate levels to analyze, assuming for each that the full amount is returned to employees:
    • a high but not unrealistic $1,000 rebate
    • a probably unrealistic $3,500 rebate

First let’s take a look at the calculation of this sample company’s manual premium, followed by its final premium at various mod levels.

Before any health insurance rebates, our sample company has a mod of 1.20 and associated premium of over $800,000. Note how low their minimum mod and premium could be.

Before any health insurance rebates, our sample company has a mod of 1.20 and associated premium of more than $800,000. Note how low the minimum mod and premium could be.

When a $1,000 rebate is introduced, the manual premium is increased by the same percentage as the effective total payroll increase – in this case 1.4%. But what I was very curious to see was whether, in the mod calculation, the increase in payroll was enough to increase expected losses and thus lower the mod, thereby offsetting some of the manual premium increase. As you can see below, this was not the case. Although expected losses (not shown) did increase, they didn’t increase enough to actually change the minimum mod or current debit mod values.

A $1,000 per employee rebate edges up payroll, but not enough to significantly impact expected losses in the mod calculation. The effective rate of the payroll increase therefore applies to the final workers' comp premium regardless of the mod value.

A $1,000 per employee rebate edges up payroll, but not enough to significantly change the mod calculation. The effective rate of the payroll increase therefore applies to the final workers’ comp premium regardless of the mod value.

So how large would rebates need to be to actually affect the mod as well as the premium? I experimented with several rebate levels and for this payroll scenario found that the magic number was somewhere around $3,500:

A $3,500 per employee rebate impacts payroll enough to change both the current and minimum mod values. This makes estimating the ultimate impact on workers' comp premium a bit more complex, requiring an analysis like this one.

A $3,500 per employee rebate affects payroll enough to change both the current and minimum mod values. That mod decrease in turn mitigates the overall premium increase.

When $3,500 is added to each employee’s salary, the resulting increase in expected losses in the mod formula is enough to drop the minimum mod by 0.01 and the current debit mod by 0.02. For this example, that offsets the 4.8% payroll and premium increase to only 3.1%.

In summary
The above example is considerably simplified; in reality, the included/excluded payroll calculation would be more complex, and additional premium credits and debits would likely apply. Results could vary greatly with company size, as well. Nevertheless, the example suggests:

  • As a rule of thumb for employers considering their rebate options, it seems reasonable to use the total amount being rebated to employees divided by the original included payroll as an approximation of the employers’ workers’ comp premium increase. The actual increase may vary when accounting for a change in the mod value or effects of other premium debits and credits.
  • Even a rebate of less than 1% may, if returned to employees, add up to thousands of dollars of premium expense for all but the smallest employers, in addition to the administrative costs of processing the rebate.
  • While relatively high-dollar rebates may be rare, employers should be especially sensitive to their increased impact on premium.

Employers should also keep in mind that, per NCCI, “an employer is required to keep records of information needed to compute premium. In addition, the employer must provide those records to the carrier, when requested, for the purpose of auditing the employer’s workers compensation policy.”

While some insurance professionals suggest that rebates may diminish with time and premium stabilization, others disagree. There’s also been discussion in the press of possible policy endorsement or other changes to protect employers from additional premium charges as a result of rebate distributions. The one thing we can all agree on is that the “bigger picture” relationship between ACA and workers’ compensation is a blurry image that will take years to fully develop.

Have you or your clients experienced a mod or workers’ compensation premium increase because of distributing a MLR rebate to plan participants? I’d love to hear your experience in the comments below.

Workers’ Comp: How We Got Here

The workers’ compensation insurance marketplace in California may at times seem like the Wild West. From the employer standpoint, it involves a dazzling array of choices and options. It is driven by a value proposition that can perilously tilt to price rather than long-term service and protection.

For insurers, it all begins at the Department of Insurance, with what is called the pure premium (claims cost benchmark). As can be expected in this complex system, the pure premium rate-setting process can appear to be as chaotic as any other aspect of this system. There is, however, a method to this madness.

Well before federal antitrust laws came into effect, the U.S. Supreme Court determined that insurance was not a part of interstate commerce. Thus, when antitrust laws were enacted, they did not apply to insurance. Insurers were free to share their market data with each other without fear of government prosecution.

That all changed in the 1940s when the Supreme Court changed its position and determined that insurance was now part of interstate commerce. Overnight, much of what the industry was doing in terms of sharing data and making rates was illegal.

Congress stepped in, and by the early 1950s what we now know as the Workers’ Compensation Insurance Rating Bureau (WCIRB) was licensed by the California Department of Insurance and was doing its business under “active state supervision” – which, under the law, allowed insurers to continue to share information.

During most of the history of California workers’ compensation insurance, fully developed rates (losses, loss adjustment expenses, and general expenses) were set by the WCIRB and approved by the commissioner. No insurer could charge a lower rate (with some exceptions), leading to the name “minimum rate law.” No multi-line or interstate combinations of experience were allowed. In other words, workers’ compensation insurance rates had to be standalone adequate.

By 1993, employers were experiencing the pain of high insurance costs and a dysfunctional system. Major reforms were enacted, including the repeal of the minimum rate law. Effective Jan. 1, 1995, a new “competitive” rate law was adopted. The WCIRB was to develop an advisory “pure premium” – losses and loss adjustment expenses only – and insurers did not have to use it. Insurers had to file their own rates and rating plans and load their own expenses. And multi-state, multi-line experience was now allowed when determining whether premiums were adequate.

Within about five years, the wheels had pretty much come off the insurance marketplace in California. There were insolvencies and impairments; capital was leaving the state; and there was an undeniable crisis that affected the system well beyond the borders of the Golden State. The causes were many and varied, and while the legislature made some changes to the rate law, its primary focus in 2003, 2004 and most recently in 2012 was to rein in the costs of the system and try to bring some stability to the marketplace.

But the pure premium rate-setting process has pretty much stayed the same since its enactment more than 20 years ago.

The WCIRB does more, much more, than collect the data necessary to develop pure premiums. It develops and administers the statistical plan for data reporting, the uniform classification system and the uniform experience rating plan, for example. Each of these requires the approval of the commissioner, and each is a regulation of the Department of Insurance. As such, they fall under the procedures of the Administrative Procedures Act (APA).

For many years, this APA notice and hearing process was used for both the regulatory and rate-setting filings of the WCIRB.

Since 2013, however, the two processes have been split up. There’s a good reason for this. The first is that the APA, housed in the Government Code, doesn’t apply to rate-making proceedings. It is the Insurance Code that requires a hearing on pure premiums but also requires that the commissioner issue an order within 30 days of the hearing. The fact is that the department and the WCIRB work very closely together throughout the year, and the intended procedure for the adoption of the pure premium rates acknowledges this. The regulations that fall under the procedural requirements of the Government Code (APA) are not as time-sensitive as the adoption of the pure premium – the latter requiring some sense of certainty not just before Jan. (or July) 1, but with sufficient time to make rate filings and, if necessary, send out notices of nonrenewal depending on the size of the rate increase. The new process developed by the department allows for that.

The WCIRB makes available copious amounts of data regarding the performance of the system. These can be found on the bureau’s website: www.wcirb.org. Everyone who is affected by the system would benefit by spending some time looking at these and understanding why we are where we are today, and the still very long journey to get to where we ought to be.