Economy Not The Only Factor Driving Up Workers' Comp Costs

Every industry has been affected by today's economic trends, but the workers' compensation industry has been hit from all directions.

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

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

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

Issues affecting the length of time a claim remains open range from those at a local level, such as an injured worker whose treating physician is more cautious about releasing him or her from medical care, to those at the national level, like the impact of Medicare regulations. An array of other issues fall somewhere in between.

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

The following are significant identifiable factors that are specific to the workers' comp industry that influence claim costs.

MEDICAL CARE COSTS

The Department of Labor indicates that for the last 25 years inflation for medical care has been surging ahead of general inflation (CPI), causing the medical care component of workers' comp claim costs to rise. According to the Insurance Information Institute, if trends hold, the medical costs associated with workers' comp claims are projected to equal 70 percent of total claim costs by 2017–compared to 46 percent in 1987, 53 percent in 1997 and 59 percent in 2007.

The increase in medical care costs can be attributed to:

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

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

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

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

This focus on network optimization and penetration allows a company to better manage shifts in the cost of workers' comp due to higher medical costs. It also helps to ensure that injured workers are receiving access to the best quality health care and most responsible medical providers in their region.

Additionally, in an effort to control medical costs as much as possible, employing a sophisticated rules-based system for medical bill review that “flags” potential duplicate coding, billing errors, and unnecessary or unauthorized treatments for further evaluation should be put into place.

Overutilization of services is an increasing concern, so it is vital for employers to ensure that only appropriate services are rendered.

PRESCRIPTION DRUG COSTS

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

Being proactive in contracting with area providers and pharmacies to better manage these costs and ensure that the needs of injured workers are met is important to counteract escalating pharmaceutical costs. Use of generic drugs, when available and appropriate, is one key to lowering drug costs.

UNEMPLOYMENT RATES

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

These trends translate into increased claim costs, as weekly benefits are paid to injured workers for a longer period of time.

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

INCREASING OBESITY

Obesity is increasing among all ages of the workforce. According to the report “Obesity and Workers' Compensation,” developed by the American Medical Association in 2007 to evaluate the results of the Duke Health and Safety Surveillance System, the most obese workers file twice as many workers' comp claims as healthy-weight workers.

Obesity often contributes to complications in the recovery process and the ability to reach maximum medical improvement. In addition, obese workers frequently require more medical treatment and for longer periods of time.

Many companies have begun to implement workplace wellness programs that provide ways to help employees adopt healthier lifestyles and provide educational material as well.

For many companies, workplace wellness programs have became a valuable asset, lowering costs in absenteeism and work-related injuries, as well as disability management costs and workers' comp claims.

TORT COSTS

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

How you treat the injured employee at the time of injury, during rehabilitation, and when he or she returns to work can significantly minimize the human and financial impact of the injury.

Maintaining a relationship with the injured employee lets them know that you are focused on their recovery, which may in turn reduce escalating legal costs.

AGING WORKFORCE

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

The natural aging process and, for some workers, a lifetime of poor lifestyle choices, may result in workers who have health issues that complicate recovery from a workers' compensation injury.

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

MEDICARE REGULATIONS

Medicare has long been concerned that cost shifting has occurred, making it responsible for costs that should be paid from another source, such as a workers' compensation payer. Failure to take appropriate steps can result in the denial of future Medicare payments to the injured worker as well as liability and penalties on the employer, workers' compensation insurance carrier and the attorneys handling the claim.

The Medicare, Medicaid and SCHIP Extension Act of 2007 closely links 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-eligible injured workers.

Employers who build a process to support immediate and accurate reporting of claims, and who work with a provider who has a system in place to identify Medicare-eligible injured workers, will best protect both the interest of Medicare and the organization.

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

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