Workers’ Comp Forecast for 2014
1. Predictive Analytics.
Using predictive analytics effectively is the holy grail for any large company.
If you are a staffing company, oil field service operation, or retailer working on tight margins, getting this right can mean the difference between a profitable year or needing to increase liability accruals to account for ever-increasing long tail development.
There is a need to not only develop models for making predictions but to be able to provide actionable information that can be used to quantify the cost/benefit of taking very specific actions. If this could be accomplished, insurers and large self-insured companies could efficiently allocate resources to the areas likely to provide the most meaningful benefit.
2. TRIA is Non-Renewed.
The Terrorism Risk Insurance Act (TRIA) or Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is scheduled to expire on Dec. 31. Even now, as we are without a decision, insurers are being exposed to unlimited terrorism-related workers’ compensation liability (based on an annual policy period).
TRIA has been in place since 2002, when Congress acted to ensure that there was a market-based solution for insurance losses arising out of terrorist acts. It is generally agreed that the sponsors of that Act suggested that it could one day be phased out, and throughout its life, the protection has been diminished. However, what remains are clear limits that comfort investors and others in the financial community.
While the Act remains unrenewed, it is the witching hour for insurers. Consequently, insurers are in the process of preparing their position with respect to the issue.
3. Loss Costs in California Deteriorate.
When California Gov. Edmund “Jerry” Brown signed the workers’ compensation reform legislation into law Sept. 18, he said that it would reverse a four-year trend of rate increases. According to the data made available to us, the insurance market clearly disagrees.
As a matter of fact, California is the state producing the highest rate increases. Possibly, the reform medicine is slow acting and good news for employers in California is on its way.
The problem in California is not a new one. At one point, the state insurance fund was writing more than 50 percent of the workers’ compensation market. That
is the fund that was created to be the market of last resort as it is a government enterprise.
What is clear is it is becoming more common for insurers to place limitations on the amount of California workers’ compensation they will write. The concern is that in the current environment it is simply impossible to be profitable. It is a subtle movement to avoid a head-on clash with regulators.
4. IRS Focuses on Insurers and Captives.
The uniqueness and secret to success for the insurance industry is its favorable tax treatment. Money comes in, expected future losses are deducted and cash is available for investment and growth. The big difference is that expenses do not need to be paid but only accrued to reduce taxable income. That leaves more cash for investment.
There has been discussion about scrutiny of taxation for insurance companies and captives, the alternative risk tool of choice. Captives are on the short list for IRS auditors and if captives are not properly structured, there is more risk that those captives will now be challenged.
5. Trial Attorneys to Target Non-Subscription.
Approximately one-third of the employers in Texas are non-subscribers. Why? Because it makes sense. It saves on frictional costs, quickly provides benefits to employees who are injured and eliminates much of the soft fraud. It has been so successful that Oklahoma enacted its own reform effort, and Tennessee is considering legislative initiatives to enhance opportunities for non-subscription.
Even without a survey, we can safely assume that the majority of plaintiff’s attorneys are not big fans of non-subscription. Benefits for non-subscription are paid out via the Employee Retirement Income Security Act. There is no need for a legal process. There is no waiting period. There are clear definitions that are subject to arbitration.
In contrast, workers’ compensation commonly requires a legal process. Should an attorney become involved in a case where there is an injury within the course of employment, the attorney’s share, although not as large as in a tort case, is for all intents and purposes no-fault. For legal firms, workers’ compensation is high volume, low risk and considerable reward.
Consequently, we would think that should non-subscription become popular in Oklahoma and be signed into law in Tennessee that it may become a target of the bar.
6. Medicare Set Asides Become Increasingly Difficult.
MSAs, as they are called, are a complicated thing. In general, money is set aside to pay benefits for costs that otherwise would be funded by Medicare. It applies only to certain classes of individuals. With an aging workforce, it has become a big and expensive issue for insurance companies.
The problem is that claims can’t be settled quickly and efficiently as government sign-off is required. The impact has been a substantial increase in large claims severity. Further, it has helped to create longer tail development. What this means is that all companies will end up with longer periods of loss development in the form of greater IBNR (Incurred but not reported losses). It translates into more collateral, higher costs and higher liability accruals.
7. Bond Yields Plummet.
Nothing has had a greater impact on the insurance market than the change in bond yields post-2008. It required underwriters to make a profit underwriting. That changed the dynamics of the marketplace and the way the big insurers look at their business.
While it is hard to imagine, it is possible that rates of return on bonds could get much lower. Should there be a European meltdown, recession in Asia or the refusal of China and others to continue to fund our deficits, rates will fall. Should this happen there will be no escaping the need for rate adjustments across all lines of insurance as the dynamics of the current market will be left smoldering once again.
The Pharmacy Cost Creep
A 2013 study by the National Council on Compensation Insurance (NCCI) showed that pharmacy spend accounts for 19 percent of all workers’ compensation medical costs, and has been slowly creeping up over the past several years.
The biggest perpetrators are increased utilization and inflated prices of compound and specialty medications, continued physician dispensing and rising prices for generic drugs.
Generics’ Supply/Demand Problem
While generic medications still offer cost savings over brand names, their prices have seen an increase amidst manufacturer consolidation and schedule changes for key medications.
“Generic cost drivers for average wholesale price (AWP) used to remain relatively flat,” said Brian Carpenter, senior vice president of pharmacy product development and clinical management, Healthcare Solutions.
“But all of a sudden in the past year or so, they’re hitting double-digit marks. That’s causing an increase in spending that was unforeseen for all payers.”
Heavy consolidation among manufacturers has created a more limited supply of some generics and pushed out competition, enabling those producers still around to hike up prices.
“There’s been a narrowing of the number of players in the market in terms of the companies that make generic drugs,” said Mark Riley, immediate past president of the National Community Pharmacists Association (NCPA) and the executive vice president and CEO of the Arkansas Pharmacists Association.
“There’s also very little crossover in the products that each manufacturer produces. So before, where you might see 20 companies making a drug, now there’s only one to three making it.”
The problem has been exacerbated by schedule changes to certain hydrocodone/acetamenophin products — an attempt to tamp down opioid overuse. A generic version of Vicodin, for example, was redesignated to the more restrictive classification of a Schedule II drug, from a Schedule III classification.
“Also, along the way the FDA required lower levels of acetaminophen content. Both of those drivers caused about a 22 percent increase in AWP literally overnight,” Carpenter said. “And that’s been repeated quarter over quarter for these products.”
According to Express Scripts’ 2014 “Drug Trend Report,” hydrocodone/acetaminophen products for workers’ compensation saw an increase of 9.6 percent in average cost per prescription. Other painkillers also grew more expensive: Ibuprofen saw a 21.4 percent increase, and oxycodone/acetaminophen drugs jumped by 51 percent.
Specialty and Compound Drugs Drive up Costs
Utilization of compound and specialty medications has also increased, which could be due in part to a decreased supply of some generics, a desire to move away from the documented dangers of opioids and the emergence of new, cutting-edge drugs.
According to the Express Scripts report, “The [cost] trend for specialty medications was 30.4 percent between 2013 and 2014, driven by an increase in both the average cost per prescription (19.8 percent) and utilization (8.8 percent).”
In that time, a new set of oral medications for hepatitis C — proven to be more effective and generally better-tolerated than existing treatments — entered the market at a cost of anywhere from $80,000 to $200,000 for a 12-week regimen.
“Payers have to understand the cost and benefits of using these new, powerful medications versus using a more traditional drug for the specific conditions being treated,” Carpenter said.
The use of compound drugs has also become a significant cost driver, with utilization increasing by five times over the past five years, according to a 2013 study by the California Workers’ Compensation Institute. Express Scripts reported the 2014 cost trend for compounded medications at 45 percent, but called it “moderate compared to the 2013 trend of 125.6 percent.”
Because they contain multiple ingredients, one medication alone can run thousands of dollars, without any proof of safety or efficacy. Unregulated by the FDA, compounds are not subject to double-blind, controlled studies and can vary in composition from batch to batch.
In workers’ comp, many compounds are topical creams meant to treat pain.
“The base ingredient of a topical compound is most typically petroleum jelly, used as both a mixing agent and a lubricant to rub the compounded ingredients on the skin,” said Matt Engels, vice president of network solutions for CorVel.
“Compounding pharmacies often mix the petroleum jelly with non-active agents in order to create a unique base to which they can attach a new, much higher, price.”
Compounders can, for example, add things like cayenne pepper to emit heat, or menthol to create a cooling effect — and can set their own price because no National Drug Code (NDC) exists for their particular mixture.
Employers should question the efficacy of the base as well as the other ingredients, which could lead to the elimination of unnecessary and expensive ingredients, Engels said.
Increased compound utilization could be due to the fact that physicians are trying to steer away from prescribing oral painkillers, which have garnered so much attention for their addictive properties. Hospitals also may use compound medications when traditional supplies are not available, an issue exacerbated by the narrowing number of generics manufacturers.
“Compounders have stepped up and supplied the market with drugs that aren’t readily available,” Riley said. “I’ve had hospitals tell me that without compounders, they’d have to shut down their operating rooms.”
High prices and utilization are just one part of the threat to payers. Compounds also pose a challenge because they can more easily escape the scrutiny of bill reviewers. If each ingredient of a compound is listed separately on a bill, and especially if those ingredients are all generics, it may not trigger a red flag.
There’s also the fact that some physicians mix and dispense compounds from their own offices, or prescribe them through specialty pharmacies outside of an employer’s PBM network, skirting the PBM’s bill review process and any point-of-sale intervention programs.
Those bills, then, typically arrive at the employer’s door in paper form, and paper bills get processed and charged at the fee schedule rate, not at the discounted rate offered by the PBM. Dispensing compounds in this way not only robs an employer of lower rates, but also undercuts its ability to deny a compound prescription and suggest a cheaper and safer form of treatment.
“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit.” — Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America
Employers can better manage their compound spend through prospective management, which requires a statement of medical necessity from the prescriber, or uses a point-of-sale program to flag costly drugs and get consensus from the payer before the prescription is automatically dispensed.
“It all comes back to the ability to hold a contracted provider and any assigned third party accountable for their obligations,” CorVel’s Engels said.
“Employers need 100 percent capture of all pharmacy transactions and transparency on how these transactions were dispensed in order to trigger the applicable obligations.”
Legislative measures can also keep compounding in check, such as restrictions on the number of ingredients that can be used.
The Drug Quality and Security Act, passed in 2013, also established an optional registry for compound pharmacists. Those who register must complete a detailed profile and are subject to biannual audits, which assures prescribers that their facilities are clean and their pharmacists reputable.
“I think like anything else, there are good players and bad players, and people have to be diligent about who they buy [compounds] from,” said Riley of NCPA.
Physician dispensing remains a big cost driver. Not only are repackaged, physician-dispensed drugs more expensive than their counterparts distributed at retail pharmacies (the average cost of a physician-dispensed medication in 2014 was $173.75, compared to $111.68 for a pharmacy-dispensed medication), but the convenience offered to patients also drives up utilization.
According to a 2012 CorVel report, “Focus on Pharmacy Management: Physician Dispensing,” physician distributing of repackaged drugs made up 19 percent of all workers’ comp drug costs. And the practice has grown increasingly more common since 2007.
According to the NCCI’s “Workers’ Compensation Prescription Drug Study: 2013 Update,” physician-dispensed repackaged drug costs as a share of total workers’ comp drug costs have increased 140 percent, from 5 percent in 2007 to 12 percent in 2011.
“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.
Additionally, physician-dispensed prescriptions’ average cost per claim grew by about 25 percent in 2008, from $24 to $30, and doubled over the next three years. By comparison, prescription cost per claim for drugs dispensed by pharmacies had a steady growth of about 5 percent per year during the same period.
“In the last few years, we’ve seen an increase in use of physician dispensing, but there is also a growing sense that there are opportunities to taper it,” said Jennifer Kaburick, senior vice president, workers’ compensation product management and strategic initiatives, Express Scripts.
“Once Florida passed drug repackaging legislation in 2013, a number of states followed suit,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America. That law caps the amount doctors can charge for drugs they dispense to 12.5 percent over the average wholesale price. Other states limit the amount or types of drugs that physicians can dispense, enforce a separate fee schedule for physician-dispensed drugs, or require physicians to price their medications based on the NDC of the original manufacturer.
“I think this will be less of a problem going forward as the other states pass similar legislation,” Holden said.
While these trends have collided to result in overall high pharmacy costs for workers’ comp payers, the climb may not continue for long. Little can be done about the effects of manufacturer consolidation on generics pricing, but payers can gain control over compound and specialty drug utilization, while regulatory and legislative efforts help to rein in physician dispensing.
“I think these trends have reached their apex, as employers and carriers have chosen to combat the rising costs,” Holden said.
“The battle is far from over, but I truly believe we are on our way.”
“Combat” is the key word. Costs can truly be controlled only through proactive management and the use of services like bill and utilization review.
“PBMs can also take a stance in the market for fairer drug pricing — especially for costly medications like specialty drugs — which improves access,” said Rochelle Henderson, senior director of research for Express Scripts.
Kaburick and Henderson pointed out that, despite an 11.5 percent increase in average cost per prescription for narcotics in 2014, an 11 percent decrease in utilization among Express Scripts’ clients allowed their overall trend to remain flat.
“In an unmanaged program, these trends will not go away by themselves,” Kaburick said. “But if employers aggressively manage their pharmacy spend, they can keep costs down despite trends in the market.”
6 Truths about Predictive Analytics
Predictive data analytics is coming out of the shadows to change the course of claims management.
But along with the real benefits of this new technology comes a lot of hype and misinformation.
A new approach, ACE 4D, provides the tools and expertise to capture, analyze and leverage both structured and unstructured claims data. The former is what the industry is used to – the traditional line-item views of claims as they progress. The latter, comprises the vital information that does not fit neatly into the rows and columns of a traditional spreadsheet or database, such as claim adjuster notes.
ACE’s recently published whitepaper, “ACE 4D: Power of Predictive Analytics” provides an in-depth perspective on how to leverage predictive analytics to improve claims outcomes.
Below are 6 key insights that are highlighted in the paper:
1) Why is predictive analytics important to claims management?
Because it finds relationships in data that achieve a more complete picture of a claim, guiding better decisions around its management.
The typical workers’ compensation claim involves an enormous volume of disparate data that accumulates as the claim progresses. Making sense of it all for decision-making purposes can be extremely challenging, given the sheer complexity of the data that includes incident descriptions, doctor visits, medications, personal information, medical records, etc.
Predictive analytics alters this paradigm, offering the means to distill and assess all the aforementioned claims information. Such analytical tools can, for instance, identify previously unrecognized potential claims severity and the relevant contributing factors. Having this information in hand early in the claims process, a claims professional can take deliberate actions to more effectively manage the claim and potentially reduce or mitigate the claim exposures.
2) Unstructured data is vital
The industry has long relied on structured data to make business decisions. But, unstructured data like claim adjuster notes can be an equally important source of claims intelligence. The difficulty in the past has been the preparation and analysis of this fast-growing source of information.
Often buried within a claim adjuster’s notes are nuggets of information that can guide better treatment of the claimant or suggest actions that might lower associated claim costs. Adjusters routinely compile these notes from the initial investigation of the claim through subsequent medical reports, legal notifications, and conversations with the employer and claimant. This unstructured data, for example, may indicate that a claimant continually comments about a high level of pain.
With ACE 4D, the model determines the relationship between the number of times the word appears and the likely severity of the claim. Similarly, the notes may disclose a claimant’s diabetic condition (or other health-related issue), unknown at the time of the claim filing but voluntarily disclosed by the claimant in conversation with the adjuster. These insights are vital to evolving management strategies and improving a claim’s outcome.
3) Insights come from careful analysis
Predictive analytics will help identify claim characteristics that drive exposure. These characteristics coupled with claims handling experience create the opportunity to change the course of a claim.
To test the efficacy of the actions implemented, a before-after impact assessment serves as a measurement tool. Otherwise, how else can program stakeholders be sure that the actions that were taken actually achieved the desired effects?
Say certain claim management interventions are proposed to reduce the duration of a particular claim. One way to test this hypothesis is to go back in time and evaluate the interventions against previous claim experience. In other words, how does the intervention group of claims compare to the claims that would have been intervened on in the past had the model been in place?
An analogy to this past-present analysis is the insight that a pharmaceutical trial captures through the use of a placebo and an actual drug, but instead of the two approaches running at the same time, the placebo group is based on historical experience.
4) Making data actionable
Information is everything in business. But, unless it is given to applicable decision-makers on a timely basis for purposeful actions, information becomes stale and of little utility. Even worse, it may direct bad decisions.
For claims data to have value as actionable information, it must be accessible to prompt dialogue among those involved in the claims process. Although a model may capture reams of structured and unstructured data, these intricate data sets must be distilled into a comprehensible collection of usable information.
To simplify client understanding, ACE 4D produces a model score illustrating the relative severity of a claim, a percentage chance of a claim breaching a certain financial threshold or retention level depending on the model and program. The tool then documents the top factors feeding into these scores.
5) Balancing action with metrics
The capacity to mine, process, and analyze both structured and unstructured data together enhances the predictability of a model. But, there is risk in not carefully weighing the value and import of each type of data. Overdependence on text, for instance, or undervaluing such structured information as the type of injury or the claimant’s age, can result in inferior deductions.
A major modeling pitfall is measurement as an afterthought. Frequently this is caused by a rush to implement the model, which results in a failure to record relevant data concerning the actions that were taken over time to affect outcomes.
For modeling to be effective, actions must be translated into metrics and then monitored to ensure their consistent application. Prior to implementing the model, insurers need to establish clear processes and metrics as part of planning. Otherwise, they are flying blind, hoping their deliberate actions achieve the desired outcomes.
6) The bottom line
While the science of data analytics continues to improve, predictive modeling is not a replacement for experience. Seasoned claims professionals and risk managers will always be relied upon to evaluate the mathematical conclusions produced by the models, and base their actions on this guidance and their seasoned knowledge.
The reason is – like people – predictive models cannot know everything. There will always be nuances, subtle shifts in direction, or data that has not been captured in the model requiring careful consideration and judgment. People must take the science of predictive data analytics and apply their intellect and imagination to make more informed decisions.
Please download the whitepaper, “ACE 4D: Power of Predictive Analytics” to learn more about how predictive analytics can help you reduce costs and increase efficiencies.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with ACE Group. The editorial staff of Risk & Insurance had no role in its preparation.