A return to RTW: workers' comp providers—as well as employers and injured workers—would be better served were they to focus on sustainable return to work, not premium price increases

Risk & Insurance, March 3, 2003 by Maddy Bowling

It's abundantly clear that the workers' compensation industry has had a tough 2001, and that the final figures for 2002 will not be much better. Consider that the Workers Compensation Insurance Rating Bureau now estimates the ultimate combined ratio for accident year 2001 at 134 percent, while Fitch Ratings says the workers' comp line lost about $500 million pretax and after investment gain in 2001, compared with a $2.4 billion gain in 2000.

Meanwhile, the industry's insurers appear to be excited about the substantial premium rate increases of 2001 and 2002, viewing "rate adequacy" as the means to get the industry back on track. In line with this outlook, insurance stocks have typically fared better than most.

Yet, as we dig deeper into the industry problems and explore the cost trends, we are forced to ask ourselves some questions:

* Will premium rate increases be able keep up with increasing loss severity?

* Even if rate increases help, how long can we count on this hard market?

* Wouldn't overall industry profitability improve dramatically if we became more focused - and thus successful -- at returning injured workers to the workplace?

The Insurance Services Office addressed the first two questions recently, noting, "There will eventually be downward pressure on premiums. It's not easy to predict when this will happen, when the pendulum will swing ... but cost-based pricing (charging enough premium to cover loss estimates) will be hard to achieve." A.T. Kearney agrees: "Improvement in underwriting alone will not close the performance gap. Cost performance must be addressed."

Clearly we would all agree that, while profitable pricing is important in any market or business, competitive pressures are always at work. Companies can create a sustainable competitive advantage by delivering greater benefits or outcomes to customers and/or by achieving a lower total cost position relative to competitors. Does this business paradigm provide our industry with opportunities for solutions that go beyond the cyclical unreliability of premium price increases?

Certainly we can identify where our premium dollars go -- to medical, indemnity and administrative claim costs.

Let's look at the major costs one by one.

Controlling Medical Costs

Does control of the unit cost (through fee schedule or usual and customary medical bill review) or control of the appropriateness, setting or intensity of treatment (through utilization review) really lower the overall medical claim costs? Recent data from the Workers Compensation Research Institute in Cambridge, Mass., demonstrate that even those states with strong jurisdictional support for utilization review and fee schedules at or below the median (e.g. Florida, Texas and California) don't necessarily have the lowest medical costs. Our traditional tools clearly are not working.

On the other hand, there is strong sentiment in our industry that the quality of the treating provider makes a significant difference in the outcome of a claim. This sentiment is based on the feeling that the "right provider" will provide the "right" treatment at the "right" time and be best able to keep the injured employee at work, resulting in faster recovery and fewer lost workdays.

The "right" provider is often defined as one with:

* Experience in occupational health or sports medicine and disability management:

* The skills and abilities to treat injuries aggressively and involve the employee and employer throughout the process;

* The know-how to evaluate and communicate physical capacities/restrictions to support transitional work assignments.

As Tom Parry and William Molmen of the San Francisco-based Integrated Benefits Institute noted in a recent article, Return to Productivity, "In the sports medicine approach, injured employees are strongly encouraged to be active participants throughout the entire diagnostic and therapeutic processes, progressively increasing their level of activity while they heal. Employees can thus get back 'in the game' quicker, just like an athlete, and results obtained using a sports medicine approach are significantly better."

The Hartford insurance organization shared its experience in a recent workplace survey demonstrating that RTW itself can positively impact medical claim severity, noting, "We've found that workers who return to work faster -- even in a job that is different from the one they usually do -- tend to recover more quickly and more fully than those that stay at home to recover. Workers often feel isolated at home, and typically the longer they remain out of the workplace, the harder it is for them to return at all."

And a midsize workers' comp payer actively using an occupational health program reports the following statistics attributable to getting the injured worker to the right provider:

* Reduction in medical expenses of 29 percent;

* 14 percent fewer long-term claims;

* Reduction in indemnity costs of 49 percent;

* Average medical case closure, 14 days.

The logic is obvious. Channeling the injured worker to the right provider possessing the right skills with a focus on returning the employee to work as expeditiously as possible is apparently the best way to reduce medical claim costs.