Monday, April 6, 2009

Why the Oregon Workers’ Compensation Premium Rate Ranking matters

The 2008 version of the Oregon Workers' Compensation Premium Ranking Study is now posted. It is worth a read even if you don’t do business in Oregon. (A summary is also available).

Without repeating the study, the basic goal is to inform stakeholders as to how Oregon’s workers’ compensation premium rates would compare with those of other jurisdictions. Oregon takes great care to make the comparison realistic and valid for Oregon. Oregon’s researchers select fifty of the most important classifications (representing about 68% of the payroll) and then seek rates from other jurisdictions for the same or similar rating classifications. Finally, Oregon researchers develop a representative index premium based on this data for each state and determine where Oregon ranks on the resulting list.

The Oregon study matters to more than just Oregonians. For any cluster of states with a similar mix to each other, the relative ranking of one state may help identify efficiencies or problems. A ranking among the lower-cost jurisdictions not only means a lower cost for employers, it may also reflect a lower cost of injuries to workers. Since severity and frequency are major cost drivers, changes in ranking (particularly in states with similar benefit structures and practices) may reflect changes (or differences) in the prevention environment as well.

It is important to note the following about the Oregon premium rate study:

  • The selection of classifications is based on what is important in Oregon.
    Classifications are based (primarily) on NCCI definitions.

  • The weightings used to develop the rates are based on Oregon payrolls (although the major classes are usually within the scope of coverage in all jurisdictions-- clerical, sales, education, medical offices, restaurants, retail stores, hospital, auto repair, trucking)

  • Expense loading factors, or loss cost multipliers are accounted for.

The study result is an ordered ranking of index premiums. The median index premium rate is $2.26 per $100. Oregon, ranks 39th on the list of 51 included in the study with an index premium rate is $1.98 per $100 (83% of the median rate).

This is important information particularly for those in Oregon but remember it is Oregon’s rate ranking using Oregon payroll weights. If a jurisdiction has a similar industry and payroll mix to Oregon, the study may provide general guidance on the competitiveness of rates; if a jurisdiction has a very different mix, the comparability is likely of less value. Washington state’s ranking on the same list is 38th at $1.98 but this is based on Oregon’s weights, not Washington’s. Although one might assume some reasonable comparability between Washington and Oregon, it is conceivable that Washington could actually have a lower ranking (less costly premium) if Washington’s weights were used in the comparison.

The study does not include jurisdictions outside the US. British Columbia publishes rates [see] and it is possible, therefore, to generate a similar ranking based on Oregon weights. Such an exercise would show BC with rates near the lowest in the Oregon ranking. Since rates are based on a percentage of payroll, changing exchange rates are not a factor in the comparison. Put another way, if Oregon had WorkSafeBC’s premium rates for the industries and payroll weights used in this study, the result would be an index premium at the bottom of the current list.

Why would BC rank so much lower than Oregon on this scale? It may have something to do with the nature of the classification system. BC’s assessment rates are more industry based than NCCI classifications (which are more occupationally based). Lower health care costs in Canada may be a factor. Lower administrative costs, effective case management and vocational rehabilitation/ Return to Work initiatives, effective prevention initiatives, economies of scope and scale, and [perhaps] lower costs for disputes may all play a role in lower premium costs (assuming similar benefits and practices).

The bottom line is that BC, Washington and Oregon would have relatively low index rates if directly compared using the Oregon methodology, a result that benefits the economies of all three jurisdictions.

1 comment:

Anonymous said...

Terry, thanks for a good post. As one of the authors of the Oregon study, I’ve seen more than a few misunderstandings of our methods and findings. You got it essentially right, but allow me to amplify a few things.

I would agree that the study findings are most valid for measuring Oregon in relation to other states. However, I doubt that using another state’s payroll distribution would move that state’s ranking in a predictable direction, or make large changes in the rankings overall. As you note, the occupational classifications with the greatest weight in the index rate computation are quite universal, and thus the study results should generalize well across states. The critical validity factor is that a comparable set of classes is used; raw averages are virtually worthless for comparison purposes. We also publish comparisons for each classification used in the appendix tables of the full study.

One other item I would call to readers’ attention in the study is the “percent of study median” measure. For many purposes this may be a better measure for states to focus on, especially for trends over time. In recent years, there have been two trends observed in the distribution of states overall: the median index rate value has declined, and the entire distribution has become tighter (i.e., the top and bottom index values are getting closer together). For states near the middle of the distribution, small differences in the index rate can translate to a change of many places in the rankings, and states with stable rates may change rankings against this moving backdrop. Thus I would caution against focusing on the ranking alone.

And of course, comparative cost is just one aspect of system performance. A system that encouraged safe workplaces, delivered adequate benefits, delivered quality effective medical care, minimized and promptly resolved disputes, and maximized return to work might well be relatively costly, but nevertheless a great value for the money. Just my opinion there.

Mike Manley