Wednesday, June 22, 2016

Is Workers’ Compensation primarily a “medical insurance” plan?

Nearly three quarters of US  workers’ compensation jurisdictions now incur more  healthcare cost than “indemnity” costs (wage replacement for temporary disability workers’ compensation claims) for the most common workplace injury claims.

For many years, NCCI has published charts like this one that was presented at the 2016 Annual Issues Symposium (Kathy Antonello, State of the Line 2016):

The total “ benefits pie” in this case is made up of specific incurred costs of claims from the injury year taken to “full development” (essentially the full lifetime of the claim).    The indemnity side of the pie represents the cost of wage-loss or replacement compensation incurred for temporary claims.  It also apparently includes certain vocational rehabilitation costs such as retraining allowances and tuition. The medical slice of the pie includes hospital, physician, physiotherapy, medications, appliances, diagnostics (including x-rays, MRIs, CT Scans) and other healthcare expenses.  Excluded from this pie are permanent disability, administrations and other costs (such as underwriting expenses, advertising, etc.) not directly associated with the main benefit costs associated with claims.The NCCI chart reflects data from NCCI states and State Fund states. 

NASI publishes a similar analysis covering all US states and the District of Columbia using NCCI data and other data from non-NCCI states (see Workers’ Compensation: Benefits, Coverage and Costs, 2013  Figure 3).  The result is similar:

The NASI study contains individual state-level data [see Table 8] .  For the following chart I have extracted the percent of the combined medical and indemnity pie and ordered the data by percentage medical.

This depiction is useful in showing the range.  Note the median value using NASI’s 2013 injury year data is 54.7% medical.  This is statistically very close to NCCI’s estimate of 58%.  Based on this ranking, three-quarters of US workers’ compensation jurisdiction pay more than 50% of the benefit pie on medical expenses. 

What accounts for the variation in the share of medical costs?  Medical costs do vary from state to state.  Some jurisdictions have medical fee schedules;  others have requirements regarding the use of certain medical networks.  The proportion of more serious injuries may also contribute to greater expense on the medical side. A jurisdiction with large, high-risk industrial sectors such as primary resource extraction (logging, mining) is likely to have more serious injuries that involve greater medical costs than a jurisdiction dominated by low-risk industries such as financial institutions or tourism.

A more significant factor, however, relates to the non-medical side of the pie that covers the level of compensation.  The so called "indemnity" or "cash benefit" side of the pie is determined by the percentage of wage replacement provided, maximum insurable earnings covered (or maximum weekly benefit payable),  the duration of a waiting period,  the length (or absence of) a retroactive period, and the overall duration of temporary disability claims (sometimes capped).  States with low compensation rates and long waiting periods (and correspondingly long or absent retroactive periods) are likely to have higher percentages of the pie going to medical.  

To make this point clearer, I used the current “Maximum Weekly Workers’ Compensation Amounts” [as reported by the SSA, Program Operations Manual System (POMS), DI 52150.045 Chart of States’ Maximum Workers’ Compensation (WC) Benefits]  as a handy proxy  indicator for the overall “comprehensiveness” of the wage-replacement compensation side of the equation.  Seven of the ten states with the highest weekly maximums ($1211 to $1628: Washington, Massachusetts, District of Columbia, Illinois, Connecticut, Vermont, Iowa) have lower-than-median percentage shares on the medical side; eight of the ten states with the lowest weekly maximums ($468.63 – $778.83: Kansas, Delaware, Mississippi, Montana, Idaho, Arkansas, Arizona, South Dakota) have medical percentage shares above the median.  Of course, this is a very rough indicator; most injured workers are unlikely to be paid at the maximum rate and this indicator fails to account for financial losses the worker must bear  in terms of uncompensated waiting periods and low compensation rates that fail to approximate usual spendable income.    

The most common claims in workers’ compensation are for healthcare expenses and temporary wage replacement.  The medical-indemnity split analysis underscores the magnitude of healthcare costs and also provides evidence regarding the wage replacement costs.  A very high percentage of medical costs may indicate  temporary disability compensation rates are exceptionally low.

Workers’ compensation systems may not have started out to be medical insurance systems but medical costs now dominate the claim expense for temporary disability in many states.  This warrants close attention to both the medical cost drivers and the levels of compensation.  

Workers will always bear all the physical, psychological and social consequences of workplace injury.  Workers’ compensation should minimize any externalization of medical or financial losses to workers and their families or the communities (including the community of tax payers) in which they live.  Severing medical costs from workers’ compensation effectively removes half the premium incentive for greater investment in workplace health and safety.  Transferring medical costs to other payments would likely amount to a subsidy to industry overall and increased costs for healthcare funders.  

The financial costs of workplace injuries, illnesses and deaths should be covered by the industries that give rise to them.  That was the basis of the "grand bargain", the "historic compromise" and should continue as the foundation for workers' compensation.  

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