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Why costs escalate unexpectedly in low risk Workers' Compensation claims

While Workers' Compensation claims frequency continues to decline, the on-going escalation of medical and indemnity losses illustrates a lack of effective post-injury management. A recent study in the Journal of Occupational and Environmental Medicine, “Determinants of Escalating Costs in Low Risk Workers' Compensation Claims” was undertaken to determine the characteristics of claims that are initially felt to be low-cost but ultimately become costly.

The study utilized data from the Louisiana Workers' Compensation Corporation (LWCC), a private mutual insurance company writing workers' compensation for approximately 33% of the fully insured market in the state of Louisiana.

The vast majority of medical-only and uncomplicated lost time claims are reserved for under $15,000. There is nothing about the nature and the extent of the injuries that would involve costly medical expenses or an extended period of time from injury to full recovery. Unexpected cost escalation of these claims takes place as the claims mature.

During the five-year study period, there were 32,063 claims that fell into the low risk category. Although only 2% (729) became migrated catastrophic claims, they accounted for 32.3% ($154,379,267) of the total claims cost. The median cost of these claims was 250 times the sum initially reserved for them.

There are several findings in the study that can aid in establishing effective claims management programs:
    • Attorney involvement and claim duration are the most important factors contributing to unexpected cost escalation in a small number of claims that drastically affect overall losses
    • The longer it takes to resolve a claim, the higher the ultimate cost of the claim
    • A combination of factors, especially attorney involvement, a failure to resolve a claim within 24 months, low back pain, and older age makes a claim vulnerable to cost escalation
    • Costs for settled claims rise slowly for approximately two years then begin to escalate rapidly. The median cost of claims that were closed 361 to 720 days was approximately one-quarter of those closed after 720 days.
    • Aggressive medical management should be applied to achieve full recovery as soon as possible and settlement should be considered before the claim has reached 12 to 18 months without resolution.
The study confirms that medical case management, Return-to-Work programs, and vocational rehabilitation are effective in decreasing medical and indemnity costs, partially because they reduce the time that a claim is open.

For helpful hints on combating escalating costs, click here.