By Daniel Hays
Accumulating medical costs are strongly impacting workers' compensation insurers' profits and some experts predict there could be a hard market by 2014.
Those who were interviewed offer a variety of assessments on why and where the market is moving, but Joseph Paduda, a principal in Health Strategy Associates, a workers' compensation consultancy in Madison, Conn., makes a case based on his projections of increased cost for the care of injured workers who, during treatment, are overprescribed with opiates that leave them with a drug dependency.
Drug-rehabilitation programs will not only add cost for insurers, but will extend the length of the claim, he said. The long-tail effects "from [injured worker] opiate addiction have not been felt yet," said Paduda.
Workers' comp injury payers "own that addiction, and I don't believe many have figured out what it's going to cost them," Paduda said.
Chartis announced in February that it would stop writing excess workers' comp as a stand-alone product citing the fact that claims from such workers' comp business involve "the cost of new and additional treatment specialties such as 'pain management,' " as well as changes in injured worker longevity and differing experience within state regions.
In public filings, Chartis' parent AIG mentioned that changes in Medicare and Medicaid evaluation protocols could increase drug costs for workers' comp insurers going forward.
"It's not just the cost of drugs, though that is significant," said Paduda, "It's also the impact on indemnity, the cost of other drugs to deal with side effects and also the associated medical costs."
Carriers are having to weigh whether they want to spend the money to intervene in a costly claim or whether they are better off settling it.
"There is now that decision of how much is it going to cost to try and fix this or would it possibly be better to settle and try to get it off the books," said Todd Pisciotti, vice president of sales and marketing for Healthesystems, a pharmacy benefit manager based in Tampa, Fla.
Pisciotti said a host of tools have sprung up in recent years to battle the challenges created by opioid use and addiction, including urine drug monitoring and more aggressive peer to peer intervention with treating physicians.
But all of those have costs that need to be weighed, he said.
Last year, a prescription-drug study by the National Council on Compensation Insurance found the opioid OxyContin was the No. 1 prescribed drug, and another narcotic, Hydrocodone-Acetaminophen, was in third place. Prescription drugs make up 19 percent of all workers' compensation medical costs, Boca Raton, Fla.-based NCCI found.
Stephen Hackenburg, chief broking officer for Aon Risk Solutions in New York, in noting the pullback by Chartis from the excess market, said that while the market is "difficult" for risks of more than $250,000, because of loss ratios and tighter supply, he did not believe the overall market is hardening.
In one case, Hackenburg said he has seen the excess insurance rate jump by 27 percent for a general manufacturing firm that renewed in the second quarter. But, he said, this example was "an outlier."
The reduction in capacity isn't enough to qualify as a hard market, as there are still a lot of firms willing to write workers' compensation, he said.
Hackenburg, who calls medical inflation a key cost driver, said bigger employers are more focused on it and somewhat more insulated from rate hikes and, in the first quarter of this year, saw rates increase only 3 percent compared with the year-ago quarter.
He said smaller companies have lately been looking at bigger deductibles and his message to them is to focus strongly on loss control activity and on case and pharmaceutical management, and be able to provide collateral to back up a deductible.
Earlier this year, NCCI noted net written premium for private insurers and state funds had increased for the first time in five years.
In May, Stephen J. Klingel, NCCI's CEO described the market as "conflicted," said Lori Lovgren, NCCI division executive for state relations. NCCI recently reported that, compared to 2011, the residual market this year grew 47 percent in the first quarter and 31 percent in the second, with the largest impact from risks of $100,000 and over.
Lovgren said in September that NCCI, which is the rating organization for 20 states, had at that point made filings with 17 state regulators. The filings recommended 12 increases and five decreases, mostly in the range of 5 percent. The outliers were a decrease of 9.1 percent sought in West Virginia and a 7.9 percent increase sought in Iowa.
Richard Kerr, CEO of MarketScout, a Dallas-based online insurance exchange, said a hard market is definitely coming because of insurers' rate inadequacy the past year, with unsustainable loss ratios well in excess of 100.
"Losses are too high. They've got to start adjusting rates upward," he said.
Kathy Langner, worldwide workers' compensation manager at Chubb Insurance in Whitehouse Station, N.J., said she sees a market that is currently schizophrenic, not hard. While, overall, there have been some modest increases, she described workers' compensation as "alive and well" for companies with good track records.
But, she noted, worker accident frequency, which had been decreasing, has stabilized, and that, coupled with rising medical costs, is pushing rates to increase. Among the medical costs, in addition to pharmaceuticals, she mentioned new, expensive treatment techniques. Worker susceptibility to injury, she noted, can also be impacted by increasing repetitive motion injuries and longer commutes to work.
Langner said Chubb works with clients to minimize risk and to weather cyclical changes in the marketplace, which, she said, is currently feeling the cumulative effects of aggressive pricing by the insurance industry.
Another insurance executive who foresees a hard market arriving is Ken Ross, president and CEO of Denver-based Pinnacol Insurance, the residual carrier for Colorado, with a 59 percent market share in the state. If the economy continues at its current anemic level, he said, there could be a hard market in 18 months.
Ross said his operation has a big focus on opioid drugs because overprescribing by doctors ? including those who dispense high-priced medications from their offices ? are a cost driver. "We have an aggressive program to control opioids. These are very expensive," he said.
Pinnacol, he said, works to educate doctors to understand the ramifications of long-term care, noting that the insurer generally has to pay for drug rehabilitation if the condition grew out of the injury treatment.
Tony Kallal, a senior area vice president in Glendale, Calif., who oversees global risk management in Los Angeles for Arthur J. Gallagher & Co. brokerage, said some of the inflation in pharmaceuticals could be blamed on physicians who get around fee schedules by "compounding drugs," prescribing two or more different drugs so that "there aren't fee schedules to statutorily limit the costs." Companies must employ pharmaceutical management companies and nurse case managers as strategies to limit such costs, he said.
Kallal said the market is definitely beginning to harden especially for guaranteed cost workers' compensation and that insurers are seeking rate increases for high deductible programs. But, at the same time, "a lot of carriers are still looking to pick up new business and being fairly aggressive."
Another factor that was cited as pushing the sector toward a hard market is the low interest rate on insurers' investments, which said Pamela F. Ferrandino, placement casualty practice leader for Willis brokerage in New York, is a challenge to workers' comp insurers. In her view, the market is "firming and contradictory at the same time."
She noted that next July, NCCI will be changing rules for calculation of the experience modification factor that will amplify the impact on rates for employers with higher loss rates, while insureds with better than average loss experience will see a lessening of rate increase on renewal.
Jonathan Zaffino, U.S. casualty practice leader for Marsh Inc. in New York, said, "Fundamentally the line is in a difficult spot," noting that the present interest rate environment sets the tone for a tentative market.
Another economic factor affecting the market is the sluggish jobs recovery, said Tom Tucker, senior vice president of Specialty Commerical and chief underwriting officer for The Hartford's Commercial Markets.
As a result, "the time out of work for injured claimants is longer than we've seen historically." Because of the job squeeze, he said, companies find it difficult to provide light duty work for programs aimed at getting injured workers back on the job.
DANIEL HAYS has written for newspapers and magazines for more than 30 years. He can be reached at email@example.com.
October 11, 2012
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