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With a number of rising cost drivers impacting the workers’ compensation space right now, many in the industry are rightfully concerned about managing and mitigating expenses.
But there’s also an opportunity in sight to bring down some of these costs through the use of Artificial Intelligence tools and automation. Here are three areas to watch when it comes to workers compensation, and one that holds great potential to transform the space.
Medical costs keep rising with no end in sight
Currently, one of the most significant shifts in workers compensation is the rise in medical costs. In 2024, medical cost severity increased by an average of 6% compared to 2023 across 38 states.
This uptick is attributed to higher utilization of services, with injured workers seeking more care, and the care itself becoming more expensive. A shift in treatment patterns has driven a trend toward more physical medicine and surgeries, which tend to be more expensive, leading to higher overall medical costs despite a decline in drug prescriptions.
It used to be easy for adjusters to reserve for anticipated costs, but with today’s expenses so much higher, it’s become challenging to do so, especially in states that follow a “usual and customary” model rather than a fee schedule.
Fee schedules do help with planning and projections, but even in fee schedule states, providers make the determination of what to charge, and it’s up to the claim manager to adjudicate those expenses down. In “usual and customary” states, where there are fewer guidelines, it’s becoming particularly challenging to reduce those fees, causing medical costs to rise above indemnity as the biggest driver of workers’ compensation costs.
In New Jersey, for example, the absence of a standardized medical fee schedule has led to higher medical expenses, with surgical costs averaging 115% more than other states. Partnering with a TPA that has a strong medical bill review department is one way that organizations seek to control some of these costs.
A strong medical background is essential to help strike the balance between getting employees the right care and mitigating exposure wherever possible. Risk managers are well advised to work with third-party administration partners that have nurses on staff to provide guidance on controlling the medical spend.
Similarly, most carriers today have chief medical consultants on staff to work with claims teams and help mitigate the exposure. With expenses rising at current rates, this medical management staff is increasingly necessary to ensure that someone is keeping their finger on the pulse of where the money is going.
Spending is also up on the indemnity side, driven in large part by higher wages and an aging workforce
Though medical costs have surpassed indemnity as the top driver in workers compensation expenses, indemnity costs are certainly continuing to climb as well. Rising minimum wages and growing salaries are the primary contributors to this upward trend in indemnity benefit spending, as higher wages mean a higher rate that must be paid while employees are off work.
The aging workforce is another contributing factor in indemnity expenses. As a population, older workers are cautious on the job, and that means fewer workers compensation claims.
But when older workers are injured, it can be much harder to get them back to work, due in part to a higher number of comorbidities that must be dealt with. A younger workforce, in contrast, generally drives a higher frequency, lower severity workers compensation claims environment.
The rising trend toward litigation funding is fueling an increase in represented claimants
Litigation funding, in which specialized firms provide capital for legal fees, has made it easier for attorneys to take on workers' compensation claims, contributing to a 35% increase in represented claimants over the past year. While some claims are certainly valid and benefit from legal support, the trend has also opened the door to more aggressive client acquisition strategies by firms seeking financial returns.
Legal advertising is at an all-time high; it is hard to get injured at work and not see a lawyer’s “call me” billboard soon after. With these legal billboards more ubiquitous than ever, firms are also finding new ways to reach potential claimants. The state of California, for example, enacted a new law on Jan. 1 requiring companies to add language to all posted workers compensation documentation in the workplace, stating that employees have the right to consult an attorney and that any legal fees will come out of the resulting settlement. Not surprisingly, the number of represented claimants in California is currently higher than that of any other state.
Despite these challenges, Artificial Intelligence holds great hope for the workers' compensation industry
With medical, indemnity, and litigation expenses higher than ever in the workers compensation space, organizations are actively looking for ways to manage expenses where they can. Artificial Intelligence holds great promise here in its ability to streamline processes and improve outcomes.
One of the biggest ways that AI can drive improvement in the industry is through automation. If routine tasks are handled through automation, adjusters will have more time to spend with injured workers and defense attorneys, ultimately providing better service and support while mitigating the cost on the file.
Similarly, the use of large language models can improve accuracy and efficiency in processes like looking at medical records, and the time saved can increase the adjuster’s ability to use information for case management and the organization’s ability to pay benefits quicker. Ultimately, this all reduces an organization’s workers compensation exposure.
In workers compensation, the more responsive the adjuster is to the claimant, the less likely a claimant is to seek legal representation. It’s all about communication, and if automation can free up opportunities to engage in that discourse, everyone benefits. By making adjusters more efficient and reducing medical and indemnity spend and legal fees, we can ultimately make injured workers’ experiences better – a win/win for all stakeholders in the workers compensation space.
Jeff Sickles is chief claims officer for Broadspire and executive leader of the national claims operations, overseeing a team of 11 regional claims managers and 900 claims administrators. He was named member of the Broadspire senior leadership team in January 2021.
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