the changing nature of workers’ compensation presented by: richard a. hofmann, acas, maaa casualty...

The Changing Nature ofWorkers’ CompensationThe Changing Nature ofWorkers’ Compensation

Presented by:Richard A. Hofmann, ACAS, MAAA

Casualty Actuarial Society2001 Spring Meeting

May 7-9, 2001

Presented by:Richard A. Hofmann, ACAS, MAAA

Casualty Actuarial Society2001 Spring Meeting

May 7-9, 2001

Benchmarking System Performance:How to Avoid the “Perfect Crisis”

Benchmarking System Performance:How to Avoid the “Perfect Crisis”

Benchmarking System Performance:How to Avoid the “Perfect Crisis”Benchmarking System Performance:How to Avoid the “Perfect Crisis”

What Is a “Perfect Crisis”? What Is a “Perfect Crisis”?

Goals & Objectives: System vs. Industry

WC Crises: Historical Perspective

Critical Elements for Success & Survival

Benchmarking System Performance

Goals & Objectives: System vs. Industry

WC Crises: Historical Perspective

Critical Elements for Success & Survival

Benchmarking System Performance

What Is a Perfect Crisis?What Is a Perfect Crisis?

Crisis: a condition of instability, as in social, economic or political affairs, leading to a decisive change.

Crisis: a condition of instability, as in social, economic or political affairs, leading to a decisive change.

Perfect Crisis: the simultaneous convergence of several sources of instability leading to cataclysmic change or system failure.

Stupidity: doing the same thing over and over again and expecting different results.

Perfect Crisis: the simultaneous convergence of several sources of instability leading to cataclysmic change or system failure.

Stupidity: doing the same thing over and over again and expecting different results.

Another Workers’ Comp Crisis?Another Workers’ Comp Crisis?

Are we in the midst of a WC crisis?

Are we in the midst of a WC crisis? Yes, but it depends on where you are and who you ask.

Yes, but it depends on where you are and who you ask.

Could we have a Perfect Crisis?

Could we have a Perfect Crisis?Yes, unless action is taken now to avoid it.Yes, unless action is taken now to avoid it.

Workers Compensation:System Goals & ObjectivesWorkers Compensation:System Goals & Objectives

State Legislatures - Avoid Crisis State Legislatures - Avoid Crisis

Stakeholders – Reduce Workplace InjuriesWorkers: Maximize Benefits & Minimize Payment Delays

Employers: Maximize Profits & Minimize Costs/Premiums

WC Agencies - Protect WorkersOld: Administer Dispute Resolution & Coverage Compliance

New: Additional Focus Data Collection & Cost Management

Insurance Regulators - Protect EmployersMonitor Insurer Solvency, Ability to Pay Benefits

Old: Rate Regulation, New: Regulate Competition

Stakeholders – Reduce Workplace InjuriesWorkers: Maximize Benefits & Minimize Payment Delays

Employers: Maximize Profits & Minimize Costs/Premiums

WC Agencies - Protect WorkersOld: Administer Dispute Resolution & Coverage Compliance

New: Additional Focus Data Collection & Cost Management

Insurance Regulators - Protect EmployersMonitor Insurer Solvency, Ability to Pay Benefits

Old: Rate Regulation, New: Regulate Competition

Data Gathering Organizations

Insurers & Service Providers

Politically Powerful Payees – Doctors, Lawyers, etc.

Special Funds, Agents, Brokers, Consultants, etc.

Goals & Objectives:

Market Growth

Increased Profits

Predictable Costs

Data Gathering Organizations

Insurers & Service Providers

Politically Powerful Payees – Doctors, Lawyers, etc.

Special Funds, Agents, Brokers, Consultants, etc.

Goals & Objectives:

Market Growth

Increased Profits

Predictable Costs

Workers Compensation:Industry Goals & ObjectivesWorkers Compensation:Industry Goals & Objectives

The Workers’ Compensation Industry: The Workers’ Compensation Industry:

Costs Increasing

Federal Restrict.

Costs Increasing

Federal Restrict.

The 1990’s Crisis: AAA WC System IssuesThe 1990’s Crisis: AAA WC System Issues

IssueIssue Late 1980’sLate 1980’s Late 1990’sLate 1990’s New DecadeNew Decade

System Reforms & Benefit LevelsSystem Reforms & Benefit Levels

Judicial ExpansionJudicial Expansion

Pressure to IncreasePressure to Increase

Legislated ReductionsLegislated Reductions

Managed Care:

General Health

Workers’ Comp

Managed Care:

General Health

Workers’ Comp

Economy &

Claim Frequencies

Economy &

Claim Frequencies

Backlash Emerging

Impact Maturing

Backlash Emerging

Impact Maturing

Cost Shifting

In Infancy

Cost Shifting

In Infancy

Increasing FrequenciesIncreasing Frequencies

Decreasing

Frequencies

Decreasing

Frequencies

Increasing Again?Increasing Again?

Employer CostsEmployer Costs RisingRising FallingFalling Rising Again?Rising Again?

IssueIssue Late 1980’sLate 1980’s Late 1990’sLate 1990’s New New DecadeDecade

The 1990’s Crisis: AAA WC System IssuesThe 1990’s Crisis: AAA WC System Issues

Competitive RatingCompetitive Rating

Price CompetitionPrice Competition

IntroducedIntroduced Greatly ExpandedGreatly Expanded Regulatory ChallengeRegulatory Challenge

Residual MarketsResidual Markets

Limited Due to Rate Adequacy Concerns

Limited Due to Rate Adequacy Concerns

Rate Adequacy Breeds Widespread Competition

Rate Adequacy Breeds Widespread Competition

Deregulated Price Increases

Deregulated Price Increases

Insurer ProfitabilityInsurer Profitability

Alternatives Expanded

Shrank Dramatically

Burden Insignificant

Alternatives Expanded

Shrank Dramatically

Burden Insignificant

Primarily A/R Plans

Grew Rapidly

Major Burden

Primarily A/R Plans

Grew Rapidly

Major Burden

Alternatives to be TestedAlternatives to be Tested

Rapid DeteriorationRapid Deterioration

Rapid Improvement

Recent Deterioration

Rapid Improvement

Recent Deterioration

Worse than 1980’s?Worse than 1980’s?

The Next Crisis:Converging WC StormsThe Next Crisis:Converging WC Storms

Persistent Insurance Crisis Persistent Insurance Crisis

Major Insurer Insolvencies

Significant Premium Increases Employer Complacency

Focus on Financial Survival

Safety Not on Radar Screen Deteriorating Economic Conditions

Growing Workforce Layoffs

Falling Stock Market Prices Federal WC Initiatives

OSHA Ergonomic Standard

HIPAA Privacy Regulations

Major Insurer Insolvencies

Significant Premium Increases Employer Complacency

Focus on Financial Survival

Safety Not on Radar Screen Deteriorating Economic Conditions

Growing Workforce Layoffs

Falling Stock Market Prices Federal WC Initiatives

OSHA Ergonomic Standard

HIPAA Privacy Regulations

Labor/Management Cooperation Labor/Management Cooperation

How to Avoid the Perfect Crisis:Critical Elements of SuccessHow to Avoid the Perfect Crisis:Critical Elements of Success

Focus on Accident Prevention

Proactive Agency Administration

Efficient Dispute Resolution

Competitive Insurance Mechanism

System Wide Actuarial Database

Focus on Accident Prevention

Proactive Agency Administration

Efficient Dispute Resolution

Competitive Insurance Mechanism

System Wide Actuarial Database

Critical Element of Success:Business/Labor CooperationCritical Element of Success:Business/Labor Cooperation

Form Business/Labor Coalitions to Advise the State Legislature

Form Business/Labor Coalitions to Advise the State Legislature

Agree on Fundamental Public Policy Objectives of the System

Identify Standards for Measuring System Performance

Define Specific Injuries to Be Covered

Agree on Fundamental Public Policy Objectives of the System

Identify Standards for Measuring System Performance

Define Specific Injuries to Be Covered

Covered Employers: Covered Employers:

Benchmarking System Performance:Benefit Plan Design - CoverageBenchmarking System Performance:Benefit Plan Design - Coverage

Private Employers: No Waivers

Small Employers (# of Ees Exemption)

Farmworkers

Household & Casual Workers (SSA)

Government Employees

Special Class Exemptions (Athletes)

Choice of State Law (Injury/Employed/Hired) Full Coverage for Work Related Diseases

Private Employers: No Waivers

Small Employers (# of Ees Exemption)

Farmworkers

Household & Casual Workers (SSA)

Government Employees

Special Class Exemptions (Athletes)

Choice of State Law (Injury/Employed/Hired) Full Coverage for Work Related Diseases

Death, TTD, PTD Benefits: Death, TTD, PTD Benefits:

Benchmarking System Performance:Benefit Plan Design - IndemnityBenchmarking System Performance:Benefit Plan Design - Indemnity

Rate >= 2/3 Gross Weekly WagesMaximum >= Statewide AWW

Duration of Benefits:Death – Widow (life), Child (18), Student (25)TTD/PTD – No Time or Dollar Limits

Other Concerns:PTD Benefits when Earning Capacity RetainedBenefits <= Pre-Injury Wages (SSA Offsets)Cost of Living Adjustments

Rate >= 2/3 Gross Weekly WagesMaximum >= Statewide AWW

Duration of Benefits:Death – Widow (life), Child (18), Student (25)TTD/PTD – No Time or Dollar Limits

Other Concerns:PTD Benefits when Earning Capacity RetainedBenefits <= Pre-Injury Wages (SSA Offsets)Cost of Living Adjustments

No Statutory Limit on Time or Dollar Amount

No Statutory Limit on Time or Dollar Amount

Benchmarking System Performance:Benefit Plan Design - MedicalBenchmarking System Performance:Benefit Plan Design - Medical

Right to Benefits Does Not Expire Other Concerns:

Medical Fee Schedule

Utilization Review

Managed Care

Right to Benefits Does Not Expire Other Concerns:

Medical Fee Schedule

Utilization Review

Managed Care

Stable, Predictable Loss Costs Stable, Predictable Loss Costs

Benchmarking System Performance:Benefit Plan Design - CostsBenchmarking System Performance:Benefit Plan Design - Costs

Indemnity as % of PayrollMedical as % of PayrollIndemnity as % of TotalActual vs. Bureau Projections

Distribution by Type of InjuryNumber of ClaimsDollars of Loss

Indemnity as % of PayrollMedical as % of PayrollIndemnity as % of TotalActual vs. Bureau Projections

Distribution by Type of InjuryNumber of ClaimsDollars of Loss

Hazard Identification Hazard Identification

Critical Element of Success:Focus on Accident PreventionCritical Element of Success:Focus on Accident Prevention

Industry Specific Safety/Ergo Program OSHA Targeting & Reporting Comprehensive Data System Frequency Analysis & Benchmarking Employee Incentive Plans

Communicate Safety Objectives

Encourage Safe Behavior

Industry Specific Safety/Ergo Program OSHA Targeting & Reporting Comprehensive Data System Frequency Analysis & Benchmarking Employee Incentive Plans

Communicate Safety Objectives

Encourage Safe Behavior

Benchmarking System Performance:Accident PreventionBenchmarking System Performance:Accident Prevention

Frequencies / Hours Worked or Payroll Frequencies / Hours Worked or PayrollAnalysis by Cause of Loss

Analysis by Body Part

Analysis by Type of Injury

Analysis by Cause of Loss

Analysis by Body Part

Analysis by Type of Injury

Benchmarks within Similar Industries Benchmarks within Similar Industries Correlate Results with:

Safety Strategies

Experience Modifications

Correlate Results with:Safety Strategies

Experience Modifications

Critical Element of Success:Proactive Agency AdministrationCritical Element of Success:Proactive Agency Administration

Employer/Employee Education Programs

Employer/Employee Education Programs

Alternative Dispute Resolution Options Adequate Judicial Staffing Extensive Use of Automation Promote Paperless Environment Set Strategic Plan for WC System

Alternative Dispute Resolution Options Adequate Judicial Staffing Extensive Use of Automation Promote Paperless Environment Set Strategic Plan for WC System

Benchmarking System Performance:Agency AdministrationBenchmarking System Performance:Agency Administration

Timely Reporting of Injuries Timely Reporting of Injuries

To Employer

To Insurer

Timely Initiation of Indemnity Payments % of Claims with Late Payment Penalties Attorney Involvement by Type of Injury Timely Scheduling of Hearings/Appeals Agency Budget as Percent of State Payrolls

To Employer

To Insurer

Timely Initiation of Indemnity Payments % of Claims with Late Payment Penalties Attorney Involvement by Type of Injury Timely Scheduling of Hearings/Appeals Agency Budget as Percent of State Payrolls

Medical Fee Schedules Medical Fee Schedules

Critical Element of Success:Efficient Dispute ResolutionCritical Element of Success:Efficient Dispute Resolution

Utilization Review

Managed Care Organizations

Payment without Prejudice

Appropriate Disability Ratings

Compromise & Release

Utilization Review

Managed Care Organizations

Payment without Prejudice

Appropriate Disability Ratings

Compromise & Release

Benchmarking System Performance:Dispute ResolutionBenchmarking System Performance:Dispute Resolution

Severity Trends Severity TrendsIndemnityMedicalAttorney Fees as % of Indemnity

% of Indemnity Claims Disputed Resolution of Disputes

% Resolved without Hearing% Settled after Hearing% with Awards & Appeals

IndemnityMedicalAttorney Fees as % of Indemnity

% of Indemnity Claims Disputed Resolution of Disputes

% Resolved without Hearing% Settled after Hearing% with Awards & Appeals

Strengthen Competitive Rating Strengthen Competitive Rating

Critical Element of Success:Competitive Insurance MechanismCritical Element of Success:Competitive Insurance Mechanism

Expand Open Competition

Eliminate Assigned Risk Plans

Create State Funds

Promote Group/Association Programs

Independent Data Collection Agencies

Expand Open Competition

Eliminate Assigned Risk Plans

Create State Funds

Promote Group/Association Programs

Independent Data Collection Agencies

Rate Regulation Needs toFocus on Rate Inadequacy,Rather than Excessiveness or

Unfairly Discriminatory

Rate Regulation Needs toFocus on Rate Inadequacy,Rather than Excessiveness or

Unfairly Discriminatory

Competitive Rating

Prohibit Bureau Filings

Permit Schedule Rating

Competitive Rating

Prohibit Bureau Filings

Permit Schedule Rating

Issue: Inadequate CompetitionIssue: Inadequate Competition


Solutions:Solutions:

Caution:Caution:

Require Actuarial Opinions to Ensure Adequate Funding for Future Benefit Payments

Require Actuarial Opinions to Ensure Adequate Funding for Future Benefit Payments

Open CompetitionDeregulate RatesCreate State FundsEncourage Self-InsuranceAllow Group Self-Insurance

Open CompetitionDeregulate RatesCreate State FundsEncourage Self-InsuranceAllow Group Self-Insurance

Issue: Rate RegulationIssue: Rate Regulation



Caution:Caution:

New Mechanism Must Be: Self Funding

Actuarially Sound

Safety Oriented

New Mechanism Must Be: Self Funding

Actuarially Sound

Safety Oriented

Replace with State Fund, or

Replace with Employer Governed Group Self-Insurance Pools

Replace with State Fund, or

Replace with Employer Governed Group Self-Insurance Pools

Issue: Residual Market AdministrationIssue: Residual Market Administration



Caution:Caution:

Benchmarking System Performance:Insurance MechanismBenchmarking System Performance:Insurance Mechanism

Standard Premium Loss Ratios Standard Premium Loss Ratios

Bureau Rate Adequacy Indices Bureau Rate Adequacy Indices

Competitive Pricing Indices Competitive Pricing Indices

Industry Net Premium Loss Ratios Industry Net Premium Loss Ratios

Reserve Adequacy Indices Reserve Adequacy Indices

Payroll Distribution by Market Segment Payroll Distribution by Market Segment

Issue: Statistical AgentsIssue: Statistical Agents


Independent Data Collection Agency

Governed by Labor & Management

Include Self-Insured Data

Insurer/TPA Advisory Committee

Independent Data Collection Agency

Governed by Labor & Management

Include Self-Insured Data

Insurer/TPA Advisory Committee


The Key to a Competitive InsuranceMarketplace Is Accurate, Timely

Data Provided to Employers for Distribution to Potential Agents & Insurers

The Key to a Competitive InsuranceMarketplace Is Accurate, Timely

Data Provided to Employers for Distribution to Potential Agents & Insurers

Caution:Caution:

Develop Better Cost Estimates by Industry & for Individual Employers

Develop Better Cost Estimates by Industry & for Individual Employers

Evaluate Cost Trends & Identify Cost Drivers Target Safety Programs at High Cost

Employers & Industries

Evaluate Cost Trends & Identify Cost Drivers Target Safety Programs at High Cost

Employers & Industries Monitor Performance of:

Workers Compensation Agency

Insurers & Other Claims Administrators

Medical & Other Service Providers

Monitor Performance of:Workers Compensation Agency

Insurers & Other Claims Administrators

Medical & Other Service Providers

Critical Element of Success:System Wide Actuarial DatabaseCritical Element of Success:System Wide Actuarial Database

Benchmarking System Performance:Data Collection AgencyBenchmarking System Performance:Data Collection Agency

Proof of Coverage Reports Proof of Coverage ReportsInsurance Compliance Monitoring

Competitive Pricing Monitoring

First Reports of InjuryFast Track Frequency Trend Monitoring

New Cause of Loss Monitoring

Claim Payment & Reserve ReportsInsurer Solvency Monitoring

Claim Payer Performance Monitoring

Insurance Compliance Monitoring

Competitive Pricing Monitoring

First Reports of InjuryFast Track Frequency Trend Monitoring

New Cause of Loss Monitoring

Claim Payment & Reserve ReportsInsurer Solvency Monitoring

Claim Payer Performance Monitoring

Workers Compensation:Historical Data Collection EffortsWorkers Compensation:Historical Data Collection Efforts

NAIC/Rating Bureaus: Focus on Insurers Only NAIC/Rating Bureaus: Focus on Insurers OnlyBenchmark Loss Costs & Experience Rating ModsNCCI: Administer Residual Market Plans/Pools

IAIABC: Focus on Electronic Data InterchangeClaims: First Reports, Subsequent Reports & Medical DataInsurance: Proof of Coverage Forms

WCRI: Focus on Benefit Delivery SystemRetrospectively Evaluate Innovations/ReformsIdentify/Quantify Cost Drivers & Emerging Trends

SIGMA: Focus on Insurance MechanismMonitor Rating Bureau Performance & Insurer CompetitionDesign Statewide Databases & Evaluate Cost Trends

Benchmark Loss Costs & Experience Rating ModsNCCI: Administer Residual Market Plans/Pools

IAIABC: Focus on Electronic Data InterchangeClaims: First Reports, Subsequent Reports & Medical DataInsurance: Proof of Coverage Forms

WCRI: Focus on Benefit Delivery SystemRetrospectively Evaluate Innovations/ReformsIdentify/Quantify Cost Drivers & Emerging Trends

SIGMA: Focus on Insurance MechanismMonitor Rating Bureau Performance & Insurer CompetitionDesign Statewide Databases & Evaluate Cost Trends

Changing Workers’ Compensation Insurance EnvironmentChanging Workers’ Compensation Insurance Environment

Rating Bureau Financial Data

Rating Bureau Financial Data

Captives & GSIPs

Captives & GSIPs

State Funds & Depopulation Plans

State Funds & Depopulation Plans

R/M PoolsR/M

Pools

Retro Plans & Large Deductibles

Retro Plans & Large Deductibles

Individual Self-Insurers

Individual Self-InsurersLarge EmployersLarge Employers

Medium EmployersMedium Employers

Small EmployersSmall Employers

Traditional MarketTraditional Market Alternative MarketAlternative Market

Statewide Data Repository:Conceptual Organizational StructureStatewide Data Repository:Conceptual Organizational Structure

W CRICom pScope Research

CW CSScorecard Research

Sm all/M ediumEm ployers

Large/Jum boEm ployers

TraditionalInsurance

IndividualSelf-Insurers

GroupSelf-Insurers

Self-InsuredEm ployers

Captives &State Funds

ResidualM arket Pools

AlternativeM arkets

DataW arehouse

Board of Directors11 Members

1 NAIC, 1 IAIABC3 Business, 3 Labor, 3 Insurers

W CRICom pScope Research

CW CSScorecard Research

Sm all/M ediumEm ployers

Large/Jum boEm ployers

TraditionalInsurance

IndividualSelf-Insurers

GroupSelf-Insurers

Self-InsuredEm ployers

Captives &State Funds

ResidualM arket Pools

AlternativeM arkets

DataW arehouse

Board of Directors11 Members

1 NAIC, 1 IAIABC3 Business, 3 Labor, 3 Insurers

the changing nature of workers’ compensation presented by: richard a. hofmann, acas, maaa casualty...

Documents

wc crisis

s crisis

system failure

workers comp crisis

perfect crisiswhat

rate regulation

cataclysmic change

decisive change