Thursday, October 18, 2012

Go To Texas for an Education

Reports on the performance of the Texas workers' compensation system should make other states jealous.

The latest publication from the Insurance Council of Texas shows the state workers' compensation system outperforming competing systems by wide margins. When coupled with the latest information from NCCI (which does studies for the state but is not the ratemaking agency for Texas), it is a wonder that other states are not clamoring to Texas to find out what they are doing that is different, and better, than them.

The Insurance Council (ICT) said Texas Department of Insurance (TDI) figures show the average premium rate in Texas has dropped from $2.70 per $100 of payroll in 2004 to $1.38 per $100 in 2010.

In the meantime, National Council on Compensation Insurance (NCCI) reported late last year that Texas carriers experienced a median combined ratio of 93% for policy year 2010 (up 11% from the year earlier and blamed on decreasing premium due to economic factors).

NCCI has delivered to the Department of Insurance a recommendation to reduce loss-cost rates by 3.8%, effective June 1, 2013. Last year, NCCI submitted a 0.3% rate decrease.

The Oregon Department of Consumer and Business Affairs latest biennial report shows Texas moved from the 12th most expensive state for workers’ compensation in 2010 to the 38th most expensive in 2012.

What's up in Texas?

In 2005 the Texas legislature passed HB 7 which is still being credited with ongoing system savings still. There seems to be near unanimous opinion in the state that the landmark reform bill is responsible for the ongoing savings.

I was thinking that there must be a dramatic decrease in claims frequency in the state in order for there to be such a big swing in costs - the conclusion perhaps being that the changes may be excluding otherwise legitimate claims (as well as those that are more nefarious). But I don't have the data to analyze this in the short time that I have to write this column every morning.

However, NCCI's last filing indicates that claims frequency is flat - meaning that there has been no appreciable increase or decrease in claims despite economic deterioration in the state (albeit Texas was much less affected by the last recession than most states in the nation).

NCCI's report shows that Texas lost-time claim frequency increased 1.4% in policy year 2009, after decreases beginning in policy year 2000, and a 5.2% decrease for policy year 2008. This tells me that initially HB 7 did affect frequency, but that it has likely stabilized.

Which makes the latest loss-cost rate reduction even more compelling.

According to ICT, the proportion of Texas employers subscribing to the system (as if you didn't know, Texas employers are not mandated to participate in workers' compensation) has steadily been increasing - the Texas Department of Insurance (TDI) Workers' Compensation Research and Evaluation Group showed a 44% non-subscription rate for 1993 and 1994. Subsequent studies showed a 38% rate in 2004, 33% in 2008 and 32% in 2010.

In its current filing, NCCI lists four “key observations” on conditions in the Texas workers’ compensation system:

  • Both indemnity and medical loss ratios “continue to exhibit favorable experience.”
  • Claim frequency has increased in the latest two policy years (albeit, as noted, not significantly).
  • Medical severity continues to decrease while indemnity severity has shown “a slight increase.”
  • Recent changes to the medical fee schedule and the statewide average weekly wage are estimated to increase overall system costs by 1.1%.
But NCCI says the change in experience and trend results in a 4.9% reduction in the rating formula. That reduction helps to offset the 1.1% increase and a 0.3% increase in loss-adjustment expense. The result is a 3.8% overall reduction.

What's missing from the rosy picture? There are always winners and losers in workers' compensation costs comparisons, and what's missing is an analysis of how injured workers are really doing compared to years past.

While frequency is flat, declining, or rising doesn't tell the picture - what would be of interest in a state by state comparison is whether Texas workers of particular classification codes fare better or worse than before - in other words, are they opting to seek care and indemnity under the state's workers' compensation system or are those claims being managed through other channels: general health and alternative disability systems.

I have been following Texas workers' compensation now for about 13 years - enough time to see the state go from being the bastard step-child of the workers' compensation world with allegations of inter-departmental fraud, corruption, mismanagement and other attributes not generally associated with a clean system, to being essentially the poster child for cost control in large state systems.

Clearly Texas has done something right and though there continue to be disputes in the state about how the system runs, who benefits, who loses, etc., if performance is to be based solely on the numbers, regulators and politicians from other states should be clamoring to Austin to get an education.


  1. David,
    Texas certainly does not have all the answers, but as one of many who worked on what became HB7 it is gratifying to see the positive effect. It is difficult to predict the effect of legislation and we are all aware of the unintended consequences problem. I think the success of the Texas reform is due, in large part, to the effort to create a balanced system that would not need constant repair. It is by no means a perfect system and adjustments have been and will be made to correct issues that arise, but it has "good bones". I have been watching the process in California lately and remember the reform in 2004 which was used to help provide incentive for the Texas reform in 2005. The 2012 reform of the 2004 reform has some optomistic projections. As someone who has worked from the employer side in both states I remain somewhat skeptical. I hope it works out for California, but, in case it doesn't, Texas is ready to welcome new businesses.

  2. Thanks for the comments Sam. There will never be a "perfect" system because everyone has a different idea of what that is. But TX certainly has proven that one can be designed to deliver benefits efficiently. Not perfect, but certainly workable.

  3. While everyone keeps praising HB7 and giving it credit for all of these trends in Texas, none of the reports have included an analysis of the effect of the huge increases in deductibles and/or self insured retention on the decline of the premium rates in Texas.