Workers’ comp – for hospitals, it’s where the money is

Two recent articles in Health Affairs highlight a growing issue for employers and taxpayers; some hospitals are increasingly looking to work comp as a profit maker.

Depending on the state, facility costs can account for anywhere from around 32 – 40% of total work comp medical expenses (different states classify locations-of-service differently).

Ge Bai and Gerard Anderson examined the fifty US hospitals with the highest charge-to-cost ratios and found their markups over Medicare-allowable costs were three times higher than the average hospital.

This is critical in work comp because state work comp regulations often base facility reimbursement on charges – despite NO evidence or requirement that those charges have any basis in reality.

Fully 20 of the fifty hospitals are in one state – Florida – that uses a percent-of-charges reimbursement methodology for hospital outpatient services (manual is here).

Bai and Anderson’s latest work provides a deeper dive into hospital profitability.  A few key quotes:

  • Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals.
  • Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics.

The methodology used by Bai and Anderson is somewhat different from that used by other researchers in that it excluded income from non-patient care services. I infer that they did this to focus specifically on the actual care delivery cost and not factor in other revenues from services such as parking, gift shops, investment income, etc.

So, what are the implications?

  • Work comp is a soft target for facilities in many states
  • The percentage-of-charges methodology is a license to…profit
  • More profitable facilities have likely already figured out how to make the most revenue possible from every source – including workers comp
  • Less profitable hospitals are going to learn from their more profitable competitors

Who’s running your company.

Is it the execs or the IT department?

The workers’ comp, and, for that matter, the entire property and casualty insurance industry, is chronically systems-poor.  While other industries view IT as a strategic asset, continually investing billions in IT, WC/P&C considers IT an expense category to be mined for pennies to add to earnings per share.

We all know how much execs HATE unallocated loss adjustment expenses

Execs at payers are hamstrung by IT departments that can’t/won’t/aren’t able to implement systems changes. In fairness, IT departments are hamstrung by a lack of strategic vision in many C-suites, which in turn is motivated by financial markets or executive comp plans at mutuals.  Suffice it to say there is plenty of blame to go around – but the result is insurers’ strategy is often greatly limited by IT.

For example, underwriting and distribution. Yes, Google’s initial foray into insurance was short-lived, but that wasn’t because they weren’t selling insurance. In fact profits were good – but “good” by insurance standards, not by tech standards.  Google just couldn’t make the profit levels they are used to.

At some point another tech innovator will figure this out and/or decide a lower profit level is just fine, and then woe betide insurers.

Another example – the medical management world is changing dramatically, and work comp insurers are very hard pressed to adapt. Bundled payments, narrow networks, electronic medical records and vertically integrated delivery systems are here today, and will grow dramatically in importance tomorrow. Flexibility, adaptability, and the ability to move quickly are essential – and equally impossible.  Changing vendors requires IT to design, implement, test and monitor new data feeds to multiple systems and stakeholders.

Conversely, some payers have tied themselves to external vendors who act as consolidators or pipes, thereby greatly reducing the carrier’s IT burden.  In exchange, a LOT of power is transferred to the pipe vendor.  That’s fine if:

  1. incentives are aligned over the long term, and
  2. the vendor is able and willing to make changes to providers, processes, and feeds as necessary, and
  3. there’s transparency.

However, expediency and underinvestment comes at a cost.

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CEO T Rex: “Hey, when is that B2B platform scheduled for testing?”

CIO Triceratops: “18 months after I get the money to hire the staff you cut to reduce ULAE…”

The B2B and healthcare delivery market is evolving at a pace akin to that the dinosaurs saw after the meteor hit.  So, here’s a couple of questions you may want to ask yourself.

  1. Does your strategy drive your IT, or does your IT drive your strategy?
  2. What’s your plan to adapt to the revolutionary changes hitting distribution and medical management?
  3. Does your IT department, management, vendors, and infrastructure support that plan?
  4. What happens when – not if, but when – a carrier or new entrant builds the infrastructure and capability you can’t or won’t?

Clinton health 2.0

Medicare for more, caps on premiums and out-of-pocket spending,

Presumptive Democratic nominee Hillary Clinton’s health plan builds on ACA in several key ways, with an over-arching goals of providing more consumer choice and reduce the financial burden on consumers.

  • a tax credit of up to $5,000 per family to offset a portion of excessive out-of-pocket and premium costs above 5% of their income.
  • incease financial incentives for states to expand Medicaid
  • allow younger seniors to “buy-in” to Medicare

Let’s take these in order.

Tax credit

The Clinton plan’s tax credit is intended to address a growing concern; while premium costs aren’t zooming up (altho 2017 premiums look to be increasing at near-double-digit rates) deductibles, co-pays and coinsurance are becoming increasingly problematic.  The $5,000 tax credit is intended to offset some of these increases, and is coupled with a limit on total insurance and related expenses of 8.5% of family income and a mechanism intended to reduce costs for those earning more than 400% of the federal poverty level. (this last can make a huge difference, as costs for those just under 400% can be a fraction of what those earning just above 400% pay).

The subsidy isn’t limited to lower-income folks, and will certainly increase costs and concerns about affordability. However, indications are that take-up among the more affluent would likely be fairly low – and the subsidy pales in comparison to the favorable tax treatment currently enjoyed by those with employer-based insurance. Notably, there’s effectively a “fade-out” of the impact of the 8.5% cap for the truly affluent just because that 8.5% represents a pretty high figure for those with a lot of income.

Medicaid

Clinton proposes federal payment of 100% of the cost for any state that expands Medicaid for three years (declining to 90% thereafter).  Her plan also includes increased funding for education and enrollment activities for Medicaid-eligibles.

Medicare buy-in

The yet-to-be-finalized plan would allow seniors as young as 50 to buy in to Medicare. If enough seniors chose Medicare, rates for “regular” insurance on the Exchanges would likely decrease as the average age of members would decrease, thereby decreasing expected costs. And, insurance premiums for those seniors buying in would almost certainly be several thousand dollars lower than they can currently get via the Exchange. Clinton contends, with some justification, that adding more consumers to Medicare would reduce overall health care costs.

Medicare’s buying power and regulatory authority gives it much more control over health care price and utilization.  That, plus the sheer number of Medicare recipients, makes it the dominant force in the marketplace.  While providers may balk, many will find it necessary to go along – or lose a substantial chunk of their patient base.

However…Medicare is a mash-up of four separate and distinct parts, with different deductibles, treatment requirements, cost sharing, and treatment limits.  While it is well understood by practitioners, that’s only because it is THE dominant health insurer in every market.  Streamlining and rationalizing the benefit plan would make it much more palatable to under-65s.

Clinton has yet to dive into the details, but given the attention span and appetite for same among the eligible-voter population, those details are going to get attention from a very limited group of health care geeks (your faithful author included).

What does this mean for you?

Depends on whether a) Sec. Clinton is elected; b) the Dems take over the Senate; and c) the Dems make significant inroads in the House.

 

Friday catch-up

Got to love May!  Everything is greening up, baseball season is in full swing, college graduations, flowers are blooming.

While I was out smelling the new blossoms, a bunch of stuff happened.

Implementing health reform

There’s been a lot of press about UnitedHealthcare’s decision to leave the Exchanges, with opponents citing the move as more proof of the impending demise of wrongly-named “Obamacare” and others noting it’s much ado about not much.

A brief and compelling post by David Williams is in the latter camp; David notes:

[United] specializes in selling high-priced plans to corporate accounts. In the price-sensitive world of the exchanges that’s a losing proposition. No surprise — United wasn’t getting traction.

As a former UHC employee (albeit from two decades ago), I have to agree.  UHC never focused on the individuals or employers or demographic groups that seem to be signing up for insurance via the Exchanges.  There are several distinct attributes of health plans winning in the Exchanges; Health plans that have expertise in Medicaid, understand local markets and have very strong local brands, and/or are vertically integrated delivery systems are succeeding.

Bernie Sanders’ campaign appears to have “inspired” Hillary Clinton to talk more about offering a public option in the Exchanges, namely allowing a to-be-defined group to buy-in to Medicare. Notably, Sec. Clinton first broached the public option back in February, so this isn’t really new news. However, it does mark the first time she’s mentioned the Medicare buy-in. (a more detailed review of Clinton’s health policy platform is coming up next week)

From JAMA, the news that employer coverage of health insurance has not changed over the last few years.  This is a key reason the Exchanges have not enrolled more higher-income folks; they are getting their insurance thru their workplace.

Finally, before you get too wrapped up in the media nonsense about prices, enrollment, and the failure/success of ACA, read Larry Levitt’s piece in Vox on Obamacare 2017.

Workers’ comp

WCRI in partnership with the good folks at IAIABC published a must-have guide to State Workers’ Compensation Laws.  Order your copy at the link; investors, analysts, compliance departments and regulators all need this on the virtual bookshelf.

Friend and colleague Peter Rousmaniere’s Working Immigrants blog has been especially active of late; Peter’s been documenting the reality behind immigration trends, and his charts and graphs will speed your understanding of what’s ACTUALLY happening.

(spoiler alert – there is no big influx of Mexicans these days…)

Finally, a terrific post by a woman – a neuroscientist – who finally decided to treat her anxiety with medication.  It is an excellent piece addressing the balance between over-medication and the positive impact drugs can have – when they are the right choice.

Correction – Are work comp medical costs really dropping?

Last week’s announcement at NCCI AIS that medical costs for lost time claims dropped for the first time ever was a shocker. Talks with experts and industry pros after Kathy Antonello’s talk led to much head scratching and wondering.

The likeliest contributor is…California.

My mistake – California is NOT an NCCI state.  I was under the mistaken impression that, while CA is not an NCCI state, CA does share data with NCCI and therefore was included in the data used for this research.

Today’s WorkCompCentral opened with the news that California’s work comp rates are dropping 5%, driven primarily by reduced medical costs.  In turn, that decrease was due to favorable medical development on older claims – which means those older claims are turning out to be less expensive than originally forecast.

As California accounts for more than 20% of ALL workers’ comp premium, it should not be a surprise that the reforms that have stripped out a lot of the egregious profiteering and waste (e.g. double billing for surgical implants, reduced reimbursement for certain procedures, reductions in costs for physician-dispensed drugs) have actually lowered cost for older claims.

What’s not apparent is the undoubted improvement in patients’ medical outcomes. By reducing incentives for too many surgeries and drugs, patients aren’t getting as much unnecessary care that prolongs disability and has dangerous side effects.

Notably, if Los Angeles was removed from the data, results would be a LOT better. That county has most of the worst physicians treating work comp patients.

What does this mean for you?

Don’t write work comp in LA County.

Bob Hartwig’s prognostications

Back to NCCI…didn’t want to overload your inbox last week.

For anyone who has heard Bob Hartwig PhD speak, he violates all the common rules about presentations and presetting – and is excellent nonetheless.  Methinks it is because Bob is both deeply knowledgeable and enthusiastic beyond measure.

On to the content.

In the overall P&C market, we’ve just had three consecutive years of underwriting profits, an occurrence previously experienced 45 years ago. Back in the days before 1970, underwriting profits were common, primarily due to the  low investment returns available in those days.

One of the key drivers has been continued reserve releases as insurers and employers take down reserves, adding to gains.

Bob noted there’s been wide disparity among and between states in terms of premium increases, linked quite closely to each state’s underlying economy, but overall premium growth has been pretty modest.  With organic growth somewhat stalled, insurance M&A activity ramped u significantly in 2015 – not just in the US but in Asia and across North America.

Hartwig talked about the Trump v Clinton positions on matters of import to P&C insurers; see his presentation for the relevant slide.

Non-farm payroll is increasing at about a 4.5% annual clip since the great depression – due to higher employment, higher pay rates, and more hours.  This is GOOD NEWS INDEED.  There are also early indications that labor force participation has improved “modestly” since the beginning of 2016, and the number of “discouraged workers’ has also dropped significantly of late.

Manufacturing is a major issue in workers comp – while there’s been solid growth since 2009, it is contracting in the energy sector along with the entire non-durable sector.

The on-demand aka Gig economy – there are a plethora of regulatory issues which, in turn, have implications for insurance.  Independent contractor v employee, private passenger auto vs commercial auto, liability, etc are all of major concern. Notably, young, minority urban males are the most likely to offer gig services – this demographic group is also more likely to incur an occupational injury.  And, gig workers WANT more regulation – they seem to think of themselves as employees.

The sharing economy is going to have hugely disruptive effects on insurance; no longer does one entity own the asset that delivers the service or product, distributes it, services it, and employs those who do the work. This will require a rethinking of how and what is insured, and how “claims” are assessed/attributed/reported/paid.

Very glad there’s lots of smart millennials that can figure this out because it sure makes my head hurt.

41% of occupational deaths were due to transportation incidents – almost 2000 in 2014, 60% of those caused by roadway incidents.  Of course, that’s not the good news, what is the good news is increasingly-automated driving will likely reduce the death rate dramatically.  The “single greatest area where we can see a decrease in frequency of deaths due to improved automation.” (paraphrase, it’s impossible to type as fast as Bob talks)

Hartwig concluded with a discussion of the growing involvement of private equity and venture capital in the insurance industry.  Google Compare came to the US from the UK; after a brief run it closed up shop in February this year due to low profit margins.  When you have a hurdle rate (desired return on investment) of 18%, insurance is probably not a terribly promising industry.

Nonetheless, there are a plethora of insurance-related companies getting $10 million or more in funding to do something disruptive in P&C insurance.  Distribution, analytics, data warehousing, insurance technology are all areas of focus.

And that’s it!

Innovation in Insurance – we are soooo far behind

ACORD’s Bill Hartnett gave a compelling, entertaining, and pointed presentation on innovation, technology, and the impact of same on insurance (my title, not his).

You will be sorely tempted to ignore this and move on to the next email or project update; Do NOT do this.

His money quote – Insurance is the DNA of Capitalism.  Buildings and homes don’t get built or repaired…”

This set the stage for a discussion of the future that fortunately began with a back-to-basics primer on what insurance is for – risk assessment and management. One lightbulb went off for me – does big data give us great predictability, which obviates the “risk” issue inherent in the concept of insurance?

We will be able to predict weather events, identify medical conditions, greatly reduce “accidents”, deliver medical care designed specifically for that individual patient.

A few factoids – every minute, there are:

  • 4 million Facebook likes,
  • a million Vine users play videos,
  • 110,000 Skype calls,
  • 700 Uber rides scheduled, and,
  • 450,000 tweets

That’s a LOT of data.

And data mining uses this incredibly rich data trove to learn a LOT about you, about health issues, drug issues, crime, you name it.  Just by accessing, analyzing, and monitoring publicly available data.

Hartnett talked about vehicular changes dealing with autonomous vehicles – Ford and Tesla will have fully autonomous cars on the road before 2023. Given vehicular accidents are the single biggest cause of occupational fatalities, this is good news indeed – computers are better drivers than humans.  Yes, even me.

Moreover, frequency and severity will drop significantly within five years – this is going to greatly impact the auto repair business and auto insurance, but perhaps no industry will be more affected than long-haul trucking.

What will today’s drivers do?  How will they be classified for workers’ comp purposes? Will we get a spate of injuries as drivers see tech taking over the wheel?

New news to meGuardhat is a hard hat with technology specifically designed to avoid falls, notify when falls occur, and monitor other movement and risk metrics. Other technologies include wearables that address posture and monitor vital signs via a tattoo on the skin.

But hard hats may not be necessary, as 3-D printed buildings are coming – a 3-D construction printing rig can build a 2500 square foot house in 20 hours and needs 3-4 technicians to move it around.

I’ll stop with this – cognitive cognition – computers that can do pretty much everything we humans can in terms of pattern recognition, intuitive capabilities, and perhaps have emotions – exponentially faster and more consistently than we ever could.

Can you imagine the impact on health care?  Doctors? Diagnostics? Medical information? The health care delivery system will be revolutionized, with the potential to dramatically reduce costs as the role of people may well be greatly reduced.

Of course, I’ll be retired by then…oh, wait, I won’t be.

That’s how fast it’s coming.

Then there’s Distributed Trust

Workers’ comp – 2016 State of the Line

NCCI Chief Actuary Kathy Antonello’s State of the Line presentation – is the hot ticket at AIS. (Her presentation will be available here right after her presentation ends; the password is Transforming .)

Antonello’s use of new imaging and automation to present data was compelling and highly informative, really helping this non-actuary understand the import of the data and findings, and potential impact going forward.

Key intro points – Medical severity changes remain moderate, but drug costs are increasing at a troubling rate.  Definitions of “employee” are evolving as is the “workplace.

Key data points

  • Work comp net written premium for private carriers up 2.9% to almost $40 billion in 2015. State funds accounted for $5.8 billion in premiums, for a total of $45.5 billion – up from 44.2.
  • WC combined ratio improved to 94, a six-point drop from 2014 and the second best combined ratio since 1990
  • Most recent P&C industry cycle was a seven-year one, shorter than previous cycles
  • Unsurprisingly, net investment income decreased slightly across all P&C lines.

Private carrier details

  • direct written premium decreased in 9 states, with the biggest drop in OK due to reforms.
  • CA and NY had larger than average increases with CO DC and OH jumping by double digits.

Work Comp Drivers

  • Payroll is up 23% since 2010 – a pretty nice increase.
  • Construction employment has led the way, up 17%
  • Frequency continues its long term structural decline, down another 3 points – just below the long-term average of 3.6%
  • Medical is 58% of total benefits
  • Medical cost per LT claim DROPPED 1% in 2015 – more on this later…
  • Indemnity expense up 1 point from 2015 on a per-claim basis.
  • Loss ratio drop of 6 points is by far the most important contributor to the improved combined.
  • Loss adjustment expense (LAE) ratio increased somewhat, due to the improvement in losses.
  • Five-year investment gains dropped to 13 percent, down below the long-term average of 14.1 percent.
  • Reserve deficiency down to $7 billion

The operating gain jumped to 18 percent, a historic high – and far above the long-term industry average of 5.8%

Not surprisingly, all this good financial data is leading to premium price reductions.  Rates are decreasing, with 57% of agents seeing a decrease in rates at renewal in Q4 2015.

Most surprising is the data on medical severity – it is actually tracking BELOW medical CPI increases, a major change from prior years.

This despite a 6 point increase in drug costs, a finding that – argh! – will be discussed in detail in the research discussion which is scheduled at the same time as my panel on regulatory issues…

More – lots more – to come on the medical cost finding.  Spoiler alert – it looks like the reforms in California are working to cut unnecessary medical expenses…with Cali accounting for about a fifth of total work comp premium, that’s a big driver.