Every industry has been affected by today's economic trends, butthe workers' compensation industry has been hit from alldirections.

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The economic downturn has driven higher unemployment rates.This, along with escalating medical and pharmaceutical costs, anaging workforce, increasing obesity, and Medicare regulations, hascaused a significant rise in workers' comp claim costs.

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Lower investment yields mean underwriting results will have toimprove for carriers to maintain profitability.

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It is widely acknowledged within the workers' comp industry thatthe longer a claim remains open, the more expensive it becomes.This is one of the major factors increasing the cost of workers'compensation claims.

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Issues affecting the length of time a claim remains open rangefrom those at a local level, such as an injured worker whosetreating physician is more cautious about releasing him or her frommedical care, to those at the national level, like the impact ofMedicare regulations. An array of other issues fall somewhere inbetween.

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It is important for risk managers to recognize the trendscontributing to increases in the cost of workers' comp so thatsteps can be taken to reduce the effects of these factors.

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The following are significant identifiable factors that arespecific to the workers' comp industry that influence claimcosts.

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MEDICAL CARE COSTS

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The Department of Labor indicates that for the last 25 yearsinflation for medical care has been surging ahead of generalinflation (CPI), causing the medical care component of workers'comp claim costs to rise. According to the Insurance Information Institute, if trendshold, the medical costs associated with workers' comp claims areprojected to equal 70 percent of total claim costs by 2017–comparedto 46 percent in 1987, 53 percent in 1997 and 59 percent in2007.

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The increase in medical care costs can be attributed to:

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? Expensive procedures, such as spinal fusions, that have becomemore common than in the past.

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? Fee schedules that have not changed for several years,resulting in lower reimbursement rates for medical providers. Inturn, medical providers are increasing utilization and diagnosticprocedures, both of which increase the cost of care.

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? Medical providers who participate in provider networks areincreasingly unwilling to discount their service fees (0 percentdiscount), which translates into higher medical costs.

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Working with a workers' comp provider with the expertise andknowledge of local market dynamics offers a key advantage inanalyzing both the breadth and quality of a medical network.Applying local knowledge in contracting with area physicians helpsto address the broad, as well as specialized, needs of injuredworkers.

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This focus on network optimization and penetration allows acompany to better manage shifts in the cost of workers' comp due tohigher medical costs. It also helps to ensure that injured workersare receiving access to the best quality health care and mostresponsible medical providers in their region.

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Additionally, in an effort to control medical costs as much aspossible, employing a sophisticated rules-based system for medicalbill review that “flags” potential duplicate coding, billingerrors, and unnecessary or unauthorized treatments for furtherevaluation should be put into place.

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Overutilization of services is an increasing concern, so it isvital for employers to ensure that only appropriate services arerendered.

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PRESCRIPTION DRUG COSTS

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Because of the rise in their average wholesale prices, drugcosts are escalating. According to a 2008 NCCI report,, prescription drugs typically account for about 3percent of total claim costs in the first year, increasing to 15percent of total claim costs after four years, and more than 35percent of total claim costs after a seven-year lifespan of theclaim. NCCI further reports that narcotics account for nearlyone-quarter of all workers' comp prescription costs and that thenarcotics share of drug costs increases as claims age.

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Being proactive in contracting with area providers andpharmacies to better manage these costs and ensure that the needsof injured workers are met is important to counteract escalatingpharmaceutical costs. Use of generic drugs, when available andappropriate, is one key to lowering drug costs.

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UNEMPLOYMENT RATES

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In January 2010, the national unemployment rate was 9.7 percent,2.0 percentage points higher than a year earlier. Unemploymentjumped nationwide with job losses widespread across nearly allmajor private-sector industries. As unemployment rates escalate,employers are not always able to provide transitional dutypositions for their injured workers, due to a decrease in availablepositions.

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These trends translate into increased claim costs, as weeklybenefits are paid to injured workers for a longer period oftime.

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Companies that place an emphasis on controlling costs anddeveloping transitional duty strategies prove to be effective inminimizing the overall cost of their workers' comp program.

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INCREASING OBESITY

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Obesity is increasing among all ages of the workforce. Accordingto the report “Obesityand Workers' Compensation,” developed by the American MedicalAssociation in 2007 to evaluate the results of the Duke Health andSafety Surveillance System, the most obese workers file twice asmany workers' comp claims as healthy-weight workers.

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Obesity often contributes to complications in the recoveryprocess and the ability to reach maximum medical improvement. Inaddition, obese workers frequently require more medical treatmentand for longer periods of time.

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Many companies have begun to implement workplace wellnessprograms that provide ways to help employees adopt healthierlifestyles and provide educational material as well.

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For many companies, workplace wellness programs have became avaluable asset, lowering costs in absenteeism and work-relatedinjuries, as well as disability management costs and workers' compclaims.

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TORT COSTS

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According to the Bureau of Labor Statistics, tort costs move up with inflation,but at twice the rate. With plaintiff attorneys becoming moreaggressive in marketing to employees injured on the job, injuredemployees are consulting and hiring attorneys much earlier than inthe past.

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How you treat the injured employee at the time of injury, duringrehabilitation, and when he or she returns to work cansignificantly minimize the human and financial impact of theinjury.

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Maintaining a relationship with the injured employee lets themknow that you are focused on their recovery, which may in turnreduce escalating legal costs.

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AGING WORKFORCE

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The number of people over 55 is growing, and more than 35percent of this population is working. Over the next seven yearsthat number is expected to increase by another third. The U.S. Bureau of Labor Statistics estimates that the labor forceparticipation rate may grow even faster, as seniors find thatthey cannot fully rely on their retirement savings alone.

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The natural aging process and, for some workers, a lifetime ofpoor lifestyle choices, may result in workers who have healthissues that complicate recovery from a workers' compensationinjury.

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To reduce the likelihood of work-related injuries in olderworkers, companies need to manage exposure and employee behaviorthrough focusing on general safety and ergonomic measures.

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MEDICARE REGULATIONS

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Medicare has long been concerned that cost shifting hasoccurred, making it responsible for costs that should be paid fromanother source, such as a workers' compensation payer. Failure totake appropriate steps can result in the denial of future Medicarepayments to the injured worker as well as liability and penaltieson the employer, workers' compensation insurance carrier and theattorneys handling the claim.

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The Medicare, Medicaid and SCHIP Extension Act of 2007 closelylinks the claims reporting process to associated fines of up to$1,000 per day for delayed or inaccurate reporting to Medicare,increasing workers' compensation claim costs for Medicare-eligibleinjured workers.

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Employers who build a process to support immediate and accuratereporting of claims, and who work with a provider who has a systemin place to identify Medicare-eligible injured workers, will bestprotect both the interest of Medicare and the organization.

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With all these trends increasing the cost of workers'compensation, employers should view cost-containment as an ongoingprocess. Employers need to implement return-to-work strategies andworkplace wellness programs as they partner with workers'compensation insurance providers that have the expertise and localknowledge to better understand the particular economic drivers oftheir regions, as well as any competitive factors that may impact acompany's business.

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Robert W. Standen is president of Key Risk, amember company of W. R. Berkley Corporation. For information aboutKey Risk, visit www.keyrisk.com.

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