Unpacking the role of workers' comp
The U.S. workers’ comp system showed its strength through 2020, while the hit from COVID was less severe than expected.
The U.S. workers’ comp system emerged from 2020 “stronger than ever,” according to Bill Donnell, National Council on Compensation Insurance (NCCI), which reported that premiums declined 10% during 2020, while losses from the pandemic were not as dramatic as initially expected.
Excluding COVID-19, total workers’ comp claim frequency fell 7% during the year, according to the council’s State of the Line report.
“The pandemic was the moment to rise to the challenge, and the workers’ compensation system did so with integrity,” Donnell said in a release. “Our workers’ compensation system is fulfilling its noble mission to help injured workers.”
Regarding the drop in premiums written, which totaled $42 billion in 2020, the council reports job losses and shrinking payrolls were the major driving forces. However, the story on payroll is still unfolding, as the premium audits are still underway for many policies, according to Matt Zender, senior vice president of workers’ comp strategy at AmTrust Financial Services.
Describing the year quite justly as “an intellectually challenging one,” Zender explained: “There were a number of models and assumptions we were having to test and retest as 2020 went on. Ultimately though, as the dust is starting to settle, we realize some of our forecasts were overly pessimistic.”
COVID’s toll is less than expected
Noting the system’s strength and resilience, NCCI Chief Actuary Donna Glenn said: “The pandemic has been devastating for families, health care workers, and the economy. While net written premium dropped significantly during the recession, other financial metrics remain favorable, at or near historic highs.”
She added there were fewer COVID-related claims than initially anticipated, with the 38 NCCI-jurisdiction states seeing around $260 million in incurred losses from more than 45,000 claims. Of those claims, around 95% had costs totaling less than $10,000. The most severe cases, which accounted for around 1% of claims, generated 60% of total COVID-19-related losses.
Health care workers and first responders accounted for more than 75% of COVID-related claims, while essential workers in food service, building maintenance, distribution and retail sectors accounted for another 15% of these claims, according to the council.
In addition, the NCCI reported private insurers posted a profitable year, with a combined ratio of 87, while workers’ compensation insurance saw a combined ratio below 90 for the fourth consecutive year. The reserves position of private insurance is also strong, increasing to a redundancy of $14 billion at year’s end.
Perhaps unexpected, as well, some of the changes made during the pandemic because the industry had no choice but to adapt are going to be sticking around, according to AmTrust’s Zender, who notes these changes include how the industry engages with policyholders.
As physical contact was limited during the pandemic, there was an inability to do in-person loss control and audits. This drove the need to develop virtual workarounds.
“Many of those workarounds were proven to be more effective. So with no other choice, we worked through these new opportunities. What you’ll find is some will stick. You’ll see telemedicine have a higher adoption rate going forward because people realize it can still work for many cases,” he said. “There are going to be other things that emerge from this that we’ll be able to look back and see the line in the sand. The way we’ll work in the future will be a result of things forced upon us last year,” he said.
Further, loss control processes will also see more opportunities to leverage the virtual realm, Zender said, explaining policyholders like the ease of these systems while insurers realize they can still obtain the necessary information through digital interactions.
How fee schedule changes impact medical prices
One type of change that has nothing to do with COVID or technology but can have huge implications are workers’ comp fee schedules. According to the Workers Compensation Research Institute (WCRI), states with no workers’ comp fee schedules for professional services saw higher prices, ranging from 44%-179% above the median, when compared with states that had a fee schedule during 2020. (Figure 1)
Further, states with no fee schedule saw faster growth in prices paid, the institute reported. The median growth rate for prices paid in no-fee states was 37% from 2008-2020, compared with a 9% median growth seen in states with fee schedules.
In addition to differences between fee- and no-fee locales, prices paid for similar services vary significantly across states. For example, prices paid in Florida are 29% below 2020’s national median, while Wisconsin saw prices 167% higher than the 36-state median, WCRI reported.
Stretching back through to 2008, the study found eight states had substantial increases or decreases in prices paid (10% or more) following a fee-schedule change.
For example, New York increased its medical fee schedule rates for professional services in 2019, the first change to the fee schedule since 1996. Following the change, overall prices paid for professional services increased 21% from 2018-2020, WCRI found. Growing costs for evaluation and management and physical medicine services drove much of the growth. The increase aimed to ensure high-quality medical care for injured workers and that providers received reasonable compensation.
In 2018, Virginia also introduced fee schedule changes that were developed using historical actual average expense. The update, which was implemented to achieve revenue neutrality, resulted in an overall decrease in prices paid of 13% from 2017-2018, WCRI reported.
Despite the decline, the state remained in the company of states paying higher prices in 2018. However, the researcher noted the price differential between Virginia and the 36-state median significantly narrowed following the fee schedule change. For example, prices for major surgery in Virginia were 43% higher than the average in 2017. In 2018, it lowered to 24% above the average.
In June 2014, Kentucky stopped using relative values from Medicare’s RBRVS for its professional fee schedule, opting for state-specific relative values based on historic data from the FAIR Health commercial database. Following the change, the state saw an increase of 19% in overall prices paid. This came at a time when prices among fee-schedule states held relatively steady, WCRI reported. The growing costs ranged from a 4% gain for major surgery to a 33% increase for physical medicine services. However, the cost for neurological/neuromuscular testing decreased 23% following the fee schedule change, according to WCRI, which attributed the drop to a fundamental change in coding for nerve conduction studies.
In 2011, Illinois’ workers’ comp fee schedule rates for all types of services underwent a 30% decrease across the board, according to WCRI. This led to prices paid for professional services declining 27% from 2010 to 2012. This came as the median growth rate for the states studied stood at 2%. However, the overall prices paid for services in Illinois still rank among the highest in states studied, WCRI reported. (Figure 2)
North Carolina, as a final example, established new fee schedule rates during the summer of 2015 in an effort to incorporate updated Medicare rates. As part of the change, service-specific rates were revised to range between 140%-195% of Medicare value. Before the change, the fee schedule rates for most services in the state were tied to a 158% rate of 1995 Medicare values, WCRI reported. As a result, overall prices paid for professional services in North Carolina increased 17% from 2014 to 2016, which moved the state from the low spectrum for prices paid to more typical average prices seen in states studied.
The updated medical price index comes on the heels of research from AdvisorSmith that found workers’ comp costs are the highest in New Jersey, averaging $1,415 per employee annually. On the other end, North Dakota sees the lowest average annual per-employee cost, coming in at just $376.
Breaking it down more granularly, the researcher found in the five states with the highest average costs, workers’ compensation insurance totals out to more than 50 cents per hour. In the states with the lowest averages, workers’ comp costs are roughly 20 cents or less per hour.
Overall, workers’ compensation premiums made up about 1.2% of the total cost of employing the average American, according to AdvisorSmith. The nationwide average cost per employee is $936 annually, or about $78 a month.
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