Wednesday, January 2, 2013

RAND & WCIRB Finally Address Small Employers

Last week the Rand Corporation released a study prepared for the Commission on Health and Safety and Workers’ Compensation on the effect of experience rating modifications.

The conclusion of Rand was that lowering the premium threshold for California employers to be eligible for experience rating modifications would improve worker safety and reduce employer costs.

This has been a topic of discussion for the past couple of years at the Workers' Compensation Insurance Rating Bureau (WCIRB).

As of July 1, 2012, the qualifying threshold for employers to receive an experience modification factor is a total of $25,225 in premium over the previous three years, calculated at the pure premium rate level as opposed to the premium actually paid to the carrier. So while an employer might have paid $28,000 in premiums over the previous three policy years, if its pure premium rates based on employee classification codes total less than $25,225, the employer would not be eligible for experience rating.

The Rating Bureau sets the rating threshold for California employers in its Experience Rating Plan, and the Insurance Commissioner has to approve any changes to the plan.

To measure the impact that experience rating has on employers, researchers compared businesses that recently became experience rated to those that were near the threshold, but didn't qualify for experience rating. The differences between the two groups should come as no surprise to anyone that believes in the power of market economics on human behavior.

This comparison of “virtually identical” employers showed an 8.4% decrease in claim reports after a business became experience rated for the first time.

While there was a decrease in claim activity for employers recently experience rated, the average cost per claim did not change. The researchers say it was unlikely that these employers were suppressing claims.

If employers were not reporting claims, Frank Neuhauser, a researcher with the University of California, Berkley, and one of the authors of the study, said the average cost per claim should increase, in part because smaller claims are easier to conceal. Additionally, smaller claims have a bigger impact in calculating experience modifications, or X-Mods, and the premiums that employers ultimately pay.

Another point of contention in the equation is the "split point" used to determine any discounts.

In calculating an X-Mod, carriers use the full cost of the claim up to the split point threshold, which is $7,000 in California, and discount the cost of the claim above that amount. The premiums charged to a small employer that is experience rated would increase by about the same amount if that business had a single $4,000 claim or a single $1 million claim.

Carriers can apply debits and credits to increase or decrease the premiums they charge, and larger carriers will often have two subsidiaries, one offering lower rates for employers with better claims histories, and the other charging higher rates for more risky employers.

But carriers aren't applying the discounts to small employers, largely because they don't consider the experience of a small employer to be credible in predicting future experience - their loss experiences are too diverse to be predictive of future behavior.

The next step researchers are going to look at, according to the story, is to examine the effect of adjusting the split point for determining primary and excess losses to see if lowering the split point reduces the variability in premiums charged to small employers.

This has been a point of discussion within the WCIRB of late, and the National Council on Compensation Insurance (NCCI), rate maker for most states, has already put into place plans to increase the split point and then tie it to inflation.

Which brings me to my basic point - in California we had a monumental change to the workers' compensation laws dealing with claims, and primarily litigated claims. These changes were pushed by Big Business and to a lesser extent Big Labor.

There was no consideration for Small Business. There was no consideration for dealing with the underwriting component of workers' compensation - the part that most directly affects Small Business.

And yet Small Business when aggregated is by far the biggest employer in the state and is disproportionately affected by the costs of workers' compensation both directly and indirectly.

I see that as a fundamental flaw in the entire negotiation and implementation of SB 863 - especially in light of the fact that in rating an employer for premium purposes the system makes a big distinction concerning the size of the business.

Listen, we all know that Small Business has no say in the California Chamber of Commerce, one of the big proponents of SB 863. We all know that Small Business really has no clout, no organization, no unification whatsoever in the political process of Sacramento. The Small Business owner is too busy trying to make payroll, manage inventory, people, customers all by him or her self.

At least it appears that the WCIRB is listening, and has some idea that Small Business really is important to the economy.

Working the experience modification formula and rating thresholds is a good first step towards making the economic burden of paying workers' compensation premiums, and engendering a more safety conscious Small Business population.

On another note, it was interesting to see, the day after my vacation started, that the Los Angeles Times ran a story about Deloitte's imbalanced ability to leverage contacts, political contributions and persuasion to garner California state information technology contracts and the huge cost overruns, as well as failed implementation, of these systems - notably the Division of Workers' Compensation's Electronic Adjudication Management System.

It's no secret that I'm no fan of EAMS. I'm not a computer expert, but I do know how shared systems should work. EAMS in my opinion is far from where a professionally built multi-million dollar network should be in terms of user access, ease of use, customization, reliability, etc.

The Times story touches on why EAMS doesn't do what I think it should do: money influencing politics. I'm glad to see that a large daily publication at least is bringing this to the public's attention, albeit a bit tardily.

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