Hospital Workers Compensation Benchmark Study

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2 Hospital Workers Compensation Benchmark Study P R E S E N T E D B Y B E E C H E R C A R L S O N I N S U R A N C E S E R V I C E S Beecher Carlson is pleased to present this fourth edition of the Hospital Workers Compensation Benchmark Study. We appreciate the opportunity and strive to continuously demonstrate value and support for the hospital industry through our efforts in developing this analysis. We applaud and appreciate the efforts of all participants and look forward to further discussions around the implementation and execution of strategies driven by the findings of this Study. Identifying the key elements that drive organizations total cost of risk and developing strategies to reduce those costs are shared objectives for the entire industry. We welcome the opportunity to discuss what this information may mean for your company specifically and to identify methods and opportunities for reducing claims. The frequency and severity of claims are the key drivers of costs for workers compensation. This Study will provide a variety of methods to measure and review both. Simply put, if you can have fewer claims that cost less on average, you will reduce your organization s overall costs. Beyond these foundational measurements, we begin to consider the frequency of severe claims, as well as the other key performance indicators specifically related to workers compensation costs overall. SCOPE OF STUDY The 2013 Benchmark Study includes claim information from 2007 through 2011 and valued in late 2012 representing: More than 600 hospitals in 41 states Nearly 650,000 employees 155,000 Non-Zero Claims over the five year period 26,000 Lost Time Claims More than $1 billion in incurred and $846 million in paid workers' compensation losses Key Observations Frequency of claims in 2007 compared to 2011 and as measured against Payroll is down by 9.6% and as measured by Manhour is down by more than 4%. Frequency of claims resulting in lost time from work or indemnity payments as measured against Payroll is down by 33% and as measured by Manhour is down by 20% comparing 2007 to Claim severity on average is up by 10% for Non- Zero Claims over the five year period. Claim severity increases the later the claim is reported to the carrier or administrator. An opportunity exists to reduce the average cost per claim by more than 13% by having them reported within the first seven days for Lost Time Claims. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 1

3 The Data Frequency Frequency per $1 Million Payroll (Non-Zero) 28.6% reduction in frequency per $1million Payroll noted between 2007 and The key factor in reducing the overall cost of workers compensation claims is to reduce the frequency at which those claims occur. The chart above illustrates claim frequency relative to Payroll. Since claims are generally reported within the same policy year, there s less of an impact on the newness of the data and the typical claims development as the accident-year matures. While there is a nearly 28.6% reduction in the frequency of claims relative to Payroll over the five year period, it is important to take into consideration the increase in Payroll over that same period of time. As the rate of pay increases, the denominator would also increase thus possibly causing an apparent reduction in the frequency rate per Payroll. Frequency per 100,000 Manhours (Non-Zero) 16.7% reduction in frequency compared to Manhours reduces the likelihood the increase in pay has a significant impact and illustrates a reduction in the frequency of claims. In order to mitigate the impact of increased pay over the five year period, we measured frequency relative to Manhours worked. This measurement shows a nearly 17% reduction over the five years in frequency of the Non-Zero Claims. This reduces the likelihood increased pay was responsible for the downward trend and supports a true reduction in frequency. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 2

4 Frequency per $1,000,000 Payroll (Lost Time) Over the same five year period, the frequency of Lost Time claims is down 33%. Due to the variability between reserving philosophies, reporting requirements and the numerous methods for handling medical only losses, Non-Zero Claims can be a less than accurate measurement of frequency. While it is important to utilize it for each individual organization, the following analysis of the frequency of Lost Time Claims may be more helpful in order to provide the greatest insight from the figures considered. During the same five years, we see a 33% reduction in the frequency of Lost Time Claims from 2007 to 2011 when measured against Payroll, moving from 0.21 Lost Time Claims for every $1 million in Payroll to 0.14 claims. Frequency per 100,000 Manhours (Lost Time) When compared to Manhours, the reduction is only 20.3% thus removing the possible effect of increased pay during the same time period. Just as with the earlier analysis against Payroll, it is important to consider the impact of increased pay during that same period of time and measure frequency against Manhours worked. Similar to the findings in the Non-Zero Claims, the rate of frequency for Lost Time Claims shows a similar 20.3% reduction from 0.59 claims for every 100,000 Manhours worked to 0.47 claims over the five year period. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 3

5 The Data Severity Medical inflation, an aging workforce, pharmaceutical costs, Medicare Set-asides, increased obesity; the list of challenges impacting our efforts to reduce the overall costs is long and difficult. While we strive to reduce the number and frequency of claims, there is a long list of factors driving the individual costs for each claim higher and higher. It is important when evaluating your organization s losses that all factors be considered. Any one benchmark or measure considered alone can give a misconception of your loss prevention and mitigation efforts. For example, some organizations can experience an unexpected increase in severity with few claims but find their overall costs going down. Thus, none of the factors considered in this study or in your own organization s analysis should be evaluated without considering all factors. In measuring severity, we first analyze the average cost per Non-Zero Claim. Over the five year period, this figure is just under $7,000 per claim with 2011 being around $5,772. We would expect the most recent year to be the lowest as these figures are undeveloped actual costs. This lower figure illustrates the recency or green nature of the newest policy year. Average Incurred (Non-Zero) It is also important to consider the cost allocation between the three claim components; expense, medical and indemnity. The ratio between these three components is rather consistent over the five years, except for the indemnity in the most recent loss year. As claims are open longer, the payments tend to increase over time, including any settlements or payments for lost wages. Thus, we can expect to see all components increase, but the larger increases will likely be in the indemnity and medical portions. To reduce the recency effect and compare loss years on an apples-to-apples basis, we have developed the losses using country-wide loss development factors as provided by The National Council on Compensation Insurance, Inc. (NCCI). The factors allow us to develop present day incurred figures to projected ultimates. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 4

6 Average Ultimate Severity Limited to $500K Average ultimate severity is up 10.2% from 2007 figures; although 2011 is projected to be slightly lower than In comparing the ultimate projected severity, there is a 10.2% increase from 2007 at $7,356 per claim to $8,109 per claim in However, there is a slight reduction from 2010 to 2011 in the ultimate severity for Non-Zero Claims. Loss Rate per $100 Payroll by Year Limited to $500K While severity is on the rise since 2007, the projected developed loss rate per Payroll is down 20.7% since To illustrate the importance of the overall picture, we considered and analyzed severity of losses in conjunction with frequency against a defined exposure base. For this analysis, we consider loss rates relative to both Payroll and Manhours. Over the last five years, the Study shows a 20.7% reduction in the rate per Payroll to an ultimate developed rate of $0.69 per $100 Payroll for The 2009 and 2010 projections are nearly identical to the projections in the prior Benchmark Study in Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 5

7 Ultimate Costs Per 100,000 Manhours (Non-Zero Claims) There is a projected 7.6% reduction in Ultimate Severity over the five years when measured against Manhours. Again, to mitigate the impact of Payroll increases and the possible dilution of a severity pattern due to higher compensation, we analyzed a total of costs against 100,000 Manhours for Non-Zero Claims. In considering loss costs per 100,000 Manhours worked, we find the average cost has gone from $25,149 to $23,967 over the last five years when developed using NCCI loss development factors. This is a projected reduction in severity of 7.6%. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 6

8 The Data Frequency of Severity Claims Percent of Total Claim Counts by Size of Incurred Loss (Non-Zero) 4.3% 1.5% Over 94% of all claims have incurred values less than $25, % 0-25K K >100K When addressing the overall cost of risk, it is essential to clarify and understand what claims are driving your organization s costs. In analyzing the losses for the Study, we found that 94% of all Non-Zero Claims had total incurred values of $25,000 or less. Incurred Percent of Total Incurred Loss by Size of Incurred Loss (Non-Zero) 26.6% 73.4% of incurred costs for the Non- Zero claims comes from claims valued greater than $25, % 32.6% 0-25K K >100K This means approximately 6% of all Non-Zero Claims having incurred values greater than $25,000 account for more than 73% of all costs! As we develop strategies to reduce costs, this shifts our efforts and focus to identify the factors that can impact and reduce the severity of that body of claims. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 7

9 Percent of Lost Time Claims to Non-Zero Claims 83% Lost Time 17% Non-Zero As we strive to further identify the body of claims responsible for the greatest costs and offer the opportunity to reduce the overall cost of risk, we look to several key performance indicators that assist in the analysis of an individual organization s loss experience. It is essential in measuring the frequency of severe cases to consider those that result in time lost from work or indemnity payments relative to those that are medical only, or Non-Zero Claims without indemnity. For this year s Study, we find the ratio to be rather consistent with prior years results. Seventeen percent of all Non-Zero Claims are Lost Time Claims where some indemnity dollars were either paid or incurred. Percent of Lost Time Costs 15% Only 17% of the claims involve Lost Time, but they drive 85% of all incurred costs. Lost Time 85% Non-Zero It is just as important to recognize the impact those 17% of all claims have on the overall costs. Approximately 85% of the costs from the five year period are tied to the Lost Time Claims. This nearly inverse measure falls very much in line with the Rule and should assist in directing efforts for mitigation and cost reduction. Organizations seeing their ratio of Lost Time Claims go up can expect overall costs to increase as well. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 8

10 Average Incurred Losses by Reporting Lag In addition to the benefits evident in returning employees to work or, just as importantly, keeping them at work to mitigate the overall cost of risk, there is a clear trend over the last four Studies that indicates the importance of prompt claims reporting. Every year has provided evidence that claim costs increase significantly for losses with greater lag time reporting than those addressed early and promptly. This result is in direct contrast to the expectation that the most catastrophic claims are known and reported almost immediately. The trend indicates a 22% higher incurred cost for claims reported on day s three to seven at $6,709 versus those reported in the first two days which average $5,588. More importantly, there is at least a 13% increase in the average cost of claims reported in weeks two through four compared to those in the first seven days. This means nearly 18% of the claims (almost one out of five) are incurring costs more than 13% higher on average. While the industry should celebrate that more than 90% of all claims are reported to either the carrier or Third Party Administrator (TPA) within the first 30 days, this illustrates a population of 10% of claims that might be less costly if identified and reported earlier. The potential savings should be evaluated by each organization when you consider that those claims average more than $8,000 in costs each. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 9

11 The Data Causation Cause Type Analysis Comparison of Total Incurred to Number of Claims By Causation Group We performed our analysis of accident causation using claims occurring between 1/1/2007 and 12/31/2011. The workers compensation cause codes which are captured in Carrier/TPA claims systems are notorious for presenting systemic data quality issues, and our data quality assessment for this analysis revealed that reputation to be warranted. The complete set of claims data that we received contained tens of thousands of different causation codes, many of which were either free-form text, null-valued or indecipherable. To begin converting this raw data into a more useable format, we eliminated from consideration all claims which had missing, null or indecipherable values. We then further filtered our dataset so as to exclude any sources which had provided purely free-form text values for the cause code field. We recruited the assistance of our loss control consulting team in the code grouping effort. This resulted in the manual assignment of 790 unique cause code values into one of the following groups: Cut/Puncture, Environmental, Exposure Incident, Fall/Slip/Trip, Other/Not Specified, Patient Movement, Security/Other Person, Strain - Cumulative, Strain - Other, Struck by/struck Against, Tools/Equipment. A summary of the total incurred values for the five most frequently observed cause groups is displayed in the table below. We can see from the exhibit below that for the groups shown, patient movement has resulted in the highest average cost per claim. Cause Strain-Other Fall/Slip/Trip Patient Movement Exposure Incident Struck by/struck Against All Other Count 23,727 23,242 18,871 14,301 13,203 34,106 Total $229.8M $228.4M $191.1M $12.1M $52.2 $199.3M Average $9,686 $9,827 $10,127 $844 $3,955 $7,536 Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 10

12 Employee Age Analysis The data we received which is required for computing the employee age variable was fairly complete, and appeared to be of a reasonably high quality. For this portion of our analysis, we eliminated from consideration any claims with missing age values as well as any claims which we felt likely had miscoded employee age values (specifically, those claims with an employee age less than 16 or greater than 89). We performed our employee age analysis by generating the following trend breakdown by accident year. Since we defined employee age as being (date of loss employee date of birth)/365.25, we can assume that these values are decisively known at the time of reporting and therefore do not need to be developed in any manner to provide valid inferences Median Mean Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 11

13 Average Claimant Age by Accident Year To investigate the spread of employee ages and how they interact with the different cause types, we generated the following exhibit. This table shows the mean employee age by cause group (defined using the methodology described earlier), along with the 25 th, 50 th and 75 th employee age percentiles for each group. Employee Age Cause 25 th Percentile 50 th Percentile (Median) 75 th Percentile Mean All Other Struck by/struck Against Exposure Incident Patient Movement Fall/Slip/Trip Strain Other **We can see from the table above that the Fall/Slip/Trip peril affected a significantly older population of claimants than did any of the other accident cause types (50% of the Fall/Slip/Trip claimants were over 49.5 years old, and 25% of the Fall/Slip/Trip claimants were over 56.6 years old). **We can also see that the claimants suffering from Exposure Incident injuries tended to be younger than other claimants, with 25% of them being younger than 28.4 years old. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 12

14 The Data Jurisdiction Ultimately, many organizations face challenges specific to their individual jurisdictions and locations. Pay rates, compensation laws, compensability issues and the court system can further impact results and costs. While there are opportunities still to address all the prior elements, all must be tempered with an awareness and understanding of the laws and statutes of each state. To consider the possible impact of each state s laws, we calculated the average claim severity for all Non- Zero and Lost Time Claims. Each state s figures are broken down into paid and outstanding for a total incurred value and then ranked from highest to lowest in average severity. Average Non-Zero Incurred ( ) ALL AK CA WI IL MN NY OK LA MD OR NH WA ID SC GA VA AL PA IN MO FL NM CT MI MS CO TN UT AZ KS AR KY WV NV TX $5,437 $9,157 $9,056 $7,188 $7,001 $7,373 $7,316 $7,282 $7,326 $6,428 $5,858 $5,234 $5,768 $5,630 $5,252 $4,919 $5,309 $4,642 $4,834 $4,243 $4,761 $4,305 $4,096 $4,503 $4,080 $3,533 $3,516 $2,957 $3,029 $2,799 $3,177 $2,844 $2,725 $317 $665 $557 $767 $315 $353 $104 $8,563 $1,172 $12,360 $11,179 $534 $644 $601 $689 $295 $751 $455 $1,006 $388 $737 $588 $163 $550 $575 $2,287 $1,656 $1,134 $1,027 $723 $457 $867 $552 $1,165 $4,714 $1,268 $3,175 $1,355 $1,148 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 Average Paid Average Outstanding Average cost of Non-Zero Incurred claims for all states noted is $6,609. It is essential that severity, just like in prior discussions, not be considered alone or factored in as one element. Further, due to the limited volume of claims data in certain states, we have only included states in this analysis where we had at least 500 Non-Zero Claims and 50 Lost Time Claims. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 13

15 To eliminate the impact of reserving differences based on specific claims handling criteria in certain regions and organizations as well as to address those Lost Time Claims driving a majority of the costs, we also reviewed and analyzed the average costs for Lost Time Claims over the five years. Average Incurred Lost Time Claim ( ) ALL VA SC GA IL PA OK CA LA NM FL CO KS AK TN KY NY MN AL MS UT NV IN MT ID MO WI DC CT AZ MD MI OR WV WA $26,237 $24,892 $25,640 $27,566 $27,503 $26,692 $24,813 $25,126 $25,940 $21,681 $23,785 $21,456 $22,404 $20,050 $20,968 $19,903 $17,734 $17,185 $17,929 $17,207 $14,747 $41,135 $56,110 $44,679 $34,968 $41,774 $36,875 $28,511 $36,362 $30,965 $35,487 $36,648 $28,697 $32,871 $31,006 $4,279 $1,886 $5,325 $2,784 $4,341 $2,811 $2,983 $1,997 $2,602 $2,720 $3,254 $2,298 $1,833 $1,745 $6,634 $10,089 $13,980 $5,023 $7,124 $9,622 $16,687 $6,450 $9,343 $4,432 $1,687 $8,461 $3,248 $5,084 $9,392 $8,609 $4,428 $3,955 $4,633 $5,097 $8,485 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 Average Paid Average Outstanding The average incurred Lost Time claim value is $32,871. Beecher Carlson Six Concourse Parkway, Suite 2300, Atlanta, GA beechercarlson.com Page 14

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