The double whammy = claim frequency and declining employment

The decline in work comp claims frequency is worrying many in the workers comp managed care business – as well it should. As I noted last week, a drop in the frequency of claims will mean fewer cases to manage, bills to process, and provider bills to profit from.
There is an ‘upside’ to the recession – claim duration could go up. That’s likely true. But the second part of our conversation may well be more important.
During a conversation with the head of a large TPA earlier this week, my colleague made the point that during a recession, claim duration may well increase for a couple of reasons – the folks who are still working are likely older (younger workers with less seniority get laid off first) and we older folks take longer to heal, and have other medical conditions that make the treatment process more complicated, longer, and more expensive.
So claim severity (the medical cost per claim) may well bump up as a result of the recession. But, and it’s a big but, there may be a more dramatic drop in the number of claims than anticipated. The key, as the exec noted, is while there has been a decade-plus long decline in the injury rate, the decline in frequency has been somewhat offset by an increase in employment.
While the economy was expanding, more jobs were being created. The increase in the number of people working offset the decline in claim frequency. (Frequency is measured in terms of injuries/illnesses per 100 FTEs, so the more FTEs the more injuries). Now, jobs are disappearing, with a disproportionate loss from jobs that have higher-than-average injury rates – construction (down 780,000 since December 2007), manufacturing (down 604,000), logistics.
The comp managed care industry has been protected from the decline in frequency by growth in employment, but this growth masked the structural, long term decline in frequency. Now that growth has been reversed, there’s a ‘multiplicative effect’; loss in high-injury-rate jobs times a decline in frequency = bad news for (most) managed care vendors.
What does this mean for you?
Tough times for some vendors; some, but not all. Tomorrow I’ll look at which sectors may be less vulnerable.