Are Workers' Comp Costs Eating Your Lunch?

New trends in workers’ compensation claims paint a gloomy forecast for American businesses. Based on medical cost inflation over the past 50 years, a workers’ compensation claim that cost $1,000 in 1961 would cost nearly $16,000 now, according to Dr. Robert P. Hartwig of the Insurance Institute of America. Medical costs continue to damage insurance carriers’ profitability.

Claims payments are divided into two general buckets for actuarial purposes. There are indemnity costs, which pay for lost wages and permanent injury compensation; and medical costs, which pay for emergency room visits and other medical expenses paid to heal the injured worker. In 1989, according to Dr. Hartwig, indemnity payments accounted for 53 percent of claim payments, with medical payments totaling the other 47 percent.

By 2009, indemnity costs totaled 42 percent of payments and medical costs accounted for 58 percent of payments. By 2019, he predicts medical costs will equal two-thirds of the total cost of a workers’ compensation claim. What is happening here?

Despite insurance carriers’ best attempts to manage medical care, costs continue to escalate. Here are some of the reasons, according to Dr. Hartwig:

• An aging workforce has major implications for employers. Older workers are hurt less frequently, but when they are hurt, it takes more time and money to nurse them back to health.
• “Claim behavior” has changed significantly. “Large numbers of lost time, low-severity claims have entered the system—claims that previously were medical only...” This may be due to a declining payroll where employees may not have a job to return to.
• Even though lost time claims actually fell in 2010, wage reimbursement schedules have increased in states like California and Arizona, increasing the total indemnity payouts.
• Workers’ compensation carriers’ return on investment is “slipping,” according to Dr. Hartwig, largely due to lower investment income. The recent move by the Fed to keep interest rates low will probably lead to a further weakening of carrier profitability. Lower profitability pressures insurance companies to strengthen underwriting discipline and pay greater attention to pricing.

What does this mean to you, the business owner? It means the insurance market is firming, Dr. Hartwig believes. The second quarter of 2011 saw the smallest decreases in commercial rates since 2004. You can expect carriers to tighten underwriting requirements and keep rates level or increase them slightly when your workers’ compensation policy renews in 2011 and 2012. As 2011 renewals filtered in, workers’ compensation rates were up more than any other line of commercial business. Neither I nor other work comp experts expect that trend to turn around. 

What can you do? The first and easiest is to bulletproof your workplace to prevent injuries. Older workers are most frequently injured from falls. Improved lighting in your work areas and eliminating trip hazards may help. Next, meet regularly with your insurance carrier or claims administrator to review your claims. Always ask what the adjuster’s plan of action is to close a difficult claim. Develop a solid return-to-work program that ensures even seriously injured workers have a job to come back to, even if it is only a few hours a day while they heal. Consider bringing in a consultant who can help you address program deficiencies or review your claims for best claims management practices.

Small changes to your workplace can mean big changes over time. When dealing with insurance matters, look closely at your workers’ compensation program as rates firm and carriers become choosier about the risks they insure. To view Dr. Hartwig's entire presentation, visit http://www.iii.org/assets/docs/ppt/WorkersComp-072911.ppt.