Thursday, February 5, 2015

Vapor Ware

In insurance parlance this is what's called a "hard market" in California workers' compensation underwriting.

That means that prices are going up, and not by piddly amounts.

After Insurance Commissioner Dave Jones approved a 2.2% increase to the advisory pure premium rate Nov. 13, eighty-seven carriers in November and December filed revised pure premium rates reporting an average 2.26% increase since Jones adopted an advisory rate of $2.74 per $100 of payroll.

The State Compensation Insurance Fund weighed in yesterday with an average increase of 9% on policies incepting or renewing on or after April 1.
Source: WCIRB

This of course doesn't mean that everyone's bill is going up 9%, it just an average. Some employers with good records, active risk management, and who qualify for tiered rating may still see big savings. Brokers tell WorkCompCentral that for employers with good records and which qualify for various discounts, the State Fund is very competitive with other carriers, and sometimes is the low price leader.

The State Fund blames the average increase on the Los Angeles area, and uses geographical rating to isolate risks in those zip codes.

"The reasons have to do with the experience in Los Angeles, the frequency increase and increased litigation rates on those claims," Jennifer Vargen, executive vice president of public affairs for State Fund, told WorkCompCentral.

The Workers' Compensation Insurance Rating Bureau reported last month that the state's claims experience has increased 8% in California since 2012, while it declined 8.1% among states that report data to the National Council on Compensation Insurance.

Claims frequency in an area that includes Los Angeles, Orange, Ventura, San Bernardino and Riverside counties, which accounts for about 45% of insured payroll in the state, increased a combined 9.4% in the area in 2012 and 2013, while it decreased by 2.7% in all other parts of the state.

So employers in those geographic zones will face a 15% factor to increase premiums, while the factor applied to policies for other employers in Southern California will increase to about 10%.

There are of course all sorts of specious reasons why the insurance market isn't responding to the landmark "reform" bill of SB 863, which had been variously projected to produce a net savings after all was said and done of about a half billion dollars.
Source: WCIRB

But just because there are savings in the system (and at this time there does not appear to be any net savings from SB 863 unless you're a self-insured employer) doesn't mean that employers will feel less pain when they get the bill.

There's an intermediary between the law and the premium notice - and that's the insurance company, a business that is tasked with the job of making money for its shareholders (or in the case of The State Fund, keeping financially strong and returning some of the excess to its policyholders in the form of dividends).

A couple of years of historically low interest rates means that the carrier's investments aren't returning the cash generally anticipated. And as a competitive industry measured by Wall Street the line isn't very attractive.
Source: WCIRB

But the allure of 25% of the nation's total workers' compensation written premium, and the entree that provides to all of the more profitable lines of business for nationally based carriers, means that the fertility of almost 19 million insurable employees is ripe for sowing.

At least as long as the business community is willing to stick around and keep those people working.

In the meantime, SB 863 continues to be unimpressive in terms of overall system performance. Yep, lien filings are down. Disability rates are up.

But medical delivery seems stifled, friction points have increased, and there is no clear indication that the system really is better off than before.

Carriers aren't going to abandon California. The state is too rich.

But if SB 863 were a marketing campaign it would be derided as "vapor ware." There's still time, for sure, but these days patience wears thin a lot more quickly than it used to.


The following response was emailed to me by Mark Gerlach, a consultant to the California Applicants' Attorneys Association:


I must admit I am a little confused by your comment that SB 863 should be derided as "vapor ware."  It is clear that expected savings from the introduction of IMR have not been realized, but virtually every other feature of SB 863 is performing either as expected, or better than expected from the employers' standpoint.

Look at the latest cost monitoring report by the WCIRB, as contained in the presentation materials for the December 3, 2014 Actuarial Committee meeting (available on the WCIRB website).  In the "Indemnity Reform" table, the changes to the PD benefit levels and replacement of the FEC factor are coming in as expected, as is the change in claim severity.  The only blemish on this "Indemnity Reform" side is that claim frequency is up more than expected, but there is an indication that this frequency increase is due to other factors such as the economic recovery and the increase in employment.  It should also be noted that the 2013/14 frequency increase is much smaller than the previous two years, less than 1%, so it is possible the recent uptick in frequency was a short-term problem.

Looking at the "Medical and LAE Reforms" the lien changes -- which account for the single largest savings in SB 863 -- are now estimated to produce savings that are actually $200 million higher than the initial projection.  The initial savings estimates of about $100 million each for elimination of the separate fee for surgical hardware and revision of the ASC fee schedule are coming in as expected, and initial evidence indicates the savings from MPN strengthening are also on target.  Additionally, the data show that introduction of the RBRVS-based physician fee schedule is not going to raise costs as much as initially projected, and that medical severities are actually declining, rather than increasing as initially projected.

Thus, the only fly in the ointment is that the projected savings from the introduction of IMR are not occurring.  It is important to note, however, that even with this negative factor, the WCIRB's estimate of the overall impact of SB 863 remains unchanged -- specifically that it will result in overall savings of around $200 million.

With the WCIRB documenting changes that are saving almost a billion dollars, and confirming its initial estimate that there will be a net impact of $200 million in savings, it hardly seems appropriate to deride SB 863 as "vapor ware."  The real issue is why isn't IMR achieving any savings? 

Simply put, because IMR addresses the wrong problem.  The issue shouldn't be how to efficiently resolve medical disputes, it should be how to efficiently provide appropriate medical treatment without so many disputes.  Our system now heavily regulates how a doctor makes a request for treatment, and the new IMR system heavily regulates how a dispute over that treatment request is resolved.  But the UR process between those two steps is basically a free for all. 

Take the Dubon case as a good example of this problem.  Whatever one thinks of the Board's decisions, there should be general agreement that the fundamental problem in that case was that the UR physician didn't review all relevant medical records.  I think most will agree that if the UR physician doesn't have or doesn't review all of the relevant records, the UR determination is likely to be wrong.  While there are important issues being decided in Dubon, wouldn't it have been better if the UR physician had looked at all of the medical evidence before making a faulty determination that is now taking on a life of its own.  Instead of spending a lot of effort and money in litigating disputes over UR, wouldn't it be more effective for all parties to find a way to make the treatment authorization process work without so many disputes? 

Bottom line, most of the changes made by SB 863 are turning out as expected, and based on the most current evaluation it looks like there will be a net savings of about $200 million for employers.  But as evidenced by your column,  the problems with IMR are so overshadowing the other changes that most observers are unaware that most of SB 863 is performing as expected.  This is not to dispute that the IMR issue is important; but the "IMR problem," in my opinion, will only be solved when UR is viewed not simply as a means to deny treatment but as a means to make sure workers have prompt access to appropriate treatment.

Sorry to send this as an email; your site wouldn't accept it as a comment because it is too lengthy.

Mark Gerlach

************MY REPLY***********

Mark - I thought about this more (of course after I wrote this morning's blog and cleared my head with caffeine!) - I think the confusion here is what typically confuses the workers' compensation industry: subrogation.

You see, we're so accustomed to synonymously equating "employer" with "carrier" because the carrier takes over, and stands in the shoes of, the employer once a claim is presented.

And yes, it is true that SB 863 is reaping savings ... for insurance companies, not employers.

What you are citing is carrier savings.

As is obvious with current rate filings, those savings are not being passed on to the paying employers.

Self-insured/administered employers ARE seeing direct SB 863 savings. They represent a very, very small piece of the pie.

TPA administered self-insureds are seeing savings too, but not to the extent their self-administered brethren are, because there are profitable friction points (e.g. UR, bill review, etc.) built into those TPA contracts.

But the vast majority of employers in this state, those that rely on insurance to cover their work comp risks, are not seeing any savings, and as is clear by the filings, are in fact seeing increases of between 2.5 and 10%.

So, while you make some very good arguments, they are characterized incorrectly. Yes, SB 863 is generating some savings (* and not nearly as much as was promised) but it's for the carriers, not the employers.

I stand by my opinion!

Or, as a good friend of mine likes to remind me: That's my opinion, ought to be yours!

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