Work Comp Costs Growing for P&C Insurers

Workers' compensation medical expense costs are growing at a rate far exceeding the increases in group health costs, and this will be a critical issue for property/casualty insurers and actuaries, attendees at the recent Casualty Loss Reserve Seminar were told.

Peter Rauner, president, RMS Solutions Inc. gave an overview of the significance of the workers' comp insurance market, explaining that workers' comp is the largest commercial line and the largest source of industry loss reserves among property/casualty insurers.

He framed the issue by describing how medical expenses are a large and growing portion of workers' comp benefits. According to NCCI data, in 1986, medical expenses accounted for 45% of the total claim costs, with indemnity accounting for 55%. In 2006, medical expenses had grown to 59% of the total workers compensation claim costs. In addition, workers' comp medical severities are growing at a rate well above the medical CPI growth rate.

“Over the last eight years, workers' compensation medical costs have nearly doubled, from about $13.5 billion in 1999 to over $25 billion in 2007 -- that’s staggering,” Rauner declared.

Rauner outlined some of the factors driving medical costs on a macro level, such as inflation, economic growth, provider consolidation, and lifestyle factors like increasing obesity and diabetes.

“The increasing medical costs trends are a very real concern to the property/casualty industry,” he stated. “The spiraling costs will not only impact workers' compensation insurance, but also the industry as a whole.”

William Miller, senior vice president and Actuary, ACE USA explained how workers' comp medical costs compared to group health costs. While they utilize essentially the same resources, there are major differences, which are driven by coverages and policy terms, political and regulatory pressures, and the duration of medical payout.

“While group health includes disincentives for overutilization, workers compensation has no coinsurance payment by the injured worker,” explained Miller. “Utilization is one of the primary reasons that worker' compensation costs are rising so dramatically.”

Miller used an NCCI study to drive home his point. The study looked directly at utilization for 12 injuries and compared services provided within three months of injury. It was found that workers' comp costs were 71% more than group health costs across the 12 injuries, driven primarily by increased office visits and physical therapy.

“Workers' compensation injuries result in more intense and costly treatments earlier on than under group health,” said Miller.

Miller encouraged the actuaries in attendance to use their analytical skills to help design efficient workers' comp medical coverages.

“Use predictive modeling to find which doctors are providing the best outcomes for getting workers back to work and staying at work,” urged Miller, as he outlined the keys to containing utilization. He also cited medical fee schedules, utilization reviews, managed provider networks, and pharmacy benefit management programs as keys to an ideal workers' compensation medical system.

Erik Johnson, consultant and actuary, Aon Global Risk Consulting, moderated the session, which was organized by the CAS Committee on Health Care Issues. The Seminar is jointly sponsored by the Casualty Actuarial Society and American Academy of Actuaries.