Workers' compensation experts remain cautiously optimistic on the state of the market. Despite skyrocketing medical costs and other areas of concern, industry players say they don't foresee any major problems that threaten to shake up the workers' comp community.
"There is no national or state-specific crisis in workers' comp, one in which the insurance market is evaporating and there is exceedingly high benefit delivery costs, along with chronic rate suppression," said Bruce Wood, assistant general counsel and director of workers' compensation at the American Insurance Association. "The latest studies have had a positive outlook for the residual markets. So in those terms, I'm guardedly optimistic overall, while recognizing that we continue to have localized challenges that will require diligence to ensure that the system doesn't go off track."
Frequency continues to decrease, rates stabilize. As has been the trend in recent years, frequency rates and comprehensive state reform efforts have helped workers' comp rates stabilize throughout the country. The National Council on Compensation Insurance recently issued its State of the Line workers' comp market analysis.
According to the report, workers' comp prices accelerated their declines in 2007. Driving the falling prices were significant reductions in California and Florida, where reforms in those states have favorably impacted costs and improved marketplace conditions in recent years.
Researchers said favorable frequency trends in 2007 continued and--along with payroll increases--were more than enough to offset medical and indemnity claim cost increases. The study found that this resulted in bureau loss cost and rate filings that generally were downward last year, with a couple of notable exceptions.
Although frequency rates continued falling in 2007, it did so at a slower rate than the last couple of years. For states in which NCCI makes its rate recommendations, the frequency decrease for last year was 2.5 percent. The prior two years had very large frequency decreases of nearly 7 percent.
Researchers said the 2.5 percent decrease in 2007 is closer to the longer-term trends for frequency declines. NCCI said it has found that frequency tends to decline during periods of economic slowdown. Therefore, despite the ease from decline of previous years, the frequency decline should continue, it said.
Driving the decline in frequency has been the improving health and safety of America's workplaces. According to the Bureau of Labor Statistics, nonfatal workplace injuries and illnesses in 2006--the latest data available--fell to the lowest levels since the agency began conducting surveys in 1972.
According to the study, nonfatal workplace injuries and illnesses among private industry employers occurred at a rate of 4.4 cases per 100 full-time workers in 2006--a decline from 4.6 cases per 100 full-time workers in 2005.
The NCCI study also highlighted the following issues:
--Workers' comp calendar year combined ratio. According to the NCCI report, the workers' comp calendar year combined ratio in 2007 stood at 99 percent--the second consecutive year that the line has realized an underwriting profit, albeit a six-point deterioration from 2006. Calendar year net written premium declined for private carriers for the first time in eight years. It was the second straight year of premium declines for the line inclusive of the state funds.
--Accident ratio. NCCI also reported that the 2007 accident year combined ratio came in at 92 percent. On an accident year basis, researchers said the current underwriting cycle peaked in 2006, with an 84 percent combined ratio--more than a 55 point improvement since 1999.
--Indemnity claim costs. NCCI said it is estimating that the average workers' comp indemnity claim cost increased 4 percent in 2007. Researchers said this is slightly lower than the 5 percent increase in 2006 and only modestly higher than the change in average wage levels last year.
--Residual market. Depopulation of the residual market continued at an accelerating pace in 2007 and 2008, according to the study. Premiums dropped to about $1 billion for policy year 2007, down from $1.2 billion in 2006. Overall, the market share of the residual market pools serviced by NCCI for 2007 dropped to about 8 percent, down from about 10 percent in 2006. Researchers said this is a great improvement from the 13 percent market share peak that was reached in 2004 in this cycle.
Cost drivers remain the same. Medical cost increases, although moderating somewhat in the last couple of years, are still a major issue putting upward pressure on costs.
"Cost drivers are always the same," Wood said. "Medical costs comprise the single biggest challenge to the benefit delivery system.Fifteen or 20 years ago, medical costs comprised 40 percent of workers' comp expenses, and now they are up to as much as 70 percent. Trying to deploy tools that are necessary to restrain the growth of these costs, while ensuring effective treatment for workers, is difficult and challenging, but absolutely a policy objective of this organization."
Experts point the finger at rising pharmaceutical costs in workers' comp. According to a study by PMSI, one of the largest providers of pharmacy and specialty products and services centric to workers' comp, annual pharmacy spending increased 11.91 percent per injured employee in 2007--compared to 8.67 percent in 2006. Researchers said the impact of rising prices for drugs represented 39 percent of the increase, while utilization increases contributed to 61 percent of the growth.
According to NCCI, prescription drugs currently account for about 15 percent--or $5 billion--of workers' comp medical expenses. Even though the growth rate in prescription drugs has slowed, researchers said it found that overall, workers' comp medical expenditures continue to rise.
Reforms make an impact. In recent years, a number of states have looked to reform their workers' comp systems, while those that have already enacted changes have ramped up their efforts to protect their initiatives from business community and labor organization attacks.
Wood highlighted the following key states:
--California. Reforms enacted to California's worker' comp system from 2002 to 2004 continue make a significant impact. According to the Workers' Compensation Research Institute, workers' comp costs per claim in the state dropped by 15 percent in 2005-06 (2005 claims evaluated in 2006), driven by rapid decreases in both medical costs per claim (14 percent) and indemnity benefits per claim with more than seven days of lost time (8 percent).
Since the reforms were enacted, Wood said, there has been a steady effort to roll back the changes by attorneys and labor groups. However, he doesn't expect much change in the immediate future.
"There is seamless conflict in workers' comp, but most efforts have been uniformly unsuccessful because the governor has stood fast," he said. "Nevertheless, there is going to be another election in 2010 and (Gov. Arnold) Schwarzenegger won't be in office in 2011. Depending on who the next governor will be, we really don't know the type of political challenges that we will face. I wouldn't predict any unraveling of the reforms until then."
--New York. "We're still awaiting the enactment of a lot of the March 2007 reforms," Wood said. "The promise of the reforms is positive, but the promise is still unfulfilled. The loss cost system is on its maiden run and the workers' comp ratings board has not yet made its filing. So, the bumper sticker for New York is 'Promises Pending.'"
--Florida. "Florida is another problem child state, but reports on the 2003 reforms continue to be positive," Wood said. "On the legislative side, there are changes that we would endorse, but there has been a reluctance to do so because of the focus on property issues related to the hurricanes from recent years. There is a concern by the business community that by opening up the act, they could lose some of the reforms."
--North and South Carolina. "The Carolinas are problematic," Wood said. "South Carolina's efforts to enact reforms have fallen short of effectively restraining cost growth. There has been an unfortunate focus on the insurance mechanism and protracted discussion of loss cost modifiers. This is an unfortunate diversion because it doesn't have anything to do with restraining cost growth."
The problems in North Carolina, Wood said, have not matured to the level of South Carolina. However, the decline in frequency is masking the cost growth underneath, he said.
"One can look at the WCRI analysis of North Carolina and see the growth on the medical side and be very troubled," Wood said. "The business community has acknowledged this and there is a heightened awareness and willingness to confront it. I'm not sure it will reach the point to where there will be a major effort to push through critical reforms in the next year."
Uncertainties face workers' comp industry. "Given the positive 2007 results, our short-term view of the market is optimistic," said Dennis Mealy, chief actuary at NCCI. "However, our long-term outlook is cautionary due to the myriad of uncertainties that continue to face the business."
According to NCCI, there are a number of concerns for the workers' comp industry, including:
--Sluggish economy. Low investment yields, with the potential of a stagnant stock market, mean that combined ratios need to be at or near historic lows for insurers to earn an adequate return on capital.
--Upcoming election. Steven Klingel, president and CEO of NCCI, said the fluid political landscape in many states and at the federal level may put additional pressure on reforms. Health care-related issues, he said, will be one of the most significant talking points of the presidential election in November.
--Underwriting trends. The current underwriting cycle is past its cyclical peak, Mealy said.
--Medicare set-asides. On the national front, Medicare's enforcement of the Medicare Secondary Payer Act is of constant concern. The act, which is triggered in connection with workers' comp settlements, is intended to ensure that Medicare benefits are not paid in the presence of an alternative and primary benefits system.
However, many workers' comp experts have said the Centers for Medicare and Medicaid Services has enforced the act in a manner that has disrupted the state comp system by imposing far-reaching and inconsistent dollar set-asides to cover the cost of future medical treatment for which workers' comp, rather than Medicare, would be responsible.
Douglas Holmes, president of UWC-Strategic Services on Unemployment and Workers' Compensation, has been working with a broad-based coalition to address the issue. Last year Rep. John Tanner, D-Tenn., and Rep. Phil English, R-Pa., introduced H.R. 2549, which sought to resolve the serious delays and confusion in the review of workers' comp Medicare set-asides by CMS. However, the bill is pending.
"The key to moving it forward is the termination of the impact on federal outlays," he said. "There has been significant difficulty in securing the cooperation of CMS in providing information to the Congressional Budget Office so that they can price the bill. The problem is that CMS doesn't currently have a baseline score of what the impact of the set-asides really are. One of the primary questions is how much money is going into set-aside arrangements and how much is coming out over an annual basis, and over five to 10 years."
September 1, 2008
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