In the last several years, our nation has been in the throes of the worst recession since the Great Depression. While the Great Recession brought plenty of challenges for the workers' compensation industry—including increased potential for fraud—during this time our country also underwent significant comprehensive health reform. These events have created unique challenges and significant uncertainty for the workers' compensation industry.
In March 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act and the companion Health Care Education Reconciliation Act of 2010 (hereinafter referred to together as “ObamaCare”). Although the full effects of ObamaCare on the workers' compensation industry remain to be seen, initially experts have seen it as a double-edged sword for medical costs.
Under ObamaCare, hospitals may have less of a need to cost shift to workers' compensation since more people will be covered by insurance (by some estimates an additional 10 percent of the U.S. population or more than 30 million people). However, other providers may cost shift more to workers' compensation due to cuts in Medicare reimbursement. Finally, as ObamaCare leads to new regulations in the health insurance industry, ultimately this may have a trickle down effect to the workers' compensation industry as jurisdictions adopt similar regulations.
ObamaCare aside, the recession has presented its own set of challenges for the workers' compensation industry. Employers, under financial pressure to reduce overall claim costs, are seeing a reduction in claim frequency but an increase in severity and duration. The potential to mitigate claim severity may be impacted by the unavailability of regular or light-duty jobs and the lack of available capital to settle claims. At the same time, medical treatment costs continue to increase and regulatory oversight is becoming more aggressive in some cases as jurisdictions look for their own increased revenue. Finally, risk management departments may be dealing with these challenges despite budget and staffing cuts to their own departments.
More Challenges, Less Revenue
Workers' compensation insurers face similar challenges of increased claim severity, lack of some mitigation tools such as availability of regular or light-duty employment, continually escalating medical costs, and increased jurisdictional oversight. In addition, insurers may be dealing with reduced premium revenue as businesses negatively impacted by the recession cancel their policies or default on premium payments. Also, as employers struggle with their own finances during the recession, premium fraud is a potential concern. Finally, insurers may have seen the recession negatively impact their available reserves and their stock prices.
During the recession, workers' compensation third-party administrators (TPAs) have seen a reduction in revenue due to reduced claim frequency while working to meet the needs of an increasingly demanding client base. The TPA industry is under pressure to maintain claim handling quality and reduce claim duration and costs for their clients despite reduced revenues and reduced availability of the aforementioned mitigation tools.
Suspicious Claims on the Rise
The recession presents the entire workers' compensation industry with an increased risk of fraud as well. The increased number of layoffs caused by the recent downturn in the economy has insurance investigators watching for possible increases in spurious injured worker claims. According to a May 18 National Insurance Crime Bureau (NICB) Suspicious Claims Report, the number of suspicious workers' compensation claims for first quarter 2011 was up 24 percent overall compared to the first quarter of 2010.
The NICB report indicated the largest trend of a reason to refer a workers' compensation claim as potentially questionable was for Inflated Medical Billing, which had a 103 percent increase from first quarter 2010 to first quarter 2011. If ObamaCare does result in non-hospital medical providers attempting to cost-shift to workers' compensation due to decreased Medicare reimbursements, instances of inflated medical billing could continue to increase.
According to the report, claimant fraud was the most prevalent reason to refer a claim, as potentially questionable with 477 instances. That was a 23 percent increase from first quarter 2010 to first quarter 2011; this category was relatively flat from 2009 to 2011.
Perhaps somewhat surprisingly, disability as a referral reason for potential questionable workers' compensation claims remained relatively flat (6 percent increase) from first quarter 2010 to first quarter 2011. Possible explanations for this are: 1) fewer jobs exist during a recession, which leads to fewer instances of this type of fraud; and 2) workers may value their current jobs more during a recession and are less likely to jeopardize them.
Many of the challenges of the recession remain and the potential impact of ObamaCare on the workers' compensation industry is just beginning.
James Ryan will be part of a panel discussion entitled“ObamaCare, the Great Recession and Workers' Compensation” during the Workers' Compensation Educational Conference in Orlando on Tuesday, Aug. 23.
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