Frank Thomas interviews Brian Chance on the complexities of the workers' compensation system, a state-regulated system that varies by state. They discuss how employers can obtain and manage state-compliant coverage, whether by buying a policy from an insurance company or third-party administrator, self-insuring, or buying a large deductible and acting as a self-insurer. Brian explains how the Cost Based Efficiency division of Stephens Insurance guides employers to realize substantial system savings in an insurance industry that has not seen innovation or disruption in decades.
[:29] What is workers’ compensation? Workers’ compensation was the country’s first no-fault payment system. It’s a state-by-state system that protects employees and their families when they’re injured. It insulates employers from negligence suits when employees get injured.
[1:05] The system was created in the United States in the early 1900s, as our economy moved away from agriculture toward industrial production. Before the states passed these laws, when employees were injured, they had to sue their employer to have their medical bills and lost wages paid. Employers could defend lawsuits by deflecting blame.
[1:40] With workers’ compensation laws, employers are required to purchase workers’ compensation insurance that covers medical bills, lost wages, and in the case of an employee killed in an accident at work, wage payments to the family for a long period. Some states also pay awards for permanent impairment of a body function.
[2:13] Employees are entitled to all of these benefits, even if the injury was caused by the negligence of the employee or a co-worker. If employers meet an exception and opt out of the workers’ compensation system, employees who are hurt at work can sue their employer.
[2:33] Why has workers’ compensation been the only profitable line of insurance over the last few years? Premium rates in workers’ comps are based on things that have happened in the past. Over the past five to ten years, we’ve seen a reduction in the number of injuries and a reduction in pharmacy prescription costs in those claims.
[3:29] Premium today assumes that prescription costs of four to five years ago will remain the same, but they haven’t been. There has been a huge reduction in prescribing opioids in workers’ compensation cases. That has resulted in a big drop in costs without a drop in premium.
[4:02] Large employers can significantly improve the quality of care their injured employees receive while reducing their costs, and improving their shareholder value. Workers’ compensation is one of the leading areas where an employer can make changes and reduce their total cost of risk.
[4:28] Declining volumes of claims resulted in a consolidation of service providers that are involved in managing workers' compensation claims. We’ve seen many mergers and acquisitions by third-party administrators (TPAs), medical bill review companies, nurse case management companies, specialty medical networks, and other providers.
[4:55] While the number of claims continues to drop, these service providers are compelled to generate more revenue from each claim transaction in order to satisfy their owners. COVID-19 will only accelerate that process.
[5:14] Workers’ comp pretty much covers everything that would happen to an injured employee, as long as they’re injured in the course and scope of their employment. Even companies that employ people who work at a desk still have an injury exposure for workers’ compensation.
[5:37] Employers have many options to finance the risk. Some options work best for different employers. The easiest but most expensive way to finance the risk is to simply buy the coverage from an insurance company. Employers can reduce the cost of that risk transfer by purchasing a deductible or going self-insured.
[6:10] Workers’ comp is a great risk to include in a captive program because it’s usually a high-frequency, low-severity risk type of program. When the workers’ compensation program is run well, costs are relatively predictable and readily financed through a captive.
[6:29] Self-insurance is a good option for large employers. There are several regulatory issues that have to be considered. In order to be self-insured, an employer has to guarantee the state that they have the financial ability to satisfy the benefits employees are entitled to if they’re injured. Most states allow employers to self-insure the risk.
[7:02] To self-insure the risk of workers’ compensation instead of buying insurance coverage, employers have to obtain approval from every state where they have employees and they want to self-insure, in order to be able to function that way. It would be difficult to become self-insured in 50 states and comply with each states’ regulations.
[7:22] It’s generally easier for you as an employer to buy a large deductible and function as though you are self-insured while avoiding regulatory headaches for each state.
[7:37] Workers’ compensation differs from state to state. Some states are more generous to employees than other states. National employers with multi-state operations should always look first to individual statutes to determine which state will have jurisdiction in workers’ compensation matters. Each state has its own statute.
[8:15] All states require lifetime payment of medical treatment for work-related injuries. Each state has a calculation for calculating lost wages and how they are paid, what limits are applied, how medical providers get paid, and sometimes awards for permanent physical impairment.
[8:39] Each state’s laws also address an employer’s subrogation interest and how jurisdiction is determined. Pennsylvania and New Jersey have different statutes on payments. The two states have different costs for medical care. Jurisdiction determines which state law applies for whether workers’ compensation is the exclusive remedy.
[9:48] Each state is a sovereign entity controlling the law within its boundary. Most states will try to apply jurisdiction outside of their borders if they have the most contact with the facts of the case.
[10:13] The finders of fact in a state will look for the number of connections that state has with the employee, such as their home state, the place where they were injured, and the state where their contract of employment originated. The employee’s home state or the state where the injury occurred will usually govern.
[10:50] It’s important to note that the courts will weigh heavily the employee’s requested jurisdiction. Jurisdiction may be shared between states in rare cases but it is difficult.
[11:14] An employee based in Michigan who travels to Ohio to work, who is injured at work in Ohio, will generally be treated near home. The place of treatment is usually where the benefits will be paid and so Michigan would have jurisdiction.
[12:12] Claims associated with COVID-19 have generally been less than $3,500. There are catastrophic cases but they are the exception. Shutdowns associated with COVID-19 caused a dramatic drop in claims frequency in the retail and hospitality industries. This drop almost offset the increase caused by COVID-19.
[13:12] COVID-19 should not affect the workers’ compensation industry dramatically. There are concerns developing about the lingering effects of COVID-19. There hasn’t been enough time to develop the data to study these effects yet.
[13:30] As the country reopens, restaurants operate in whatever the new normal looks like. The biggest challenge COVID-19 caused for restaurants was compliance with the evolving guidelines for reopening. Sometimes, individual cities enact unique rules and regulations. Compliance across multiple regulations is an operational nightmare.
[14:25] The best thing a restaurant chain can do is to make the workplace as safe as possible for their employees. If the restaurant is safe for your employees, it’s safe for your customers. The chain should designate a corporate office to monitor the regulations that govern each restaurant to ensure regulatory compliance.
[14:53] In most organizations, monitoring regulations for local compliance fell upon the risk management department. Without their guidance, most restaurants would not have been able to reopen. This is a witness to the advantage of strong risk management programs for every national chain that is up and running now.
[15:24] The recent consolidation in the industry has created conflicts of interest in large claim platforms. When a TPA is owned by the same company that owns the bill review company, or other service providers used in workers’ compensation, there is no internal pressure to deliver better results. Customary checks and balances are missing.
[16:00] Service agreements typically do not fully disclose or quantify arrangements that exist between separate service providers, so employers generally do not see the true cost of the services or obtaining data that makes these services transparent.
[16:29] Stephens has identified these arrangements and established associated benchmarks. Stephens’s Cost Based Efficiencies division works with clients to strip excess costs out of their workers’ compensation program.
[16:44] Stephens’s Cost Based Efficiencies division studied data from thousands of claims and developed metrics to evaluate the performance of a large claim-handling platform. Their metrics yielded conflicting and unusual results that caused Stephens to dig deeper into the data. They found perverse incentives within arrangements between providers.
[17:21] After discovering these hidden arrangements, Stephens worked to find solutions to eliminate them. Self-insured companies and companies that carry large deductibles have budgets and accruals for the claims they expect to pay. Stephens routinely finds savings of between 15 and 30 percent of the medical costs in these programs.
[17:57] With Stephens’s help, companies are able to realize a reduction in those costs and can reduce the accrual, which will immediately flow to the bottom line of the company. For publicly traded companies, those savings can affect earnings per share.
[18:08] Why are risk managers not finding and addressing these hidden costs? Workers’ compensation has not been a source of much pain for risk managers over the past few years. Results have improved slightly, year over year by maintaining the status quo. The insurance industry works hard to make sure these costs remain secret.
[18:54] Workers’ compensation will see dramatic data-driven changes in claims-handling philosophies, strategies, and staffing as Artificial Intelligence enters the industry.
[19:14] Over 20% of insurance industry employees are expected to retire over the next few years. There are not enough younger people entering the industry to fill the talent gap. Insurance carriers, TPAs, and other service providers are looking to technology to fill that talent gap.
[19:38] The most important thing for employers to consider when thinking about workers’ compensation is to recognize that they can control their workers’ compensation cost just like they do with any other business cost. Most employers don’t recognize the opportunity to improve results because they accept the industry’s status quo.
[20:05] The acceptance of the status quo has resulted in an industry that has not experienced any disruption or innovation for decades. Improved results over the last few years were not caused by industry efforts but by events like the reduction in injuries and opioid prescriptions.
[20:30] Employers should demand continuous improvements from their service providers and work with partners who want to help that innovation that’s long overdue.
[20:45] Frank thanks Brian for these important insights about workers’ compensation.
[20:50] For more information on this topic, please contact Stephens Insurance at 1-800-643-9691.