Are labor & medical inflation affecting workers' comp?
Economic experts from NCCI share additional insights on their research on inflationary trends.
The price of labor, which is tightly bound to workers’ comp premiums, has matched pre-pandemic trends during the five quarters since the pandemic began, according to the National Council on Composition Insurance (NCCI). During the period, the employment cost index increased 3.2% on an annualized basis.
The council reported there is no strong evidence to suggest upward pressure on wages in general, noting much of the recent wage growth has been concentrated in low-wage positions and new hires in service sectors, including leisure and hospitality.
Further, most wage gains came in the form of one-time hiring bonuses, which signals employers are trying to attract workers without having to commit to a permanent higher wage, NCCI reported, noting wage growth should see a trajectory in 2022 that is more aligned with historical data.
While wage growth has been temperate, the producer price index (PPI) for medical costs increased 4.3%, annualized, since December 2020 and 2.7% from February to December 2020, according to NCCI. In comparison, the PPI for health care services grew 2.2% in the 12 months before the pandemic.
However, NCCI found the increasing cost of health care services was not because of pandemic-driven inflationary pressures. The gains were driven by changes to reimbursement rules and rates for medical services set by Centers for Medicare and Medicaid Services that went into effect at the start of the year. These changes included a substantial increase in payment rates for evaluation and management services, while around 300 musculoskeletal-related services were removed from the inpatient-only list.
Additionally, the changes will impact fee schedules related to Medicare reimbursement rates, in turn affecting the size of workers’ comp medical claims. Further, spending on hospital outpatient care and ambulatory surgical centers, in particular, has grown faster than other categories in recent years. This trend will be accelerated by the removal of musculoskeletal-related services from the in-patient only list, NCCI reported.
From the report authors
To get additional insights from NCCI’s review of inflationary trends on workers’ compensation, PropertyCasualty360.com connected with the council’s economists and report authors Patrick Coates, Ph.D., and Francesco Renna, Ph.D.
PC360: Given recent wage growth was concentrated among low-wage positions and primarily driven by hiring bonuses, do you anticipate these increases to have an impact on overall workers’ comp premiums?
Coates: Wage increases lead to higher payroll and workers’ compensation premiums. Slow wage growth at the beginning of the pandemic combined with faster wage growth in 2021 averaged out to about the pre-pandemic trend after adjusting for changes in the worker mix. The biggest impact of the economic recovery on workers’ compensation premium is via the number of lost jobs and the pace of employment recovery, not wage growth.
PC360: Do labor shortages have any impact that could potentially be long term?
Coates: Two aspects of today’s labor shortages may have an enduring impact on labor markets.
First, the labor supply declined during the pandemic, in part due to a wave of early retirements. Early retirements are most impactful in industries and occupations with a disproportionate share of older workers, such as trucking.
Second, the labor shortage is causing a reshuffling of workers across jobs and sectors. For example, many unemployed leisure and hospitality workers are looking for new jobs in other sectors and finding them. As workers switch jobs and move across sectors, tenure and experience levels drop, which puts upward pressure on injury frequency.
How big this effect may be and whether it will meaningfully offset the long-term declining trend in frequency — averaging declines around 4% per year since 2000 — remains to be seen. Conversely, if recent wage and benefit increases for low-wage workers are sustained, that may reduce turnover and put downward pressure on injury frequency in future years.
PC360: Did the pandemic and an increase in patients have any impact on medical inflation?
Renna: Medical price inflation jumped in 2021 — 4.3% annualized for the year through July as measured by the producer price index. The primary contributors are physician services and hospital outpatient care, for which 2021 price increases are not due to the coronavirus pandemic but to Medicare rule changes that took effect at the beginning of the year — higher reimbursement rates for evaluation and management and an enlargement of the list of services that can be reimbursed on an outpatient basis. Both changes may be rolled back in the future. Changes in physician reimbursement rates are tied to the Consolidated Appropriations Act, and the CMS has proposed reversing some of its outpatient-related rule changes in 2022.
Medicare rules for pricing and utilization matter to workers’ compensation; not only is Medicare a major consumer of medical services in general, but workers’ compensation fee schedules for physician and hospital services in many states are directly tied to Medicare reimbursement rates.
Related: