Comparison of Cost Drivers in
Group Health and Workers
Compensation Insurance
CAS Spring 2007 Meeting
Orlando, FL
June 18, 2007

Comparison of Cost Drivers in Group Health and Workers Compensation Insurance
Panelists


John Cookson, F.S.A., Milliman Inc., Wayne, PA
John Robertson, F.C.A.S., M.A.A.A., NCCI Inc.,
Boca Raton, FL
Moderator

Bill Miller, F.C.A.S., M.A.A.A., Philadelphia, PA
1






Background on CHCI and Why This
Panel Was Formed
CHCI is the Committee on Health Care Initiatives
Committee, chaired by Teresa, 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 last year.
Look for additional topics on Medical Malpractice and other healthcare related areas.
WE NEED YOU(r feedback and participation)!
2

2005 Comparison of Medical Insurance Systems
4.02%
7.79%
41.83%
% of Total
29.16%
11.10%
4.26%
1.84%
Medicare
Medicaid
Other government (Veterans,
NIH, Indian)
Worker’s compensation
Private insurance
Patient (out-of-pocket)
All other patient care sources, not elsew here classified
3

Where Does the Dollar Go?
Distributions of Medical Costs
First three months following injury
GH
E:
25%
A:
36%
D:
15% C:
10%
B:
14%
A: Office Visits
B: Physical Therapy
C: Radiology
D: Prescription Drugs
E: Surgery and Other
Services
WC
E:
18%
D:
9%
C:
17%
B:
22%
A:
34%
Source: "Workers Compensation vs. Group Health: A Comparison of Utilization," NCCI, 2006
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
4

Office Visits and Physical Therapy
Stand Out
Contributions to Cost Difference by Service Category
First three months following injury, GH=100%
A: Office Visits
B: Physical Therapy
C: Radiology
D: 0%
E:
5%
D: Prescription Drugs
E: Surgery and Other
Services
C:
18%
A:
23%
B:
23%
WC costs
71% more than GH across the 12 injuries
Source: "Workers Compensation vs. Group Health: A Comparison of Utilization," NCCI, 2006
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
5

John Cookson, F.S.A., Milliman Inc., Wayne, PA
CAS Spring 2007 Meeting
Orlando, FL
June 18, 2007

Driving Economic Factors

National Macro Economic Drivers


Inflation
Economic Growth

Technology
7

An Economic View






Momentum is important
Inflation adjusts wages
Wealth effect increases demand with a lag
Aging relatively constant
 in population
Interventions




DRG
RBRVS
Managed Care Effect early 1990s
Back lash in late 1990s
Cost Shift
8

Health Cost Index vs. CPI-W All Items
Less Energy vs. Unlagged Personal Income
20%
15%
10%
5%
0%
-5%
Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
$0 Deductible HCI CPI-W All Items Less Energy Unlagged Personal Income
Health Cost Index represents a $0 deductible plan
9

Health Cost Index vs. CPI-W All Items Less
Energy (Lagged 1 Year) vs. Unlagged Personal Income
20%
15%
10%
5%
0%
-5%
Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
$0 Deductible HCI CPI-W All Items Less Energy (Lagged 1 Year) Unlagged Personal Income
Health Cost Index represents a $0 deductible plan
10

CPI-W All Items Less Energy (Lagged 1 Year) vs.
Health Cost Index vs. Personal Income
(3 yr average, lagged 18 months) vs. Hospital
Costshift (2 Year Smoothed)
20%
5%
0%
15%
10%
-5%
Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
$0 Deductible HCI
Personal Income (3 yr average, lagged 18 months)
Health Cost Index represents a $0 deductible plan
CPI-W All Items Less Energy (Lagged 1 Year)
Hospital Costshift (2 Year Smoothed)
11

CPI-W All Items Less Energy (Lagged 1 Year) plus
Personal Income (3 yr average, lagged 18
Months) plus Adjusted Hospital Costshift vs. Health Cost Index
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
$0 Deductible HCI
CPI-W All Items Less Energy (Lagged 1 Year) plus Personal Income (3 Year Avg, Lagged 18
Months) Plus Adjusted Hospital Costshift
Health Cost Index represents a $0 deductible plan
12

Micro Factors


High Concentration of Resources and Especially
Specialist Physician



Higher Spending
More use of high-cost, non-evidence based care
Quality no better and possible poorer
Implication


Growth in Physicians/Capita increasing trends
Growth in Specialist/Physician increases trends
13

Important Trend Issues

Local Differences Affect Local Trends






Physicians
Specialist
Hospital Beds
Health Employment and Wage Rates
Hospital Beds


Replacement
Specialty Hospital
New Technology

MRIs, PETs, etc.
14

Important Trend Issues




New ASC and OP Hospital Facilities
Influenza Outbreaks
Benefit Changes
National

Working days
15








Workers Compensation vs.
Full Medical
Mix of Services
Mix of Diagnoses
Mix of Providers
Provider Contracting
Medical Management
Business Cycle Effects
Potential for Prevention
16

Health Cost Index vs. Large Employer
Annual Trend
20%
15%
10%
5%
0%
-5%
Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
Large Employer $250 Deductible HCI
Health Cost Index represents a $250 deductible plan with $1,000 OOP
17

Health Cost Index vs. Large Employer Two
Year Smoothing
16%
14%
12%
10%
8%
6%
4%
2%
0%
Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
Large Employer $250 Deductible HCI
Health Cost Index represents a $250 deductible plan with $1,000 OOP
18

Health Cost Index vs. Large Employer
Five Year Smoothing
14%
12%
10%
8%
6%
4%
2%
0%
Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
Large Employer $250 Deductible HCI
Health Cost Index represents a $250 deductible plan with $1,000 OOP
19

CDC – Morbidity and Mortality
20

Suggestions for Improving Forecasts
Working Day (my non-RX estimate)
Period Ending
December-04
December-05
December-06
3 Month Trend 12 Month Trend
1.6% 0.9%
-0.6% -0.5%
-0.6% -0.1%
21

Government Healthcare Data Physician
10.0%
7.5%
5.0%
2.5%
0.0%
1999 2000 2001
Total per Capita
2002 2003
Total less Medicare per Capita
2004 2005
22

Government Healthcare Data Physician
10.0%
7.5%
5.0%
2.5%
0.0%
1999 2000 2001 2002 2003
Total per Capita
Total less Medicare per Capita
Total less Medicare, Medicaid, Other Gov and Uninsured per Capita
2004 2005
23

Government Healthcare Data Hospital
10.0%
7.5%
5.0%
2.5%
0.0%
1999 2000 2001
Total per Capita
2002 2003
Total less Medicare per Capita
2004 2005
24

Government Healthcare Data Hospital
15.0%
12.5%
10.0%
7.5%
5.0%
2.5%
0.0%
1999 2000 2001 2002 2003
Total per Capita
Total less Medicare per Capita
Total less Medicare, Medicaid, Other Gov and Uninsured per Capita
2004 2005
25

Illustrative Impact of Cost Shifting and
Payments Based on Billed Charges
26

Price, Utilization, and Cost for
Workers Compensation Medical Services
John Robertson, FCAS, MAAA
June 18, 2007
Orlando, FL

Lost-Time Claims
Medical
Claim Cost (000s)
25
Annual Change 1991 –1996: +4.1%
Annual Change 1997 –2005: +9.5%
20
15
10
+6.8% 1.3% -2.1%
+9.0%
+8.3%
+10.1%
+5.1%
+7.4%
+8.2%
+10.6%
+7.4%
+14.0%
+9.0%
+6.8%
+7.5%
+11.7%
5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
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
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
28

Lost-Time Claims
Percent Change
16
14.0
14
11.7
12
10.6
10.1
10
8
7.4
8.3
8.2
7.4
9.0
7.5
6.8
6
4
4.5
5.1
3.5
3.2
3.5
4.1
4.6
4.7
4.0
4.4
4.2
4.0
2.8
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Year
Change in Medical Cost per Lost-Time Claim Change in Medical CPI
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
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
29

All Claims—NCCI States 2006p
1996
1986
Indemnity
41%
Medical
59% Indemnity Medical
48%
52% Indemnity
55%
Medical
45%
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
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
30

We will look at:


Changes in prices and utilization for medical services over time
Prices and utilization in WC compared to Group Health (GH)
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
31

Cost Difference Is Sum of Price and
Utilization Components
Cost = Price × Utilization
Cost Difference = Price Component
+ Utilization Component
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
32

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%
40%
20%
High
Mid
Low
0%
1996 1997 1998 1999 2000
Accident Year
Injuries by diagnosis were classified as high, mid, and low based on paid medical severity in accident year 1998.
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
2001 2002
33

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
Unadjusted Medical Severities on Lost-Time Claims
Increase Due to Diagnosis Mix Differences
Increase Due to Number of Treatments
Remaining Increase Due to Price and Other Factors
Increase in Severity,
Accident
Years
2001/02 vs.
1996/97
73%
15%
38%
20%
Percent of Severity
Increase,
Accident Years
2001/02 vs.
1996/97
100%
21%
52%
27%
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
34

Medical Costs in Workers Compensation





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 and utilization compare to
Group Health (GH)?
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
35

WC and GH Prices for Medical Services

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
36

WC and GH Costs for Medical Services

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
States reviewed: FL, GA, IL, KY, TN
37

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
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
38

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
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
39

Utilization Is the Largest Driver of Cost
Differences Between WC and GH
Percent
200
150
100
First three months following injury, GH = 100%
171%
157%
114%
50
0
Price Utilization
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
Cost
40

Cost Differences Vary by State
Workers Compensation Versus Group Health
Percent
250
200
150
100
50
First three months following injury, GH = 100%
High Cost
Medium Cost
Low Cost
0
FL KY SC CO MD GA AZ AL TN CT KS
State
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
IL OK IN
41

Price Differences and Cost Differences
Between WC and GH Correlate by State
Percent
250
200
150
100
50
First three months following injury, GH = 100%
224%
75%
107%
162%
136%
160% 162%
0
Price Utilization
Low Cost Medium Cost
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
111%
167%
Cost
High Cost
42

Cost Difference Is Bigger for Chronic and
Complex Injuries Due to Utilization
Workers Compensation Versus Group Health
Percent
250
200
150
100
50
First three months following injury, GH = 100%
109%
120%
136%
184%
145%
204%
0
Price Utilization
Acute and Trauma
Cost
Chronic and Complex
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
43

WC Pays More Than GH for Many
Services Due to Utilization

Office visits are a significant contributor to cost difference despite lower average price in WC

Office visits are the predominant contributor to the cost difference for acute and trauma-related injuries

Physical therapy contributes to cost difference due to utilization

Physical therapy is the biggest driver of the cost difference for chronic and complex injuries
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
44

Price and Utilization Impacts Vary by Service
Workers Compensation Versus Group Health
Percent
300
200
100
First three months following injury, GH = 100%
266%
269%
276%
191%
185%
81%
186%
167%
103%
130%
73%
103%
123%
98%
121%
0
Office
Visits
Physical
Therapy
Radiology Prescription Drugs
Surgery and Other
Services
Price Utilization
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
Cost
45

Utilization of Office Visits and Physical
Therapy Is Higher in WC
Percent
300
200
100
79%
First three months following injury, GH = 100%
Office Visits
349% 347%
Physical
Therapy
239%
244%
204%
187%
176%
156%
98% 105%
83%
0
Acute &
Trauma
Price
Chronic &
Complex
Utilization
Acute &
Trauma
Chronic &
Complex
Cost
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
46

Radiology Has Higher Prices and Utilization in WC
Percent
400
300
200
100
First three months following injury, GH = 100%
Radiology Surgery &
Other Svcs
318%
192%
156%
248%
190%
227%
146%
144%
191%
107%
65%
72%
0
Acute &
Trauma
Chronic &
Complex
Price Utilization
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
Acute &
Trauma
Chronic &
Complex
Cost
47

Medical Costs Are Higher in WC
Than GH Because of Utilization

Differences in costs of treating injuries correlate with differences in utilization

Differences in costs across states correlate with differences in prices

Utilization of office visits and physical therapy is the biggest driver of cost differences
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
48

Conclusion

WC costs more than GH to treat similar injuries, largely due to greater utilization of medical services in WC

Greater network penetration reduces costs

RVS schedules with lower markups relative to
Medicare work the best

Fee schedules reduce WC medical costs
© Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.
49