The Changing Nature of Workers’ Compensation

1. The Changing Nature ofWorkers’ Compensation Benchmarking System Performance:How to Avoid the “Perfect Crisis” Presented by: Richard A. Hofmann, ACAS, MAAA Casualty Actuarial Society 2001 Spring Meeting May 7-9, 2001

2. Benchmarking System Performance:How to Avoid the “Perfect Crisis” • What Is a “Perfect Crisis”? • Goals & Objectives: System vs. Industry • WC Crises: Historical Perspective • Critical Elements for Success & Survival • Benchmarking System Performance

3. What Is a Perfect Crisis? • 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.

4. Another Workers’ Comp Crisis? • Are we in the midst of a WC crisis? Yes, but it depends on where you are and who you ask. • Could we have a Perfect Crisis? Yes, unless action is taken now to avoid it.

5. Workers Compensation:System Goals & Objectives • State Legislatures - Avoid Crisis • Stakeholders – Reduce Workplace Injuries • Workers: Maximize Benefits & Minimize Payment Delays • Employers: Maximize Profits & Minimize Costs/Premiums • WC Agencies - Protect Workers • Old: Administer Dispute Resolution & Coverage Compliance • New: Additional Focus Data Collection & Cost Management • Insurance Regulators - Protect Employers • Monitor Insurer Solvency, Ability to Pay Benefits • Old: Rate Regulation, New: Regulate Competition

6. Workers Compensation:Industry Goals & Objectives • The Workers’ Compensation Industry: • 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

7. The 1990’s Crisis: AAA WC System Issues System Reforms & Benefit Levels Judicial Expansion Legislated Reductions Pressure to Increase Managed Care: General Health Workers’ Comp Cost Shifting In Infancy Backlash Emerging Impact Maturing Costs Increasing Federal Restrict. Economy & Claim Frequencies Increasing Frequencies Decreasing Frequencies Increasing Again? Employer Costs Rising Falling Rising Again?

8. The 1990’s Crisis: AAA WC System Issues Competitive Rating Regulatory Challenge Introduced Greatly Expanded Rate Adequacy Breeds Widespread Competition Limited Due to Rate Adequacy Concerns Deregulated Price Increases Price Competition Residual Markets Primarily A/R Plans Grew Rapidly Major Burden Alternatives Expanded Shrank Dramatically Burden Insignificant Alternatives to be Tested Insurer Profitability Rapid Deterioration Rapid Improvement Recent Deterioration Worse than 1980’s?

9. Persistent Insurance Crisis The Next Crisis:Converging WC Storms • 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

10. How to Avoid the Perfect Crisis:Critical Elements of Success • Labor/Management Cooperation • Focus on Accident Prevention • Proactive Agency Administration • Efficient Dispute Resolution • Competitive Insurance Mechanism • System Wide Actuarial Database

11. Critical Element of Success:Business/Labor Cooperation • 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

12. Benchmarking System Performance:Benefit Plan Design - Coverage • Covered Employers: • 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

13. Benchmarking System Performance:Benefit Plan Design - Indemnity • Death, TTD, PTD Benefits: • Rate >= 2/3 Gross Weekly Wages • Maximum >= 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 Retained • Benefits <= Pre-Injury Wages (SSA Offsets) • Cost of Living Adjustments

14. Benchmarking System Performance:Benefit Plan Design - Medical • No Statutory Limit on Time or Dollar Amount • Right to Benefits Does Not Expire • Other Concerns: • Medical Fee Schedule • Utilization Review • Managed Care

15. Benchmarking System Performance:Benefit Plan Design - Costs • Stable, Predictable Loss Costs • Indemnity as % of Payroll • Medical as % of Payroll • Indemnity as % of Total • Actual vs. Bureau Projections • Distribution by Type of Injury • Number of Claims • Dollars of Loss

16. Critical Element of Success:Focus on Accident Prevention • Hazard Identification • Industry Specific Safety/Ergo Program • OSHA Targeting & Reporting • Comprehensive Data System • Frequency Analysis & Benchmarking • Employee Incentive Plans • Communicate Safety Objectives • Encourage Safe Behavior

17. Benchmarking System Performance:Accident Prevention • Frequencies / Hours Worked or Payroll • Analysis by Cause of Loss • Analysis by Body Part • Analysis by Type of Injury • Benchmarks within Similar Industries • Correlate Results with: • Safety Strategies • Experience Modifications

18. Critical Element of Success:Proactive Agency Administration • Employer/Employee Education Programs • Alternative Dispute Resolution Options • Adequate Judicial Staffing • Extensive Use of Automation • Promote Paperless Environment • Set Strategic Plan for WC System

19. Benchmarking System Performance:Agency Administration • 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

20. Critical Element of Success:Efficient Dispute Resolution • Medical Fee Schedules • Utilization Review • Managed Care Organizations • Payment without Prejudice • Appropriate Disability Ratings • Compromise & Release

21. Benchmarking System Performance:Dispute Resolution • Severity Trends • Indemnity • Medical • Attorney Fees as % of Indemnity • % of Indemnity Claims Disputed • Resolution of Disputes • % Resolved without Hearing • % Settled after Hearing • % with Awards & Appeals

22. Critical Element of Success:Competitive Insurance Mechanism • Strengthen Competitive Rating • Expand Open Competition • Eliminate Assigned Risk Plans • Create State Funds • Promote Group/Association Programs • Independent Data Collection Agencies

23. Critical Element of Success:Competitive Insurance Mechanism Issue: Inadequate Competition Competitive Rating Prohibit Bureau Filings Permit Schedule Rating Solutions: Rate Regulation Needs to Focus on Rate Inadequacy, Rather than Excessiveness or Unfairly Discriminatory Caution:

24. Critical Element of Success:Competitive Insurance Mechanism Issue: Rate Regulation Open Competition Deregulate Rates Create State Funds Encourage Self-Insurance Allow Group Self-Insurance Solutions: Require Actuarial Opinions to Ensure Adequate Funding for Future Benefit Payments Caution:

25. Critical Element of Success:Competitive Insurance Mechanism Issue: Residual Market Administration Replace with State Fund, or Replace with Employer Governed Group Self-Insurance Pools Solutions: New Mechanism Must Be: Self Funding Actuarially Sound Safety Oriented Caution:

26. Benchmarking System Performance:Insurance Mechanism • Standard Premium Loss Ratios • Bureau Rate Adequacy Indices • Competitive Pricing Indices • Industry Net Premium Loss Ratios • Reserve Adequacy Indices • Payroll Distribution by Market Segment

27. Critical Element of Success:Competitive Insurance Mechanism Issue: Statistical Agents Independent Data Collection Agency Governed by Labor & Management Include Self-Insured Data Insurer/TPA Advisory Committee Solutions: Caution: The Key to a Competitive Insurance Marketplace Is Accurate, Timely Data Provided to Employers for Distribution to Potential Agents & Insurers

28. Critical Element of Success:System Wide Actuarial Database • Develop Better Cost Estimates by Industry & for Individual Employers • 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

29. Benchmarking System Performance:Data Collection Agency • Proof of Coverage Reports • Insurance Compliance Monitoring • Competitive Pricing Monitoring • First Reports of Injury • Fast Track Frequency Trend Monitoring • New Cause of Loss Monitoring • Claim Payment & Reserve Reports • Insurer Solvency Monitoring • Claim Payer Performance Monitoring

30. Workers Compensation:Historical Data Collection Efforts • NAIC/Rating Bureaus: Focus on Insurers Only • Benchmark Loss Costs & Experience Rating Mods • NCCI: Administer Residual Market Plans/Pools • IAIABC: Focus on Electronic Data Interchange • Claims: First Reports, Subsequent Reports & Medical Data • Insurance: Proof of Coverage Forms • WCRI: Focus on Benefit Delivery System • Retrospectively Evaluate Innovations/Reforms • Identify/Quantify Cost Drivers & Emerging Trends • SIGMA: Focus on Insurance Mechanism • Monitor Rating Bureau Performance & Insurer Competition • Design Statewide Databases & Evaluate Cost Trends

31. Traditional Market Alternative Market Individual Self-Insurers Retro Plans & Large Deductibles Captives & GSIPs Rating Bureau Financial Data State Funds & Depopulation Plans R/M Pools Changing Workers’ Compensation Insurance Environment Large Employers Medium Employers Small Employers

32. Statewide Data Repository:Conceptual Organizational Structure