Consulting Actuaries
EXAMINING COSTS AND TRENDS OF WORKERS COMPENSATION CLAIMS IN MASSACHUSETTS
AUTHORS
Scott J. Lefkowitz, FCAS, MAAA, FCA Steven G. McKinnon, FCAS, MAAA
CONTENTS
1. INTRODUCTION 1
2. AVERAGE CLAIM COSTS IN MASSACHUSETTS 2
2.1. INTRODUCTION 2
2.2. MASSACHUSETTS CLAIM COSTS 2
2.3. BENCHMARKING 4
3. CLAIMS FREQUENCY 6
1. INTRODUCTION
The average cost of workers compensation claims naturally increases over time. Wage inflation has a direct impact on the cost of indemnity (wage replacement) benefits, while increases to the cost of medical services and pharmaceuticals have a highly leveraged impact on the cost of workers compensation claims, where medical care is generally more complex and costly than services associated with general health care.
Average claim costs and trends will vary between states. Each individual state has its own workers compensation benefit structure, administrative system, and governing statutes. Compensation rates, maximum and minimum weekly benefits, automatic adjustments to maximum and minimum benefits, system utilization, industry mix, administrative efficiency, constraints on medical care, and general cost of living levels all potentially vary by jurisdiction and represent a sample cross section of items that directly impact variances by state.
The purpose of this paper is as follows:
• Present current estimates of average workers compensation claim costs in Massachusetts based on the most recent available data from the WCRIBMA;1
• Benchmark average Massachusetts claim costs against claim costs in other states; and
• Present current claim incidence rates in Massachusetts.
Footnote references throughout the paper provide additional detail and context around the text.
1 The Workers’ Compensation Rating and Inspection Bureau of Massachusetts is the workers compensation data collecting organization in Massachusetts. The WCRIBMA is an extension of the insurance industry and analyzes collected workers compensation claims data generated by all insurance companies doing business in Massachusetts. The WCRIBMA uses this data to calculate, among other items, premium rates for all employee classifications. The premium rates (as well as other aspects of workers compensation rating plans) are filed with the Massachusetts Division of Insurance.
2. AVERAGE CLAIM COSTS IN MASSACHUSETTS
2.1. INTRODUCTION
“Lost time” and “medical only” are the two most general categories of workers compensation claims. Lost time claims are sufficiently serious to warrant lost work time of sufficient duration2 such that the employee qualifies for wage replacement benefits. Conversely, medical only claims are cases where wage replacement benefits have not been and are not expected to be paid. Medical only claims are characterized by minor injuries requiring minimal medical treatment with little or no lost work time.3 Generally, lost time claims represent only 25% of total claim volume, but generate 95% of total workers compensation benefit costs.
Conversely, medical only claims represent 75% of total claim volume, but generate only 5% of total workers compensation costs.
Claim costs are measured using policy year data.4 Data from policy years 2002 through 20095 are currently available for Massachusetts claims.
2.2. MASSACHUSETTS CLAIM COSTS
The table to the right displays
average lost time claim costs, average medical only claim costs, and average combined total claim costs, by policy year.6 Of note is the very large difference between lost time claim costs and medical only claim costs.
This difference emphasizes how, despite generating the majority of over all claims, medical only claims generate only a very small percentage of overall workers compensation costs.
2 All states have a “waiting period” for wage replacement benefits that generally range from 3 to 7 lost workdays. Wage replacement benefits are paid only if the disability exceeds the waiting period. The employee is retroactively reimbursed for wages lost during the waiting period only if the disability exceeds a specified duration defined as the “retroactive period.”
3 Massachusetts has a 5 day waiting period and a 21 day retroactive period. Therefore, claims with 5 or less lost workdays are, by definition, medical only claims, as no wage replacement benefits will have been paid.
4 The policy year of experience represents, very roughly, the period during which the claims generating the data occurred. More specifically, the policy year of experience represents claims covered by insurance policies beginning during a specific calendar year period. For example, policy year 2008 represents claims due to insurance policies beginning during 2008. It is apparent that since most policies provide coverage for a single year, half the claims in policy year 2008 occurred in calendar year 2008, and half the claims occurred in calendar year 2009. For example, consider a policy beginning on July 1, 2008. This policy provides coverage for the last six months of 2008 and the first six months of 2009.
5 Policy year 2009 represents the most recently available data. This is because the WCIRBM must collect, compile, and examine data generated by every insured workers compensation claim in Massachusetts. This multi-year lag between collection and publication is common and expected in the insurance industry 6 The average lost time claim cost is the cost of all lost time claims divided by the number of all lost time claims. The average medical only claim cost is the cost of
all medical only claims divided by the number of all medical only claims. The average total claim cost is the cost of all lost time AND medical only claims divided by the number of all lost time claims AND medical only claims.
AVERAGE WORKERS COMPENSATION CLAIM COSTS MASSACHUSETTS
POLICY YEAR LOST TIME ($) MEDICAL ONLY ($) COMBINED TOTAL ($)
2002 26,903 535 8,246
2003 28,965 597 9,037
2004 33,519 642 10,294
2005 33,695 702 10,476
2006 36,346 744 11,237
2007 37,315 774 11,634
2008 40,144 796 12,659
2009 43,749 799 13,944
The graphs below show that trends to claim costs have been relatively stable over time, and range between 6% and 7% annually. Specifically, measured annual trends and claim cost forecasts for 2012 are in the table to the right.
An interesting observation is that the measured annual trend to the combined total claim cost, 7.1%, is greater than the measured annual trend for each of the individual component claims, 6.7% and 6.0% for lost time claims and medical only claims, respectively. This is due to a subtle but measurable increase over time to the percentage of claims that are lost time. This is discussed in greater detail later in this paper.
AVERAGE WORKERS COMPENSATION CLAIM COSTS MASSACHUSETTS – AVERAGE LOST TIME CLAIM COSTS
POLICY YEAR OF CLAIM EXPERIENCE AVERAGE LOST TIME
CLAIM COSTS, $
Trend line
Policy year forecasts Available policy year data
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0
60,000
30,000
20,000
10,000 40,000 50,000
AVERAGE WORKERS COMPENSATION CLAIM COSTS MASSACHUSETTS – AVERAGE MEDICAL ONLY CLAIM COSTS
POLICY YEAR OF CLAIM EXPERIENCE AVERAGE MEDICAL ONLY
CLAIM COSTS, $
Trend line
Policy year forecasts Available policy year data
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0
1,200
600
400 800 1,000
200
CLAIM TYPE ANNUAL TREND 2012 FORECAST
Lost time claim cost 6.7% $53,000
Medical only claim cost 6.0% $1,000 Combined total claim cost 7.1% $17,000
AVERAGE WORKERS COMPENSATION CLAIM COSTS MASSACHUSETTS – AVERAGE TOTAL CLAIM COSTS
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 POLICY YEAR OF CLAIM EXPERIENCE
18,000 AVERAGE TOTAL CLAIM COSTS, $
Trend line
Policy year forecasts Available policy year data 8,000
6,000 10,000 14,000
2,000 4,000 12,000 16,000
0
2.3. BENCHMARKING
Average claim costs in Massachusetts are relatively low when benchmarked against other states. The tables below display values for Massachusetts relative to the top ten states, by policy year, for which data is available.
For all three measurements of claim costs, Massachusetts is in the lowest third amongst all jurisdictions in the United States.
AVERAGE LOST TIME CLAIM COST TOP TEN STATES BY POLICY YEAR
PY 2008 PY 2007 PY 2006 PY 2005 PY 2004
DE 83,013 DE 78,726 DE 79,595 DE 74,173 DE 66,315
LA 77,231 NY 66,501 LA 62,015 LA 58,660 NY 54,007
NY 73,055 LA 65,657 NC 60,748 NC 58,356 NC 53,776
MT 64,773 MT 63,021 NY 60,124 NY 56,424 LA 50,980
NC 63,234 NC 61,963 MT 55,405 MT 54,646 SC 48,141
GA 61,821 VA 57,737 VA 54,142 VA 49,766 GA 47,059
AL 59,905 GA 56,925 GA 52,525 GA 49,623 MT 45,829
AL 59,905 GA 56,925 GA 52,525 GA 49,623 MT 45,829
IL 59,190 IL 55,438 SC 52,376 IL 47,960 IL 44,228
PA 57,492 AL 55,281 IL 50,643 SC 46,734 VA 44,178
... ... ... ... ... ... ... ... ... ...
MA 40,144 MA 37,315 MA 36,346 MA 33,965 MA 33,519
AVERAGE MEDICAL ONLY CLAIM COST TOP TEN STATES BY POLICY YEAR
PY 2008 PY 2007 PY 2005 PY 2004 PY 2003
LA 1,709 LA 1,607 LA 1,501 LA 1,424 LA 1,402
AK 1,510 NJ 1,486 NJ 1,410 NJ 1,290 NJ 1,248
NJ 1,509 DE 1,391 DE 1,296 AK 1,280 AK 1,199
NH 1,401 AK 1,367 AK 1,285 IL 1,160 DE 1,141
DE 1,323 NH 1,323 NH 1,209 DE 1,153 IL 1,085
IL 1,307 IL 1,215 IL 1,197 NH 1,108 NH 1,030
VA 1,243 VA 1,160 VA 1,067 VA 1,000 TN 989
IN 1,200 IN 1,097 MO 1,025 FL 949 VA 931
AL 1,178 MO 1,094 AL 1,023 DC 946 AZ 918
WI 1,164 AL 1,081 IN 1,000 MO 940 NM 907
... ... ... ... ... ... ... ... ... ...
MA 796 MA 774 MA 744 MA 702 MA 642
AVERAGE COMBINED TOTAL CLAIM COST TOP TEN STATES BY POLICY YEAR
PY 2007 PY 2006 PY 2005 PY 2004 PY 2003
NY 27,652 NY 24,431 DE 24,262 DE 22,162 NY 19,771
DE 24,802 DE 23,445 NY 21,939 NY 20,686 DE 19,527
LA 22,060 LA 18,895 LA 17,145 LA 16,875 CA 16,510
IL 19,805 IL 18,381 IL 16,556 IL 15,432 LA 14,630
OK 18,159 OK 16,134 DC 15,983 MT 13,946 IL 14,429
CA 17,433 NJ 16,100 AK 15,471 CA 13,686 AK 14,153
MT 16,791 AK 15,985 NJ 15,263 NJ 13,682 DC 14,007
DC 16,780 MT 15,889 SC 14,776 NC 13,549 NJ 13,613
CT 16,502 CT 15,598 OK 14,337 OK 13,351 SC 13,582
SC 15,532 CA 15,265 CT 14,110 SC 13,185 OK 12,796
... ... ... ... ... ... ... ... ... ...
MA 12,659 MA 11,634 MA 11,237 MA 10,476 MA 10,294
3. CLAIMS FREQUENCY
The graph below displays the frequency of medical only claims and lost time claims per $10 MM payroll adjusted to a 2009 cost level. Note that there is an inherent increase to payroll over time due to inflation. In order to accurately measure historical claim frequencies, payroll must be adjusted to a constant cost level.
Without this adjustment, historical claim frequencies would be overstated, all else being equal.
CLAIM FREQUENCY PER $10 MM PAYROLL AT 2009 COST LEVEL MASSACHUSETTS
1994 2002 2003 2004 2005 2006 2007 2008 2009 2010
POLICY YEAR OF CLAIM EXPERIENCE 8
CLAIM INCIDENCE PER $10 MM PAYROLL AT 2009 COST LEVEL
Medical only claim frequency
Lost time claim frequency 4
2 6 7
1
1995 1996 1997 1998 1999 2000 2001 0
5
3
It is apparent from this graph that there has been a long term decrease to the incidence of both medical only and lost time claims, which continues in the short term as illustrated in the table below:
Long term annual trend is measured as the average annual decline across policy years 1995 through 2009.
Short term annual trend is measured as the average annual decline across the most recently available 5 policy years of data – 2005 through 2009 as of the writing of this paper.
Of interest is the relative incidence between medical only claims and lost time claims. The following graph displays lost time claims as a percentage of total claims for policy years 1995 through 2009.
CLAIM TYPE
LONG-TERM ANNUAL TREND
SHORT-TERM ANNUAL TREND Lost time claim cost -5.0% -6.0%
Medical only claim cost -5.4% -7.4%
LOST TIME CLAIMS AS A PERCENTAGE OF TOTAL CLAIMS MASSACHUSETTS
1994 2002 2003 2004 2005 2006 2007 2008 2009 2010 POLICY YEAR OF CLAIM EXPERIENCE
28.0 31.0 LOST TIME CLAIMS
% OF TOTAL CASES
29.5 29.0 30.0 30.5
28.5
1995 1996 1997 1998 1999 2000 2001
In more recent years, the portion of total cases that are lost time claims has increased. The increase is subtle – going from roughly 29% of total cases in the late 1990s to 30.5% of total cases in policy year 2009. Nevertheless, given that lost time cases in Massachusetts are 50X more costly than medical only cases, this increase is large enough to impact statewide workers compensation costs. Had the percentage of lost time cases remained a constant 29%, then the statewide average trend to total claim costs (lost time claims and medical only claims combined) would have been approximately 6.6%, rather than the 7.1% quoted earlier in this report.
ABOUT THE AUTHORS
Scott J. Lefkowitz is a Director of the Actuarial Consulting Practice of Oliver Wyman and Leader of the Melville, New York office. Scott is a Fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries, and a Fellow of the Conference of Consulting Actuaries. Scott has twenty five years of actuarial experience in the insurance and risk management industry, and has provided consulting services to a wide variety of clients on all aspects of property/casualty risk exposure. Scott is regarded as an expert the area of workers compensation and has provided consulting services to public and private firms, governments, and regulatory agencies. Scott’s experience includes ratemaking, and reserving, rate of return analysis, occupational disease, and the design and implementation of experience rating programs. Most recently, Scott has spent the past several years studying New York workers compensation costs, as well as the impact of the statutory changes that were implemented in New York in 2007.
Scott can be contact directly at (631) 577-0548 or scott.lefkowitz@oliverwyman.com.
Steven G. McKinnon is a Senior Consultant of the Actuarial Consulting Practice of Oliver Wyman and is located in the Melville, New York office. Steve is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Steve has ten years of actuarial experience in the insurance and risk management industry. He specializes in all lines of property/casualty insurance, with a focus on workers compensation. Steve has assisted in the preparation of expert witness testimony for several state workers compensation rate filings.
Most recently, Steve has spent the past several years studying New York workers compensation costs, as well as the impact of the statutory changes that were implemented in New York in 2007.
Steve can be contacted directly at (631) 577-0555 or steven.mckinnon@oliverwyman.com.
www.oliverwyman.com
The Actuarial Consulting Practice of Oliver Wyman specializes in property, casualty, life and health insurance risks. We provide independent, objective advice combining a wide range of expertise with specialized knowledge of specific risks. With more than 70 credentialed actuaries it is one of the largest actuarial practices in North America. Oliver Wyman currently has actuarial consulting offices in Atlanta, GA; Charlotte, NC; Chicago, IL; Columbus, OH; Houston, TX; Los Angeles, CA; Melville, NY; Milwaukee, WI;
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For more information, contact:
Scott J. Lefkowitz FCAS, MAAA, FCA 631-577-0548
scott.lefkowitz@oliverwyman.com
Steven G. McKinnon FCAS, MAAA 631-577-0555
steven.mckinnon@oliverwyman.com
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