Archive for the ‘Insurance & Insurers’ Category

Primary and Excess Losses: Big Changes Beginning in 2013

Wednesday, January 2nd, 2013

This is Part 3 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent and Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating
Parts 4 and 5 will be posted next week.

Previously, we offered a basic review of workers comp claim losses, the building blocks of experience rating. Now it’s time to go deeper.
As we’ve seen, workers comp claims are made up of what has been paid and what has been “reserved” for future payments throughout the life of the claim. The “total incurred amount” projects total indemnity payments (lost wages), medical bills and expenses estimated to be paid for any given claim. From 1990 through 2012, the first $5,000 (called the “split point”) of the “total incurred” amount of each claim is considered “primary,” and all of it counts in the experience rating calculation. Any amount above $5,000 is considered “excess” loss, and is discounted in the experience rating calculation by at least 70%. Moreover, any amount above a state-specific rating point (ranging from about $125,000 to as high as $250,000) is excluded from the calculation; it does not count at all in the calculation of your experience rating.
Primary losses going up!
For the first time in 20 years, the Primary Loss split point is about to change. Beginning in Policy Year 2013 (PY 2013), primary losses will increase from the first $5,000 of each claim to the first $10,000. In subsequent years, primary losses will continue to rise, reaching $15,000 by PY 15.
So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. Given the increasing severity of claims over the past decade, NCCI has decided to make experience rating more sensitive to severity.
Under the current rating system, only the first $5,000 of each claim is primary; this means that one big claim will have a limited impact on the experience mod: the first $5,000 enters the calculation dollar for dollar, but all the losses above $5,000 will be sharply discounted.
The new rating system has been adopted by all NCCI states for 2013, and it will become effective concurrently with each state’s approved rate/loss cost filing on or after 1 January 2013. NCCI has published a chart detailing the split point changes effective dates for each state (PDF).
Under the new system, the first $10,000 of each claim will be primary and, as in the current (and soon to be old) system, all primary losses will enter the experience rating calculation dollar for dollar. For employers with individual losses above $5,000, the experience mod is likely to run higher than under the current rating system. (And keep in mind that the primary loss split point will continue to rise to the level of $15,000 by 2015.)
Here is a simple comparison of the current and pending rating systems in action:
Employer 1:
1 claim at $20,000 / Current Primary = $5,000 / Pending Primary = $10,000
Employer 2:
2 claims at $5,000 / Current Primary = $10,000 / Pending Primary = $10,000
Under the current system, all other things being equal, Employer 1 would have a lower experience mod than Employer 2 for two reasons, even though total losses are $10,000 greater than Employer 2’s total losses. First, Employer 1 has $5,000 less in primary losses. Second, Employer 1’s excess loss of $15,000 would be discounted by 70% to $4,500 in the calculation making total calculable losses of $9,500, compared to Employer 2’s total calculable losses of $10,000.
Under the new rating system, Employer 1 would be the one with the higher mod, because its primary losses would be equal to Employer 1’s, but Employer 1 would also have $3,000 of excess losses included in the calculation (10,000 – [10,000 x 70%]).
The split point change will lead to some interesting, as yet unaddressed, developments. For example, consider a loss that happened in PY 2010 to a driver for ABC Limo. The loss would first appear in ABC Limo’s Mod calculation for 2012. Let’s say its total incurred value at that time was $15,000. In 2012, before the split point changes, $5,000 would be primary and $10,000 excess. Fast forward to the Mod calculation for 2013, and let’s suppose that the claim was closed during 2012 for a total of $10,000. The 2013 Mod calculation, with the split point having been changed, effective January, 2013, will show $10,000 primary and $0.0 excess. Consequently, the closed claim of $10,000 will affect ABC Limo’s mod more adversely in 2013 than the open claim of $15,000 did in 2012. This will happen to many employers, and their advisors would be well-advised to advise them beforehand.
Medium-sized Employer, Big-sized Trouble
Here’s the worst-case scenario for a lot of medium-sized employers (premium in the $20-$100,000 range): if they have a frequency problem (a lot of relatively small injuries) and a severity problem (a few relatively big losses), the new split point for primary losses will more than likely increase their experience mod, perhaps substantially.
If you find yourself in this position, with an experience modification well above 1.0, you need to learn more about the intricacies of the rating process itself. There are opportunities for minimizing the impact of your losses. All of which are the subject of our next Experience Rating post.

A Basic Review of Claim Losses, the Building Blocks of Experience Rating

Wednesday, December 19th, 2012

This is Part 2 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent. Parts 3 to 5 will be posted after the holidays.
When you report a claim to your insurance carrier where outside medical bills are involved, the insurer will estimate the ultimate cost of the claim. For medical-only claims, the estimate is small; for lost time claims, it might range anywhere from a few thousand to hundreds of thousands of dollars, depending upon the severity and duration of the injury.
Your company’s claim losses are described in detail on a loss run, a written summary available through your agent or directly from your insurance company. The loss run lists what has already been paid plus what is projected for payment over the life of the claim. The projected, but as yet unpaid, amount is called the “reserve,” because it’s the amount set aside, or reserved, for future payments. The amount already paid plus the reserved amount is called the “total incurred amount.”
Example: John Doe injured his back one year ago:

Paid at the time of the loss run: $ 45,600
Reserved for future payments: $ 60,000
Total Incurred amount: $105,600

Reserves are based on the insurance claim adjuster’s investigation into the nature of the injury (diagnosis and prognosis) and the insurer’s experience with similar cases. The total incurred amount is the insurer’s best estimate of the ultimate cost of the claim: the expected payments for lost wages (indemnity), medical treatment, disability and nurse case management, rehabilitation, attorney fees and other related expenses over the duration of the claim.
The same injury to two workers might result in very different reserves. Among the factors included in setting reserves are:

  • Education level
  • Co-morbidities (medical problems which may impact recovery such as high blood pressure, diabetes, obesity, drug addiction, etc)
  • Age (younger workers generally heal faster than older workers)
  • Transferable skills (if unable to return to the original work, whether the injured worker has marketable skills)

The initial reserve is usually posted within 30 days. Once posted, reserves are periodically updated to reflect any changes in the course of the claim. The costs of a projected settlement are usually included in the reserve.
In terms of experience rating, whether a claim is medical-only or indemnity means a lot. Why? Because, with the exception of Massachusetts, medical only claims are discounted by 70% in the experience rating calculation (Massachusetts, a non-NCCI state with its own Rating Bureau, does not discount medical-only claims). However, once any indemnity payments are incurred, there is no discount for any medical costs already paid or projected to be paid, and the loss, up to its first $5,000 counts full value in experience rating. This first $5,000, the “split point,” is called Primary Loss, and it, as well as Excess Loss, all dollars above $5,000, is the subject of our next post. In it we address the imminent and upward change in the split point.

The Experience Rating Process: Significant Changes Are Imminent

Monday, December 17th, 2012

Here at the Insider we realize that we have readers from different areas of the insurance world, some directly related to workers’ comp and others indirectly related. Some of our readers are risk managers at large Fortune numbered companies. Other readers are with agencies and brokerages, large and small. Still others work in various roles for insurers. Because in just a couple of weeks the insurance industry’s experience rating system will undergo its first significant change since 1990, we’ve decided, beginning today, to present a 5-part series aimed at those readers for whom this change will have direct and immediate impact.
For some readers, what we’ll be presenting will be old news. If you’re in this group, this is the time to hit the “delete” key. Also, to be candid, the first, and possibly second, post may appear too basic for some, but we believe we have to prime the pump before we can draw the water. For everyone else, hang around; there might be something to learn. We’re talking directly to middle and small market employers and the agents, brokers and consultants who serve them. Essentially, anyone affected by experience rating.
The goal: Reduce the cost of workers comp insurance
Other than reducing payroll, in most cases the only way for an insured employer to reduce its workers compensation premium is by reducing experience modification, which is the end result of the experience rating process. Experience rating is complex, but it contains elements responsive to strategic planning and employer control. That’s why understanding experience rating is so important.
First, some basics. Coming up with an employer’s workers comp premium is, essentially, a two-step process. The first step multiplies the employer’s premium class rate by its payroll in hundred-dollar increments. That is: rate times each hundred dollars of payroll. This is called the “manual premium.” In the second step the insurer multiplies the manual premium by the “experience modification factor,” which is derived from a mathematical calculation that examines the employer’s claim loss history over the most recent three-year period in relation to its industrial peers. The application of the “mod” will either raise or lower the manual premium, resulting in a competitive advantage or disadvantage. This is why keeping the mod low is so vital.
NOTE: For a comprehensive basic primer on experience rating, we recommend going to the source: The National Council on Compensation Insurance (NCCI) website provides a well-written document (PDF) that will walk you through the fundamentals of experience rating.
In the next four posts we offer the following:

  • First, a basic review of claim losses, the building blocks of experience rating
  • Second, an explanation of the difference between Primary and Excess Loss, as well as a description of the 2013 Split Point change
  • Third, a recommendation for dealing with Reserves
  • Fourth, a discussion of Expected Losses, Expected Loss Rates and a wrap-up.

Keep in mind that in experience rating, size matters. Large insureds with large premiums are expected to have higher losses than smaller insureds. Indeed, because their margin of error is smaller, companies with premiums in the $10,000 to $100,000 range can easily find themselves in a lot of trouble with just a few injuries.

The Enigma Variations: Comp Rates in Connecticut and Massachusetts

Wednesday, October 17th, 2012

Today we examine two states, side by side on the map, going in opposite directions in their workers comp rates: Connecticut, which has the dubious distinction of being the second most expensive state (only Alaska is higher) and Massachusetts, ranked 44th for overall costs, with rates so low the market is beginning to implode. These states may be headed in opposite directions, but each faces a pending crisis.
Messing with the Miracle
We begin with Massachusetts, which my colleague Tom Lynch summarized brilliantly a few weeks ago. After nearly two decades of rate reductions, MA employers are now paying about the same rates as existed in the early 1980s. Compared to the other New England states, MA rates are consistently lower, some times one fourth that of their neighbors. So it is hardly surprising that the Workers Compensation Rating and Inspection Bureau (WCRIB) sought an increase in the rates: they initially requested 18 percent, with the realistic hope of ending up somewhere in the vicinity of 6 to 8 percent. A rate increase of this magnitude would maintain the state’s position as the lowest among the major industrial states, still far below its New England neighbors.
The response of the state’s Division of Insurance is, in its methodology and ultimate result, a public work that might make the infamous Big Dig seem prudent and reasonable. The Division dismantles the entire application, demeaning and ultimately dismissing virtually every data element supporting the rate increase. While it is true that some of the data was inconsistent – due largely to the idiosyncracies of insurer submissions – the report’s conclusion that no rate increase was merited defies common sense. Indeed, when the attorney general opines that higher rates “would greatly increase the cost of doing business in Massachusetts and have a deleterious effect on the overall employment level,” one can only wonder what they have been smoking – perhaps the substance on the ballot up for legalization next month.
One the mainstays of the Division’s argument is the fact that insurance carriers continue to offer rate deviations: proof, in the Division’s eyes, that the rates must be high enough. Perhaps it is time to remind the bureaucrats who administer this program that insurers always think they can defy the odds and find the optimum risks. Insurers sell insurance to the people and organizations least likely to use it – or so they hope. As Tom Lynch likes to say, “insurance companies are prone to eating their young.” Nonetheless, a glance across state lines and across the country reveals that Massachusetts is about to cook the golden goose: with the current unabated rate suppression, the assigned risk pool will continue to grow and savvy carriers will scale back their participation in the workers comp market.
Asleep at the Wheel
While Massachusetts’s inaction on rates jeopardizes the most successful comp reform program in the country, Connecticut meanders toward economic disaster. As recently as 2008, the state was ranked 20th for overall costs in the invaluable Oregon Rate Study. But in 2010 they rose to 6th, and the state now sits in the number two spot, ahead of such reliably high cost states as New York, California and Florida. The median cost of comp in CT has risen to $2.99, compared to the nation-wide average of $1.88. (MA comes in at a paltry $1.37.) CT suffers from a toxic combination of very high medical costs (doctors love it) and a worker-centric system that is extremely generous with benefits. To add insult to injury, NCCI is requesting an additional 7.1 percent increase in the already bloated rates. Costs are out of control and regulators are asleep at the wheel.
Surely it is time for business advocates in Connecticut to raise the red flag. The cost of comp has reached unacceptable levels. When business owners can move their operations to New York to lower the cost of workers comp, you are in deep, deep trouble.
Across the Rate Divide
MA and CT provide compelling examples of enigma variations: in the perpetual search for comp rates that are fair to both carriers and businesses alike, these states have drifted too far from the middle ground. How they reached this point may be an enigma, but what they need to do is clear: take immediate steps to extricate themselves from rate cycles that simply are not working. It will take leadership, vision, and courage to confront these reverse-image crises.

In MA, regulators must stop playing political games – no easy task in a hyper-political state – and allow rates to begin a long overdue, moderated rise.

In CT, regulators must confront entrenched stake holders and begin to exert control over runaway costs.

With rates either much too low or much too high, state leaders and regulators are mired in swamps of their own making. If the current inertia is allowed to continue, the two states may eventually end up in the same place: with dysfunctional comp systems incapable of serving the needs of injured workers and employers alike.

New Jersey: Usual, Customary and (Un)balanced

Monday, September 24th, 2012

Cooper Road in Middletown, New Jersey, is rumored to be haunted by strange, ghostly creatures. They jump out from behind trees and startle the drivers of cars traveling down an unpaved portion of the road. There are no street lights and the road has sharp turns, so the appearance of these apparitions is both sudden and alarming. Based upon the numerous oddities in New Jersey’s workers comp law, these ghostly beings might well be carrying sign boards that read “Ruined by balanced billing.”
From the perspective of virtually any other state jurisdiction, New Jersey’s approach to the reimbursement of medical providers in the workers comp system is demon-ridden and rather strange. To begin with, there is no fee schedule. Providers are entitled to their “usual and customary” fees. By leaving fees to the providers, the state creates an unusual level of tension between these providers and the insurance carriers and self-insured employers who pay the bills.
The tensions are not limited to the payers, however. When a payer refuses to cover all or part of the “usual and customary” bill, the provider has the option of billing the injured worker for the balance. The euphemism is “balanced billing” but in both concept and practice this is as unbalanced as a comp system can get.
The Broken Premise
The fundamental premise of workers comp is that the medical costs and lost wages of workers injured on the job will be covered by their employers. In return, workers have given up the right to sue their employers for work-related injuries and illnesses. In most states, the protective barrier between injured workers and the costs of treatment is absolute: there are no copays, no deductibles and no fees whatsoever for injured workers. Comp even covers the cost of travel to and from treatment. “Out of pocket” is a concept that simply has no place in workers comp.
Medical coverage under workers compensation is, in the words of my colleague Tom Lynch, “the best coverage plan in the world”: it pays for everything and includes indemnity payments for lost wages, too. The only catch – and it’s a big one – is that to qualify you must be injured “in the course and scope” of employment, with an injury “arising out of” employment.
Balanced billing is patently unfair to workers. Routine disputes between medical providers and payers spill over to injured workers. Unpaid portions of medical bills are sent to the workers, who are in no position to pay them. When workers routinely refuse to pay these bills, they may find themselves harassed by collection agencies. Not exactly what the doctor ordered when you are trying to recover from your injury and return to work.
Senate 2022 to the Rescue?
Senate Bill 2022 is wending its way through the New Jersey legislature. The bill recognizes the inherent unfairness of balanced billing and would put an end to the practice. Any disputes about payment would revert to the workers comp bureaucracy, but under no circumstances would the disputed portion of any medical bill become the responsibility of the injured worker.
It’s interesting to note that the bill explicitly avoids the issue of a fee schedule. Medical providers will continue to bill for their “usual and customary” fees, which, in turn, will keep the cost of medical treatment relatively high. But at least the injured workers will be exempt from the dispute. That’s the least the Garden State can do in its belated effort to restore fairness and equity to the comp system.
Here’s hoping that S 2022, in one form or another, finds its way to the Governor’s desk in time for Halloween. That would soothe the ghosts on Cooper Road and allow them to revise their signs to address some other glaring inequity in our imperfect world.

New Hampshire: Are Injured Workers Avoiding Comp?

Thursday, September 6th, 2012

The Insider has come across an intriguing but ultimately frustrating study concerning the under-reporting of workers comp claims in New Hampshire. Under the auspices of the NH Department of Health and Human Services, the Behavioral Risk Factor Surveillance System survey (with the unfortunate acronym of BRFSS) conducted phone interviews with nearly 7,000 adults who were employed during 2008. About 340 people – close to 5 percent – reported that they had been injured at work sometime during the prior year – injured, that is, seriously enough to require “medical advice or treatment.” (Sigh, when you include “medical advice,” you might be including the first-aid-only incidents that should be excluded from the study.)
Here is the interesting – if somewhat compromised – nugget from the study. Among those who were injured, only 54 percent reported that their treatment was paid (“all or in part”) by workers compensation. The remaining 46% reported their treatment was paid for by private or government insurance (25%) or by other means (21%). Unfortunately, by the time you get down to the 150 people in the non-comp segment, the combination of small numbers and ambiguous questions seriously reduces our ability to draw any meaningful conclusions. The study may indicate substantial under-reporting, but to know for sure, the researchers are going to have to ask some more questions.
Focus on Comp
Because the survey is conducted by the Department of Health and Human Services, the focus on workers comp is, pardon the expression, almost accidental. In fact, the 2008 survey was the first time they included questions about workplace injuries and payment for related treatment. While I applaud their interest in comp, I hope they would consider adding just a few questions to make the survey more effective. Assuming the survey guarantees anonymity, the questions might include:
– For those reporting that they are self-employed, ask whether they carry workers comp insurance (it is optional in NH).
– For those reporting that they were injured, the follow-up questions should be limited to those who secured outside medical treatment (and not those seeking only “advice”).
– If comp paid just “part” of the treatment cost, who paid the remainder?
– For any worker whose treatment was not covered 100% by workers comp, ask whether they paid anything out of pocket (which would be a violation of comp law).
– If treatment was covered by a non-comp insurer, ask whether workers were instructed by their employer to report the injury as “non-work related” (employers giving this instruction and employees following it are committing insurance fraud).
– For any workers reporting injuries, ask whether they lost time from work due to the injury and whether they were paid for the time they missed. (Some employers are so determined to avoid the comp system, they pay wages for employees missing time due to injury, even beyond the state’s three day waiting period.)
Cost-Shifting?
Lurking in the shadows of this study is the distinct possibility that under-reporting is real and possibly instigated by employers trying to game the experience rating system; they are shifting costs onto forms of insurance that are less loss sensitive. In addition, Injured workers may fear retaliation for reporting legitimate injuries: they may face disciplinary action, may be fired, may be denied overtime or may even ruin the “days without accident” program that dangles the promise of a pizza lunch and drawing for a TV if a certain number of days are free from (reported) injuries.
The BRFSS study provides just enough data to tease us: there may be a serious issue here, but then again, there may be no problem at all. To the good folks in New Hampshire, let this be a word of encouragement. Your study, to put it rather harshly, may be kind of useless in its current form, but with a little tweaking, it might lead to genuine insight into the way injuries are managed in – and possibly diverted from – the state’s workers comp system.

New York Comp: Fully Documented Downward Spiral

Tuesday, June 19th, 2012

We live in the digital age, with all its conveniences and consequences. It would be hard to imagine a law requiring that all telephone calls be routed through live operators, or limiting maps to those that can be purchased at your neighborhood gas station. But each technological innovation creates a few new jobs and, seemingly, the loss of many others. Which brings us to the continued – and mandated – use of stenographers in virtually every workers comp claim filed in New York.
Senator Diane Savino (D-Staten Island) has filed S. 4112, which would certainly help the employment prospects of stenographers in the Empire state. Following an aborted effort by the NY workers comp board to test the use of digital recording in a few of the 300,000 or so annual workers comp hearings, Savino wants to ban digital recording from any comp hearing and require stenographic reports as the sole recognized form of documentation. Her bill, currently under consideration, would make stenographers a permanent fixture in workers comp for years to come.
Stenographers and their allies will argue that their presence improves the accuracy of court reporting. There are fewer “inaudibles” in their transcripts. But such accuracy comes at a substantial cost. The wages of a stenographer are in the $50-60K range, plus benefits. The cost of installing digital recording equipment in a courtroom runs less than $20,000, and once installed, the cost of maintenance is minimal. The trade off becomes even more reasonable when you consider that the New York system requires an unprecedented number of hearings for each and every workers comp claim.
In contrast to virtually every other non-monopolistic jurisdiction, New York insurers and TPAs are not allowed to make routine, unilateral changes in the status of any claim. A change in claim status requires a hearing, in front of a judge, complete with legal representation on both sides and a stenographer. This is enormously redundant and, in a word, non-sensical. It is also the root of New York’s highest-in-the-country, soon-to-go- higher administrative costs. On a per capita basis, New York has more judges, more bureaucrats, more hearings, more paper flow – and more stenographers – than any other competitive state.
No Easy Answers
The fundamental goals of reasonable reform in New York can be easily stated: improve benefits for injured workers and lower the exorbitant cost of insurance for employers. It is not difficult to imagine how this can be done: simply look at the way most other competitive states manage workers comp claims. New York would have to streamline its entire system: instead of operating like a monopolistic state, micro-managing every claim, New York could empower insurers and TPAs to manage claims as skillfully and independently as they do in other states; by doing away with unnecessary hearings and hugely redundant reviews of literally millions of forms, New York could substantially reduce staffing levels at the Workers Comp Board.
But efficiency comes at a cost. One person’s cost savings is another’s job loss. These needed reforms would eliminate many, many jobs – and in doing so, would throw hundreds of loyal workers into the already burgeoning unemployment lines. In this one small example, the elimination of stenographers from hearings would lower administrative costs, even as it would increase the unemployment of people with potentially obsolete skills. This is not an easy trade off, but a necessary one.
At some point, New York has to look at the big picture: workers comp is way too expensive, even though the benefits, for the most part, are mediocre. Every adjustment to the current statute, every administrative decision, should pass through a single filter: does this improve the benefits to injured workers and does it reduce the cost to employers? When you run Senator Savino’s S. 4112 through this filter, it’s not part of the solution, but just another clog in an already overloaded drain.

Risk Transfer as Three-Card Monte

Tuesday, May 22nd, 2012

When you’re looking for ethically-challenged business practices, Florida is usually a good place to begin. The latest kerfluffle involves a toxic combination of very high deductibles for workers comp insurance and employee leasing companies. Oklahoma based Park Avenue Property and Casualty Insurance sold policies with deductibles as high as $1 million to PEOs. Think about that for a moment: a million dollar deductible is virtually self-insurance, as very few claims break that formidable barrier. Park Avenue, along with its successor companies, sold these policies to employee leasing companies, who in turn passed the coverage through to their client companies. With such a huge deductible, the coverage must have been relatively inexpensive compared to standard market rates.
Under large deductible programs, the insurance company pays all the bills and then seeks reimbursement from the client company, up to the deductible amount. It’s not hard to figure out the flaw in this business model: client companies will welcome the discounted premiums, but when it comes time to pay back the insurer for paid losses, they will be unable to cut the checks. Given the complete absence of regulatory-mandated collateralization for the claims liability, there is no way the insurer will be reimbursed for large loss claims.
That’s where the three-card Monte comes in: the insurer wrote these policies knowing full well that the deductibles would never be paid. That’s why Park Avenue morphed into Pegasus Insurance, which morphed into Southern Eagle Insurance, which flies off into the pastel sunset of bankruptcy.
Gaming Risk Transfer
The cards have been moved around at blinding speed, but who ends up paying? Once again, those who played by the rules will have to pay for those who didn’t. (For a more egregious example of punishing the innocent, see our blogs on the New York Trusts.) Policy holders in Florida will be charged somewhere between 2% and 3.5% of premiums to cover the $100 million plus of losses.
In the WorkComp Central article by Jim Sams (subscription required), Paul Hughes, CEO of Risk Transfer Company, which markets insurance to PEOs, complains that singling out the PEO industry is unfair. The state should never have allowed Park Avenue and its winged successors to write insurance, as they were clearly incapable of assuming the risk. True enough, but even Hughes would have to admit that the PEO industry offered a ripe venue for the scam: individually, PEO clients would never have qualified for high deductible coverage, but somehow, under the collective umbrella of a PEO, they did.
Meanwhile, PEOs are being sued for failing to reimburse the claims payments of Park Avenue and its successors. After the PEOs lose these cases, they will seek payment from their clients, who are unlikely to have the ability to pay anywhere near what is owed. The litigation will go on for a long time, but the bottom line is simple: risk transfer cannot exist where none of the parties can cover the exposure. That isn’t risk transfer: it’s a shell game, where those who did not play are left holding the bag.
Follow Up – June 7, 2012
After posting this blog, I received a call from Paul Hughes, CEO of Risk Transfer in Florida, who is quoted above. While not contesting the premise that large deductibles are poorly managed in Florida (and elsewhere), he believes that I unfairly singled out PEOs in the blog. The fundamental issue is the failure of the state to adequately regulate and oversee large deductible programs. I agree.
Please take a few moments to read Paul’s response, which employs the useful metaphor of a casino for the risk transfer industry:

The core issue to me is the role of the regulator versus the business owner in the management of the “casino” (insurance marketplace). That is one of the parts of Jon’s article in Workers Comp Insider that blurs the line a bit on what the PEO’s role is within the casino and whose job it is to set the rules. The casino is the State as they certify the dealers to play workers’ compensation (Carriers, MGU’s, MGA’s, Agents and Brokers) and the State also certifies that the players are credible (not convicted of insurance fraud) and can pay/play by the rules of the house. The rules are set by the house and the games all require public filings – ability to write workers’ compensation (certificate of authority), ability to offer a large deductible plan (large deductible filings), agent license, agency license, adjusters license and any other deviation from usual business practices (like the allegations that one now defunct insurance carrier illegally charged surplus notes to desperate PEO’s in the hardest market the industry has ever seen). The “three-card monte” that Jon alludes to in this article is managed not by the dealers (carriers), but by the house (state). Would a real life casino consider it prudent to allow one of their dealers to expose 20% of their $5m in surplus through high deductibles sold to PEO’s with minimal financial underwriting and inadequate collateralization? Would any casino write harder to place (severity-driven) clients to include USL&H, roofers etc with the minimum amount of surplus needed to even operate a carrier…? Of course not. These “big boy” bets would never be allowed in Vegas without the pockets being deep enough to cover the losses.

Too Much Sitting Plus Comorbidities = Big Trouble

Tuesday, May 15th, 2012

For those who seek risk conundrums, workers comp is fertile ground. From a micro perspective, the unfortunate Ronald Westerman, a paramedic for a California ambulance company, embodies many of the elements that result in sleepless nights for claims adjusters and actuaries: Westerman had an inordinately long commute (2.5 hours each way!), a sitting job with periodic lifting (inert patients and medical equipment), along with the comorbidities of hypertension, obesity and diabetes. In two years of ambulance work, Westerman gained 70 pounds, thereby compounding the co-morbidity issues.
In March 2009 Westerman returned home from a 36 hour shift and suffered a stroke. His doctor determined that the stroke was work related and that Westerman was permanently and totally disabled. He was 50 years old. While there was some dispute over the cause of the stroke, an independent medical evaluator surmised that it was caused by a blood clot moving through a hole in Westerman’s heart to his brain, otherwise known as in-situ thrombosis in his lower extremities – a direct result of too much sitting. (We blogged a compensable fatality from too much sitting here.)
At the appeals level, compensability centered on the performance of a shunt study – an invasive test – that would have determined whether the blood clot caused the stroke. Westerman was willing to undergo the test, but his wife refused to authorize it, due to his fragile health. If there was no hole near the heart, the entire theory of compensability would be disproven; the stroke would not have been work related.
Had the defense attempted to force the test issue, it would have given rise to yet another conundrum: was refusing an invasive test the equivalent of “unreasonable refusal to submit to medical treatment”? Indeed, does a diagnostic test, by itself, meet the definition of “treatment”? Fortunately for Westerman, the defense requested – but did not attempt to require – the shunt test.
Managing Comorbidities
Our esteemed colleague Joe Paduda, who blogs over at Managed Care Matters, provides the macro perspective, one which is unlikely to aid in the sleep patterns for actuaries. He reports on the impact of comorbidities on cost from the recent NCCI conference:

The work done by NCCI was enlightening. 4% of all claims (MO and LT) between 2000 – 09 had treatments, paid for by workers comp, for comorbidities, with hypertension the most common. These claims cost twice as much as those without comorbidities [emphasis added].

It is beyond doubt that comorbidities make work-related injuries more expensive. But what, if anything, can claims managers do about this? In the Westerman case, there is not much to be done, as the stroke resulted in a permanent total disability. But in other cases where there is a path to recovery and even return to work, adjusters should flag these claims for early, intensive intervention, including psychological counseling and support for weight loss and other life style adjustments. To be sure, this would increase the upfront costs, but these steps just might go a long way toward mitigating the ultimate cost of the claims.
As is so often the case in workers comp, it’s “pay me now” and “pay me later.” To which I can only say to my claims adjuster and actuary friends, “sweet dreams!”

NCCI Experience Mod Changes: The (Ominous) Future is Now

Wednesday, May 9th, 2012

These are the calm days before the coming storm. For most employers, workers comp falls under the “business as usual” category. If a worker is injured, the standard protocols are followed: secure medical treatment; report the claim; if it’s convenient and not too difficult, bring the worker back on temporary modified duty. Sure, you will eventually pay for the losses in the form of higher premiums. But rates have been low for a long time. As for the experience mod, how high could it possibly go?
Pretty high! NCCI’s new rating plan will roll across the country throughout 2013, beginning in January in a handful of states and finishing up in Utah at the year’s end. Employers who pay attention to these things know that primary losses – the most expensive dollars in every claim – are doubling from the current cap of $5,000 to $10,000 in 2013, and eventually going up to $15,000 by 2015. It sounds a bit ominous, but it’s still way off in the future, right?
The future is now. Most employers are currently operating in policy year (PY) 2012, which began sometime between January 1 and today. The losses under this policy will not be included in the experience mod until PY 2014 and they will remain in the calculations through PY 2016. In other words, the increased primary losses in these calculations have already been incurred – not only for PY 12, but going back as far as PY 09. The future rating plan, in other words, is not only with us, it’s behind us!
What Should Be Done?
Employers who want to stay on top of their insurance costs need to ratchet up their loss control programs. The best injury is the one that never occurs. And for those moments when a safety program fails, employers need to enhance their post-injury management programs, which should include:
– Employee awareness on hazards and safety
– Supervisor training in immediate post-injury response
– A relationship with a quality occupational medical provider
– Prompt reporting of all injuries to the insurer
– An effective and aggressive temporary modified duty program
– Accident analysis to prevent recurrence
To be sure, these key elements are no different from what was needed under the current rating system. But the situation is about to change dramatically. With primary losses doubling and eventually tripling, the need to manage claims from day one has become much more important. Under the current system, the “heavy losses” end at $5,000. Going forward, the heavy losses push much deeper into each claim and will come back to haunt employers in future experience mods.
Waiting Periods: No Time for Waiting!
For employers in states managed directly by NCCI, there is an opportunity to reduce primary losses substantially. If injured employees can be brought back to work – in regular or modified jobs – before the end of the waiting period, the medical-only costs associated with the claim will be discounted by 70%. Waiting periods vary from state to state, with the shortest running for three days and the longest for seven. Once the waiting period is over, out-of-work employees are eligible for indemnity (lost wage) payments and the discount disappears.
So here is some free – and, if I must say so, extremely valuable – advice: do everything humanly possible to bring injured workers back to work before the end of the waiting period. Even if medical bills run to thousands of dollars, the total amount of these primary losses will be reduced by 70% – if, and only if, return to work occurs before indemnity kicks in.
This may not seem important today, but once the experience rating sheets for PY 2014 and beyond start to hit the your desk, you will see the wisdom of this preventive action. The experience rating changes may still be months away, but you are already operating under the new rules. For those who remain oblivious to what is already happening, the future may be dark and ominous indeed.