By Dan Reynolds
On its 100th anniversary, the success of our nation's workers' compensation system can perhaps best be measured by how dynamic a market it is to make or lose money.
Recently, it has become a formidable risk to underwrite for insurance carriers because medical costs are steadily increasing and have marched right past indemnity costs, and look like they will keep on marching.
The latest data from A.M. Best & Co. show that the workers' compensation line's combined ratio degraded sharply in 2010, striking 118.1. Things look even uglier for 2011, with the A.M. Best analysts in Oldwick, N.J., projecting a 121.5 combined ratio for the line.
There is plenty of movement in market share among carriers, with industry leader Liberty Mutual seeing an 8 percent drop in net written premiums from 2009 to 2010. Liberty Mutual had 11.4 percent of all net written premiums in the workers' compensation space in 2009 and 10.9 percent of the market in 2010.
Competitors The Hartford and ACE INA Group increased their net written premiums in the line by 6.4 and 6.5 percent, respectively, over the same period. Hartford's share went from 6.6 percent of net written premiums in the workers' compensation market in 2009, to 7.3 percent in 2010. ACE's share went from 1.7 percent of net written premiums in 2009 to 1.9 percent in 2010.
What about the competition among the pharmacy benefit managers and the third-party administrators? It looks fierce, with different theories about what will happen with that piece of the market as we look forward to the next 25 years. Data, and who handles it best, will probably rule the day, according to the professionals interviewed for this article.
"I think that you are going to see a variety of vendors come into the space that have specific expertise with respect to what they can do with data in the data-mining space and the predictive analytics space," said Eric Silverstein, an Atlanta-based casualty practice leader for broker Beecher Carlson.
Silverstein said that focus on good data may stand the best chance to cut costs and improve underwriting results.
"Access to as complete information as possible is one of the keys," said Daryl Corr, the president of Tampa-based pharmacy benefit manager Healthesystems.
"We do think that increasingly carriers are relying on data to help drive decisions to determine what leads to the best outcomes in preventing injuries in risk management, and also leading to the quickest return-to-work and best medical outcomes," said Chris Cunniff, a Boston-based senior vice president and product manager for workers' compensation for Liberty Mutual.
Many people agree with that view.
TO MERGE OR NOT TO MERGE?
What about in the area of mergers and acquisitions? Will the massive health care carriers, with tens of thousands of group health accounts and the technology to scale up, finally "solve" the highly specialized workers' compensation market by buying smaller workers' compensation carriers or service providers? Opinions differ on this one.
"The health care space is going through a fair amount of change right now and many, many health insurers outside of workers' compensation are looking for ways to diversify their portfolio and workers' compensation is a natural place for them to go," said Jay Krueger, chief strategy officer for PMSI, the Tampa-based pharmacy benefit manager.
"A lot of the people I talk to all of the time, whether it is on the insurance side or a third-party administrator, or even some of the ancillary services are very, very interested in workers' compensation," Krueger said.
His theory is that 50 different states with 50 different workers' compensation regulatory schemes spreads and diversifies the risk for carriers, unlike the world of Medicare in which carriers are governed by one federal overseer.
Size is one thing. Expertise is another, said the CEO for a workers' compensation carrier.
"I think there will always be some creative destruction in our business, like there is in any other business. That someone will always see a better way to do things and scale sometimes makes a big difference when it comes to that," said Mark Wilhelm, the CEO of St. Louis-based workers' compensation insurance specialist Safety National.
The key is whether large health insurance carriers could ever successfully adopt the expertise needed in workers' compensation. For a large carrier that has built up the expertise and has a national presence, sure.
"I think from the perspective of running a workers' compensation claim organization, certainly having size and scale provides a lot of advantages in terms of being able to respond, and reacting to changes in the workers' compensation environment,'' said Maureen McCarthy, a senior vice president responsible for workers' compensation and managed care products and services for Liberty Mutual.
But what if you're just learning? What if you are relatively new to the workers' compensation world?
"I would doubt that it could be successful because again, if your focus is one thing and it is claims administration, then you are probably going to be better than a company that does other things in addition to claims administration," Wilhelm said.
PMSI's Krueger, however, thinks the big health carriers and third-party administrators will eventually enter the space successfully.
"It's not easy, but eventually if we are thinking five to 20 years out you will see folks figure this out," Krueger said.
In this current cycle, workers' compensation has gotten so scary even the traditional powers might start laying off of it, said Ken Martino, the president and CEO of workers' compensation third-party administrator Broadspire, a subsidiary of Crawford & Co.
"If you listen to a lot of the carriers right now they have raised a lot of concerns about underwriting that particular line of insurance and some of the challenges that exist there, particularly as it relates to medical costs and those things," Martino said.
"My thought is that it will move more and more toward alternative markets," Martino said.
For some employers, that will mean moving toward self-insurance in many cases, and perhaps the nonsubscriber option that has emerged in Texas and is being looked at in Tennessee and Oklahoma. The nonsubscriber option offers employer-provided indemnity and medical costs coverage while still providing the employee the option to litigate if they feel they're not being treated fairly.
"Right now it is starting to get some legs," said Beecher Carlson's Silverstein. "I don't see it as something that would happen nationally overnight, but I do see increased interest in this, especially where the state economies are hurting and they are trying to do something to draw employers."
UNITED ON BENEFiTS
Where there seems to be unity and true hope going forward is in the area of pharmacy benefits. What some have described as an epidemic in addictive pain medication use and abuse in workers' compensation has finally gotten the attention of enough people, it seems.
"As far as I'm concerned, I think that it is a good thing that it is being called an epidemic because it's bringing a higher level of awareness to the issue," Healthesystems' Corr said.
He said what is now a national awareness and a willingness by the Drug Enforcement Administration to provide stiffer regulations is what's needed.
"Because workers' compensation is such a small segment in relation to the overall healthcare market, it makes it a little more difficult to get something accomplished on a social issue like this if it is solely focused on workers' compensation," Corr said.
"I think from the perspective of workers' compensation the awareness level around the impact of pharmacy that is happening on workers' compensation results is really becoming much more pervasive throughout the industry," McCarthy said.
So what will work besides the federal and state regulation that many in the industry are clamoring for? Effective communication to counteract the effect of pharmaceutical industry television advertising, for one.
"I think the patient education part, as far as all of the damages that opioids and other types of powerful drugs are doing, the public and physician community really needs to be better informed about the dangers and potential consequences at the time they are being prescribed," Healthesystems' Corr said.
"The physicians need to be sitting down and explaining to them, 'Here is the plan. I am going to put you on these drugs first and here is why,' " Corr said.
How the American workplace will develop and what effect that may have on workers' compensation is more difficult to pin down.
Telecommuting and our increased use of electronic devices at work and at home has shattered a useful boundary for the purposes of adjudicating a workers' compensation claim.
"When the lines between your personal life and your work life are completely blurred then what is it?" Beecher Carlson's Silverstein said. "Is it workers' compensation or is it some other benefit?"
But there is uncertainty about just how much of the workforce will engage in telecommuting everywhere all the time. "I'm a little skeptical about there being a huge movement toward telecommuting," Safety National's Wilhelm said.
There are other workplace risks to watch for, of course. Nanotechnology is giving some people the jitters. There are studies that take opposing views on whether the tiny particles in the technology will invade our systems and years from now give the workers' compensation industry a torrent of casualty claims, as asbestos claims did more than 30 years ago.
What remains a certainty is that the workers' compensation fabric we have created in this capitalist culture is dynamic and that it works. It is populated by myriad professionals whose purpose is marrying the interests of workers and employers, of compensating the former and helping both realize the best paths back to work and recovery.
"I think we are in a unique position to be advocates for the overall health of the system and keeping costs in balance and managing employees, and helping them with the best medical solutions to get them back to work," Cunniff said.
DAN REYNOLDS is senior editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
December 1, 2011
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