Work comp is affected by several factors, but none are as significant as the economy. After over a year of horrible news, things look to be slowly getting better. As activity picks up, we can expect the comp industry to start breathing again.
Last week the index of leading economic indicators improved again, marked by increases in housing starts and sales of existing homes, and manufacturing hours worked. Things have been on the upswing since April, although digging out of the worst recession since the 1930s is proving hugely difficult.
The employment picture also brightened somewhat in July, but the improvement is an indicator of just how bad things have been. 247,000 jobs were lost during July, the lowest total since last August. Auto sales were also up fifteen percent in the month driven in part by the ‘cash for clunkers’ program, and Ford announced it will actually increase production by 21% later this year.
The big concern has been inflation, which would choke off any recovery; so far, there appears to be no dramatic increase in consumer prices, with the consumer price index flat last month.
Those of us deep in the workers comp business have watched as the injury rate has declined along with the economy; with fewer people working fewer hours, particularly in high-frequency industries such as manufacturing, construction, and transportation, the number of claims ‘fell off a cliff’ during the winter. Moreover, the people who were laid off were the ones with less experience, and the pace of work likely lessened as well.
The drop in frequency hammered many workers comp service firms; with fewer claims, there has been much less demand for claim intake and triage, claims management, primary medical care, physical therapy and diagnostic imaging, medical case management, bill repricing, and utilization review. Provider networks have suffered as well with fewer bills resulting in lower revenues.
The decline in frequency was somewhat offset by a continued rise in severity – medical expenses and wage replacement costs.
Now what?
As economic activity increases, premium volume will increase in line with payroll. That’s the good news – more revenue for comp writers. The bad news – for those comp writers, is the injury rate is likely to jump, and there are no indications that severity is going to decline. We may well be looking at an increase in the number of injuries coupled with higher costs per injury.
The good folks at the NCCI have looked at the impact of economic recoveries on workers comp, finding “Job creation is related to an increase in the proportion of workers who are inexperienced in their current job and, hence, more likely to sustain a workplace injury.”
As firms staff up to meet demand for new houses, cars, and services, the faster pace of work, coupled with the inexperience of the new hires, will likely result in more injuries both in total and as a function of hours worked. Again, according to NCCI, “On net, the effect of job creation dominates quantitatively, thus generating the observed pro cyclical behavior in the growth rate of workplace injury and illness incidence rates. Further, it is shown that the growth rate of frequency tends to overshoot during economic recoveries, although this effect is not common to all recessions.”
In layman’s terms, we can expect a ‘higher than expected’ increase in the number and frequency of injuries. Here’s how this will affect the comp industry:
– Insurers – higher claims volume and higher medical/indemnity expense equals greater losses, which may not be balanced by premium increases. I’m expecting combined ratios to increase this year and next, as premiums tend to lag experience (the continued soft market is a contributing factor, as some comp insurers persist in fighting price wars,)
– Claims organizations – TPAs can’t wait much longer for a better market. Several have cratered, and others are losing business at a scary rate. Many TPAs get paid on a per-claim basis, and the drop in frequency has just murdered their top line, while the increase in severity means they are spending more resources (or not, for those TPAs near death) to manage those claims that do occur.
– Medical providers – The occ clinic companies – Concentra, USHealthworks, and their regional and health system-affiliated competitors, have been hammered by the drop in frequency. These clinics are primary-care focused, and are directly, and immediately, affected by any changes in frequency. Increases in severity have little effect on their results, as more expensive claims are almost always treated by specialists which don’t practice at clinics.
– Managed care firms – While Coventry has continued to increase revenue during the recession, this has been driven by price increases and hard bargaining. Other firms, including Genex, IntraCorp, and the regional players have seen precipitous drops in activity for two reasons. The obvious one is there are fewer claims to handle; the less obvious is many of their customers – TPAs and insurers – have internalized managed care functions in an effort to hold on to revenue and capture whatever margin went to vendors.
– Specialty managed care firms – Companies focused on PT, pharmacy, and especially durable medical equipment and home health care have been affected less severely than other service firms. As the injury rate picks up, they will see more volume, particularly in the areas of PT and pharmacy.
What to watch for
Tracking trends in work comp requires the ability to see ‘over the horizon’; none of the reporting agencies or entities have been able to collect data in real time, or anything close to it. Unless you want to wait for eighteen months, you’ll have to rely on anecdotal ‘data’. Here are a couple potential sources.
– TPAs and case management firms posting new jobs
– Individual company hiring notices, especially in manufacturing, construction, transportation, health care
– Employment statistics, particularly increases in hours worked and jobs created
