Heading into 2012, we had expected to see a trend emerge and be driven by two divergent perspectives: technical factors and trading factors.

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1 Winter 2013 MARSH INSIGHTS: CASUALTY TRENDS IN THE WORKERS COMPENSATION INSURANCE MARKET DIFFICULTIES CONTINUE, WHILE AN INTEGRATED APPROACH, MODELING, AND ANALYTICS DRIVE STRATEGIES TO CONTROL COSTS By Christine Williams, Client Management Leader, US Casualty Practice We are dedicating this issue of Marsh Insights: Casualty to a comprehensive review of some of the more significant trends and developments influencing the workers compensation insurance market. Workers compensation continues to be one of the major insurance and risk management issues facing companies. Many employer organizations are involved in budget and strategic planning for 2013 and, given the current challenges in workers compensation, it is increasingly important for employers to stay abreast of key market developments, both strategic and tactical. Heading into 2012, we had expected to see a trend emerge and be driven by two divergent perspectives: technical factors and trading factors. Technical factors ultimately drive underlying loss trends for various lines of business and, therefore, pricing and terms. Trading factors involve market supply and are a measure of overall underwriting appetite and competitiveness. We did in fact see just such a tug-of-war between these competing factors emerge in 2012, and it continues as we enter In This Issue Trends in the Workers Compensation Insurance Market... 1 Increasing the Split Point: NCCI Enacts Changes to Its Experience Rating Plan... 4 California Workers Compensation Reforms to Take Hold in New Year... 6 Appeals Board Takes on Lien Claims... 7 Rising Medical Costs in Workers Compensation Encourage Risk Managers to Seek Alternative Program Designs... 9 What s New in Marsh s Casualty Practice?... 11

2 Marsh s Casualty Practice recently launched the industry s first Workers Compensation Center of Excellence, which allows us to harness our full toolkit to deliver customized, coordinated strategies and solutions to our clients. The goal: To help clients manage and reduce their total cost of risk. CURRENT STATE OF THE WORKERS COMPENSATION MARKET The workers compensation market has continued to experience its well-publicized difficulties in 2012, according to several independent organizations that closely follow this line of business. An oft-cited example of this would be the summary results for 2011 published by the National Council on Compensation Insurance (NCCI). Announced at its Annual Issues Symposium earlier this year, NCCI cited the 2011 calendar year combined ratio as one of the worst levels seen in over a decade. The combined ratio registered at 115% for private carriers the highest level seen since Further, it was the third straight year that workers compensation led all commercial lines with the highest combined ratio. Turning our attention to the largest state funds California and New York the situation deteriorates markedly. Granted, the state funds are the market of last resort, thus some slippage of the combined ratio would be expected; however the magnitude of the difference is stark. A recent A.M. Best study estimated the 2011 combined ratios for California s and New York s state funds to be 141.7% and 163.1%, respectively. Escalating medical costs, reserve adequacy, and a weak investment market remain concerns for insurance carriers. NCCI estimated undiscounted loss reserves were $11 billion deficient at year-end Average indemnity and medical costs continue to rise (2% and 4% respectively in 2011 alone), putting additional pressure on results. Factors such as co-morbidities, long term use of narcotic drugs for pain management, and prescription drug costs are all serving to drive medical costs even higher. According to NCCI, the share of claims with a co-morbidity diagnosis has been rising over the past several years, climbing 275% between accident year 2000 and Claims with co-morbidity diagnoses have about two times the medical costs of otherwise comparable claims. And, in the Workers Compensation Research Institute article, Longer-Term Use of Opioids, the organization notes that 8% of injured workers who are prescribed opioids were still on the drugs six months later. It is simply more expensive to treat injured employees with these conditions. Frequency and severity loss trends are not encouraging either. Following increased lost time claim frequency in 2010 of plus 3%, NCCI estimated an average lost time frequency of minus 1% in While this is an improvement over 2010, it is well below the historical average frequency decline of more than minus 4% that was seen in the prior years, which helped offset severity increases over the same period. All of this, against the backdrop of a slow economic recovery and a further deterioration of reserve adequacy, paints a relatively bleak picture for the workers compensation market, and has caused upward movement in rates, especially on distressed and unprofitable business. There were several offsetting factors to the technical market from a trading perspective. New primary casualty insurance market entrants and competition helped to mitigate the market trends on placement results. In fact, although workers compensation carriers were attempting to generally push double-digit rate increases, through the third quarter of 2012 we saw rates increase between 0% and 5% on loss sensitive business and between 5% and 10% on guaranteed cost business across our portfolio. Insured headcount and payrolls showed signs of improvements with slight increases through the third quarter as well. 2013: THE MARKET AHEAD Entering 2012, we predicted that the casualty markets appeared to be in a state of transition, one that was expected to continue in an uneven fashion across various lines of business and client demographics. We saw 2 Marsh Insights: Casualty

3 this come to bear throughout 2012 and expect to see a continuation of this trend as we head into We anticipate that workers compensation underwriters will attempt to push for rate increases or structural program changes. The instances where the magnitude of rate increases will be more impactful are dependent on characteristics such as: Program structure: guaranteed cost vs. loss sensitive. Concentration of a client s risk in a particular geography. Individual risk factors, including industry, employee concentrations, loss mitigation techniques, and historical loss experience. Looking forward, as carriers push to increase rates or change program structures, more clients will be looking to market their business as they seek alternatives to achieve optimal results. The overall time needed to complete renewals has increased, and underwriters are applying their guidelines in a more prescriptive fashion. There have also been some new insurer entrants into the primary casualty space, which has been a welcome addition for many of our clients. NOTABLE TRENDS Underwriting Process: Underwriters are inundated with submissions, so it is important to initiate the next renewal process early ideally 120 days prior to the policy or program effective date. Developing a communications strategy around all key risk exposures will benefit the renewal process. It is imperative that organizations provide underwriters with complete, accurate, and thorough data and analysis in order to differentiate their risk profile in areas such as large losses, loss trends, and safety programs. Program Structures: With recent market trends, the availability of guaranteed cost programs has become more limited and some companies are moving to loss sensitive programs. In addition, many carriers will no longer consider writing monoline workers compensation. These shifts in the availability of certain types of structures make it important to consider alternative program structures, carriers, and risk funding arrangements ranked in accordance with expected outcomes, counterparty security, and financial priorities. Data Quality/Modeling and Analytics: Workers compensation is rich with individual and aggregate loss summaries over many years for individual clients. To better understand and use such data, consider: How can data be used to help make better decisions, both in terms of retained risk and transferred risk? How is data analyzed and used to develop measurable strategies and to drive better outcomes and lower costs? As the amount of data available for analysis increases, so does the opportunity to develop customized solutions. Common elements that can be woven into our comprehensive and integrated analytical approach include: Identifying a client s unique workers compensation cost drivers and focusing on how best to reduce them. Reviewing how a specific client s actual loss performance compares to that of its peers (for example, average paid losses, incurred reserves, and closure rates) and various other benchmarks to determine above and below average loss characteristics. Estimating future losses and the volatility of those expected losses at various levels to optimize program structure and risk financing techniques. Identifying claims and workplace safety management inefficiencies and redundancies to improve the working environment for employees. Customizing solutions to maximize cost-containment efforts, improve the bottom line, and save on the total cost of workers compensation risk. Although each company s loss situation is different, there are common themes. There is now more consistency in the use of models at every stage of the annual renewal cycle, and there is also a higher level of sophistication to the models being deployed regularly. An example includes predictive analytics. Marsh 3

4 These tools involve analyzing large quantities of claims data to understand interrelationships and predict potential outcomes, thus allowing a client to better deploy specific strategies and resources to individual claims. Ultimately, having high-quality data, properly analyzing the data, using ever-more sophisticated tools, and developing outcome based strategies are trends that are only likely to increase in the years ahead. Throughout 2012 we witnessed a myriad of state legislative and rate changes across the US, making it even more important for employers to ascertain the insurance market s view on the desirability of their risk. Leading into 2013, Marsh is developing a new visual tool, shown on US maps, that allows clients to make informed decisions based on quantitative factors, including loss cost levels and rate activity in each state, in addition to qualitative factors such as uncertainty caused by legislative changes. The maps can be further customized to reflect a client s operations by overlaying its specific exposures and individual hazard group profile providing insight on how insurers would underwrite their risk. CONTROLLING WORKERS COMPENSATION SPENDING Gaining total control over workers compensation spending is a difficult task, especially against macro headwinds such as those noted above. The relentless escalation of medical expenses and the steady increase in indemnity create a difficult environment. Taking a holistic view of your worker s compensation program is important. For loss sensitive buyers, the majority of cost of risk will be retained, so a proactive approach to both pre- and post-loss risk mitigation efforts is critical. Having a solid strategy in these areas may allow clients to be more aggressive, or even offensive, with their program structure; thus insulating them further from the swings in the market. Highly developed tools exist to pinpoint where there may be opportunities to implement pre- or post-loss strategies. There are also increasingly sophisticated tools to help choose claims management partners and manage the associated costs. Analytic assessments can form the foundation of a solid strategy to manage cost. The companies that use these tools thoroughly and at the earliest stages of the process will be best suited to manage costs effectively. Ultimately, the process is an investment analysis. When budgeting for workers compensation expenses, it is wise to invest in the tools that allow you to set the strategic framework and determine how to achieve more control over your program. Equally important is partnering with advisors who have a deep expertise in risk management and the most comprehensive data and tools available to manage and help reduce the total cost of risk. With human capital a key strategic consideration in virtually every industry, reducing workers compensation costs remains a top concern for nearly every employer. In recognition of this strategic imperative, Marsh s Casualty Practice collaborated with Marsh Risk Consulting (MRC) to develop the Workers Compensation Performance Assessment (WCPA). Using a suite of proprietary analytical tools and the industry s most comprehensive database on workers compensation claims, WCPA provides an overview of a client s specific workers compensation claims performance against a dozen key performance indicators (KPIs), metrics, and best practices. The tool prioritizes and quantifies cost savings opportunities and potential return on investment. To learn more about WCPA, please contact your Marsh representative. 4 Marsh Insights: Casualty

5 INCREASING THE SPLIT POINT: NCCI ENACTS CHANGES TO ITS EXPERIENCE RATING PLAN By Christopher Flatt, Workers Compensation Center of Excellence Leader, US Casualty Practice There are 38 states that participate in the NCCI plan; all have approved the updated experience rating formula. While the majority of NCCI states will update their rate filings on January 1, 2013, not all will do so. A number of other states have rate filing effective dates later in the year, so depending on an employer s state of operations, the potential impact may not be realized until after the initial effective date of the changes. The new year will bring some important changes to the way many companies workers compensation experience modification factors are calculated; a change that can affect their overall costs in what is already a challenging area. Companies should understand how the coming changes from the National Council on Compensation Insurance (NCCI) may affect their experience mod factors, the impacts on their programs, and what they can do to keep their costs under control. Effective January 1, 2013, all NCCI participating states will implement the changes included in NCCI Filing E This filing updates the NCCI Experience Rating Plan, which is used to predict the likelihood an employer will develop loss experience that is better or worse than an average risk would generate in a particular workers compensation classification. It is a method for tailoring the cost of workers compensation insurance to an employer s actual risk characteristics, ultimately giving the employer a level of control over its final workers compensation premium. The most important change in the updated rating plan is the increase of the split point the dollar threshold used by NCCI to divide individual losses into primary, or frequency, and excess, or severity, layers. The split point is currently $5,000 a level it has been at for about 20 years. Filing E-1402 calls for the split point to increase in phases over the next three years to: $10,000 in $13,500 in $15,000 plus two years of inflation adjustment in Additionally, NCCI is changing the maximum debit modification formula, capping the debit experience rating modificaton (mod) factors, which vary by state and size of employer. This change is not expected to have a significant impact on experience modification factors according to NCCI. IMPACT OF SPLIT POINT CHANGES Despite its intention to update the split point with inflation factors over time, NCCI had not done so in approximately 20 years. Since that time, the average cost of a workers compensation claim has tripled. The formula is designed to respond to an employer s actual loss experience, and should Marsh 5

6 NCCI updates the voluntary loss costs and rates by state, experience rating values, expected losses, and discount ratios. For employers that are eligible for experience rating, their actual loss experience is also updated annually, which could impact the experience mod factor calculation. be indexed with actual cost drivers, such as increasing medical and indemnity workers compensation claim costs. An effect of not changing the split point despite client costs continuing to rise is that a much smaller portion of claims is allocated to the primary layer in the formula. This puts less weight on an employer s actual loss experience and ultimately results in the formula being less responsive to an individual employer s actual experience. Transitioning to higher split points will add credibility to the experience rating formula and will help maintain the effectiveness of NCCI s experience rating plan. Depending on how each organization s actual loss history affects the calculation s outcome, businesses will view the experience mod changes either positively or negatively. Some mod factors will yield larger credits for the employer and others will become larger debits. (Credit mods can reduce an employer s workers compensation premium while debit mods can increase it.) NCCI is phasing in the change over three years. This will help reduce any perceived negative impacts and give employers time to adjust. Note that is common for experience mod factors to change by several percentage points annually due to factors unrelated to the split point. For example, every year According to NCCI, after testing the impact of the upcoming changes to the split point, it was able to determine that credits and debits will increase as the formula becomes more responsive to an individual employer s actual loss experience. Further, NCCI expects minimal negative impacts to most employers as a result of the split point change as 75% of all organizations modification factors will likely remain the same or even decline. However, the remaining 25% of companies likely will see their experience mod factors increase. Although the majority of the increases will be less than 10 percentage points, approximately 5% of employers may see their mod factors increase by more than 10 percentage points. Fewer than 1 in 200 mod factors are estimated to flip from a debit to a credit or from a credit to a debit. Further, NCCI found no industry bias in their testing, and has said the changes will not result in any major shifts in premium by state. RATING PLAN CHANGES AND EMPLOYER COSTS Individual employers should understand the potential affect this change may have on their workers compensation costs and what they can do to mitigate potential negative effects. As already mentioned, the actual impact on an individual employer will vary based on its experience and loss history. Employers with better than average loss experiences will likely receive an improved modification factor, while employers with below average loss experiences will generally receive higher mod factors. A critical issue will be how well an employer controls its loss experience through active risk management and safety programs. Understanding the potential impact begins with a review of the loss experience that goes into the experience mod factor calculation. For example, if an employer has no claims exceeding $5,000 (the current split point) in its rating period 6 Marsh Insights: Casualty

7 generally defined as the latest three complete years of experience it likely will receive a larger credit modification factor. Conversely, for employers that experience a high frequency of claims greater than $5,000, more weight will be put on those losses in the calculation and they will generally receive a smaller credit or larger debit modification factor. This could impact the workers compensation premiums charged by insurers because standard workers compensation policy premiums are developed by applying an employer s experience mod factor to the premium calculation. The timing of NCCI s changes has encouraged employers to thoroughly review their current loss mitigation techniques and return-to-work programs to find additional methods to generate workers compensation program savings. Eliminating or minimizing the chance of potential claims and getting injured workers back to work sooner will serve to reduce the loss values that go into an NCCI experience rating calculation in the future. The changes also provide an incentive for employers to review their existing inventory of open claims to see if they are being properly handled and if there are methods available to reduce the case reserves on those claims and accelerate claim closures. These too can reduce the loss values going into the rating formula, lowering an employer s modification rating and potentially reducing long-term claim volatility and workers compensation premiums. To learn how Marsh can help your organization manage its workers compensation costs please contact your local Marsh representative to schedule an appointment with one of our specialists. Marsh 7

8 CALIFORNIA WORKERS COMPENSATION REFORMS TO TAKE HOLD IN NEW YEAR By Christopher Flatt, Marsh Workers Compensation Center of Excellence Leader, US Casualty Practice California s most wide-ranging workers compensation reform effort since 2004 is set to take effect at the beginning of The law SB 863 is the state s latest attempt to control escalating workers compensation costs while at the same time improving benefits for permanently disabled injured workers without reducing benefits for other injury types. The law includes cost-saving measures meant to reduce costs in the workers compensation system in order and expenses and one that, arguably, is not improving. Further, reserve adequacy and medical inflation continue to be major concerns. These issues, coupled with a weak investment environment, have insurers scrutinizing workers compensation, resulting in more rate increases than in prior quarters as underwriters have a renewed focus on near-term profitability. A number of insurers are taking a wait-and-see approach to the legislation s impact; however, most appear hopeful that the changes imposed by SB 863 will improve the effectiveness and efficiency of California s workers compensation system. The 2011 year-end combined ratio published by the Workers Compensation Insurance Rating Bureau of California (WCIRB) was 122%, which was 7 percentage points higher than NCCI showed for the private carrier workers compensation industry as of the same date. California is performing worse than some industry averages, and well above the 100% benchmark for profitability. Many of the favorable impacts from California s 2004 reforms have been eroded, and the state has become one of the most expensive for workers compensation insurance. to offset the increased benefit levels, and seeks to create efficiencies in the treatment of injured workers and improve medical care. Workers compensation is currently a challenged line of business, with ongoing difficulties that are expected to persist into For example, workers compensation leads all commercial insurance lines in having the highest combined ratio a measure of underwriting loss experience CALIFORNIA SB 863: OVERVIEW OF KEY CHANGES According to the California Division of Workers Compensation, SB 863: Increases benefits for permanently disabled injured workers, and changes the method for calculating them and what they cover. 8 Marsh Insights: Casualty

9 Establishes a $120 million Return to Work fund. Introduces independent medical review. Seeks to improve medical provider networks. Creates an independent bill review process. Makes other changes in areas related to medical liens, fee schedules, and qualified and agreed medical evaluators. From a pure benefit level perspective, the law increases permanent disability payouts (minimum and maximum weekly permanent disability benefits) on new claims that will be phased in over a two-year period. Estimated costs per year will be $310 million in 2013 and $530 million in The goal is for these costs and those associated with the Return to Work fund to be offset by changes in how the system operates. The WCIRB estimates that the law s structural reforms will save more than $1 billion annually. SAVINGS FROM INDEPENDENT MEDICAL REVIEW The independent medical review (IMR) process is intended to result in the most significant cost savings, while also improving care and reducing the number of filed medical liens. According to the California Division of Workers Compensation, a significant change in the law is how medical treatment disputes will be resolved. As of January 1, 2013, for injuries occurring on or after that date, and as of July 1, 2013, for all dates of injury, the IMR will be used to decide disputes regarding medical treatment in workers compensation cases. Under the current system, it typically takes 9 to 12 months to resolve a dispute over the treatment needed for an injury. The dispute process currently requires eight steps, from negotiating over selection of an agreed medical evaluator through awaiting a judge s decision on the recommended treatment. SB 863 replaces the eight steps with an IMR process similar to a group health process that takes no APPEALS BOARD TAKES ON LIEN CLAIMS California s Workers Compensation Appeals Board (WCAB) recently reviewed the assertion of a lien claim that was filed in November 2009 regarding an injury that took place in In its decision in Torres v. AJC Sandblasting and Zurich North America, the WCAB soundly rejected the lien claim, which was based, as many are, on little more than an unsigned copy of an insurance form submitted by the lien claimant. Citing the California Labor Code (sections and 5705), the WCAB held that those parties attempting to enforce a lien must carry the burden of proof, by introducing evidence that the employee sustained a compensable injury and that the lien claimant rendered treatment that was reasonable and necessary. Previous practice would have condoned the lien claimant s minimal proffer of evidence. However, the WCAB said it had to act, according to its opinion, because of the number of lien claimants who persist in disregarding existing law as to their burden of proof and repeatedly proceed to trial on lien claims that are so lacking in evidentiary support and/or presented with such a total disregard of existing law as to be frivolous. Not only was the lien denied, but the WCAB assessed sanctions against the claimant and its representatives. This is binding upon all WCAB panels and workers compensation judges. Marsh 9

10 more than 40 days to arrive at a determination allowing appropriate treatment to be obtained. An IMR can only be requested by an injured worker following a denial, modification, or delay of a treatment request through the utilization review process. Employers and insurance carriers cannot request review of treatment authorizations. There are safeguards for injured workers built into the IMR process. For example, they can be assisted by an attorney or by their treating physician, and there is a right to appeal an IMR determination on the basis of fraud, conflict of interest, or mistake of fact. The reviewer s underlying medical decision making, however, cannot be overturned by a judge. If an appeal is granted, the remedy is referral to another reviewer. IMR will not be available in cases in which there is a dispute over anything other than the medical necessity of a particular treatment requested by the injured worker s physician (such as cases where the injury itself is in dispute). MEDICAL LIEN PROCESS CHANGES The most significant area of change under SB 863 is with the medical lien process, which is expected to save as much as $450 million per year, according to the WCIRB. Medical liens are a legal notice that the medical provider has unpaid medical bills and wants to appeal for payment against the final compensation award. Before the latest reform efforts, there was no cost to filing medical liens, and they were not subject to a statute of limitations. Medical providers have used the lien process to contest an employer s determination of the amount payable for goods or services, and had the ability to file medical liens many years after the last day of treatment. The significance of this spiraling problem was spelled out in the January 2011 Liens Report, published by the California Commission of Health and Safety and Workers Compensation, which said that liens are both a cause and a result of serious distress in the California workers compensation system. As a cause, liens are choking the system¹. California employers and insurers spend roughly $200 million per year on loss adjustment expenses to handle medical lien claims. The volume of liens provides an environment where indefensible delays and denials by claims administrators can thrive, side by side, with lien claimants. The prevalence of liens is unique to California. The billions of dollars in dispute through the medical lien process reflects both claims obligations that should have been paid as well as those that should not be paid but which may eventually have to be compromised in order to obtain any payment or to close the claim. The report also notes that, at the time of the report, approximately 350,000 liens were filed for 2010 and over 450,000 were expected in These medical treatment liens account for more than 60% of the liens filed and 80% of the dollars in dispute. After adjusting for amended liens, $1.5 billion per year is claimed in medical lien disputes. This has become an extremely expensive and time-consuming process that has had a direct negative affect on California s workers compensation system. To address the issue, SB 863 imposes filing fees of $150 for new medical liens and activation fees of $100 for existing medical liens. It also includes statutes of limitation. The changes are hoped to significantly reduce the large number of medical liens filed each year. However, according to one insurer consulted, the changes are unlikely to put a dent in the hundreds of thousands of new medical liens filed annually. However, a better alignment of lien claimants, employers, and carriers could be effective at reducing the filing of liens where there is a strong defense as well as those that may potentially be viewed as frivolous. 1 Sean McNally (2011 Chair). (2011, January, 5). The California Commission on Health and Safety and Workers Compensation. Retrieved from 10 Marsh Insights: Casualty

11 CONCLUSION Uncertainty exists around what impact SB 863 will ultimately have in saving workers compensation costs. As a result of the law s expected savings, the WCIRB amended its proposed pure premium rates; filing for pure premium advisory rates that will be in effect January 1, 2013, reflect no change in rates. This is a revision of the WCIRB s initial recommendation that pure premium rates be increased by 12.9% on average and, on its face, appears to show the WCIRB s belief that the reforms may be effective and serve to reduce workers compensation costs in California. Barring other changes, if the reforms do not create the intended savings, the unprofitability of California s workers compensation system will likely continue. If the estimates of the costs and savings created by SB 863 are correct, the law could create some stability in the system and begin to move California toward improved profitability. We look forward to monitoring the impacts of SB 863 in the coming year and providing our clients with additional insight into California s latest efforts to control workers compensation costs. That said, there are ongoing discussions as respects the need for a rate increase, and recently the California Insurance Commissioner issued a decision to overrule the WCIRB s revised rate filing and recommended an increase in pure premium advisory rates significantly, depending on the measure. This is a case where the math matters and actuarial science is the critical component in determining a rate that will maintain insurers ability to pay claims, said Commissioner Dave Jones. We cannot afford to set the pure premium rate based on over estimates of the potential reform savings that SB 863 will bring when insurers are already paying out more in claims than they are collecting in premiums. Marsh 11

12 RISING MEDICAL COSTS IN WORKERS COMPENSATION ENCOURAGE RISK MANAGERS TO SEEK ALTERNATIVE PROGRAM DESIGNS By Tom Cammann, Marsh s US Casualty Practice, and Pamela Hobbs, Marsh Risk Consulting Escalating medical costs present a continued challenge for businesses financial growth. The dramatic increase in workers compensation medical costs has all stakeholders researchers, policymakers, insurers, managed care providers, and employers seeking strategies and solutions to help reduce them. MORE THAN 20 YEARS OF RISING COSTS Industry researchers, such as the National Compensation Commission Institute (NCCI) and Workers Compensation Research Institute (WCRI), have published a great deal of information on the impact of rising medical costs on workers compensation insurance. Studies show that 60% of every dollar spent on lost-time workers compensation claims (claims with medical and indemnity) goes to the medical portion and 40% goes to the indemnity portion. These percentages have reversed since the 1980s, when medical represented 40% of every lost-time claim. The average medical cost of lost-time claims has more than tripled over the last 20 years, as annual rates consistently exceed the overall medical consumer price index, according to NCCI. This trend is not slowing down. One of the most alarming findings recently published by NCCI is that the share of medical claims receiving narcotics has increased to 38% from 28% in Not only has this resulted in an increase in prescription drug costs especially on more severe claims but it has led to litigation over employer responsibility for drug addiction, driving even more expense into the workers compensation system. This is just one of many causes affecting medical cost trends. Others include co-morbidities (e.g., obesity and diabetes), the aging workforce, and the erosion of historical workers compensation reforms. All of this emphasizes the need to focus on outcome-based solutions to provide injured workers the best treatment at the most economical costs. Medical costs have risen for more than 20 years despite assertive efforts to contain them, including state legislative reforms, mandatory utilization review protocols, pharmacy fee schedules, greater control of physicians directly dispensing pharmaceuticals, and improved provider choices. MEDICAL COST CONTAINMENT CONSIDERATIONS Employers, while retaining their commitment to accident prevention and return-to-work programs, are increasingly taking control over medical management programs. At the same time, insurers and third-party administrators (TPAs) have redesigned their claims administration practices and procedures to focus on medical versus disability management, while independent managed care companies have thrived by providing medical cost containment solutions directly to employers and insurers. Employers can position themselves to achieve superior outcomes by critically evaluating and implementing focused medical cost containment strategies. The selection of vendors to manage workers compensation claims is one of the most important decisions an organization can make. Historically, the insurer or TPA handled all aspects of claim management, including the managed care components of cost containment, bill re-pricing and processing, medical case management, and return-to-work efforts. However, there is a growing trend for risk managers, particularly at large companies, to opt out of insurer- or TPA-administered 12 Marsh Insights: Casualty

13 managed care and hire a specialist vendor to provide managed care services as one method of reducing their workers compensation medical costs. This is called unbundling a company s managed care. The trend towards unbundled managed care has been fueled in part by an increase in transparency concerns over undisclosed markups charged by some TPAs for managed care services and by the conflict of interest that may exist when a TPA controls the use of its own medical resources to support claim handlers. But the advantages to unbundling go beyond just scrutinizing costs. Managed care vendors boast an increase in claim savings through improved medical control and return-to-work outcomes. Managed care organizations specialize in providing managed care services with focused product development, staff training, and management representation. They typically maintain high quality standards and certifications, while understanding and focusing on an employer s medical issues and goals. Most managed care companies can tailor their services to meet employers direct needs, such as on call medical support, in-house staff, and access to detailed medical reports. Because of the direct contractual relationship with the vendor, risk managers who have unbundled programs claim to have better control over their individual program components, the employee-vendor interaction, and the management of overall claim outcomes. They also report having more customized workflows available to them than they would with a bundled program. allow TPAs to offer employers seamless bundled service delivery options that ultimately may generate outcomes and savings equal to that of unbundled programs. The TPA s objective is to deliver a comprehensive program, comprised of a mosaic of specialty vendors through a single source, making it easier for the employer to manage. Many risk managers who use the bundled approach to managed care feel that they achieve efficiency, avoid duplication of effort, and negotiate better pricing through one-stop shopping discounts. Not all managed care providers or TPAs offer the same level of services or have the industry expertise risk managers may be looking for. It is important for risk managers to employ comprehensive and customized procedures on managed care with the goal of achieving the best outcomes for injured employees at the lowest cost. It is also important to have a clear line of sight into what services are received from vendors and the associated costs. When considering unbundling managed care, keep in mind that a company may pay a premium to take less than the full suite of services provided by a TPA, and there may be an additional charge to compensate the TPA for the work they have to do to interface with an unbundled managed care service provider. When making the decision to buy bundled or unbundled managed care services, companies should consider which options will help produce the best treatment and outcomes for injured employees and the lowest medical costs. Unbundling managed care is an attractive option and works for some risk managers because it focuses the attention on controlling the increases in medical costs. However, we have seen some TPAs motivated to develop improved managed care services and become more sophisticated in their service delivery, data capability, and process flow options. Most TPA organizations subcontract components of their program (such as networks and field case management) and use data, analytics, and buying power to drive service delivery and lower prices. These subcontracted relationships SPECIALIZATION AND CUSTOMIZATION: ADDITIONAL CLAIMS MANAGEMENT AND MANAGED CARE The effort to control medical costs has led to new services offered by both TPAs and managed care organizations: Outcome based networks (OBNs) are a relatively recent addition to the workers compensation managed care scene. These are smaller networks of medical providers that are statistically shown to have superior outcomes in Marsh 13

14 terms of medical recovery, disability duration, and claim costs. Although these networks may have less of a discount per service, they generally have fewer services per claim, resulting in lower costs overall. On-call injury support and triage services provide employers with 24-hour telephone support to help them assess an injury at the time that it occurs. These services are helpful to employers with third-shift workers, retailers, and any employer that needs help evaluating the level of injury. Injury support staff help the on-site manager to determine what the initial injury response procedure should be, whether to transport a worker to a nearby provider or emergency room, and to provide managers with the location of the closest in-network provider. Results show that these programs can reduce the number of lost-time claims and the severity of claims that are triaged. Predictive modeling has long been used in reserve calculation tools but the methodology is now being applied in a new and innovative way to medical case management. Most claim and managed care providers now use a type of predictive model designed to identify for early intervention specific claims that are likely to escalate in cost and complexity. Predictive models are not all alike, and some are much better than others. The more significant and detailed the amount of available data for use in the model is, the higher the model s predictive power and capability. Partnering with advisors that have the best modeling capabilities can more quickly identify the claims most likely to increase in value. Pharmacy benefit management companies (PBMs) use all means available to control prescription usage and cost, including formularies, step therapy, and therapeutic interchange. Opioid use is under close scrutiny now due to increased use; as a result, PBMs are offering solutions to directly impact the dispensing of this class of medication. In addition, physician-dispensed drugs and repackaged prescriptions are allowed in workers compensation in 23 states and can affect the cost of prescriptions. Bill review vendors pay special attention to durable medical equipment (DME) costs, especially the cost of implants used during surgery. Bill negotiation and bill audits are used to mitigate costs an important program component for employers managing severe workers compensation injuries and that are faced with rising hospital inpatient costs. Clinical case management protocols based on best practices are continually being developed, evaluated, and modified to assure that appropriate referrals are made, clinical resources deployed, and results achieved. These include procedures for triage, qualifications of staff, use of treatment and disability duration guidelines, case closure criteria, and quality control. Clearly, the services and cost containment programs offered by claim administrators and managed care organizations are becoming far more complex. A high level of expertise is required to understand the employer s needs, analyze the various service offerings, and come to an objective determination of the best managed care program design. Making an informed decision relative to managed care programs will have a material and sustainable impact on an organization s bottom line. Far too often these decisions are made based on service cost differentials without considering a claim administrator s or managed care organization s ability to drive superior outcomes. Employers must be diligent about vendor selection and oversight and use strategies specific to their business in order to deliver sustainable medical cost savings and a competitive advantage. 14 Marsh Insights: Casualty

15 WHAT S NEW IN MARSH S CASUALTY PRACTICE? Following are some recent initiatives of and personnel moves within Marsh s Casualty Practice. INITIATIVES Marsh recently launched the Workers Compensation Center of Excellence (COE), which combines the resources of Marsh s Casualty Practice, Marsh Risk Consulting, CS STARS, Marsh s Global Claims Practice, and Marsh Global Analytics. This enables the firm to seamlessly deliver a full spectrum of coordinated workers compensation insurance and risk management capabilities to clients, including advanced analytics and modeling, pre- and post-loss strategies, claims management and advocacy, and industry leading insurance program design and placement. The Workers Compensation COE produced a three-part webcast series: Part 1: Using Diagnostics to Understand Workers Compensation Program Costs. Experts from Marsh Risk Consulting and CS STARS discussed ways to identify workers compensation relative risk indicators, identify solutions to maximize cost containment efforts, determine the financial implications of claim outcomes, and estimate future losses at specified retention levels. Part 2: Optimizing Your Workers Compensation Insurance Program. Panelists discussed workers compensation insurance program optimization, placement, and innovative risk transfer and retention options. Part 3: Reducing Workplace Risk, Improving Your Workers Compensation Program ROI. Our experts discussed workplace safety management and post-loss risk control measures. To listen to replays please visit our website, marsh.com/newsinsights/webcasts.aspx. A Workers Compensation COE webcast was held on the impact of upcoming changes in the National Council on Compensation Insurance (NCCI) experience modification split point, which becomes effective January 1, A replay of the webcast is available on our website, www. marsh.com. MARSH IN THE MARKETPLACE Christopher Flatt, leader of Marsh s Workers Compensation COE, and Claude Yoder, head of Marsh s Global Analytics recently co-authored two articles: Controlling Costs with Data and Analytics for Risk & Insurance magazine; published November 1, Optimizing your workers compensation program through analytics ; published in the August 23, 2012, edition of Business Insurance. US Casualty Practice leader Jonathan Zaffino was featured in a Business Insurance article, Excellence in Focus, on August 20, Richard Ries, casualty advisory specialist in Morristown, New Jersey, presented at the New Jersey RIMS meeting on September 11, 2012, providing an update on casualty market conditions. CASUALTY PRACTICE PERSONNEL MOVES Christopher Flatt joined Marsh in July as the leader of Marsh s Workers Compensation COE. Chris, a 22-year veteran of the workers compensation insurance and reinsurance markets, joined Marsh from its sister company Guy Carpenter. Marsh 15

16 Steve Naylor joined Marsh s Casualty placement hub in Chicago as the custom desk team leader. Previously, Steve was with ACE Risk Management in Chicago where he was an underwriting team leader. Kevin Orphan rejoined Marsh as casualty advisory leader in our Pacific Northwest Partnership. Kevin has been named a Risk & Insurance magazine Power Broker twice in the past three years. Jesse Paulson rejoined Marsh as a placement specialist in our excess casualty group. Previously, Jesse was a principal at Integro Insurance Brokers, where he managed the design, service, and placement of large casualty accounts. Jim Voltz rejoined the company as Marsh s Casualty Practice s advisory leader for the East Central Partnership. In nearly 25 years with Marsh, Jim held a myriad of positions in regional, partnership, and office management. Chris Weber was named Marsh s Casualty Practice s primary placement hub leader in Chicago after serving as the custom desk leader. Christine Williams joined Marsh s Casualty Practice as its client management leader. Christine will help manage the complexities of our multiple platforms and diverse offerings. Al Schneider rejoined Marsh s Casualty Practice placement hub in New York. Al spent six years in senior marketing roles with Crum & Forster and Endurance after his first 18 years with Marsh. Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman. This document and any recommendations, analysis, or advice provided by Marsh (collectively, the Marsh Analysis ) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Copyright 2012 Marsh Inc. All rights reserved. Compliance MA