48 Cents to Deliver 1 Dollar of Workers’ Compensation Benefits in California?

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Containment of Cost for Whom?

This seems like an obnoxious amount of money needed to process statutory benefits.

As I giddily get ready for the #wci360, the largest insurance gathering the country will see this year, it will not be with a lack of those that are part of the workers’ compensation cost containment community. There are so many in that community that do amazing things in helping our clients contain cost of individual claims. Unfortunately, there are also many that crush claims files with unnecessary expenses such as “network costs” and unnecessary case management hits.

With no perfect script to understand cost containment impact, ROI of cost containment continues to be speculative and not data-driven; an industry where people charge and pay without empirical acknowledgement of worth or value.

Logic tells us it should not cost $.25/$1 to only provide benefits ! countrywide for workers’ compensation; never mind $.48/$100 in California. Note this does not include commissions, taxes, assessments or other non-claims expenses.

Huh? Why? 

Disability claims among workers’ compensation systems throughout the country. The 639 PD claims per 100,000 employees in California in 2021 — an improvement from 774 per 100,000 employees in 2015 — is more than double the (national) median of 256.

Average claim duration is also significantly higher in California than in other states. At 60 months post-injury, about 12% of indemnity claims are open in California compared to about 5% in the average state.

Average cost of $3,656 in the median state. At 36 months, the average benefit delivery cost in California of $10,473 is more than 50% higher than the median of $6,830.

Average ALAE costs in the Los Angeles area at the first report level —  about 18 months post-injury — are about 25% higher at $3,160 compared to $2,520 for the rest of California. At the 10th report level — about 120 months — average ALAE costs per indemnity claim in Los Angeles are about 29% higher, or $11,663 compared to $9,073 for the rest of the state.

Make sure that those that contain cost are properly to do that. There are no controls in place for them to show value.

From our friends at workcompcentral.com

Frictional costs in California’s workers’ compensation system have come down a bit in recent years, but they’re still nearly twice as high as the median state in the latest analysis by the Workers’ Compensation Insurance Rating Bureau.

It costs 48 cents to deliver $1 of benefits in California. While that’s down from earlier assessments finding the cost of delivering $1 in benefits was more than 50 cents, it is still nearly double the 25 cents it costs to deliver the same benefits in the median workers’ compensation system, WCIRB Vice President and Actuary Tony Milano said during a webinar Wednesday.

Milano said the WCIRB has identified key drivers — dubbed “the frictional four” — that explain why California remains an outlier despite recent favorable trends that have moved the Golden State closer to the median.

“They’re the high volume of permanent disability claims, a higher proportion of cumulative trauma claims in California, we have a longer average claim duration and just within the state there are significant differences regionally,” he said.

California has, by far, the highest proportion of permanent disability claims among workers’ compensation systems throughout the country. The 639 PD claims per 100,000 employees in California in 2021 — an improvement from 774 per 100,000 employees in 2015 — is more than double the median of 256.

The proportion of PD claims in California outpaces even that of other states that use the same version of the American Medical Association’s Guides to the Evaluation of Permanent Impairment to determine permanent disability.

Permanent disability claims are more complex and involve more disputes, which drives up frictional costs and allocated loss adjustment expenses compared to claims that result only in temporary disability.

More than 80% of permanent partial disability claims involve so-called “non-trivial” amounts of ALAE, which the WCIRB defines as $1,000 or more in allocated loss adjustment expenses. Less than half of the TD-only claims involve non-trivial ALAE.

Cumulative trauma claims, which appear to be more prevalent in California than other jurisdictions, can also drive frictional costs. Cumulative trauma claims tend to involve disputes over issues such as compensability and, as a result, involve more frictional costs than other claims.

And Milano said recent growth in the proportion of cumulative trauma claims in California has been driven by claims with non-trivial ALAE costs.

At the same time, once a claim incurs more than $1,000 in allocated loss adjustment expenses, the average ALAE per claim is similar for both cumulative injuries and specific injuries.

Average claim duration is also significantly higher in California than in other states. At 60 months post-injury, about 12% of indemnity claims are open in California compared to about 5% in the average state.

As claims stay open longer, they incur more frictional costs, Milano said.

Average benefit delivery costs in California at 12 months post-injury of $4,269 are about 17% higher than the average cost of $3,656 in the median state. At 36 months, the average benefit delivery cost in California of $10,473 is more than 50% higher than the median of $6,830.

These differences are likely larger at later periods in the life of a claim.

Finally, ALAE costs tend to be higher in Southern California — and specifically the Los Angeles area — as compared to the rest of the state.

Average ALAE costs in the Los Angeles area at the first report level —  about 18 months post-injury — are about 25% higher at $3,160 compared to $2,520 for the rest of California. At the 10th report level — about 120 months — average ALAE costs per indemnity claim in Los Angeles are about 29% higher, or $11,663 compared to $9,073 for the rest of the state.

The effects are more pronounced for some components of the so-called “frictional four” compared to others, with claim duration being the biggest driver.

If average claim duration in California were more in line with the typical state, average ALAE would be about 37% lower than it currently is.

If the proportion of permanent disability claims were similar in California to other jurisdictions, average ALAE would be about 14% lower. Average ALAE would also be about 14% lower if claims from Los Angeles are excluded.

Finally, if the proportion of cumulative trauma claims in California were similar to other states, average ALAE in the Golden State would be about 3% lower.

The WCIRB will post a recording of the webinar to its website in a couple of days. WCIRB webinars are here.

A link to the WCIRB report on frictional costs is here.

 

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Contact the Founder of the PEO Compass and Professional Employer Organization (PEO) Expert, Paul Hughes

Paul Hughes has been working with the Professional Employer Organization (“PEO”) industry since 1995 and data management since 2005. He is responsible for the day to day operations of both Libertate Insurance Services, LLC and RiskMD, which reports into the overall Ballator Insurance Group family of companies. Learn more about Paul.

Specializing in PEO Services: Workers Compensation, Mergers & Acquisitions, Data Management, Insurance Focus on: Employment Practices Liability (EPLI), Cyber Liability, Health Insurance, Occupational Accident, Business Insurance, Client Company, Casualty and Disability Insurance.

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