NCCI report sheds new light on drivers of medical, indemnity severity

Utilization has been a key factor in both medical and indemnity severity, according to the National Council on Compensation Insurance. In fact, the organization's latest research indicates they are more closely related than you might think.

"I think there's a tendency for us in the industry to think of the two separately . . . because we see medical severity grow on a steady basis at relatively high rates and indemnity sometimes does and sometimes does not," said Harry Shuford, NCCI's chief economist. "But what our analysis suggests is that if you strip out the impact of price inflation on medical severity and average weekly wage on indemnity severity and look at what is left, which, by definition is utilization, you see the two are very similar."

Shuford coauthored a report that examines the relationship between medical utilization and indemnity claim severity over two time periods: 1996/97 to 2000/01 and 2001/02 to 2005/06. It examines the drivers of the high rates of increase in medical and indemnity severity in the last half of the 1990s and the more gradual increases in the first half of the 2000s.

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"To me even more striking is that the measure of what we call quantity, change in duration on indemnity and change in medical treatments per claim on the medical side, also move very closely."

The report focuses on claims with temporary indemnity payments that are closed within 24 months of the date of injury. Among its findings:

Utilization was a major driver of severity increases in the first period but decreased in absolute terms in the second.
Price for medical and indemnity move consistently with their respective leading indicators, medical inflation and average weekly wages.
The impact of changes in diagnosis mix was significant in the first period but eased off in the second.

For the study, utilization was defined as treatments per claim for medical and duration for indemnity. Shuford said the fact that the utilization piece is apparently shared by medical and indemnity severity indicates that to a large extent the differentiating factor is on the price side.

During the last half of the 1990s, the economy was strong and average weekly wages were increasing at a faster pace than medical prices, Shuford explained. During the recession in the early 2000s, the rate of increase in average weekly wages dropped substantially then rose again as the economy recovered.

"In contrast, medical price inflation remained relatively consistent across the entire period," Shuford said. "I believe that's because the factors that drive prices in the medical marketplace reflect things going on with technology and regulation. My sense is that what's going on with inflation is the key factor that differentiates medical versus indemnity severity change."

Read more at the WorkersComp Forum homepage.

March 17, 2011

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