No Crystal Ball Needed To See WC Threats

Despite recent improvements in the health of the workers' compensation system, pressures continue to challenge this line of insurance.

We first need to consider those issues that could have a major impact on workers' comp in 2006 and the foreseeable future. These include the soaring cost of medical care and prescription drugs, the impact of judicial rulings on workers' comp laws, and the looming threat of another catastrophic terrorism loss.

Following that, we need to examine what steps can be taken to respond to trends in these and other areas, particularly by creating a culture of safety in the workplace and in getting all stakeholders in the system more politically active to keep workers' comp healthy and viable for all.

o Medical Inflation:

The most significant concern confronting workers' comp continues to be medical inflation. In 2004, over 50 percent of total losses were tied to medical benefits in states where the Boca Raton, Fla.-based National Council on Compensation Insurance provides rate-making services. Moreover, workers' comp medical costs in these states increased 10.5 percent from 2003 to 2004. Medical inflation continued in 2005 and is expected to remain a factor in 2006.

A multitude of elements continues to drive these expenses upward. Rising prescription drug costs, a general lack of meaningful utilization review in most states based upon prior authorization of services using clinical guidelines, as well as increasing use of specialists such as pain management providers, all contribute to the trend.

In addition, new medical technologies, medical malpractice suits and the lack of a medical fee schedule in certain states all magnify the overall health care cost trend, putting pressure on workers' comp insurers and their clients in managing costs.

o Age-Old Problem:

In addition to these challenges, an emerging trend that will impact workers' comp medical costs is the aging of the workforce. According to the Bureau of Labor Statistics, 11.9 percent of the workforce was 55 or older in 1994, compared to 15.6 percent in 2004 and a projected 21.2 percent in 2014.

The good news is that older workers have fewer accidents than their younger colleagues. However, age-related changes can heighten the severity and cost of an injury, having a major impact on overall medical costs and lost work time.

The median length of absence for workers age 55 to 64 is 12 days versus five for workers age 20 to 24, according to BLS, influencing employers to think more proactively about workplace safety issues that might impact the health of their older employees.

On the other hand, the impact of medical inflation on overall workers' comp costs has been dampened somewhat by a declining claims frequency. According to the NCCI, lost-time workers' comp claims have declined a cumulative 42 percent from 1990 to 2003.

o The Judicial Environment:

Another trend that will continue to affect the workers' comp environment is the judicial interpretations of laws and regulations. Workers' comp is a highly regulated line, with state laws and regulations that mandate the type, amount and length of benefits paid to injured workers. Challenges to these laws–and, in response, judicial interpretations that broaden or change the intent of reform legislation–are disruptive to the system's effective operation.

Many times, these interpretations create a disconnect between the intent of the legislation as enacted and as interpreted, resulting in adverse loss trends.

o Terrorism:

Terrorism exposure is a significant issue for all insurers. However, for workers' comp, it is particularly troublesome as policies cannot exclude acts of terrorism. Even though the federal reinsurance backstop of the Terrorism Risk Insurance Act is being extended, the act still leaves the property-casualty industry and individual insurers with a significant risk through a sizeable retained deductible.

Terrorism presents a unique risk exposure. The insurance industry needs to work with the federal government to develop a longer-term solution that provides protection for employers and their employees while safeguarding the financial health of individual insurers.

While we can't control the economy or predict the next terrorist attack, much can be done to protect the health of our industry and ensure that the workers' comp system continues to work as intended.

The health of the workers' comp system directly impacts employer bottom lines. Remember, insurance is essentially a risk-transfer mechanism. Rising costs stemming from medical and economic inflation, litigation and increased claims frequency need to be passed on to business and, ultimately, insurance consumers feel the economic consequences.

Insurers can't stand alone in creating and maintaining a healthy workers' comp system. The key is for all stakeholders–insurance carriers, agents and brokers, businesses and employee groups–to take an active role in promoting a healthy system. To do this, workers' comp stakeholders need to focus on two key areas.

o The first is the development and execution of effective risk management and cost-reduction programs.

Consistent adherence to safety and risk management practices and the creation of a safety culture in the workplace need to be priorities for employers and employees. Well-executed post-loss strategies are also vital. If claims occur, management teams need to communicate frequently with injured workers and support and be involved in return-to-work initiatives.

Continually rising medical costs require a stronger, more proactive approach to health care cost containment. Strong execution is needed in case management, medical bill review, and utilization of preferred provider networks and pharmacy benefits management programs.

o Second, a healthy workers' comp market calls for active participation in the political arena by all stakeholders.

In particular, the voice of employers is crucial. Businesses need to be aware of their state workers' comp issues and impending legislation to effectively promote their views to legislators. We all need to work with legislatures to seek positive solutions to issues like rising litigation costs–ultimately workers and employers will benefit.

Despite these pressures, the workers' comp system continues to bring enormous value to our economic system. For nearly a century, workers' comp has served an important role in fueling this nation's economic engine by helping injured employees regain their health and return to work, while providing a mechanism for businesses to manage their risk.

We look forward to all workers' compensation stakeholders joining together to continue making the system work in an efficient manner.