Alarming trends in Workers' Compensation and why they can increase your premiums: claims frequency, claim costs and narcotics
The recent annual Issues Symposium of The National Council on Compensation Insurance, Inc. (NCCI) offered pertinent information on Workers' Compensation revealing alarming trends that can increase your Worker's Compensation premiums. Three steps to take to avoid these trends:
The decline in claims frequency for Workers' Compensation continued in 2008 and economic factors suggest further reductions are likely in 2009. Preliminary results indicate a decline of 4.0% for 2008. This is on the heels of a 2.6% drop in claim frequency in 2007 and extends a trend started in the 1990s. There is a noticeable exception, however.
Claims are classified into four categories: temporary partial, temporary total, permanent partial and permanent total. The NCCI analysis shows that claims have been consistently declining for all injury types, except for permanent total claims. Although permanent total disability frequency declined from 1998 to 2003, it has been rising since then.
Employees with permanent total disabilities are not expected to ever be able to return to work. While they generally make up less than 1% of lost-time claims, they are the most costly claims, accounting for approximately 10% of lost-time costs.
Surprisingly, it is not older workers who are driving these claims. Because older workers tend to have more permanent total claims and the average age of the workforce is increasing, this was a potential explanation for the recent uptick. However, the data tells a different story.
The increase in permanent total claims appears to be driven primarily by workers age 50 and under. Based on a sample of data, that age group experienced a much larger increase in permanent total claims between 2003 and 2006 than did older workers–those more than 50 years old. NCCI also has found that all major causes of injury contribute to this rise and has ruled out law changes as a major factor. As a result, it is currently investigating other explanations, including the interaction of Workers' Compensation systems and Medicare set-asides for settled claims and the Social Security disability income system.
NCCI said the industry group with the most lost-time frequency in 2007 was Contracting. In that same year, the region with highest frequency was the West.
Advisor Insight: How could Medicare set asides increase costs?
Previously, for example, an injured employee's claim was evaluated to have an exposure of and was settled for $25,000. Once the injured employee quickly exhausted the settlement monies, all future medical care (typically) became the responsibility of Medicare. Recognizing this as a form of 'cost shifting'; Medicare requires an evaluation be performed (normally by a nurse) to determine what future care would be needed and the related costs. These costs were then 'set aside' from the overall settlement.
The question is: Are the values (perceived or real) of settlements being increased to offset the dollars being 'removed' due to the set aside? If yes, then the overall value of the claim and resulting costs of settlements will continue to increase to cover the perceived settlement reduction driving up claim costs, experience modifications and resulting premiums.
How could Medicare set asides drive up the number of permanent total claims?
One might guess that the plaintiff's attorney approach to settlement would be to demand larger settlements to 'net' this client the monies they perceived to be due and counter this with a demand to be accepted as permanently and totally disabled (lifetime benefits). At the same time, the injured employee can file for Social Security Disability Income (SSDI) benefits. The implications of permanent disability after being accepted by SSDI are driving more and more claims to the extremely costly 'life-time' benefits of Permanent Total. Workers' Compensation costs will continue to experience substantial increases in costs, experience modification factors and resulting premiums when the employer chooses not to accommodate immediate return to work.
Offsetting the drop in claim frequency is the increased cost of a claim. Both indemnity and medical costs of a claim continue to rise. While indemnity severity rose by an average 8.7% between 1996 and 2001, the average annual increase since then has been 3.6%. This includes an NCCI-estimated increase of 5.0% for 2008 that outpaced wage inflation.
While the growth in medical costs has slowed, it still surpasses the medical consumer price index. The estimated 6.0% growth for 2008 in average medical costs is driven by medical price inflation (3.7%) and increases in the utilization of medical services. Medical costs continue to represent a growing percentage of claims costs, reaching 58% in 2008.
The age of a claim directly impacts its costs; in fact, a study by PMSI found that injuries older than three years account for more than 80% of total Workers' Compensation medical spending.
Narcotic use in Workers' Comp claims
As claims age, the narcotics share of total drug costs increases due to a shift toward more expensive narcotics. Narcotics are prescribed for back or neck injuries more often than other injuries. Painkillers are often prescribed for the acute phase of an injury or surgery; yet, patients continue on a long-term course to relieve recurrent symptoms. The effectiveness of the drug diminishes over time, resulting in the prescription of higher doses. A majority of all narcotics prescribed under the Workers' Compensation system include Oxycodone or Hydrocodone.
Advisor Insight: In most jurisdictions, Workers' Compensation is responsible to continue to pay benefits to an injured employee who has become addicted to narcotic prescriptions as a result of their on-the-job injury. This could include any rehabilitation treatment necessary to break the addiction.
A Pharmacy Benefit program that monitors all narcotic prescriptions and implements a process designed to protect the injured employee from prescription addiction and the employer from the associated high costs can help reduce costs.
NCCI research brief