Frank Pennachio

Declining Workers’ Compensation injury claims and the impact of legislative reforms bode well for employees, employers, and insurers as rates have gone down in most states in recent years.

Yet, as always, in long tail coverage such as Workers’ Compensation, there are challenges that cloud the future. The Workers’ Comp outlook for 2008 is one of caution and concern. Here is an assessment of what employers can look forward to in the year ahead and even beyond.

1. Rising costs and utilization of medical treatments.Analogous to other health care systems, escalation of medical costs in Workers’ Compensation is well documented and expected to continue. While these burgeoning costs will adversely affect Workers’ Compensation, the issues in Workers’ Compensation are even more complex than medical inflation. The causes of rising medical costs are multifarious and compounded by alarming increases in utilization of medical services.          

Taking a closer look at the medical expenses that drive the costs of claims, a National Council on Compensation Insurance (NCCI) study, “Measuring the Factors Driving Medical Severity: Price, Utilization and Mix,” concludes that the key driver is not price but growth in the number of medical treatments and a different mix of treatments. For all diagnoses combined, the number of treatments increased 45 percent. In some instances such as sprain of knee and legs, the increase was as high as 80 percent. (Study compared 2001/2002 with 1996/1997.)

What’s more, there is a shift to more complex and expensive treatments. For example, complex surgery and anesthesia increased 60 percent and complex diagnostic testing increased 57 percent, while physical therapy increased 67 percent.

The seismic shifts in medical innovation and the corresponding increase in treatment options coupled with consumer demand for the latest and greatest treatments will continue to propel the spiral of increased utilization in 2008. Unchecked, the combination of these factors mean soaring medical costs.

2. A sundry of health care standards.While the ability to direct care is governed by states, none have programs as extensive as those in California. A cornerstone of the state’s successful sweeping reform legislation is the mandated use of a Utilization Schedule based on the American College of Occupational and Environmental Medicine scientific evidence-based treatment guidelines.

A powerful means for increasing the effectiveness of medical care to injured workers, these benchmarks enable employers to measure the actual versus expected duration of absence based on the injury and determine whether or not treatment matches the prescribed protocols.

Together with capping utilization of high-volume services such as chiropractic manipulation, establishing designated medical provider networks and dispute resolution solutions, the application of evidence-based guidelines has been effective in constraining Workers’ Compensation medical care costs. In 2003, employers paid an average of $6.47 per $100 for coverage - the highest in the nation. By the first quarter of this year, the cost had fallen to $2.93.

While the efforts in California have been closely watched, only a handful of states have adopted similar extensive reforms. If you’re asking why, there is no mantra to adopt this system as a national model. In the United States, Workers’ Compensation is a multiplicity of systems governed by the states. In a climate of declining rates that fosters lethargy and with unique political obstacles in each state, it is unlikely that state policies will ever converge.

The adoption of evidence-based guidelines will be agonizingly slow. In 2008, many job-related health decisions will continue to be made by health care professionals without appropriate training and expertise in occupational injuries.

3. Declining rate cycle to bottom out.The expectation that rates will remain low belies logic. Historically, the Workers’ Compensation price cycle has proven “what goes down, must go up.” The price cycle has repeated in a predictable fashion: rising rates precipitate a public outcry that triggers legislative reform; these reforms create attractive market conditions for insurance companies that drop their prices to compete; businesses shop for “the best deal”; employers lose their focus on injury prevention and cost containment as complacency sets in; claim costs do not fall in relation to the reduced rates so Experience Mods go up; returns on the legislative reform erode or flatten; insurance companies’ profits diminish; and rates increase.

All eyes are turned again to California, often a precursor for the nation, where a key insurance industry group is urging the Insurance Commissioner to recommend a 4.2 percent rate hike in 2008 citing the cost of legal work, fraud investigation, and other claims management tasks.

While dramatic rate increases are unlikely, the tide is turning and the days of double-digit percentage rate reductions may well be over.

4. Unnecessary loss of skilled workers.There is a broad spectrum of responses that occur when workers are injured on the job. Frequently, the employer sends injured workers to the emergency room where they may wait for hours to be seen by those who are not familiar with occupational medicine. A prescription is issued and an appointment scheduled several days later with a primary physician.

Let’s say the injured employee is experiencing back pain. The treating physician requests the insurance adjuster to schedule an MRI. It could be as long as six to eight weeks before the employee has the MRI and the results are read. This means that physical therapy is not scheduled until 10 weeks post-injury.

This prolonged process can easily produce a “disability mentality” - the employee begins to think that there is something seriously wrong. When employees are off the job more than 12 weeks, there is only a 50-50 chance that they will return.

While studies show that 90 percent to 95 percent of injured employees should be back to work by the fourth day following the injury, nationally 24 percent of workplace injuries result in lost time greater than three days (ManagedComp survey). In effect, the system creates unnecessary disabilities and there is no evidence that this will change in the coming year.

5. Injuries to older workers will continue to cost more.The aging workforce poses a dilemma for many employers, especially in blue-collar fields. On the one hand, there is the need for retention, since fewer young workers are entering the skilled trades and finding qualified, experienced employees is a pressing challenge. On the other hand, older workers have higher cost injuries (albeit, fewer) and take longer to recover than do younger employees.

By the year 2012, approximately 20 percent of the workforce will be 55 years or older.

Now is the time to become attuned to the implications of the maturing workforce and implement programs that foster retention and prevent injuries. Without proper planning, this unprecedented growth in the number of aging workers will lead to more serious injuries and increases in Workers’ Compensation costs in the years ahead.

6. Drug use - legal and illegal - will continue to plague the workplace.A recent study by the U.S. Department of Health and Human Services found that one in 12 full-time U.S. workers acknowledged using illegal drugs in the previous month. While greater vigilance by employers in the use of drug testing has made inroads, substance abuse remains a daunting problem, with alcohol topping the list. Add to this the aggressive advertising by drug manufacturers that has fueled the public’s demand for new prescriptions and the risk of prescription and illegal drugs leading to workplace injuries is considerable.

As sadly demonstrated by the recent controversy surrounding the death of two fire fighters in Boston, this is a thorny issue fraught with resistance. If there is to be success, it will depend upon a high level of employee education as well as increased drug testing. This will take time; look for continued problems in 2008.

7. Wellness programs require continued commitment.There is little doubt that the lifestyle of the American worker is a threat to productivity. A Duke University Medical Center analysis found that obese workers filed twice the number of Workers’ Compensation claims, had seven times higher medical costs from claims, and lost 13 more days of work a year from work-related injuries or illness than did non-obese workers.

Recognizing the high economic costs of poor health, many employers are implementing wellness programs ranging from health risk appraisals to personal health coaches. Aimed at encouraging employees to adopt more healthful lifestyles, the programs are intended to reduce medical care costs, lower absenteeism and injuries, and boost worker productivity. 

To be effective, wellness initiatives require the support of top-level management and continual motivation of employees. Employers are still grappling to understand what particular interventions, programs, and incentives yield the greatest return on investment. Privacy and legal issues also continue to be significant concerns.

This noteworthy and beneficial trend will continue in 2008, but the effort needs to be constant - much like the anti-smoking campaigns - in order to be effective.

8. The bar will be raised on return-to-work programs.While early and safe return to work is a recognized “best practice” in Workers’ Compensation, there are still employers who resist transitional work assignments, offer demeaning or “make-work” jobs, or run ineffective programs.

Simply getting the employee back to work is not enough. A successful return-to-work program is intended to facilitate the transition from temporary medical restrictions to the resumption of full duty in the usual job within a limited time frame. As such, employers need to understand and enforce medical restrictions, establish realistic and evidence-based guidelines for the resumption of duties, monitor progress, integrate human resources with risk management, and train employees and supervisors on the value of such programs.

Health care providers have a role, too, by being accountable and becoming an active partner in the return-to-work process. At the same time, case managers must work to minimize lag time in treatments and communications. Only those employers who recognize the value of return-to-work in retaining employees, improving productivity, and reducing costs will commit the time and resources required. Progress will be made in 2008, but changing attitudes take time and there is much work ahead.

9. There will be limited use of technology as a strategic tool for cost containment.Sophisticated Internet tools, software, and online access to information are available to help employers quickly respond to injuries, predict claims that are likely to spiral out of control, monitor benchmarks, detect fraud, and improve communication and collaboration between all parties involved in the Workers’ Compensation process.

Insurance agents need to become the early adopters and take the lead in using the tools and educating employers. This requires a change in attitude by agents and employers. Agents can no longer “sell” Workers’ Compensation insurance, but must become experts and consultants to deliver a full range of injury management services. Employers need to recognize that Workers’ Compensation is not an expense but a controllable business cost that, when managed properly, will have a measurable and positive return on investment.

According to Dr. Spencer Johnston, “If you do not change, you can become extinct. Get out of your comfort zone and adapt to change sooner. Take control, rather than let things happen to you.” The few who take charge will change the risk management paradigm in 2008.

Clearly, managing Workers’ Compensation costs is not an “on/off” intervention to be used when injuries occur or rates rise, but a never-ending process that encompasses all aspects of the workplace. Workers’ Compensation needs to be top of mind in the year ahead and long after.

Publication date:01/07/2008