Workers Compensation. Are Costs Controllable?

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1 Workers Compensation Are Costs Controllable?

2 Your WC Risk Costs Has your WC premium gone down in recent years? Has your WC premium stayed the same? Has your WC premium gone up in recent years? Are you paying $1 for something worth 30 cents? Advisory WC rates in IL are down since 2011 Illinois Assigned Risk Pool has almost doubled in size

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6 Illinois WC $2.6 Billion in 2012 IL WC Premium < than 2007 IL WC rates average <3% of Payroll Average 3% - 4% of employees injured per year Has been one of the higher loss ratio WC States Overall Combined Ratio of 120% from Combined Ratio Improvement: 108% & 99.5%

7 Illinois WC Changes in law estimated to reduce loss costs Assigned Risk Pool has grown to over $100 M Higher litigation of WC claims than most states 200, ,000 total workers claims per year 65,000 80,000 injuries over 3 lost workdays Arbitrators involved in 50,000 55,000 claims

8 Illinois WC Recent Changes No WC benefits if employee intoxication proximate cause of injury Effective in 2013 Rules for drug testing added in 2013 (DOT) Reason for post accident drug testing Medical Fee Schedule updated to discount medical costs of claims.

9 Workers Compensation History - Background

10 History & Purpose of WC Workers compensation laws first came to states in the US in 1911 as a improved way to deal with work-related injuries and illnesses. Workers Comp benefits are the sole-remedy for work-related injuries and illnesses. It provides medical care at no cost to the injured employee, & partial replacement wages if the injured employee is unable to work. In exchange, employers are protected from law suits by injured employees.

11 Positives of WC Protects employee from the financial risk of workplace injuries (No Fault) Injured employees cannot sue their own employers (there are rare exceptions). Eliminates time & $ consuming liability trials. Reduces financial burden on family & public. Reduces legal fees and burden on courts. Prevents business from being bankrupted. Spreads the cost among many employers.

12 Negatives of WC Erosion of sole-remedy principles More litigation & arbitrator involvement Has become adversarial and more costly Long tail many years before all claims closed System abuse (Menard Correctional Center)

13 WC Price Calculation Payroll is the basis for pricing WC. Proper Classification (~600 WC class codes) results in the correct unit charge for coverage based on the nature of the work. Proper Allocation results in the correct subtotal charge for each class code. Accuracy is important & payrolls audited Manipulating payroll classification and/or allocation is both illegal and unethical, and may ultimately harm the insured.

14 Factors Affecting the Cost of WC Which of these can the insured control? Economic Conditions Returns on Market Investments Insurance Industry Changes & Competition Regulatory Changes Medical Cost Proliferation & Inflation Cost Shifting from Other Healthcare Systems Decisions by Judges & Arbitrators Experience Modification Factor (EMF)

15 Critical Success Factors for WC Experience Mod Factor Return to Work Rapid Claim Reporting Dedicated Adjusters & Rehab Nurses Communication with Claim Handler Injury Management Employer & Insurer Injured Employee Contact Pre-hire Screening Substance Abuse Testing Accident Reporting Accident Investigation

16 Workers Compensation Underwriting

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19 Critical Success Factors for WC Effective Safety Program Safety Coordinator Owner/CEO Involvement Supervisor Involvement Employee Involvement Accountability for All Training Safety Inspections Job Descriptions Disciplinary Policy OSHA Compliance

20 Workers Compensation Underwriting

21 Advisory Rates Most insurers use NCCI Base WC Rates NCCI / Insurance Department publishes based on past losses and payroll in Illinois These rates are adjusted by insurance companies for specific insured risk factors Experience Mod adjusts - loss experience Underwriters can add or subtract 50%+ What can you do to deserve more credit?

22 Attractive WC Accounts Established businesses with demonstrated success in controlling WC exposures. Formal Stay at Work / Return to Work Program Drug testing programs established (post accident, for cause, post offer, DOT random, etc.). Business risks with appropriate WC controls in place (hazard assessment, JSA, etc.). Employers who capitalize on their opportunity to prevent and manage injuries. Businesses with very consistent loss history

23 Deductibles Illinois allows small deductibles of up to $1,000 per medical-only claim (6% to 2% discount). Illinois allows large deductibles with $250,000 of each claim being more common. 70% discount of medical claims <$5,000. Added to EMF calculation to discourage small claims not being reported. All WC claims are to be reported.

24 Claim Reporting Process & Importance

25 Timely Reporting of Claims The benefits of timely reporting are many, and include: Early intervention through the adjuster. Rapid triage to an appropriate medical provider. Investigation while the claim is fresh and details are readily available. Better quality and more timely medical treatment. Utilization of cost containment tools from the start. Increased satisfaction of the injured employee. Reduced chance of litigation.

26 Top Reasons for Reporting Delays #1: Self-Treatment the employee believes the pain will go away on its own or with self-care. #2: Lack of Employee Training the employee doesn t know the correct procedures to follow when an injury occurs. #3: Perceived Negative Consequences the employee believes, right or wrong, that reporting will bring negative consequences, such as disciplinary action.

27 Early Reporting of Claims Reporting Delay (Lag Time) vs Average Increase in Claim Cost 4 weeks or longer 45% 3-4 weeks 29% 2 weeks 18% 1 week 10% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Based on a study by Glen-Roberts Pitruzello, published in NCCI s Issues Report, Summer 2000.

28 Experience Modification Factor

29 Experience Modification Factor (EMF) a.k.a. Experience Modification Rating or EMR. The EMF is a statistical tool used to quantify and represent losses for a business over a 3 year period of time. The formula includes data on actual and expected losses, and multipliers to account for data credibility and centering the results around 1.00 as average is a C not good enough.

30 Experience Rated vs Merit Rated Experience Rated must meet minimum premium and business history requirements, $5,000/year in premium in Illinois, and at least 2 years of WC experience. Merit Rated Used for smaller insureds that can not qualify for experience rating. Typically, employers with no lost time claims over the two year period will qualify for a small discount from the manual rate. Those with one lost time claim will receive no discount, an those with two or more lost time claims will have a surcharge.

31 EMF The Insured s Bottom Line Things you should know: Many factors affect the cost of WC insurance. Insureds pay for their loss experience via the EMF. The EMF is major factor the insured can control. Insureds can control their EMF via best practices. With this understanding there are reasons to utilize best practices for WC. Prevention Cost Controls

32 Minimum EMF is the Goal Current EMF: Based on 3 years prior to expiring year. Minimum EMF: The EMF with zero losses. Controllable EMF: The difference between these two.

33 Controllable EMF = $avings Example Current EMF - Minimum EMF = Controllable EMF 1.27 $127, $ 82, $ 45,000 What would the premium be if the EMF is 1.00?

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35 EMF Formula Terms (NCCI) (A) Weight (C) Expected Excess Losses [D-E] (D) Expected Losses (E) Expected Primary Losses (F) Actual Excess Losses [H-I] (G) Ballast (H) Actual Incurred Losses (I) Actual Primary Losses (J) Total of Actual (K) Total of Expected

36 EMF Formula (NCCI) Stabilizing Value (I) + [C x (1 - A) + G] + (A x F) = (J) (E) + [C x (1 - A) + G] + (A x C) = (K)

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38 MI EMF Formula Terms (A) Actual Incurred Losses (B) Primary Actual Losses (C) Actual Excess Losses [A-B] (D) Expected Losses (E) Primary Expected Losses (F) Expected Excess Losses [D-E] (G) Total of Actual (H) Total of Expected (W) Weighting Ballast

39 Premium Credits Premium Credits are discounts. Premium Discount Schedule Credits Pricing flexibility by underwriter of +/- 25%, 50%, or more of filed base rates in most states. Other Credits Large Premium accounts 70% Medical only discount in Mod Contractors Credit Safety Programs & Safety Committees Drug-Free Workplace Managed Care

40 The Split Point Change The Split Point is the threshold between Primary Losses and Excess Losses. Was $5,000 for years. Primary Losses = the first $10,000 incurred/claim. Excess Losses = incurred amount over $10,000/ claim. The Split Point will increase as of each state s annual rating anniversary (dates vary): to $10,000 in 2013 (some states are still at $5,000) to $13,500 in 2014 to at least $15,000 in 2015 (likely closer to $17,000) Indexed annually thereafter based on medical inflation.

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46 Assigned Risk Pool Covers businesses that can t obtain WC insurance from any of 300 competing carriers. Overall pool loss paid by carriers. Rates average 30% to 70% more than advisory rates in Illinois. ARAP factor is extra charge for poor loss experience. Not always easy to get out of the Pool.

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48 Your WC Cost Controls Prevent workplace injuries Safety Culture Quality employee hiring and selection Managing WC claims Work with Insurer Timely Reporting of Claims Formalized Return to Work Program Experience Mod reflect your WC loss history Shared risk: deductibles or loss sensitive programs Make your business attractive to WC carriers to increase credit pricing

49 Summary Q & A