Inside the Job: State of the Workers Comp Market

When the National Council on Compensation Insurance (NCCI) completed its 2016 workers compensation rate filings this summer, 35 of 36 states saw decreases.

The combined ratio, meanwhile, held steady at 94%—an indication of “two good aggregate years in a row, which hasn’t happened in 25 years plus,” notes Peter Burton, senior regulatory advisor for external and government affairs at NCCI. “Many of last year’s filings were, on average, double-digit decreases. That’s unusual compared to other lines of insurance.”

The jury’s still out for the 2017 rate filing cycle, currently in full swing. But “if it’s like what last year portended, you’ll see another favorable environment,” Burton predicts.

What’s Driving Competition?

It seems to be an ongoing pattern: “Workers comp rates have been declining in a very modest way since 2015,” points out Larry Corsi, leader of workers compensation at Nationwide. “Over the last four or five quarters, the industry has been down between two and four points. I expect that will continue throughout 2017.”

“I don’t anticipate any major changes in terms of rate, at least not in the short term,” agrees Remmie Butchko, CEO of Georgetown Insurance in Silver Spring, Maryland. “A lot of carriers are making money on workers comp. Particularly with the regionals, we’re seeing more players coming into the market than getting out of the market.”

According to NCCI’s 2017 State of the Line Guide, total net written premium for private workers comp carriers increased to $40.1 billion in 2016 from $39.7 billion the previous year. Corsi calls workers comp “a great ratemaking system,” explaining that premium rates reflect the loss costs that have been down consistently for years.

But are these levels of competition and profitability sustainable in the long term? Not necessarily. Workers comp has turned an underwriting profit a couple of years in a row now, but past experience indicates that may change soon.

“If you look at past soft-ish markets, a similar pattern has emerged before things started to turn back the other way in the direction of rates getting more expensive,” says Kevin Ring, lead workers compensation analyst at the Institute of Work Comp Professionals.

Part of the issue is that carriers can no longer rely on investment income to make money. NCCI reports that the total property-casualty industry’s investment gain ratio has declined every year since 2013.

“There was some hope that interest rates were going to rise and rescue people with investment income, which we all know is a long-term process,” says Michael Bourque, CEO of The MEMIC Group. “But even though rates have begun to rise from the Federal Reserve’s perspective, we have not seen bonds go in that direction as strongly as anybody in the insurance industry hoped.”

And if that’s true, “one of two things has to happen,” Ring says. “Carriers either have to be more selective—which would be reflected in the growth of the residual market, and that’s not what’s happening—or they’re going to have to start charging more.”

But there’s a third option, too: shrewder underwriting. “Carriers are using a lot of analytical models to underwrite, and they’re using big data to make pricing decisions,” Burton says.

Corsi agrees, noting carriers including Nationwide have “gotten much better” at using analytics and predictive modeling based on individual risk quality.

So even if carriers are forced to raise rates, “the swings should be less wild in the market as we move forward,” Bourque predicts.

What’s Driving Costs?

But workers comp carriers face plenty of other challenges as costs continue to rise, especially in the medical sector. “Twenty-five years ago, medical was just 40% of the benefit dollar and the indemnity benefit was 60%,” Burton says. “It’s totally flip-flopped now.”

The increase appears to be slowing—according to Ring, the workers comp medical spend increased 72% in 1995-2001, 47% in 2002-2008 and only 14% in 2009-2016—but any increase has consequences. “Cost controls are always a step behind the innovation that’s occurring in the medical world,” Bourque points out. As of today, “medical care is more of the claim dollar than it’s ever been, and it’s continuing to grow.”

Although NCCI reports that average lost-time claim frequency declined 4% last year, “if you look at medical costs on lost time claims, it’s over $29,000 per claim and up 5% in 2016,” Corsi points out. “The long-term growth rate has far outstripped general inflation and even the Personal Health Care Index reported by the Centers for Medicare and Medicaid Services.”

Demographic issues are partly to blame—“with an aging workforce, when people get injured, it takes longer to get them back,” Corsi explains. But more sophisticated medical technology is the main culprit.

“You have new procedures and equipment that are coming online all the time,” says Bourque, who cites examples like robotic exoskeletons which offer mobility to paralyzed individuals.

“Where we’ve seen things get particularly problematic are injuries that require surgeries,” Butchko adds. “As technology continues to improve, and the quality of surgical procedures continues to improve, that’s doing nothing but pressing costs.”

The most obvious area where costs can “spiral quickly” is drugs, Bourque says—particularly opioids. But major efforts are underway to reverse the epidemic [see sidebar]. According to a drug trend report from The Express Scripts Lab, the overall spend for opioids—which the report notes is the most expensive therapy class—was down 4.9% in 2015, marking the fifth consecutive annual decrease.

Similarly, the 2016 Drug Trends Series from Coventry Health Care Workers Compensation, Inc. reports an 8.5% decline in opioid use and a 9.9% decline in cost per claim between 2015 and 2016, as well as a 5.6% decrease in average morphine dose per prescription.

What’s Next?

By increasing the portion of individuals with health insurance, the Affordable Care Act (ACA) was widely expected to lead to a healthier population overall—which, in turn, would decrease the frequency and severity of workers comp claims.

“The thought was, the more people who are insured, the more likely they are to get services that improve their personal wellness. That makes them less likely to get hurt, and it makes them much more able to return promptly if they do get hurt,” points out Bourque, who notes that almost all MEMIC’s significant workers comp claims involve concurring health issues like obesity, diabetes, smoking, and drug or alcohol use. “As an employer, you take on responsibility for all these factors that accompany an injury when somebody’s hurt at work.”

But Corsi is “not holding out a lot of hope for reductions in loss costs as a result of the ACA,” he says, because related research hasn’t been conclusive.

With the U.S. health care system on unsteady ground, many companies are looking toward strategies like telemedicine in order to cut medical costs in workers comp. In telemedicine setups, an injured employee calls an 800 number to speak with a nurse or sometimes a doctor about their injury. “They’ll triage the claim and take the first report of injury,” Ring says.

Thanks to telemedicine, Ring knows of employers that are reporting 40-50% reductions in the number of injured employees who have to physically visit a physician’s office. “The nurse might say, ‘That sounds like a sprained ankle—take 800 milligrams of ibuprofen and call me back tomorrow to talk about what’s happening,’” he explains. “I’m oversimplifying, but essentially, they’re able to diagnose and form some level of treatment. Then, if they’re not, they can punt them to a skilled medical provider.”

In the last 18 months, Ring has observed a “dramatic increase” in the number of companies that are partnering with telemedicine firms. “You’re talking about paying for an $80 phone call as opposed to a $200 doctor visit, and then the follow-up visits and everything else,” he says.

Moving forward, Corsi expects technology in general to be a “monumental” force on the workers comp market. “Think about wearables that can detect what you’re doing, how you’re moving, whether your body temperature is too high,” he points out. “That kind of technology could change industries that have historically been subject to severe losses. It’s going to be revolutionary.”

Jacquelyn Connelly is IA senior editor.

Crisis Averted?

In response to the opioid crisis, many states have instituted laws that limit prescribing practices.

“There are some states that have delineated how many days you can prescribe the certain drug, what type of drug you can prescribe, how much is in the script,” points out Peter Burton, senior regulatory advisor for external and government affairs at the National Council on Compensation Insurance.

Maine, for example, limits opioid prescription duration to less than a week for acute pain and no more than 30 days for long-term pain, says Michael Bourque, CEO of The MEMIC Group. If the pain persists, patients must secure additional approval from their doctor. Similarly, New Jersey does not allow physicians to prescribe opioids longer than five days initially, according to Larry Corsi, leader of workers compensation at Nationwide; other states require them to reconsider an opioid prescription every 90 days.

Individual insurance companies are also doing their part to curb the crisis. Bourque says MEMIC requires injured workers to see a doctor after a 30-day supply if they’re seeking more, “to confirm they’ve been using it as they’ve said, and to attempt to ween them off or make sure it’s truly necessary,” he explains.

The advantages of solving the opioid crisis are significant for workers comp, because “if I’m addicted to painkillers, then I’m probably not coming to work,” points out Kevin Ring, lead workers compensation analyst at the Institute of Work Comp Professionals. “As the use of opioids and the prescribing of opioids decreases, there’s really no way that can’t be a positive.” —J.C.