Industry trends help guide the management of Workers' Compensation

Recognizing and capitalizing on industry trends helps position a business to better manage its Workers' Compensation costs and gain a competitive advantage. One good source of such trends is the National Council on Compensation Insurance's (NCCI) annual issues symposium held in May.

The mood this year was more upbeat and positive than in recent years. For insurers, premium is up by $3.3B, about nine percent in all. The all-important combined ratio has dropped from 115 to 109 (projected). There is also good news in the loss area, with frequency of loss-time claims down an average of five percent across all sectors. Indemnity claim costs are up just slightly, as are severity costs. The improving medical trends were attributed to somewhat moderating pricing schedules (more fee schedules for hospitals); better control of drug costs and indications from two Pharmacy Benefit Managers (PBMs) that they've been able to reduce the use of narcotics.

While the taming of growth in medical costs is good news for employers, medical costs remain a major concern. NCCI CEO Steven Klingel demonstrated the dramatic impact of medical expense on profitability. He explained the difference in profitability attributable to a mere three percent increase in trend - that increased trend leads to an operating loss of around eight percent compared to just about breakeven at the current three percent trend. It is a clear message that employers cannot take their eye off containment of medical costs.

A few specific cost drivers are noteworthy. While surgery is only 5.4 percent of all services in Workers' Compensation, it represents 35.5 percent of the costs. Medical necessity and the likelihood of improved outcomes should be the basis of all surgery decisions. Another driver is the use of brand medications. Brand name Rx are 24 percent of scripts but over 50 percent of Rx costs in Workers' Compensation.

Improvements in the Workers' Compensation line for insurers are translating into a "hardening" market, or increased costs for employers. Discounting of premiums has decreased from 7.6 percent to a projected level of 4.5 percent. And there are challenges ahead that will impact future rates and availability. These include:

• Limited job prospects for Workers' Compensation claimants who are "older" leads to higher Social Security disability claims

  According to a recent article in Business Insurance, insurers and Medicare set-aside service providers say they have seen a trend of Workers' Comp claimants - particularly those in their 50s and younger who have been hardest hit by a lack of employment prospects -increasingly filing for Social Security disability benefits. This trend complicates and increases settlements because of Medicare Secondary Payer compliance requirements. Workers' Comp claims payers must fund all future medical needs for work-related injuries or illnesses suffered by claimants who automatically become eligible for Medicare health insurance benefits after receiving Social Security disability insurance for 24 months.

  While it originally was expected that the Medicare Set Aside would involve employees nearing the retirement age of 65, the trend toward younger claimants increases the amount of set aside dramatically because of the longer life expectancy. Faced with steep wage losses, limited employment prospects and high health care costs, injured employees may be encouraged by friends or attorneys to pursue Social Security disability benefits.

  According to the article, some employees file for Social Security disability while their Workers' Comp claim is being contested. "To bolster their chances of qualifying for the disability benefits and possibly winning their case for Workers' Comp benefits, attorneys may advise them to seek additional medical treatments. That can force workers comp payers to fund Medicare set-aside arrangements based on an estimated value of future medical care inflated by the additional treatments that claimants received to bolster their chances of qualifying for Social Security disability."

  Although it appears as though the number of disability claims may have peaked in 2011, the number of Social Security disability recipients grew two million between 2006 and 2011 to 9.8 million. Most (89%) are disabled workers, a majority of whom suffered musculoskeletal or connective tissue injuries, according to a recent report from the U.S. Social Security Administration.

• Workers' Compensation insurance availability will decline for employers in certain cities and industries as the expiration for Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) approaches

  According to a recent report by Marsh Inc., employers with large employee concentrations, particularly in certain industries or cities, can expect that there will be less insurance capacity available for their Workers' Compensation risks. Hospitals, financial institutions and hotels in major metropolitan areas are among industries most affected by insurers' concern over the loss of protection under TRIPRA. According to Marsh, underwriters are already asking probing questions about building security, crisis management planning and building construction during Worker's Compensation renewals.

  Marsh recommends starting the renewal process early and building a strong case of risk management with high quality data relating to all key risk exposures. As an example, telecommuting of a significant portion of the workforce can reduce risk exposure and underwriters need to know the composition of the workforce. Employers who can successfully provide complete, accurate, and thorough data and analysis that presents a favorable risk profile are in the best position to negotiate and obtain the insurance they are seeking.

• Sluggish pace of economic recovery and low interest rates impede profitability

  Workers' Compensation markets are driven by employment with manufacturing and construction representing about one-third of premiums. The lethargic growth of employment in these sectors puts pressure on profitability and the current climate of low interest rates cannot offset underwriting losses.

• Uncertainly surrounding federal and state laws

  While some believe that the impact of the implementation of the Patient Protection and Affordable Care Act in 2014 will mean a reduction in cost shifting to Workers' Comp, others believe it looms as an uncertainty for the line. At the state level, one of the most significant Workers' Compensation bills ever adopted was signed into law in Oklahoma. The plan allows employers to opt out of the state system by establishing an alternative plan that pays benefits similar to Workers' Comp regardless of who caused the injury. The bill establishes an administrative dispute resolution system that removes it from the court-based system. Legal challenges are expected that could determine if the opt-out provision gains momentum beyond Oklahoma. In any case, some speculate that this could result in good risks opting for alternative coverage, leaving higher risks in conventional coverage, which could raise costs for those left in the system.

  Insurers and employers are also watching a rehearing on whether Florida's limit on temporary Workers' Compensation benefits is unconstitutional, which could lead to challenges of temporary total disability benefit time limits in other states. If upheld, NCCI has projected it could increase Florida Workers' Comp costs by 2.6 percent, or $65 million a year.

While many of the macro influences on Workers' Compensation are beyond the control of the individual employer, they demonstrate the overlying importance of strong risk profiles and being viewed favorably by insurers. What drives rates and increases premium is what underwriters perceive as risk. More than ever, carriers are requiring explanations for losses and evidence of the changes made to prevent the losses from reoccurring. But even valued customers with good loss histories are not immune to the pressure on rates. Underwriters are well aware how rapidly situations can change - a low risk company can be tomorrow's catastrophe. The smart employer constantly evaluates and differentiates its risk profile by reducing exposures and strengthening operations.