Red storm rising

Risk & Insurance, Nov, 2004 by Frank X. Altiere

Workers' compensation costs continue to present a challenge for today's employers. Medical inflation and claims severity are on the rise. The economic outlook is uncertain and the insurance industry has been plagued by numerous judicial challenges. Risk managers must understand the industry's emerging trends and use key strategies to protect every employers' most valuable asset--their employees.

Escalating workers' compensation costs continue to present a challenge for today's employers. But rather than watch these costs continue to rise, savvy risk managers should focus their attention on the sources of the problem--and on reducing their effects through a variety of key programs and initiatives.

One of the key sources of higher workers' compensation costs is medical inflation. Workers' compensation medical inflation rates are currently two to three times the rate of normal inflation, according to figures from the National Council of Compensation Insurance (NCCI).

New medical technology, medical malpractice, prescription drugs, provider leverage and use of specialists have all contributed to the increased costs. While the general healthcare sector also struggles with rising medical inflation, it has a somewhat different impact on the workers' compensation industry, as a result of the mix of injuries covered and the types of providers and services utilized.

Another factor driving workers' compensation costs higher is an increase in claims severity. The workers' compensation industry currently has the lowest claims frequency incidence rate in five years, a result that is primarily attributable to employer safety initiatives and the increased use of robotics and power assisted processes. Unfortunately, the decline in claims frequency is in the smaller claims--not in the expensive claims.

To help control medical inflation, risk managers should report claims early to maximize medical management, maximize return-to-work programs, and use of preferred provider networks and pharmacy benefits management programs. To control claims severity, risk managers should educate employees on workers' compensation costs, identify cost drivers and trends through a risk assessment, use safety programs including return-to-work programs, and consider the use of integrated disability management.

With costs on the rise, it's no surprise successful risk management programs typically employ a partnership strategy. More and more companies recognize the value in playing an active role in their workers' compensation programs. Working together with their insurer and/or third party administrator (TPA) has the potential to maximize the strength of loss prevention efforts.

Medical and indemnity costs typically account for approximately 90 percent of workers' compensation costs and TPA/excess costs comprise the remaining 10 percent. The fact is that both are inextricably connected. Experienced managers know that impacting either component impacts both of them. Proper balance and focus are required. A reduction in medical and indemnity costs will typically lower a company's TPA and excess costs over time and vice versa.

But be careful about choosing a TPA primarily on low service cost. Lower TPA costs could result in escalating loss costs.

Risk managers should maintain their TPA, excess and loss costs in relative proportion to one another year after year, meaning loss costs should be 90 percent and administrative costs 10 percent. Medical and indemnity expenses should be proportionately relative to one another. They should be about 50/50.

The current workers' compensation TPA market is shaped by various external influences. In formulating strategies, risk managers must take into account what's going on in the economic, judicial and technological sectors. Economic uncertainty and judicial reform, for instance, will complicate corporate workers' compensation initiatives.

Over the last several years, the economy has faltered and an election year brings even greater uncertainty. Technology and productivity gains continue to keep staffs lean and companies continue to outsource both blue and white collar jobs. In the legislative arena, several states have enacted or proposed their own workers' compensation reform initiatives.

Investments in technology will boost efficiencies and reduce workers' compensation costs. Advances in risk management information systems are enhancing the efficiencies in workers' compensation claims administration. Companies working with TPAs that invest in technology are more likely to have a competitive advantage. That advantage is ease of doing business, increased productivity and lower average workers' compensation costs.

Risk managers should take advantage of these advances in technology by reporting workers' compensation claims via the Internet to save time and money. They also should use OSHA log software embedded in First Report of Loss software in order to prevent double entry, use online fraud prevention tools in order to identify problem claims early and they should contract with a TPA that has access to the technology to process medical bills electronically.