Employers Just Need Stability

I've been on a tear this week about California reform and politics, so why stop now?

Yesterday the California Workers' Compensation Insurance Rating Bureau (WCIRB) met to discuss quarterly data and make actuarial prognosis for the next quarter.

The verdict? Nothing has changed yet, and the concern is that increases in frequency seen since 2010 may not be related to economic factors. The bad part is that the driver behind increased frequency can't be identified.

And, what has been repeated almost ad nauseum by anyone not associated with the SB 863 propaganda, the impact of the reforms will not be measurable for at least a year, and it probably will take longer than that.

Tony Milano, senior actuarial analyst for the Rating Bureau, told members of the Actuarial Committee on Wednesday that there was "nothing new that we haven't already discussed" in the data from the third quarter of 2012.

From the good news side of the reporting, claim settlement rates continued to improve at the third-quarter mark for the second consecutive year, Milano said. About 21.3% of indemnity claims filed in accident years 2008 through 2010 were closed within nine months. In 2011, the settlement rate increased to 21.9% of claims being closed by the end of September, and in 2012 that number increased to 22.5%.

Can the settlement rate be sustained though? Frequency is growing faster.

Data collected through Sept. 30 shows the number of claims being filed is on pace to increase by 3.3% in 2012. The increase follows a 0.8% increase observed in 2011, and a 9.1% increase in 2010.

Dave Bellusci, chief actuary for the Rating Bureau, said the increase in frequency and increases in indemnity and medical severity points to an overall 6% or 7% increase in costs for 2012.

2013 will be busy for the WCIRB, as it will for most professionals in the California workers' compensation system coming to terms with SB 863.

The Actuarial Committee of the WCIRB plans to track the cost impact of SB 863 and analyze the impact on loss development methodologies. WCIRB actuaries will also review, and if necessary, revise estimated savings and costs associated with the bill.

The WCIRB also plans to analyze fee schedules for interpreter, copy and home health services, within 90 days of the Division of Workers' Compensation publishing final values, and also said it will price the Official Medical Fee Schedule based on Medicare's Resource-Based Relative Value Scale within 90 days of knowing the final values.

More importantly to the vast majority of the state's employers, i.e. small business, the WCIRB is finally planning on reviewing its experience rating plan next year.

Currently, the split point used for calculating experience modification factors, or X-Mods, is $7,000. The portion of a claim up to $7,000 is counted in full for calculating an X-Mod, while claim costs above $7,000 are discounted.

This has a disproportionate effect on small businesses which otherwise have a good claims history but get dinged by a single costly claim. The National Council on Compensation Insurance is changing its claim points gradually such that, in 2015, it will be adjusted annually for inflation.

Coincidentally the WCIRB last Tuesday started issuing its 2013 X-mods.

So what does all this mean? In my opinion, not much. At least, not yet.

We're in a period of transition. Nobody really knows what's going on. The fact that frequency continues to increase despite a relatively stable (if not troubled) economy is disconcerting.

Throw into the mix the complete uncertainty created by drastically changing the rules of the game with no time for adjustment and we have a lack of stability and predictability.

What the purveyors of SB 863 (indeed, each reform plan since I have been in this business) is that it's not the totality of costs that drive business owners and operators nuts. It is the lack of predictability that is troublesome.

Good business management needs known factors. Business does not like anything that can not be calculated and upon which good forecasting can be made. One can not plan adequately for the future and that is what drives the bean counters running the books and business owners crazy.

Spikes in pricing, whether up or down, is maddening - albeit downward spikes don't get negative attention because generally that means more money left over at the end of the fiscal year. Upward spikes however destroy financial forecasting and create business panic when the cash isn't in the bank account at the end of the year to pay those extra, unpredicted, costs.

Continued focus on "costs" does no one who is actually responsible for business any good. The focus should be on consistency and predictability. We have an increase in frequency that can't be otherwise identified - how can frequency be controlled if the cause can't be known?

Based on nine months of experience, Milano said the projected growth in medical costs ranges from a low of 4.5% to a high of 8%. Trends in indemnity costs point to growth of between 0.6% and 3.8% in 2012, he said.

Those are wide ranges - business can not adequately plan when trends can not be succinctly tracked and identified.

SB 863 does nothing to provide business with the ability to plan. Instead it creates havoc, with the actuaries essentially making wild-assed guesses as to what the future holds.

What am I complaining about though? SB 863 is here to stay, it is the law, it is what the Brown Administration wished upon the business community of California.

So just let it be for once. When SB 863 doesn't work out the way that its proponents thought it would in a couple of years, leave it alone! This industry goes though a major change in the law every 7 years or so, which is not enough time for stabilization to occur.

Our collective short term memory loss only drives the cost of doing business in California up. Workers' compensation is not about us. It's about business environment which means that those in business need to make money at the end of the day, and need to know that they in fact can make money and how it's going to get done.

Planning. That's all businesses really want - the ability to understand what's in the way of achieving a goal and being able to plan for it. One can not manage what one does not know.