This is Part 5 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating; Part 3 Primary and Excess Losses: Big Changes Beginning in 2013, and Part 4 Dealing with Reserves: When Do Losses Really Count?
We finish this series of blog posts with a brief discussion of “Expected Losses” and “Expected Loss Rates.”
The entire experience rating process is driven by “expected losses,” the total losses insurance actuaries expect you to suffer. But what exactly are “expected losses” and where do they come from?
Expected losses are contained in the premium rates you pay for each classification of worker. Expected primary loss rates and expected excess loss rates (called the “D ratio”) are a percentage of the total rate.
For example:
Class rate – $5.00
Expected losses – about 50% of the rate – $2.50
Expected primary losses about 20% of total losses – $0.50
These percentages do vary somewhat, but will be close to the above estimates.
Thus, the calculation for expected losses for $500,000 in payroll for the above class would be:
Manual premium = $500,000 times $5.00 divided by 100 = $25,000
Expected losses = $25,000 times 50% = $12,500
Expected primary losses = $12,500 times 20% = $2,500
Note that even with half a million dollars in payroll, the expected primary losses are only $2,500. This amount would be exceeded by relatively small losses or one big loss.
One final note: under the new rating plan in PY 13, expected primary losses will increase by about 50%. Using the above example, the new rating plan raises primary rates as follows:
Expected primary losses = $12,500 times 30% = $3,750
In other words, primary losses will go up as the split point goes up, but not fast enough to help employers with significant losses.
Expected losses and expected loss rates have significance in workers comp program performance measurement. Here’s why. A good way to measure how well a company manages workers comp is to track how much it spends in losses per hundred dollars of payroll. Then, one can compare that number with the expected loss rate, which is a rate per hundred dollars of payroll. If losses per hundred are running higher than expected losses per hundred, one can readily see that a problem exists, which can be immediately addressed.
After 20 years of stability, the experience rating process is about to undergo significant changes. Educated employers will track these changes and make any needed adjustments to their workers comp cost control programs.
Archive for the ‘Insurance & Insurers’ Category
The Enigma Variations: Comp Rates in Connecticut and Massachusetts
Wednesday, October 17th, 2012Today 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, 2012Cooper 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, 2012The 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, 2012We 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, 2012When 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.
