Workers Compensation Claims Drive the Cost of Fixed and Experience Rated Policies
The ultimate performance of any workers compensation policy is that of paying for injuries incurred by employees during the course of their work. That's what it's for! Taking care of the injured employee and getting them back to work. Workers compensation benefits include paying for medical bills, rehabilitation, lost time, permanent injuries and death benefits of those injured employees. Workers compensation coverage is mandated by each individual state. Yes, it is still a state governed product with a few Federal program exceptions. So when looking for specifics on workers compensation benefits you must look towards individual state statutes for guidance. That's where you'll find the details on how a workers comp policy will respond to an injured employees claim for compensation.
Consider medical care in today's economic environment. While just one part of a claim, the cost for medical procedures continue to go up and when they go up workers compensation total claim costs go up. You'll find that most workers compensation insurance carriers have instituted some type of medical review committees and use outside medical review consulting groups whose responsibilities are to keep an eye on medical claim expenses. Similar to how health care carriers now operate, workers compensation carriers employ many tactics to assist in controlling their medical expenses and claim costs.
What Are The Primary Claim Cost Components?
As mentioned above, medical expense plays a very important part in the overall cost of a workers compensation claim. It can be the most costly part of a claim, of course depending on the type and extent of injury incurred. The medical portion of a claim is generally paid until the disability has ended. This is controlled by individual state statute. When thinking of medical cost for a workers comp claim just imagine all of the medical bills that may contribute. It can be staggering!
There are four types of workers comp indemnity. Indemnity refers to lost wages of the injured employee while they are off from work. In a work comp claim the injured employee will be compensated for time off, until they return to work, at some rate specifically guided by their states statute. Here's the four sub-categories:
Temporary Total Disability (TTD); Where the injury is of a significant nature that the injured worker cannot perform any job duties and is therefore off of work. They are expected to fully recover and at some point return to work. Compensation under temporary total disability continues until the injured employee returns to work.
Temporary Partial Disability (TPD); The workers injury is of a partial nature that may keep them from performing some of their job duties but they can still work. The injury is of a temporary nature and their indemnity will be adjusted between the difference of what they were earning before the injury and after the injury.
Permanent Total Disability (PTD); Where the injury is of a permanent total nature. The injured employee will never work again at any job. In most states, the injured employee will be paid a weekly wage for life as guided by state statute.
Permanent Partial Disability (PPD); Where the injury is of a permanent partial nature. The injured employee can still perform work duties but not at the level they could before the injury. Their level of compensation then is permanently affected and individual state statues will provide guidance as to a percentage settlement of their case.
Most actual dollars paid in a claim come from medical and indemnity categories however there is another claim expense category usually unknown to the insured employer. It is the:
Insurance Company Claim Expense Category:
Under this category are expenses an insurance company incurs while processing a claim. It may include attorney and litigation fees, investigation cost, and other settlement expenses. This expense category can grow quite large in cases that go to litigation.
Let's recap. The primary cost components of a workers compensation claim are; Medical Expense; Indemnity Expense; and Insurance Company Claim Expense. It's the combination of these items that make up the direct cost of a workers compensation claim.
How Do Claims Effect Workers Compensation Premium?
The cost of a claim is directly reflected on an experience rated workers compensation policy in the form of an increase of the experience modification rate or EMR. The EMR is a premium modification factor that is applied in the premium calculation process. It's generated from experience data gathered on any individual experience rated employer over a three year period of time known as the experience period. This may vary given certain circumstances but regardless the experience period it is a reflection on current premium for claims incurred in the past. Here's the effect:
Let's look at how this concept applies using some numbers. Experience modification rates are individual to every experience rated policy so our example shown below is not accurate. Keep in mind; while these numbers are not real, the concept still applies:
Debit Mod Example:
$12,000 Claim ----> Generates an EMR of 1.08 ----> 1.08 EMR x $29,000 Premium = $31,320 Modified Premium
In the above example of a debit mod the employer will pay $31,320 in premium, $2,132 more than the average employer doing the same type of work who may have a 1.0 mod.
Credit Mod Example:
Now lets look at how a credit mod works. Lets say this employer has had no claims for the experience period and his EMR is 0.90.
No Claims --------> Generates an EMR of .90 -----> 0.90 EMR x $29,000 Premium = $26,100 Modified Premium
In the last example you can see the employer with the good experience, no claims, has been rewarded in the experience mod calculation. Both employers do the same work but the employer with the 1.08 will pay $5,220 more in premium. That's a significant difference. And that's how claims can effect an employers premium!
Claim Mistakes That Effect Workers Compensation Premium -
As we've shown above, claims greatly impact the premium of an experience rated workers compensation policy. It's important to know what they are, how they occur, why they occur and how to correct claim errors and mistakes when they are discovered.
Areas where claim problems are typically discovered:
Insurance Company Claim Handling;
Gaps and problems found in procedures and methods an insurance company uses when handling a claim can lead to claim mistakes and errors that ultimately lead to over payment and claim mishandling. When a workers comp claim is submitted to an insurance company they are charged with:
Contacting the injured employee;
Verifying validity of the workers compensation claim;
Communicating and coordinating with the health care providers;
Managing the claim process;
Paying the health care provider;
Calculating and paying lost wages or indemnity to the injured employee;
Additional costs occur when a claim is mishandled by an insurance company. These costs and mistakes show up on the total cost of a claim and are transposed onto the employers claim or loss experience which is used to calculate his experience rating.
Claim Reserving Practices;
When an insurance company is first presented with a claim they will review the details and then assign what's known as a "Claim Reserve." This is what the insurance company believes they will ultimately have to pay for the claim. The reserve is treated on all experience data as money already paid out when maybe not one dollar has yet been paid. Lets take a look at a reserving example:
Lets say an employee has fallen at work and injured their back. The insurance company receives the claim, reviews the details and sets up a reserve of $200,000. The employee goes to the doctor and the doctor discovers the injury is a soft tissue strain, no surgery required, prescribed no lifting, bed rest and time off from work;
First month has passed, $2,500 in medical bills has been paid and $4,000 in lost wages has been paid totaling: $6,500 paid out;
Second month has passed, additional $1,500 in medical bills has been paid and another $4,000 in lost wages: $12,000 total paid to date;
Fast forward one year, the employee is released to go back to work: $76,000 total paid on the claim;
The claim remains open and the insurance company reports $200,000 to the rating organization as the claim data experience for this employer;
Time passes and no reserve adjustment is made, the rating organization uses the last claim data reported to calculate the employers experience modification rate.
Yes, it is a simple example and we did skip many steps just to make a point! But you can now see how reserving practices play such an important role in the development of claim experience data and how that data can be mistakenly used.
How Can An Employer Discover Claim Mistakes And Protect Their Company?
Conduct A Claim Review - Have a Claims Review conducted by an independent workers compensation consulting firm. We cannot place enough emphasis on this action. Workers compensation claims are comprised of many different parts each of which may lead to a costly error for an employer. They are complicated and unfortunately most employers do not have the time or skills to properly review claim details. So seek out the independent services of a consultant;
Be Involved In The Claim Process - Employers who are involved in the workers compensation claim process, who know what's going on with the claim at any given time stand a better chance of avoiding some of these problems;
Ask For And Periodically Review Loss History - Ask your insurance company for a current copy of your loss runs, or claim history. Loss history will provide you with details like how much medical and indemnity has been paid to date on any individual claim. It will give you a great snap shot of the condition of your workers comp claim experience data;
Institute or Improve A Safety Program - Claims make a difference! So why not have a goal of eliminating claims from the equation? Improve your existing safety program or if you don't have one, set one up! Start at the source reduce claims and reduce the problems associated with them;
Learn About And Review Your Experience Rating - The formula is complicated, the rating factors are not readily available but you should see how the experience data effects your EMR and ultimately the premium you pay;
The validity of claims used for your experience data;
Proper reporting of claim data to your rating organization;
Application of proper reserves on your claims;
Proper claim handling by your insurance company;
If costly claim errors and mistakes were on your experience rating.
Once claim problems have been identified, our consultant will work with you and/or your attorney in developing a plan to move forward and to correct the mistakes. We hope this page will help you better understand the importance of monitoring claims. Be sure to contact our office if you should have any questions or if we may be of any assistance to you and your company!