Tuesday, June 30, 2015

New Mexico Farmers Singing Workers Comp Blues

New Mexico recently remove the exemption for ranchers and farmers in the state's Workers Compensation Act. And the cost of Workers Compensation insurance is now proving to be significantly more than some of those agricultural employers had anticipated.

Those in the agricultural business are, perhaps predictably, suggesting that these increase costs spell the end of the agricultural business in New Mexico. Somehow, that seems as if it might be a little exaggerated. Still, as so many other businesses have learned, the cost of insuring against your Workers Compensation liability is non-trivial. But most other kinds of business enterprise have figured out how to handle this cost of doing business, even though it can be painful (or worse).

Those farmers who are only now being introduced to the enervating drain on revenue that Workers Comp coverage can represent should learn from the experiences of other industries who have had to wrestle with this issue for many years: "Trust, but verify". That is, double check those insurance premiums an audits, as errors by the insurers and rating bureaus can be common and costly.

California Tinkering With Experience Mod Formula

California operates under its own set of rules for Workers Compensation insurance, rules that, while having a lot in common with the rules used elsewhere, can also differ significantly in some important details.

California's Workers Comp rating bureau, the WCIRB, has just filed to make some changes in the formula used to compute the experience modification factor used to compute California Workers Compensation insurance premiums. This follows changes made over the past few years by NCCI in their experience mod formula used in most other states.

The WCIRB changes will change the eligibility threshold for experience rating, effective in 2016, so that it is computed using the expected loss rates for insureds rather than pure premium rates. This change is technical enough that it is a little difficult to predict just what real world impact it will have. We're reviewing it at the AIM offices at the moment, and will share the results of that analysis when it is done.

The other change WCIRB is proposing, to be effective in 2017, is to adjust the "split point" used in the mod formula. The split point is the cut off value for determining how much of a claim gets fully counted in the mod calculation an how much, if any, gets discounted as being "excess". WCIRB says they will make the split point "flexibible" base on the size of the employer. Again, it's going to take a little analysis to figure out how much difference this will make in mods, and which employers might find the changes helpful, an which employers might find the changes producing higher mos.

The recent NCCI changes in split point have seen modifiers increasing for a fair number of employers with moderate loss records, while rewarding employers with very low loss records. It seems likely the WCIRB changes will operate in similar fashion, but we are still working on our detailed analysis, as the WCIRB changes are different from those implemented by NCCI.

Wednesday, June 3, 2015

Illinois Workers Comp "Reform"--Some Useful Context

Illinois Governor Bruce Rauner is currently advocating for changes to the Illinois Workers Compensation system that he describes as reforms that are needed to keep Illinois business competitive and healthy. His first efforts at this have just been rejected by the Illinois legislature, but he indicates he does not intend to abandon his efforts in this regard.  So I've written leaders in the Illinois legislature the following, in an effort, quixotic though it clearly is, to provide some context on this debate, and some ideas I've long advocated for. Be advised, this is a rather lengthy post.

The specific changes recently sought included:

Restricting the eligibility of workers for benefits under the Workers Compensation Act when they are traveling for work, imposing a requirement that the employer be paying or reimbursing for the travel costs or paying travel expenses and would exclude injuries due to “common risks of travel”. The bill would also exclude injuries occurring on a paid or unpaid break at work when the worker is not performing any specific task for the employer;

Excluding eligibility for injuries due to “hazard or risk to which the general public is also exposed”;

Adding the phrase “credible” to the phrase “employee bears the burden of showing, by a preponderance of the credible evidence, that he or she has sustained accidental injuries arising out of and in the course of the employment;

Adding that the Act does not apply if the “accident resulted from a hazard or risk to which the general public is also exposed”;

Adding a requirement that the “course of employment has to be a "major contributing cause" of a medical condition or injury, defined as being greater than 50% of all combined other factors;

Applying that same “greater than 50%” standard to cumulative or repetitive injury like carpal tunnel claims, with the burden of proof on the worker.

The bottom line is that these changes would significantly increase the burden placed upon injured workers to establish that an injury is covered under the Act, and would eliminate eligibility for workers in certain circumstances.

Given that significant Workers Compensation claims are often the subject of fierce legal dispute and that injured workers already sometimes find that some insurers  employ strategies to delay and avoid paying some legitimate claims, these changes hold the potential to increase the friction and delay experienced by injured workers when seeking medical and indemnity compensation under the Act.

Worse, it does not appear likely that enacting these changes would actually produce significant savings for most Illinois employers. These changes might be helpful to the very largest employers, who self-insure Workers Compensation exposures, and insurance companies, but produce limited benefit to the vast majority of Illinois businesses.

Consider the proposed “reform” to reduce or eliminate eligibility of traveling workers. The current ability of traveling workers to obtain Workers Compensation benefits is not a significant factor in the current cost of Workers Compensation insurance in Illinois. Illinois workers are already ineligible for Workers Compensation benefits for injuries sustained while traveling to or from work.

The proposed change would restrict eligibility for workers when traveling out of town on behalf of employers. Yet an analysis of insurance rates for those most exposed to this risk indicates a significant decline in claims in recent years for this class of workers.

As evidence of this, consider the manual rates applied to traveling salespeople in Illinois, as calculated by the National Council on Compensation Insurance (“NCCI”), an insurance industry rating organization that serves Workers Compensation insurers.

In 2015, NCCI has calculated the manual rate  for Code 8742, which is for outside salespeople, to be $0.44 per hundred dollars of payroll. In 1996, NCCI had calculated this rate at $0.71 per hundred dollars of payroll. So over the past nineteen years, the rate for outside salespeople in Illinois, the workers most exposed to the risks and hazards of business travel, have declined by 38%, according to the insurance industry’s own rating organization. These rates are computed by NCCI based on actual claims reported by Illinois Workers Compensation insurers statewide. The decline in rates for outside salespeople indicates a significant drop in claims and claims costs for these workers. This would not support the contention that a restriction of eligibility for traveling workers is required to reduce costs for employers. Those costs have been dropping considerably even while allowing those injured while traveling to be compensated under the Act.

Indeed, over the past nineteen years, manual rates overall  for Workers Compensation insurance in Illinois have declined significantly. My own review of a representative “market basket” of Illinois manual rates for ten kinds of workplace exposures, including clerical work, outside salespeople, manufacturing, contracting, and retail industries, found a 14.3% decline in manual rates from 1996 to 2015.

Although these manual rates had increased for the period from 1996 through 2010, there has been a marked decrease in rates since 2010, reflecting changes that have already been made in the Illinois Workers Compensation system.  Indeed, using this same “market basket” of rates and comparing 2010 to 2015, there has been a rate reduction of 19%. So the changes already made in Illinois have been producing significant rate reductions for employers.

Still, Workers Compensation insurance rates in Illinois are higher than those in neighboring states. Partly, this is a reflection of higher average wages, as many Workers Compensation indemnity settlements are based on earnings of the injured worker.

However, there are other aspects of this rate differential that do not appear to be the result of higher average wages. Illinois remains significantly more costly than nationwide averages, and more expensive than neighboring states, in regards to Permanent Partial Indemnity claims.

While this also can be explained, in part, by higher average wages in Illinois, this appears to be only a partial explanation.  And according to analysis by NCCI released in mid-2014 (the latest year available) Illinois is significantly more costly in this regard.

The problem is that the proposed changes to the Illinois Workers Compensation Act are not well focused on this aspect of Illinois Workers Compensation claims costs. Imposing arbitrary obstacles on the ability of some legitimately injured workers to obtain Workers Compensation benefits seems unlikely to reduce the systemic incidence and severity of serious claims. It would seem likely to incentivize cost shifting to other insurance and government benefit programs, and also likely to reduce the incentives for employers to operate safely.

To look at it from a different viewpoint, if the biggest difference between Illinois and neighboring states is in the cost of those claims that produce permanent injury to workers, is it truly good public policy to attempt to reduce costs for employers by denying medical care and indemnity to workers who have suffered permanent injury?

I would argue that a better approach would be to develop programs to incentivize workplace safety and training to reduce these costs. Just this week, NCCI announced the results of a study that indicated that delays in reporting claims increased claims costs up to 51%. A statewide program to educate employers about prompt reporting of injuries could do far more to reduce Permanent Partial Indemnity costs than the proposed restrictions on eligibility.

The other important context for these proposed changes is the fact that, for most Illinois employers, what matters most is the cost of Workers Compensation insurance, as all but the largest employers handle their Workers Compensation obligations by purchasing insurance to cover those obligations.

As evidenced by the manual rates computed by NCCI, Illinois has already achieved significant reductions in claims costs. But many employers have not seen Workers Compensation insurance premiums decline commensurately, because the insurance industry in Illinois has been effectively deregulated.

So even as the manual rates for insurance have declined significantly in recent years, many employers have seen Workers Compensation insurance costs rise, due to actions by the insurance industry.

The insurance industry, over the course of the past four years, has implemented a major change in the formula used to adjust current Workers Compensation insurance premiums based on past reported losses. These changes in what is known as the Experience Modification Factor have significantly increased Workers Compensation insurance costs for many Illinois employers, more than offsetting the manual rate reductions that have occurred.

Additionally, in Illinois, many smaller employers are insured through the Assigned Risk Plan, which imposes much higher insurance costs. For the period 2010 through 2013, as reported by NCCI (which administers the Illinois Assigned Risk Plan on behalf of member insurance companies) the number of policies written in the Assigned Risk Plan increased by 22.3%, even as overall premium volume of the Illinois Assigned Risk Plan more than doubled, from $56,500,000 in 2010 to $118,500,000 in 2013.

For smaller employers in Illinois, increases in the cost of Workers Compensation insurance have been the financial burden, not excessive claims or benefits paid to workers.

It isn’t just manual rates that are higher in the Assigned Risk Plan—although they are. The “market basket” of manual rates I used in my earlier analysis show that the 2015 Assigned Risk Plan rates calculated by NCCI to be 50% higher than the average rate for the same classifications in the Voluntary Market.

And the Assigned Risk price differentials don’t stop with manual rates. Assigned Risk policies get no Premium Discount, which is a size discount automatically applied to Non-Assigned Risk policies. And Assigned Risk policies are subject to an additional surcharge called ARAP—a surcharge for assigned risk policyholders if their Experience Modification Factor goes above 1.00 (which, thanks to the changes in the experience rating formula, is more likely for many employers). Finally, Assigned Risk policies are not eligible for significant discretionary credits that employers in the Voluntary Market often obtain.

It is routine for the insurance costs of employers in the Illinois Assigned Risk Plan to be double those that would be available in the Voluntary Market.

It should be noted that the Assigned Risk Plan historically has operated at a deficit—that is, claims costs have exceeded even the increased premiums charged. But there are many smaller employers in Illinois with minimal or no claims, but who nonetheless have to pay the greatly increased insurance costs associated with the Assigned Risk Plan.  Currently, the Illinois Assigned Risk Plan has no mechanism to provide premium reductions to smaller employers with good loss records, as the experience rating plan does not apply to employers below a certain premium size.

Adjusting the Illinois Assigned Risk Plan to provide relief to smaller employers with low claims could provide dramatic benefits to many Illinois businesses, without reducing benefits to injured workers.

Changes in the Illinois Workers Compensation system in recent years have reduced benefits paid to workers, and limited payments to medical providers, with the resulting manual rate reductions cited earlier. But no similar limitations have been placed on insurers.

Indeed, Workers Compensation insurance regulation has been effectively removed by large reductions in staff at the Illinois Department of Insurance, and by the adoption of a laissez-faire rate regulation process that allows the insurance industry to file and use rates and rating plans without any significant oversight or limitation.

While it may well not be advisable or advantageous to return to the strict rate regulation that once was the norm in the Workers Compensation insurance field, allowing the insurance industry to operate without
effective independent oversight or limitation, in the realm of Workers Compensation insurance, does seem inconsistent with the limitations that have been imposed on workers and on medical providers, which have been done in the interests of containing Workers Compensation costs for businesses in Illinois.

If it is good public policy to impose arbitrary limitations on the ability of injured workers to obtain benefits under the Workers Compensation Act, and to impose arbitrary cost controls on the medical providers who actually treat injured workers, it is difficult to understand why reasonable and independent oversight of Workers Compensation insurance rates and premiums is not also good public policy. Reinstating such oversight could well reduce or obviate the need for imposing further limitations on workers and medical providers.

Historically, the insurance industry has been among those advocating that workers and medical providers make sacrifices for the good of the economic climate in Illinois. It would seem equitable that the insurance industry also make some changes that would improve our business environment.

In summary, the recently proposed changes to the Illinois Workers Compensation Act do not appear to actually address the fundamental issues that burden many Illinois employers in regards the cost of meeting their Workers Compensation obligations. Recent changes in benefits and medical fees have
already produced significant cost reductions, reductions that have not been consistently passed along to all Illinois employers by the insurance industry. Before further reductions in benefits and medical fees are seriously considered, adjustments to the Workers Compensation insurance system in Illinois would seem to offer opportunities to provide relief to employers that would not harm injured workers or those who care for them.

I’ve worked with Workers Compensation in Illinois since 1978. I’ve been an insurance broker, consultant, author, and expert witness on Workers Compensation insurance and have served on a task force organized by the Illinois Department of Insurance to help implement Workers Compensation insurance regulations. I’ve helped countless Illinois employers reduce their Workers Compensation insurance premium charges by finding and correcting errors made by insurance companies in computing premiums.

I’ve also consulted with major insurance companies regarding Workers Compensation insurance, including such companies as Zurich American, Great American, Zenith Insurance, FCCI Insurance, Liberty Mutual, Lloyds of London, and others. I’ve also consulted with insurance agents and brokers on Workers Compensation insurance for their policyholders, and I’ve served as an expert witness on these matters in civil and criminal courts across the U.S.

All of that experience and training leads me to believe that these proposed changes to the Illinois Workers Compensation Act would likely produce very limited benefit to employers, while causing significant harm to some workers just when they most need assistance.  There are other, more equitable and focused approaches, in my opinion, that would better serve the workers and employers of our state.