The following is an 8-page analysis of the recent NCCI filing calling for a 32.9% average increase in Workers Compensation Loss Cost levels for South Carolina. The author of the report is Frank Knapp, Jr., president of The SC Small Business Chamber of Commerce. Mr. Knapp also holds a Masters Degree in experimental social psychology from the University of South Carolina. He has both academic and public sector research experience and has been published in academic journals and other publications. This report reflects only his personal views.
In summary, this report finds that the NCCI recommendation of a 32.9% average increase in Workers Compensation Loss Cost levels to be unjustified based on:
1. Potentially flawed and unverified data used in projections.
2. Documented and anticipated positive experience not given full weight in projections.
This report is highly critical of NCCI’s listing of contributing factors to increased Workers Comp claims, especially in regard to attorney involvement and claims remaining open longer. On the former, the report calls the NCCI data and analysis “amateurish at best and deliberately deceptive at worst” and concludes that NCCI’s statistical abilities are either in doubt or their motives have jeopardized the objectiveness of the process and recommendations.
This report recommends that far-reaching legislative reforms are not necessary to correct a problem that may disappear when the final loss cost levels are approved. This report does recommend that the South Carolina Workers Compensation Commission institute policy reforms that will immediately cut the cost of Workers Comp medical claims.
COMPLETE REPORT
POTENTIALLY FLAWED AND UNVERIFIED DATA USED IN PROJECTIONS
Statistical projections must use accurate data or the projections will be less than accurate. NCCI’s data has several potential problems that lead to questioning the credibility of the projections.
1. Data representing a significant portion of information for 2002 and 2003 was either not collected, not used due to “quality issues” or NCCI decided not to use the data based on “actuarial judgment”.
a. Carriers representing 12.8% of premium in 2003 were not included in experience (NCCI Appendix A-IV-A)
b. Carriers representing 13.3% of premium in 2002 were not included in experience (NCCI Appendix A-IV-A)
c. Newport Star Reinsurance Company data not included in claim count experience for 2003 (NCCI Appendix A-IV-B)
d. AIG, the carrier with the largest amount of premiums (10.7% of total) in 2003, and Lumbermens Mutual Casualty Company data were not included in the Large Loss Catastrophe Call data (NCCI Appendix A-IV-C)
2. No explanation is given for the missing data from each company. No opportunity is provided for external examination of any collected but unused data. Therefore, we only have NCCI’s word that the data was not available, not of good quality (and unable to be corrected) or should not be used for actuarial reasons. All of these reasons for not obtaining or using data raise red flags and call into question the validity of the final recommendation.
3. NCCI refers to these exceptions to their data collection and use as happening only “occasionally”. It can be argued that not using over 10% of the actual data is not occasional and calls into question NCCI’s data collection and decision-making processes.
4. There appears to be no independent verification of data provided by carriers, which have a vested interest in the outcome of this process.
DOCUMENTED AND ANTICIPATED EXPERIENCE NOT GIVEN FULL WEIGHT IN PROJECTIONS.
Even if accurate data is used in making a projection, the assumptions underlying the statistical methodology and the weight given to certain trends can dramatically alter the final conclusions. Questions regarding these matters challenge NCCI’s statistical procedures that lead to its recommendations.
1. Workers Comp reforms adopted by the General Assembly this past legislative session are only now being put into place. The benefits of these reforms were not taken into consideration in NCCI’s projections. These reforms include:
a. A new computer system at the Workers Comp Commission that will be installed in phases over the next two years. This new system will enable the Commission to better manage case information and thus speed up the handling of cases. As NCCI correctly points out, “generally the longer claims remain open, the more costly they become.”
b. Additional personnel resources for the Workers Comp Commission that will facilitate information to employers and claimants regarding the status of cases, improve case management, assist businesses in complying with Workers Comp Insurance laws to deter fraud and addresses the cost of medical procedures paid by Workers Comp Insurance.
c. Additional resources for the S.C. Attorney General’s Office resulting in a five-fold increase in its insurance fraud unit, which should result in less premium and claimant fraud and thus more Workers Comp premiums paid to carriers and potentially less claims.
2. Lost-time claim frequency has decreased every year but one since 1996.
3. The indemnity cost per case in excess of wage growth dropped in 2003 to well below the 2001 level.
4. The percentage of lost-time claims closed within 24 months has been increasing since 2001.
5. Direct earned premiums by carriers have increased every year since 1999 (up 44%).
6. Insurance carrier “losses” have dropped by nearly 12% since 1999.
7. The underwriting results for insurance carriers have improved by over 28% since 1999 with 2003 being the best year for underwriter results.
FACTORS AFFECTING WORKERS COMPENSATION COSTS ACCORDING TO NCCI–MISSING, CONFLICTING AND FAULTY DATA
NCCI states—“In summary, the following factors have contributed to increasing claim costs in South Carolina:
· Substantial increases in average claim costs—especially medical,
· The state’s high level of attorney involvement, and
· A trend toward claims remaining open longer”
1. Substantial increases in average claim costs—especially medical
According to the NCCI report, medical costs now represent 51.4% of the Workers Comp benefit costs. The average increase in medical cost per case based on previous years is expected to be 10%.
But what NCCI has not shown is the trend for the frequency of medical claims every year since 1996 as it did with lost-time claim frequency. If we can assume that medical claim frequency is positively correlated to lost-time claim frequency, then we would expect the frequency of medical claims to also be in a declining trend.
However, regardless of the frequency there is no doubt that medical costs have and continue to rise dramatically, far exceeding the rate of inflation. As a result, not only is there an upward pressure on Workers Comp rates but also on health insurance in general.
The components of this annual increase in medical costs are 1) increased cost for the same services, 2) increased utilization of services, and 3) use of more expensive services. NCCI states that 60% of the increase in medical cost per service is due to increase in price and 40% due to utilization.
To combat the rise in medical costs, the South Carolina Workers Compensation Commission has established ceilings on the amount paid for medical services when provided in the doctor’s office and as an in-patient in the hospital. The physician schedule comes out to approximately 140% of Medicare approved fees to be paid by insurance carriers. However, each carrier may have a lower fee schedule already negotiated with the providers.
The Commission has also set a ceiling for paying outpatient services at 87.9% of the hospitals normal charge for these services. However, this fee schedule allows hospitals to increase their charges at their will and consequently increase the total dollar amount allowed to be paid for Workers Comp claims for these out-patient services.
The issues of using more costly services and overall utilization of services is not addressed by the Workers Comp regulations since these issues are at the prerogative of the insurance carriers, attending physicians and claimants.
2. The state’s high level of attorney involvement
NCCI presents two illustrations to unequivocally conclude that attorney involvement is a major driver of Workers Comp cost increases.
The first is a bar graph showing the percentage of all cases with claimant attorney involvement in South Carolina compared to countrywide. This graph depicts great variability in this percentage in South Carolina from 1998 to 2002 with the highest percentage in 1999 (approximately 22%) and the lowest in 2000 (approximately 15%). The 2002 percentage of attorney involvement of approximately 18% is lower than 2001 percentage. For the countrywide data, the percentages are fairly constant every year ranging from a low of approximately 12% in 2000 and a high of approximately 14% in 2002.
The second NCCI illustration presented to demonstrate that attorney involvement is a major driver of Workers Comp costs is a linear graph showing the indemnity costs for each year from 1998 to 2002 for cases with and without attorney involvement. Each year shows that indemnity cases with attorney involvement have significantly higher costs than cases without attorney involvement.
Analysis of data and conclusion:
In spite of NCCI’s actuarial and statistical prowess, the data provided to justify the conclusion that attorney involvement is a major driver of Workers Comp costs is amateurish at best and deliberatively deceptive at worst.
The NCCI bar graph on attorney involvement is missing 2003 data, a key year in NCCI’s analysis justifying a dramatic increase in the loss costs level. Thus, one cannot conclude that attorney involvement in 2003 increased thus causing higher costs warranting the jump in loss cost.
What the bar graph does show is a widely fluctuating percentage of South Carolina attorney involvement with 2000 having the lowest percentage. Yet, when NCCI shows Workers Comp underwriting results in South Carolina for the years 1999 to 2003, the year 2000 showed the highest losses and worst underwriting results in spite of having the lowest percentage of attorney involvement according to NCCI’s bar graph.
Furthermore, the NCCI data used for the bar graph appears to be seriously flawed. The SC Workers Compensation Commission’s data Shows that attorney involvement in all cases is well below the levels presented by NCCI and at levels that are at or below the countrywide data. The SC Workers Compensation Commission data, unlike the NCCI bar graph, shows a steady decline in claimant attorney involvement in all cases from a high of 14% in 1999 to 11% in 2002 and 2003. The SC Workers Compensation Commission data shows neither a higher percentage of attorney involvement in all cases compared to NCCI’s countrywide data nor any relationship between increasing costs and attorney involvement in all cases.
The SC Workers Compensation Commission data does show that attorney involvement in indemnity cases is much higher than the percentages showed in the NCCI bar graph. However, the percentage in these indemnity cases is stable from 1999 to 2003 ranging from 36% to 37%. Again, this data does not indicate any causal effect of attorney involvement to justify a dramatic increase in loss costs based on 2003 data.
The linear graph presented by NCCI, while meant to demonstrate that attorney involvement results in higher indemnity costs, only represents a correlation not causality. NCCI could have also produced a linear graph showing that when hospitals or surgery is involved in indemnity cases, those cases have higher indemnity costs than when there is no hospital or surgery involved. The explanation for higher indemnity costs in cases when attorneys, hospitals or surgery are involved may very well be because these cases are the more severe and complicated cases, resulting from more serious impairment and lost time.
NCCI’s unsubstantiated conclusions regarding attorney involvement are very troubling.
How does and organization that on its own web site states that it provides “expert actuarial and economic testimony before state or federal regulatory and legislative groups to support NCCI’s analysis and costs estimates” arrive at such a strong conclusion regarding attorney involvement using incomplete, inconclusive and faulty data? This matter raises serious questions.
–Does the amateurish analysis and subsequent unsubstantiated assertion regarding attorney involvement driving costs reflect the same degree of statistical and analytical skills NCCI has used to produce the recommended 32.9% increase in loss cost? If the answer is “yes”, then the entire NCCI filing should have little credibility.
–If the answer to the above question is “no”, how and why was the data and conclusions about attorney involvement included in the report being presented to the State of South Carolina? Was the purpose to distract policy makers from questioning the NCCI data analysis? Was the purpose to lead policy makers to legislative reforms favored by NCCI’s insurance company members? Was the purpose to focus controversy on an already maligned trade group instead of the practices and efficiencies of NCCI insurance company members that may result in poor underwriting results?
3. A trend toward claims remaining open longer
Everyone agrees that the faster a Workers Comp case can be closed, the less costly it will be. NCCI presents a bar graph showing an almost steady decline in the percentage of lost-time cases closed within 24 months from a high of 75% in 1993 to its lowest percentage in 2001. The percentage of cases closed within 24 months then increases slightly to about 60% in 2003.
However, NCCI’s claim of a trend toward cases remaining open longer may be overstated. As mentioned earlier, NCCI has also presented data showing a steady decline in lost-time claim frequency from 1996 to its lowest level in 2003. To the degree that the number of lost-time cases has declined it can be inferred that businesses are doing a better job of keeping workers, who are involved in minor accidents, in active employment with the company. The serious lost-time cases may not be taking longer to close. The logical explanation may be that the less serious lost-time cases of the past are no longer lost-time cases and are being removed from the overall pool. The statistical trend may simply reflect a higher percent of serious cases making up the pool of lost-time cases.
An alternative explanation of NCCI’s data might be that the number of serious lost-time cases is increasing. These cases would naturally take much longer times to close regardless of the efficiency of the Workers Comp system. In this scenario, it is not the length of time it takes to close the case that drives the cost, but the severity of the case.
While efforts should continue to speed up the handling of cases to close them as quickly as possible, there are different valid explanations for NCCI’s data showing a higher percentage of lost-cost cases not being closed in 24 months. Consequently, NCCI’s focus on this trend as a causal factor of cost increases is not appropriate.
SUMMARY & RECOMMENDATIONS
Based on the analysis of the NCCI filing, it is clear that medical costs are the primary driver of any Workers Comp claim cost increases in South Carolina. NCCI’s data and other data provided in this report do not support NCCI’s finding of a causal relationship between attorney involvement and claim costs. Nor does NCCI’s data substantiate the conclusion that there is a trend toward claims remaining open longer thus causing increased claim costs.
While some legislative reforms to the state’s Workers Comp system may be advisable, efforts to make major changes based on NCCI’s filing are unjustified since the recommended 32.9% increase in loss cost levels may be drastically reduced as a result of a complete public debate before an administrative law judge. Support for this contention can be found in the fact that recent filings of this nature by NCCI have been consistently reduced before being adopted by the S.C. Department of Insurance.
In addition to this predictable reduction in the recommended loss cost levels, other information does not lend itself to major reforms to the South Carolina Workers Comp system.
1. In a report prepared by Actuarial &Technical Solutions, Inc., for the manufacturing industry, in 2004 South Carolina was ranked as the 7th lowest Workers Compensation cost state in the country—a favorable ranking it has held for a number of years.
2. The South Carolina Workers Compensation Commission reports that approximately 96% of Workers Comp cases requiring hearings are heard within 4.5 months with the average time for all hearings being 4.9 months. Legal requirements setting the time for filings by all parties appear to make hearings in less than 4 months to be unfeasible.
3. The Commission reports that the average time for an appeal to be heard in less than three months.
However, policy reforms within the Workers Compensation Commission appear to be advisable and offer the fastest and most effective method of curtailing the increases in medical costs. These policy reforms focus on the one component within the control of the Commission—the increased cost for the same medical service. The Commission should reduce the fees paid for:
1. medical services performed in a doctor’s office.
2. in-hospital medical services.
3. outpatient medical services.
Medical Services Performed in a Doctor’s Office
The current fee schedule for medical services performed in a doctor’s office, a cap on allowable charges, is approximately 140% of Medicare’s fee schedule. Other states set their fee schedules at far less for these same services. Florida recently capped allowable charges at or near Medicare’s fee schedule for medical services performed in a doctor’s office. Pennsylvania’s fee schedule was recently about 117% of Medicare’s fee schedule.
As noted, this fee schedule is a cap on allowable charges. Some insurance carriers may already have negotiated a fee schedule for these medical services that are below the Workers Comp fee schedule currently in use in the state.
Consequently, the South Carolina Workers Compensation Commission can reduce medical costs for services performed in a doctor’s office by adjusting the fee schedule to lower the cap on allowable charges. Ideally, the Commission should set this fee schedule at a level that is closer to Medicare’s fee schedule or closer to the fee schedule of the insurance carrier with the lowest fee schedule in the state. South Carolina businesses deserve the most favorable Workers Comp fee schedule whether it is dictated by the federal government or by private carriers.
In-Patient Medical Services
While not pegged at a percentage of Medicare, the South Carolina Workers Compensation Commission also has a fee schedule for in-patient services that caps allowable charges for these services. The number of Workers Comp claimants receiving medical services as in-patients has actually decreased from 3150 in 1995 to 3118 in 2003. However, the actual payments made for these services has increased by nearly 100% in that time from $31,114,000 in 1995 to $62,121,000 in 2003 according to the Commission.
As with the physician’s fee schedule, the South Carolina Workers Compensation Commission can reduce medical costs for hospital services performed as an in-patient by adjusting the fee schedule to lower the cap on allowable charges. The Commission should set this fee schedule at a level that is closer to Medicare’s fee schedule or closer to the fee schedule of the insurance carrier with the lowest fee schedule in the state. Once again, South Carolina businesses deserve the most favorable Workers Comp fee schedule when compared to the fee schedules of Medicare or of the private carriers.
Outpatient Medical Services
The current fee schedule for outpatient services, 87.9% of normal charges, is very inadequate for controlling costs. Hospitals are free to raise their charges at will and thus the Workers Comp outpatient fee schedule is essentially dictated by the hospitals. According to the Commission, outpatient Workers Comp payments have increased over 250% from $10,512,000 in 1995 to $37,591,000 in 2003.
With the current medical trend of providing more medical services on an outpatient rather than an in-patient basis, this segment of Workers Comp medical costs has the most potential for increased costs. Recognizing this problem, the Commission has a Hospital Advisory Committee that is to make recommendations for outpatient medical services by this November. This Committee should replace the Workers Comp discount on normal outpatient charges with a fee schedule in line with that for physicians and in-patient services.
As with the earlier recommendation, the Commission should set this fee schedule at a level that is closer to Medicare’s fee schedule or closer to the fee schedule of the insurance carrier with the lowest fee schedule in the state. South Carolina businesses must receive the most favorable Workers Comp outpatient fee schedule available to the federal government or private carriers.
(For a hard copy of this report that includes attachments, please call 803-252-5733 or e-mail sbchamber@scsbc.org.)