Wednesday, May 16, 2012

Cost Containment Expenses - I Smell a Rat

"If cost containment tools are not working but cost more than they benefit the system, we need to know why."

That's what California Insurance Commissioner Dave Jones was quoted as saying yesterday at the Department of Insurance (DOI) rate making hearing, expressing concern that medical prices are increasing in spite of the rise in spending on cost-containment programs, such as medical provider networks and utilization review. Jones said it might be appropriate to study whether the programs are worth what they cost.

Perhaps he should initiate review, utilization and fee schedules for cost containment services...

For those of you less sensitive to sarcasm in print, a healthy guffaw is applicable now.

The Workers' Compensation Insurance Rating Bureau (WCIRB) estimates that carriers spent $350 million on medical cost-containment programs in 2010. The estimate for 2011 is $370 million.

WCIRB's Chief Actuary Dave Bellusci said the overall impact of reform measures passed between 2002 and 2004, including cost containment, a cap on the number of physical therapy visits and treatment guidelines based on evidence-based medicine were overall "tremendously effective in controlling medical costs."

According to Bellusci, using the medical inflation rate for the years leading up to 2005 to project costs through 2011, the average cost per medical claim would be $88,092. Because of the 2004 reforms, the actual projected cost is $43,308.

If we use only the volume of litigated claims in California (generally about 300,000 filed per year) that means the industry saved about $13.5 billion.

Seems to me that if the goal of cost containment services is to actually contain costs, then the extra $20 million spent last year is still producing a good return on investment. Maybe I'm not reading this right though. These insurance guys are a lot smarter than I am - I have never been good at math.

Bellusci also noted that the WCIRB is seeing a shift in the percentage of indemnity and medical-only claims. Between 2005 and 2007, 71% of all claims were medical-only and 29% were indemnity. By 2010, only 66% of claims were medical-only.

I didn't see the estimate for 2011 in the report on the meeting.

NCCI noted a similar spike in indemnity claims in its Annual State of the Line report delivered just last week, and also noted that the 2010 spike appeared to ameliorate in 2011 - so this "trend" may not be a trend at all, but some statistical anomaly that has yet to be identified.

In large part because of these alleged out-of-control expenses, the WCIRB recommended to the Insurance Commissioner a pure premium rate hike of $2.51 per $100 of payroll.

That would be 9.1% higher than the rate that took effect Jan. 1 and 7.7% higher than the $2.33 recommended by the Rating Bureau in its Jan. 1, 2012, filing. The recommended pure premium rate is also 4.15% higher than the industry average charged rate of $2.41 as of Jan. 1, 2012.

Rating Bureau President Bill Mudge said he believes that some of the cost-containment expenses can be attributed to regulations that make it difficult to establish and maintain a medical provider network.

I suggest that perhaps some cost-containment expenses can be attributed to profiteering and over-utilization of these services. It isn't rocket science, and not even actuarial science - just follow the money. Who owns utilization services? Where does that money flow? Who is dictating policies about cost containment services?

Not all medical treatment needs to be subjected to utilization or bill review and my guess is that most treatment requests don't require this level of oversight.

But the anecdotes I hear point towards nearly mandatory review by most companies of almost all treatment requests. To me that's a utilization issue that the carriers need to address with their internal policies, not some external priming of the pump to extract more cash from the insured base.

Let's look at another issue with these dog and pony show rate making hearings - how many of the state's carriers are really operating at such high loss ratios and high combined ratios? Are these statistics skewed by just a few of the state's carriers? How many carriers are operating at levels that are much rational?

And since the last rate hike recommendation, just how many carriers actually increased rates?

Maybe I'm just naive, uneducated, or just plain stupid (don't pick one - this is theoretical) but it just seems to me that we're not getting the whole story. I can't make sense of these numbers.

And it seems that the Insurance Commissioner buys into the gloom and doom, in part because he doesn't study workers' compensation history very well - he is quoted as stating that the current trajectory of the market is not sustainable and one doesn't have to look back far to "see the ground littered with the bodies of 35 workers' compensation carriers" that the Insurance Department had to liquidate.

Those 35 carriers were the subject of inadequate rates, not because of inaction by the DOI, but because of irrational exuberance based upon the availability of irrational reinsurance deals that went bust - deals that the rest of the market knew was a fantasy - following revocation of the minimum rate floor in 1995.

If the sky is falling then why isn't everyone running for cover? If doing business in California is such a huge burden and such a money losing proposition, then why do carriers remain in the state and write coverage for California business? Why not just cede all that risk to the State Fund and let them worry about it?

I smell a rat. But I don't have the bait or a big enough trap to catch it.

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