Comparison of Cost Drivers in
Group Health and Workers
Compensation Insurance
CLRS 2008 Meeting
Washington, DC
September, 2008
Overview






Introduction
Statement of Issue

Current WC Medical Expense Trends
Global Perspective

Total US Medical Expenditures

Medicare Cost Projections

Cost Drivers
WC vs GH

Cost Drivers

Cost Comparisons

Price Comparison

Utilization Comparison
Conclusion
Appendix - Cost Controls
1
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance
Panelists
Bill Miller, F.C.A.S., M.A.A.A., SVP &
Actuary, ACE INA
 Pete Rauner, F.C.A.S., M.A.A.A.
Moderator
 Eric Johnson, FCAS, MAAA, Aon

2
Background on CHCI and Why This
Panel Was Formed



CHCI is the Committee on Health Care
Initiatives
Committee is fostering research with
FSA and other groups on healthcare in
various lines of insurance.
Was formed in response to CAS
members’ response to survey
3
WC Medical Inflation:
A Critical Issue For P&C Insurers, Employers
Although WC medical is still small compared to
government and group health programs:

WC the largest commercial line (10% of P&C Prem);

WC the largest source of industry loss reserves
($120B, or about 22% of total);

Medical expenses are a large (59%) and growing
portion of WC benefits; and

WC Medical severities are growing at a rate well
above the Medical CPI growth rate.
4
Workers Compensation Medical Losses
Are More Than Half of Total Losses
All Claims—NCCI States
2006p
1996
Indemnity
1986
Indemnity
Indemnity
Medical
Medical
Medical
2006p: Preliminary based on data valued as of 12/31/2006
1986, 1996: Based on data through 12/31/2005, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
SOURCE:
5
WC Medical Claim Cost Trends—
Growth Continues in 2006
Lost-Time Claims
WC Medical Costs in $Billions
Annual Change 1991–1996:
Annual Change 1997–2005:
+4.1%
+9.5%
Accident Year
2006p: Preliminary based on data valued as of 12/31/2006
1991–2005: Based on data through 12/31/2005, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
SOURCE:
6
WC Medical Severity vs Medical CPI
Lost-Time Claims
%Change
Medical severity 2006p: Preliminary based on data valued as of 12/31/2006
Medical severity 1995–2005: Based on data through 12/31/2005, developed to ultimate
Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies
Source: Medical CPI—All states, Economy.com; Accident year medical severity—NCCI states, NCCI
7
The Share of Diagnoses with “Low” Medical
Severity Has Declined While the Share of
“Mid” and “High” Has Increased
All Lost-Time Claims at 24 Months After Date of Injury
100%
80%
60%
High
Mid
40%
Low
20%
0%
1996
1997
1998
1999
2000
2001
2002
Accident Year
Injuries by diagnosis were classified as high, mid, and low based on paid medical severity in accident year 1998.
Source: NCCI
8
Changes in Utilization Explain More than
Half of the Increase in Paid Medical
Severity
Paid Medical Severities on Lost-Time Claims Closed
Within 24 Months of Date of Injury
Increase
in Severity,
Accident
Years
2001/02
vs.
1996/97
Percent
of Severity
Increase,
Accident Years
2001/02
vs.
1996/97
Unadjusted Medical Severities on Lost-Time Claims
73%
100%
Increase Due to Diagnosis Mix Differences
15%
21%
Increase Due to Number of Treatments
38%
52%
Remaining Increase Due to Price and Other Factors
20%
27%
Source: NCCI
9
Distribution of Total US Medical Expenditures
At over $21B paid per year, WC Medical is only 2.4% of Total Medical
SOURCE:
10
US Medical Costs in Perspective
2005
Medicare Expenditures as % of Total Federal Expenditures
13.4%
Medicare Expenditures as % of GDP
2.7%
Total Medical Expenditures as % of Total Federal Expenditures
43.7%
Total Medical Expenditures as % of GDP
8.8%
NOTE: In 2007, Medicare as a % of total Federal expenditures increased to 15.2%, and as a % of
GDP increased to 3.1%
SOURCE: Medicare Trustee Reports
11
Medicare Is Projected to Grow Dramatically
Projected Medicare Costs in $ Billions
Year
Medicare
Expenditures
Total Federal
Expenditures
GDP
Percent of
Federal
Spending
Percent
of
GDP
2010
545
3,330
16,411
16%
3.3%
2020
1,245
5,668
28,032
22%
4.4%
2030
2,997
9,716
47,882
31%
6.3%
2040
6,200
16,596
81,790
37%
7.6%
2050
11,736
28,349
139,709
41%
8.4%
2080
74,435
141,290
696,305
53%
10.7%
SOURCE: Medicare Trustee Reports
12
Factors Driving Medical Costs

National Macro Economic Drivers

Inflation:



Economic Growth




Medical
Wage
Wealth effect increases demand with a lag
Provider Consolidation
Cost Shifting from Public to Private
Lifestyle factors, e.g., like increasing obesity
and diabetes
13
Workers Compensation Medical Costs

Workers compensation (WC) medical costs per claim
grew 7% to 14% per year over the last several years

WC uses fee schedules to control costs in most states

Use of treatment guidelines in WC is growing

But medical costs in WC can be high due to
overutilization

How do WC medical costs compare to Group Health
(GH)?
Source:
14
WC Medical vs Group Health Costs


Utilize basically the same resources
Compare Differences:



Coverages and policy terms
Political and Regulatory
Duration of medical payout
15
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance



Lack of WC coinsurance payment by injured
worker
WC medical coverage guaranteed for life of
claim and injury treatment
Limitations on cost controls in WC system



WC fee schedule markups over medicare vary by
state but can be significant
Limits on ability to direct care to an MPN
Limits on ability to manage medical utilization
16
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance

As costs get squeezed in Gov’t and Group
programs, Hospitals have reasons to seek out
higher-margin payers




Steady declines in inpatient volumes
Rising number of uninsured patients
Hospitals employing more physicians and
specialists, raising fixed costs
Hospitals looking to recoup substantial capital
investemnts in expensive diagostic imaging
machines
17
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance

Hospital office administration is undergoing
an evolution


More dedicated, professional business managers
intent on maximizing revenues
Hospitals and Physician Groups able to
enforce discriminating pricing schemes


Advancements in technology
Budding industry of revenue consulting companies
18
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance

WC Claim Documentation



To prove injury exists
To document that recovery is not yet
complete and that continued wage
replacement benefits are warranted
To document that the employee has
reached maximum medical improvement
19
WC Medical vs Group Health Costs

2007 NCCI Research – 2003 Data

2006 WCRI – 2006 Data
20
WC and GH Utilization of Medical Services

Study looks directly at utilization for 12 injuries

Hospital charges are not included in utilization
comparisons (due to data availability issues)

Comparisons reflect services provided within three
months of injury
21
Cost Difference Components
Cost = Price × Utilization
Cost Difference = Price Component
+ Utilization Component
22
WC Medical Costs



Changes in prices and utilization for
medical services over time
Prices and utilization compared to
Group Health (GH)
Impact of WC medical fee schedules
23
Cost Differences Vary by State
Workers Compensation Versus Group Health
Percent
First three months following injury, GH = 100%
250
Medium Cost
High Cost
Low Cost
200
150
100
50
0
FL KY SC
CO MD GA AZ AL TN CT KS
IL OK IN
State
24
Price Differences and Cost Differences
Between WC and GH Correlate by State
Percent
First three months following injury, GH = 100%
250
224%
200
162%
150
160% 162%
136%
111%
107%
100
167%
75%
50
0
Price
Utilization
Cost
Low Cost
Medium Cost
High Cost
25
Where Does the Dollar Go?
Distributions of Medical Costs
First three months following injury
SOURCE:
26
Contributions to Cost Difference by Service Category
First three months following injury, GH=100%
Office Visits and Physical Therapy Stand Out
WC costs
71% more
than GH
across the 12
injuries
SOURCE:
27
Price and Utilization Impacts Vary by Service
Workers Compensation Versus Group Health
First three months following injury, GH = 100%
Percent
300
200
276%
266% 269%
191%
186%
167%
185%
130%
81%
103%
103%
73%
100
123%
121%
98%
0
Office
Visits
Price
Physical
Therapy
Radiology
Utilization
PrescripSurgery
tion Drugs and Other
Services
Cost
SOURCE:
28
Cost Difference Is Bigger for Chronic and
Complex Injuries Due to Utilization
Workers Compensation Versus Group Health
Percent
First three months following injury, GH = 100%
250
204%
184%
200
150
109%
120%
145%
136%
100
50
0
Price
Utilization
Acute and Trauma
Cost
Chronic and Complex
29
WC vs. GH Costs:
Office Visits and Physical Therapy
First three months following injury, GH = 100%
Percent
349% 347%
Physical
Therapy
Office Visits
300
239% 244%
204%
200
176%
187%
156%
98%
100
79%
105%
83%
0
Acute &
Trauma
Chronic &
Complex
Price
Acute &
Trauma
Utilization
Chronic &
Complex
Cost
SOURCE:
30
WC vs. GH Costs: Radiology
First three months following injury, GH = 100%
Percent
400
Surgery &
Other Svcs
Radiology
318%
300
200
248%
192%
156%
227%
190%
191%
146%
144%
107%
100
65% 72%
0
Acute &
Trauma
Chronic &
Complex
Price
Acute &
Trauma
Utilization
Chronic &
Complex
Cost
SOURCE:
31
WC vs GH: Medical Service Costs

WC costs more than GH to treat similar injuries,
mostly because of differences in utilization

WC has more intense and costly treatments earlier on
than does GH

Cost differences are smaller than average for acute
injuries and trauma-related conditions like fractures
or sprains
Cost differences are greater for chronic and complex
injuries
Includes hospitals

Medical services provided 1997 to 2001
States reviewed: FL, GA, IL, KY, TN
32
WC vs GH: Medical Service Fees

Prices paid for medical services in WC and GH are
generally comparable

In states with fee schedules, WC paid prices similar to GH

In states without fee schedules, WC paid higher prices
than GH

Networks have the biggest impact on prices in states
without fee schedules
Excludes hospitals
Medical services provided 1997 to 2001
StatesFootnote
reviewed:years
FL, GA,
IL,etc.
KY, TN
used,
33
WCRI Fee Schedule Comparisons
34
WC and GH Utilization of Medical Services

Study looks directly at utilization for 12 injuries

Hospital charges are not included in utilization
comparisons (due to data availability issues)

Comparisons reflect services provided within three
months of injury
35
Utilization Is the Largest Driver of Cost
Differences Between WC and GH
Percent
First three months following injury, GH = 100%
200
157%
171%
150
114%
100
50
0
Price
Utilization
Cost
36
Comparison of Cost Drivers in Group Health
and Workers Compensation Insurance

More than half the increase in WC
medical severities due to utilization,
according to NCCI study
37
Key Findings on Utilization




WC pays more than GH for medical services in the
first three months following injury, largely due to
utilization
Cost differences among injuries are largely due to
utilization differences
Cost differences among states are largely due to
price differences
Fee Schedules, Utilization Review, Managed Provider
Networks, and Pharmacy Benefit Management
Programs are all key to containing utilization
38
Conclusion



WC costs more than GH to treat similar injuries,
largely due to greater utilization of medical services
in WC
As US medical costs continue to increase as a
percentage of federal expenditures and GNP, the
potential for more cost shifting to WC is great
States, insurers and large employers have done much
in the way of laws and initiatives to control medical
costs in WC, but the nature and politicization of WC
act as offsets to these controls
39
Appendix
Components of Medical Cost Control in Workers
Compensation
40
Components of Medical Cost Control in
Workers Compensation

Fee Schedules



Limits per unit charges
Most states use Fee Schedules
Based on Mark-ups over either Medicare fees or Usual and
Customary




Using medicare as basis is found to control costs better
Magnitude of Mark-up varies quite a bit
The larger the Mark-up, the more costly medical costs are
Even with low Mark-ups, Fee Schedules alone are not
effective
41
Components of Medical Cost Control in
Workers Compensation

Employer vs. Employee Choice of Physician




Level of utilization varies greatly by medical
provider
Return to work outcomes vary significantly by
provider
Insurers can obtain volume based discounts if
they can direct a lot of business to particualr
providers
States vary as to the extent to which the employer
can direct injured worker to preferred provider
42
Components of Medical Cost Control in
Workers Compensation

Provider Networks





Provider Networks exist in all states
Even if the employee has the choice of provider, employer
can usually successfully recommend a list of preferred
providers
WC is unique: employer/insurer and injured worker have
common goal: quality medical care to get better quickly and
get back to work
Best providers for insurers often best providers for injured
worker
As long as injured worker feels he is getting quality care,
usually OK.
43
Components of Medical Cost Control in
Workers Compensation

Medical Utilization



Utilization review of some kind or other is
allowed in most states
Medical Treatment Guidelines - Oversight
of the treatment based on medical
community protocols
ACOEM guidelines – used in some states as
basis for determining Treatment guidelines
44
Components of Medical Cost Control in
Workers Compensation

Pharmacy Costs




Last frontier of WC medical cost containment
Pharmacy costs had been increasing 12 to 15% a
year to where they represent 15% of total medical
Often a bigger share of medical on longer duration
claims
Pain medications a big component
45
Components of Medical Cost Control in
Workers Compensation

Brand Names vs. Generics




Many of the most commonly prescribed drugs for WC were
until recently only available in Brand names
Movement to generics a key component of WC medical cost
controls
Large drug companies typically come out with new and
improved version of pain medication with new name and
new patent protection
Industry is applying new techniques to manage pharmacy
costs
46
Components of Medical Cost Control in
Workers Compensation

Pharmacy Fee Schedules



Caps per unit prices
Does not control utilization
Pharmacy Benefit Management Programs




Volume discounts
Use of generics
Utilization review
Peer to Peer program
47
Components of Medical Cost Control in
Workers Compensation

Pharmacy Utilization Review

Can identify providers who




prescribe excessively
Prescribe outside of guidelines
Develop initiatives to identify excessive length of
drug use and recommend program to phase out
drug use
Predictive Modeling

Predict claim outcomes based on type, level, mix
and length of drug use
48