Report: Healthy but Challenging Workers’ Compensation Market

By | May 2, 2016

The workers’ compensation market is healthy and robust. It’s both competitive and profitable.

That’s good news for business owners, the insurance industry and injured workers.

Beneath the positive news, however, is a layer of anxiety over how long the market will remain healthy. There are numerous developments eating away at stakeholders’ confidence: rising medical costs, the opioid crisis, chronic pain claims, an aging and unhealthy workforce, and movements to allow employers to opt-out of mandatory workers’ compensation.

Discussions are underway on how to deal with some of these underlying concerns. A few developments including drug formularies and predictive analytics offer some hope. The fact that this is an election year with regulatory jobs in a number of states up for grabs is an opportunity that could go either way.

Workers’ compensation right now is as profitable a line as it has been for quite some time.

First, the good news.

The industry is expected to post a combined ratio of 97.6, which is lower than it’s been in quite some time. That’s a slight improvement from the workers’ comp calendar year combined ratio of 98 in 2014, and well below the 102 combined ratio in 2013.

Mark Walls, vice president, communications and strategic analysis, at Safety National, sees today’s market as a good deal for good risks in particular.

“If you have a good, solid return-to-work program, a good loss control program and your losses are reflecting that, then you’re going to have people competing for your business,” said Walls, who is the founder of the Work Comp Analysis Group on LinkedIn, a discussion community dedicated to workers’ compensation. “If you’re having a lot of losses, a lot of frequency, there’s going to be less competition and you’ll probably be seeing some rate hikes. In markets like this, good programs are rewarded.”

“Workers’ compensation right now is as profitable a line as it has been for quite some time,” said Steven Festa, chief operating officer of Employers, which wrote $689.3 million in net written premiums in 2015 and focuses on low-hazard, small business risks.

At the same time, business owners are in a much better position in terms of rates than even just a few years ago when rates were firming, he said.

About two-thirds of the NCCI states (about half of the United States) have had rate decreases over the past year.

“Market conditions today for workers’ compensation from a rate standpoint is very attractive,” Festa said. “I expect that to continue through the remainder of this year and probably through at least 2017 as well.”

The healthy market conditions are due in part to insurers’ own attention to safety.

“The industry has done a good job over the past few years putting more effective safety programs in place, mitigating not only the number of claims that occurred, but also trying to impact the severity of those claims,” Festa said.

With the exception of California, which only recently saw a decrease in claim frequency, most states over the past five-plus years, and in some cases 10 years, have seen claim frequency decline.

“That along with some moderation in medical severity has led to a much more profitable workers’ compensation product,” Festa said.

Medical Care

But while claims are declining, the cost of medical care continues to rise and that’s a troubling trend.

Rich Ives, vice president of workers’ compensation at Travelers, said the rising cost of medical is the number one concern of both carriers and business owners. “It’s been a top concern of ours and of our customers for a long time,” he said.

According to Ives, about 60 percent of his company’s workers’ compensation claim costs are directly attributed to medical right now and that’s been on the rise for some years. He said Travelers has forecast that by the year 2019, medical will be close to 70 percent of workers’ compensation costs.

Future Concerns

In addition to medical costs, industry experts are also worried about America’s opioid epidemic.

A recent study, “The Opioid Crisis in America’s Workforce,” (see page 22) found that nearly one out of every three (32 percent) opioid prescriptions is being abused. Those drug abusers cost employers nearly twice as much ($19,450) in medical expenses on average annually as non-abusers ($10,853).

That’s a hefty price to pay but the “real cost” is far greater than the dollars spent on medical.

“We spend time focusing on how to get those injured workers back into productive, working mode and spend a lot of time talking about the cost of the drugs themselves,” said Festa. “But my philosophy, and that of the industry, too, is that the cost of the drugs themselves are, in the scheme of things, just pennies.”

He said the “real dollars” are paid out for individuals who, over a period of time, get hooked on these drugs. The longer abusers are addicted, the less likely they are to ever go back to work, Festa said. That loss of production is beyond workers’ comp costs. “That has an even bigger impact on the overall U.S. economy,” he said.

Amanda Granger, vice president of workers’ compensation claims for IWC Group Insurance Companies, said opioids have been a problem for years, but now more people are doing something about it.

In her view, legislation establishing formularies for prescription medications in the workers’ compensation system will help address part of the problem. A formulary provides medication guidelines for injured workers with the goal of counteracting the overutilization of addictive drugs.

“This is a key issue that we’re tracking, not only nationally, but specifically in California where legislation is going through for 2017 to land a formulary,” Granger said. “This is a very positive step for California, but only if we really stay focused in setting up this formulary correctly.”

She believes the industry must make policy decisions based on data analysis and not on anecdotal information “because … that’s when you lose the significance around the purpose and intent of a formulary.”

Granger said Texas and Washington have had good results with drug formularies thus far and now other states are paying attention. “[They] are saying, ‘Hey, the savings are significant there and they don’t have the same issues around the overuse, dependency issues, to some of these opioid narcotic drugs.'”

The rising frequency of claims for chronic pain is another cause for concern within workers’ comp.

“This includes long lasting pain that hampers their ability to be able to return to work, or to even maintain the same lifestyle that they had prior to the acute injury,” according to Travelers’ Ives.

He said a study by his company a decade ago found that 10 percent of its more serious injuries involved chronic pain. Now that’s up to about 50 percent and, of those chronic pain cases, 90 percent are prescribed opioids, Ives said.

While the Centers for Disease Control, the Federal Drug Administration and some states are trying to provide guidance for the safe use and monitoring of opioids, they are not addressing the root cause, according to Ives. “What needs to be addressed is how can we intervene early while the person is still going through the first several weeks of treatment and address the chronic pain issue,” he said.

Travelers’ has a tool — its Early Severity Predictor — that offers some hope. It helps to identify people likely to develop chronic pain within the first few weeks of the injury. “It’ll allow us an opportunity to get involved, bring additional resources, and really personalize the care for that individual that would put them on a safe road to recovery and that could change the future for that person,” he said.

“When we think about workers’ compensation claims specifically we need multiple plans to address opioids,” said Kimberly George, senior vice president, senior healthcare advisor at Sedgwick. “It’s about early intervention. How the industry is using big data, resources, examiners, adjusters, pharmacy benefit managers, nurses to help consumers, to help injured workers understand the risks in taking opioids and to address those early with physicians.”

Those early interventions are where the industry has an opportunity to mitigate against somebody getting addicted to opioids, George said.

Unhealthy Workers

Another underlying concern is the unhealthy lifestyles of many Americans.

“Generally, the working population is older than they were prior. That’s contributing but in general the health and well-being of Americans has declined,” Ives said.

Comorbidities, or when a person has a chronic condition before the injury, are more prevalent today than ever before.

Ives said research suggests that 50 percent of the injured workers have at least one comorbidity prior to their injury, or one chronic condition. These include be conditions related to obesity, smoking and diabetes. Existing chronic pain would fall into that category as well. About 25 percent of the American working population has more than one comorbidity.

“The significance to the rise in medical care is this: If someone has one comorbidity, the cost of that overall claim doubles. If somebody has more than one comorbidity, the cost of that overall claim is five times more than it would be as if they didn’t have any,” Ives said.

Options and the Government

State insurance commissioners are elected in 11 states and appointed in the other 39. In this year’s coming election, there are 12 gubernatorial seats and five insurance commissioner positions to be decided.

The workers’ compensation industry needs to be paying attention to these elections because the commissioners can have significant influence over policies and enforcement in their states, said Walls.

The industry also needs to be watching the federal government.

In October 2015, Democrats on key Senate and House committees sent a letter to the Department of Labor asking it to conduct a critical review of state workers’ compensation systems — and their target appears to be states that are establishing opt-out programs that allow employers to create their own workers’ compensation plans, often with procedures and benefits less favorable to injured workers than traditional state-approved private insurance plans.

Walls said the Department of Labor is subpoenaing records from people involved with the opt-out programs in Texas and Oklahoma. “It’s not really focused on the level of the benefits. It’s focused on the procedures because that’s the limit of DOL’s oversight on those types of plans,” according to Walls.

What’s most interesting, Wall said, is that efforts to install opt-out have stalled. Early in the year, supporters of opt-outs in Tennessee and South Carolina tried but failed. “I think coming into the year, there was a lot of expectations for what was going to happen in those states, and it just hasn’t materialized,” Walls said.

But perhaps the biggest setback for the opt-out movement has been in Oklahoma, where lower courts have declared it unconstitutional and the Oklahoma Supreme Court has been asked to get involved. Oklahoma’s attorney general has asked the Supreme Court not to rule on the issue because the legislature is trying to fix the concerns that were raised by the lower court.

Last year, Walls said, Oklahoma’s opt-out seemed like a model for other states, but now it’s questionable at the least.

“You have had a lower court declare it unconstitutional, and whether or not the higher court does the same thing remains to be seen, but at minimum, the legislature’s taking a look and trying to tweak it to address the concerns the court’s raised,” he said.

Even employers have stepped back a bit from the opt-out movement. “You don’t see employers leading these conversations,” said George.

The Future

Walls thinks the anxieties surrounding workers’ compensation are deeper than rising medical costs, the opioid crisis or unhealthy workers. In his view, the century-old industry needs to face some fundamental truths.

“Is workers’ compensation doing what it was originally mean to do?” Walls asked. “Workers’ comp is more than 100 years old — it was really set up and designed around an industrialized society — that’s not what we have any more.”

In Walls’ view, workers’ comp needs to evolve to serve the future.

“There’s a need for comp to evolve to keep up with the realities of medical science and today’s workforce, and so many other things. These conversations are definitely taking place, but where it will go remains to be seen because we are dealing with 50 different state systems, so moving the needle’s a very difficult thing.”

Topics California Legislation Claims Workers' Compensation Talent Oklahoma

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