December 23, 2013
Workers’ Compensation Comes of Age
A number of societal, legal, and demographic developments will affect this venerable line of business as it moves into its second century.
With close to $40 billion in net written premium, the workers’ compensation line of business is an important driver of financial success for many property/casualty insurers. It has come a long way since its inception roughly 100 years ago.
As we move forward into the second century of workers’ compensation, it’s possible to anticipate many of the challenges (and opportunities) that are coming. What follows is a checklist of areas to watch.
CLAIMS FREQUENCY—Many aspects of the U.S. economy should help keep claims frequency flat or negative in the near future, including:
An increasing underground economy
In April, Mark Koba, a senior editor at CNBC, chronicled the growth of a large shadow economy of workers who, because they are unable to find regular employment, are taking jobs under the table with no reportable income or taxes. Since these workers have no workers’ compensation insurance protection, medical costs may shift from the workers’ compensation system to the health care system. With some estimates showing construction employment at just 75 percent of 2007 levels, it’s possible that a portion of these jobs are being filled by under-the-table workers. If that’s the case, these traditional higher-frequency classes may not show up as heavily in the industry’s calculations as they have in the past—moderating frequency trends going forward.
Growth in Social Security disability payments
Also in April, CNN Money reported a 29% increase in the number of Americans with little or no employment income who receive disability payments. For those who were formerly employed, the increase was a staggering 44%. In 2011, according to the CNN report, the federal government spent almost $250 billion on disability payments to some 23 million Americans. Although this is a ballooning liability for the federal government, the impact on workers’ compensation insurers is largely in the opposite direction. As workers who are less than healthy exit the workforce, the remaining pool of healthier workers will lead to claims frequency decreases in the future.
Expansion of other state and federal backstops
Since the recession began, there’s been a dramatic increase in federal and state assistance. A March article that appeared on the MoneyNews website reported that the number of food stamp recipients reached a record high in 2012, with an average of 46.6 million people receiving food stamp benefits each month. According to Supplemental Nutrition Assistance Program (SNAP) data, total food stamp benefits increased from $30.4 billion in 2007 to $74.6 billion in 2012, a 145% increase. As state unemployment benefits and other backstop programs cover more people for longer periods, the pool of future workers’ compensation claimants likely to file claims shrinks. When individuals leverage government backstop programs and choose not to work, workers’ compensation insurers benefit.
Older workers not retiring
People are working longer. For the manufacturing industries, this most likely means a dramatic reduction in the number of new employees entering the workforce. Although older workers have higher claims severity, new workers have significantly higher claims frequency.
Workplace health and safety efforts
The risk management and environmental, health, and safety departments of companies continue to focus on enhancing return-to-work programs, promoting workplace wellness, and improving workplace safety. These efforts continue to bear fruit, especially as the workforce ages and the adverse impacts of obesity receive more attention.
Part-time to full-time bias on frequency
Workers’ compensation frequency is often calculated as a ratio of the number of lost-time claims per an adjusted payroll amount. To the extent that recent payroll increases have been driven by more part-time workers converting to full-time work, the doubling of exposure for current workers isn’t the same as doubling the number of workers. In the short term, a heavier reliance on existing employees working longer hours very likely will help make frequency statistics look better. This trend could reverse if smaller employers keep their head count under 50 employees or reduce employee hours to part time (under 30 hours) to mitigate the impact of the employer mandate in the Affordable Care Act (ACA). Newly added part-time workers are likely to bring higher claim frequency, while workers taken below the 30-hour threshold to avoid employer-mandated health care might have an increased incentive to shift claims to workers’ compensation.
SEVERITY—A number of coalescing factors could drive medical and indemnity severity higher in the years ahead, including:
Rising interest rates
With the Federal Reserve finally winding down its quantitative easing programs, interest rates will be heading higher. To the degree that this coincides with an improving economy, indemnity severity is likely to tick up with rising wage pressure. Medical severity, which historically has run at roughly double the medical consumer price index, is likely to rise from the 3% levels we are experiencing today. Severity trends in the 6% to 7% range may be manageable in light of today’s rate increases, but it will be difficult to expand profit margins over the long term if medical inflation returns to double-digit levels.
Claims predictive modeling
Companies increasingly are using advanced analytics to identify claims for triage as early as the first notice of loss. By identifying the highest severity claims, assigning the appropriate resources for triage, and doing a better job on referrals from special investigative units, companies are favorably affecting the duration and severity of claims.
The obesity statistics are staggering. The Centers for Disease Control and Prevention (CDC) estimates that in 2010, 36% of Americans age 20 or older were obese. The Robert Wood Johnson Foundation in a 2012 report predicted that obesity rates for adults over the next 20 years would reach or exceed 44% in every state in the United States, and exceed 60% in 13 of those states. Recent NCCI studies show that the ratio in the medical costs per claim of obese to nonobese claimants at the end of five years is 5.3, and the duration of obese claimants is five times that of nonobese claimants. Given the fact that workers of all ages are struggling with maintaining a healthy weight, workers’ compensation costs will only increase as other comorbidities associated with obesity increase costs.
An aging workforce
As workers age, gradual changes in hearing, vision, strength, and balance may lead to increased probabilities and durations of workplace injuries, including sprains, strains, slips and falls, carpal tunnel syndrome, knee and shoulder problems, hip replacements, and back issues. A 2012 NCCI study, however, concluded that an aging workforce appears to have far less of a negative impact on workers’ compensation claims costs than was previously thought. Although there’s evidence that injured workers older than 35 years have higher costs than those younger than 35, costs associated with injured worker cohorts older than 35 tend to be quite similar. And while older workers have more costly injuries, the NCCI observed that such injuries are becoming more prominent in younger workers.
While the NCCI has presented conflicting data on the claim costs of older workers, we know that the number of older workers in the workforce will nearly double in the next 15 to 20 years. The U.S. Department of Health and Human Services estimates that the 39.6 million persons age 65 years or older today will increase to roughly 72.1 million by 2030. That equates to roughly one in every five Americans being 65 or older. While the jury is out on the precise impact of an aging workforce on claim frequency and severity, an aging workforce increases the likelihood of more severe injuries and longer claim durations.
LONG-TERM TRENDS—On the plus side, several trends are emerging that could benefit workers’ compensation insurers in the long run, including:
When the Surgery Center of Oklahoma in Oklahoma City started posting its prices online four years ago, it forced competing area hospitals to follow suit. Although it will take time to catch hold across the country, greater price transparency in the delivery of health care could benefit workers’ compensation insurers. Running counter to this trend is the pace of consolidation in health care. The ACA, with its focus on accountable care organizations (ACOs), electronic medical records, and other coordination-of-care rewards, is fueling consolidation in health care at an unprecedented rate. With increased consolidation comes increased local pricing power, and workers’ compensation insurers could find themselves on the wrong end of that pricing pendulum.
The epidemic of opioid abuse that had swept the nation is finally starting to abate. State governors, attorneys general, and legislatures are passing laws to toughen criminal and administrative penalties for doctors and clinics, establishing standards of care for doctors who prescribe narcotics, increasing the reporting and tracking of prescriptions, and limiting reimbursements to physicians who dispense prescription drugs to no more than a certain percentage above cost. State agencies, local agencies, and the U.S. Drug Enforcement Administration also are aggressively prosecuting individuals involved in illegal prescribing activity and “pill mills,” causing physicians, nurse practitioners, and pharmacies to surrender their federal licenses to dispense controlled substances. In the most serious cases, the offenders have had to surrender their medical licenses to state medical/pharmacy boards. Physicians and medical boards also have developed resources to guide physicians on responsible opioid prescribing, and there’s been a rise in the number of physicians who have had their licenses suspended by state medical boards for the unlawful distribution of controlled substances and for prescription drug fraud. Organizations like the Federation of State Medical Boards and Physicians for Responsible Opioid Prescribing also have joined the fight.
Given the high-profile nature of these efforts to define the proper use of opioids in treating injured workers, it’s likely the workers’ compensation line will see an effect. With medical expenses exceeding 60% of workers’ compensation costs, 20% of that going toward prescription drugs, this would be a welcome development.
Medical tourism continues to grow as an option for patients all across America. An airline magazine recently had advertisements from hospitals outside the United States showing savings of 50% to 80% on procedures such as knee and hip replacements that are common in workers’ compensation. The general cost in the United States for a knee replacement was shown at $34,000, versus the overseas cost of just $10,000. A hip replacement was listed as $35,000 versus the overseas cost of just $11,000. Even with the cost of airfare, transportation, and hotel accommodations, the potential savings are significant (acknowledging that we aren’t attempting to control for quality or safety differences). With several companies and health insurers investigating offering medical tourism options to their employees and insureds, there could come a day when workers’ compensation insurers could leverage these tremendous savings to help drive down severity for certain procedures. While businesses may welcome the cost savings, we recognize that persuading state legislatures and injured workers to agree to these practices could be difficult.
Several economist and workers’ compensation industry stakeholders have predicted that the ACA will create shifts in the workers’ compensation industry. But exactly how isn’t clear. Many refer to the Massachusetts Health Care Reform Act to bolster the argument that the ACA will lower overall health care costs and workers’ compensation costs. Under Massachusetts health care reform, costs within the workers’ compensation system decreased. Although ACA is more complex, similar provisions in the two laws allow a comparison of the impact on the workers’ compensation system. Analysis by RAND in 2012 found that expanding coverage to previously uninsured individuals resulted in a drop in workers’ compensation costs in Massachusetts. Finding an association between being insured and the frequency of workers’ compensation claims, RAND concluded that expanding the population holding group health insurance could reduce cost shifting to workers’ compensation.
In a May blog posting, Joe Paduda, a principal at Health Strategy Associates, affirmed his belief that the overall effect of the ACA on workers’ compensation would be positive, citing among other things, that it would lessen the motivation for cost shifting and fraudulent claims. Others have argued that increasing access to care and expanding preventive services, coupled with employer-sponsored wellness initiatives, should make the working population healthier overall, leading to a reduction in claim frequency and faster recoveries when injuries do occur.
On the other hand, some speculate that the ACA will increase workers’ compensation costs over time by straining already scarce primary care resources and causing longer wait times for treatment. The projected shortage of primary care physicians could make it more difficult for injured workers to find a physician. This, in turn, could lead to increased costs because of extended disability durations while waiting to see a physician. Others have pointed out that a decreasing supply of physicians and increasing patient demand could drive costs higher. Other factors that could affect cost shifting are significant increases in copayments and high-deductible health plans—costs that employees must bear. This could motivate some employees to file workers’ compensation claims for nonoccupational injuries.
According to findings from a recent study by Assured Research, a connection between increased health insurance coverage and decreased workers’ compensation costs isn’t supported by the data. The study evaluated health insurance penetration rates by state from 1999 to 2011 and corresponding statewide workers’ compensation loss ratios. After adjusting for national workers’ compensation trends, the results showed 31 states with rising health care penetration that resulted in decreased loss ratios. On the other hand, 20 states with rising health care penetration experienced increased loss ratios.
There are approximately 11 million undocumented people living in the United States. Many don’t file workers’ compensation claims for fear of being deported. The general consensus is that legalizing undocumented immigrants will increase workers’ compensation claims. At the same time, immigrant workers are more prevalent in high-risk sectors such as agriculture, construction, and landscaping. With an influx of workers into a high-risk injury class, the potential impact on frequency and severity in the workers’ compensation system can’t be overlooked.
Anticipate and Plan
British Prime Minister Benjamin Disraeli once quipped, “What we anticipate seldom occurs, what we least expect generally happens.” Still, it’s important to anticipate and plan for the future risk. There’s little doubt that change is looming for workers’ compensation insurers and that actuaries have a key role to play in identifying and managing the transformation.
Denise Gillen-Algire and Kevin Bingham collaborated with Bill Van Dyke and William Wilt in writing this article.
Bill Van Dyke, an associate of the Casualty Actuarial Society and a member of the Academy, is a specialist leader at Deloitte Consulting LLP in Hartford, Conn. He has extensive actuarial experience in managing and performing workers’ compensation unpaid claim reserve and pricing analyses for state funds, insurers, reinsurers, state agencies, municipalities, self-insured corporations, and captives.
William Wilt, a fellow of the Casualty Actuarial Society, is president of Assured Research, a research and advisory firm focused on property/casualty insurance. Prior to forming Assured, he held diverse roles as an actuary, as a credit and equity analyst, and in corporate development.
This article first appeared in the November | December 2013 issue of Contingencies Magazine and is © 2013 American Academy of Actuaries. Reprinted with the permission of the American Academy of Actuaries. All Rights Reserved.