The workers' compensation community has seen a push for much-needed reforms in recent years, and in 2005, many of these efforts began to yield positive results.
However, as we move forward in 2006, many of these reforms are under siege in the courts and state legislatures. In addition, emerging issues and familiar problems continue to challenge the workers' comp system.
While workers' comp rates are stabilizing in many areas of the country and the frequency of claims-filing continues downward, the news is bittersweet for employers. The industry's cost per workers' comp claim is surging higher, driven largely by skyrocketing medical expenses.
Although the federal government continues to insure employers against terrorist attacks, the solution is temporary. Insurers are concerned about the lack of resolution on this issue--as well as many others--in 2005 and will likely be pushing for further reforms and legislation on the national and state levels in the coming year.
While some areas of the workers' comp market look grim, there is positive news for employers. Reform efforts in California and other states have helped workers' comp rates stabilize in many parts of the country. Aside from a few notable exceptions--such as South Carolina--few states approved large rate increases in 2005. This bucked the trend of double-digit increases seen in many states at the beginning of the decade.
Peter Burton, senior division executive of state relations for the National Council on Compensation Insurance, says that at first glance, it might appear that rates have increased nationwide. However, he says, if employers look at the big picture, it will paint a different story.
In some larger states like Florida, NCCI approved significant decreases. In smaller markets like South Carolina, the organization approved a more than 32 percent increase. These statistics can skew the overall national picture, he says.
"Workers' comp costs overall have been pretty flat," Burton says. "When you factor in the independent bureaus and measure the gains made in the big states, costs overall have gone down about 1 percent."
Despite rising medical costs and concerns about the length of time to close a claim, the frequency at which claims are filed has steadily fallen in recent years. The decline may be the result of improved workplace health and safety programs, which have driven injury rates to historically low levels.
UP AND DOWN
The latest study by the Bureau of Labor Statistics found that work-related injuries and illnesses fell slightly in 2004, from five cases of injury or illness per 100 full-time workers in 2003 to 4.8 cases in 2004.
Researchers found that 1.3 million injuries and illnesses in private industry required recuperation away from work beyond the day of the incident in 2004. This was a decline of 4.3 percent from 2003. Median days away from work--a key measure of the severity of the injury or illness--was seven days for all cases in 2004, down from eight days in 2003.
"The reduction in frequency has been a positive trend," Burton says. "In almost every state, frequency levels are down to all-time low levels. The funny thing is that all states are seeing a reduction in frequency--small and large businesses. It is a phenomenon in all industries."
Eric Oxfeld, president of the Washington, D.C.,-based UWC-Strategic Services on Unemployment and Workers' Compensation, says it is difficult to pinpoint what is producing the trend, though the reduced frequency has helped keep the costs of workers' comp coverage stable. "Costs have been going up," he says. "But the increased medical costs have been offset by fewer claims."
When will this trend cease to continue? Oxfeld equated the frequency decline with that of a financial bubble. Eventually, he says, the bubble will burst, and prices and the market will fall back to realistic expectations.
"When this stops, we are poised for significant cost increases," he says. "It is hard to say when this will happen. We don't know if this will be the year or it will come next year, but you'd better prepare yourself, especially if you are self-insured."
Skyrocketing medical costs continue to be the top source of concern in the industry.
"Inherently, when most people talk about the challenges facing the workers' comp community, they point to the rise in medical costs, which continues to escalate at double-digit increases," Burton says.
Bruce Wood, assistant general counsel of the American Insurance Association, agrees that medical costs are one of the most significant issues facing the system.
"Historically, medical costs comprised about 40 percent of the benefit dollar," he says. "That number is now about 50 percent. In workers' comp medical treatment, there aren't the kinds of controls you see in the health insurance side. It is ironic because the workers' compensation system should have an even greater ability to direct care. We're not a medical program, but a disability program with a medical component."
Why are medical costs rising? Experts cite prescription drug costs, and physical, medical and diagnostic testing as some of the reasons.
"The reality is that medical procedures are becoming more expensive--drugs and the cost of health care in general," says John Burton, professor emeritus in the School of Management and Labor Relations at Rutgers University. "Unfortunately, I don't see any solution to that, and it's a matter of a lot of concern."
UNDER A SHADOW OF TERROR
Under pressure to ensure that the federal government continued to protect employers against terrorist attacks, Congress narrowly passed a bill that extended the Terrorism Risk Insurance Act before it expired on Dec. 31. The legislation reauthorizes the federal backstop program through 2007. The renewal increases the industrywide deductible in 2006 to $25 billion from its current level of $15 billion. In 2007, the deductible increases to $27.5 billion.
TRIA's renewal passed despite the firm stances taken by the Bush administration and Republicans to not extend the act without curbing taxpayers' liability. The parties reached a compromise to narrow the scope of TRIA by increasing the size of the event that would trigger federal aid. The compromise increases the current trigger of $5 million to $50 million in 2006 and $100 million in 2007.
"The insurance industry needs some kind of permanent backstop because it understands the numbers," Oxfeld says. "A major terrorist attack could bankrupt the entire workers' compensation system. The employer community is less attentive to what is at stake, which has led to a lot of frustration."
In its analysis for the Congressional Budget Office, California-based catastrophe modeler Risk Management Solutions finds that the renewal of TRIA will shift the relative share of the risk from the government to the insurance industry, but nonetheless provide vital protection against extreme losses. The analysis shows that while TRIA provides solvency protection in extreme events, it is not an insurance industry subsidy. Based on the new TRIA terms, more than 90 percent of the RMS-modeled average annual loss would be retained by the industry. If an attack occurred, there would also be less than a 10 percent chance that it would cause the industry deductible to be reached, because only the most extreme, low-probability attacks will cause losses in excess of $30 billion. For example, the 2001 World Trade Center attacks resulted in approximately $32.5 billion of insured losses. If an event of this magnitude occurred today, RMS says it would produce only a minimal TRIA recovery for the insurance industry.
The insurance industry said that it was pleased TRIA had been renewed, but felt that Congress failed to address a long-term, permanent solution to the problem.
Marc Raciot, president of the American Insurance Association, praises Congress on the action, but warns that it will only keep a safety net in place for commercial policyholders for the next two years, even though the risk of a terrorist attack will face the nation for years. "Lawmakers will now need to focus, with the same urgency, diligence and bipartisan cooperation, on finding a long-term solution to insuring America against the ongoing economic threat of terrorism," he says.
According to the RMS analysis, the increase in deductibles will lead to another significant increase in the amount of terrorism risk held by the industry, highlighting the need for insurers to focus on terrorism risk management.
"Since the introduction of TRIA in 2002, risk management practices have advanced significantly, and virtually all of our clients with a material amount of terrorism exposure are actively managing their risk in an increasingly sophisticated and broad manner," says Peter Ulrich, senior vice president of enterprise risk management for RMS. "Several years ago, companies focused on exposure accumulation and scenario modeling, but now they are using probabilistic modeling to help inform decisions on underwriting guidelines, risk selection, reinsurance transactions and the possible securitization of terrorism risk."
UWC's Oxfeld says that the extension is temporary and a more permanent solution is needed. "What that solution is, exactly, is open to debate," he says. "However, I can't imagine a solution that doesn't contain the government as a crucial part of a backstop."
The workers' comp community should keep a close eye on several other issues on the horizon. Those issues include:
* Mobile work force. "When workers' compensation statutes were initially set up, the work force wasn't as mobile as it is today," says Keith Bateman, vice president of workers' compensation for the Property Casualty Insurers Association of America. "Construction crews, for example, go from one state to another. It raises a lot of questions about who is considered an employee and is the person covered. There are a lot of questions coming to light now about cross-jurisdictional issues."
* Medicare Secondary Payer program. Insurers continue to be concerned with their ability to settle claims due to the Medicare Secondary Payer program. Many believe the issue, while not new to insurers, has gotten worse.
"The Medicare program has grossly overreached its right to the secondary payer when the workers' comp claim is settled," Oxfeld says. "However, it is hard to boil down because it is a federal program."
The Centers for Medicare and Medicaid Services, the federal agency that administers the Medicare program, has played a more active role in recent years in making sure federal funds do not compensate eligible injured recipients who are also covered under workers' comp systems.
Oxfeld says Medicare interferes in the ability to settle cases, and reform legislation is expected to be introduced sometime this spring.
* Coverage for illegal aliens. Many states are beginning to address the issue of illegal aliens' right to workers' comp coverage. A Colorado Senate panel recently shot down a proposed bill that would have prevented illegal immigrants from receiving benefits for injuries suffered on the job. Opponents of the legislation argued that it would have encouraged employers to hire illegal immigrants. Undocumented workers would be unlikely to sue if injured, and employers would not have to pay workers' comp premiums for those workers.
In New York, the state's highest court recently ruled that two undocumented construction workers injured on the job were not barred from collecting lost wages from their employers solely because of their illegal status.
As the illegal immigrant population grows in the United States, many believe the issue will be a hot-button topic for years.
"There tends to be a gut reaction to the illegal alien issue--should they be covered or not?" Bateman says. "The gut reaction tends to be not, but then when people look at all the arguments, they tend to change their views. This all ties in with the independent contractor issue. What do you do when they are injured? What is their lost wage capacity, and is that due to their injury or their illegal status now being known?"
* Other medical issues. Insurers are concerned about a number of emerging medical issues, including obesity and how the aging baby-boomer population will affect medical costs. In addition, insurers are focusing on a possible avian flu pandemic, which could affect millions of employees, ranging from farmers to health-care workers.
is a writer based in Chicago.
April 15, 2006
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