Thursday, January 31, 2013

What does a rising trend in injury costs mean?

The costs of work-related injuries are felt by individuals, families and communities.  The personal and human costs are immense but difficult to quantify.  Injury costs associated with workers’ compensation claims, however, are financial and easily quantifiable. 

Changes in injury claim costs get the attention of employers and workers’ compensation administrators.  The obvious concern is that rising claims costs might be an indicator that claims managers are “giving away the farm”, not managing the claims very well.  I have rarely found this to be the root cause of such a trend.

Rising injury claim costs can be related to external factors.  Healthcare cost inflation is outstripping overall inflation, for example; even if all else remains the same, this factor alone may account for increased claims costs.  The external employment environment may also be a factor.  We know from research that claim duration increases as the employment moves from high demand to steady and from steady to declining demand (given relatively constant labour force supply). 

Occasionally injury claim costs rise because of closer adjudicative scrutiny.  I recall one claims director promoting very early intervention and a medical report every two weeks before a payment could be issued.  The result was increased medical tests and physician visits, which added significantly to costs and did not result in shorter duration. 

I was consulting with one large employer who was considering terminating his third party administrator (TPA) because indemnity and medical costs per claim were on the rise.  As we discussed the situation, it became clear that demographics not claim management practices were the main driver.  As this very large firm had automated and improved efficiency, it had hired fewer workers.  Mandatory retirement had also been eliminated so more workers were working longer (automation actually facilitated a longer work career).  Taken together, the result was an aging workforce and one with a greater level of co-morbidity (diabetes, high blood pressure, obesity).  While injury rates were lower, duration and medical costs were higher every year.  Clearly, these issues—not the TPA’s claims management practices—were driving claim costs upward. 

Recently, I was corresponding with a coordinator for a booming resource extraction firm where recruitment and retention were big issues.  The employer made a point of meeting with all the crews, raising awareness about workers’ comp and disability benefits as well as their extensive EFAP program and easy, on-line extended benefit program.  The result was increased utilization in WC, EFAP, LTD and extended health driving premiums higher.  This was both expected and welcomed because it contributed to a more important corporate objective:  increased employee retention and lower turnover.  The higher premium costs were much less than the cost of recruiting and training of new employees. 

Of course, a trend toward higher injury claim costs may also be related to internal factors.  Increasing caseloads, for example, may be caused by staffing reductions or increased claim volume with insufficient increases in staffing; either way, the result may be less attention per claim and rising injury claim costs.  Other internal changes to systems, policies and procedures may also contribute to higher costs.  One insurer back-filled a significant number of case manager positions with less experienced staff so the more senior staff could be assigned to a particular crisis situation.  At the best of times, the handover of a particular caseload from one case manager to another may contribute to longer claim duration and increased utilization as the new case manager becomes accustomed to the caseload.   When amplified by the simultaneous transfer of many caseloads, the impact on performance measures such as claim cost can be significant.

Whether you are looking at the performance of an overall system or a specific firm, rising injury claim costs cannot be viewed in isolation.  Its meaning must be interpreted within a broader context. 

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