Convenience store retailers in July learned that they won’t be penalized for not providing health insurance in 2014. The Obama administration has delayed that requirement until 2015. This is only a delay and not a removal of the requirement; retailers will still face compliance and other related issues. The Affordable Care Act continues to provide anxiety about the impact on an organization’s bottom line.
Much attention has been paid to the effect increased benefit costs will have on retailers, while health-care reform’s effect on workers’ compensation has received little notice. The economic factors of health-care reform are far-reaching, and workers’ comp insurance is not exempt.
Public, Private Connection
During the health-care reform debate, it was often said the United States needed a government health-care system. The nation already has a robust government health-care system. In fact, the government system is larger than the private insurance system.
The private system, which includes workers’ compensation insurance, is inextricably linked to the government healthcare system. Perhaps it is not the lack of a government health-care system that makes private health insurance so expensive, but it is the presence of our government system that contributes to the high cost of health insurance in America.
The majority of U.S. hospitals receive less money in reimbursements from Medicare than the actual cost of delivering care. The underfunding of Medicare, Medicaid and other government programs results in higher required reimbursements from the insurance industry. This historic pattern of shifting costs to the private sector will worsen as Medicare reimbursement reductions within PPACA take effect.
Also, workers’ compensation healthcare expenses are anticipated to increase due to the rising costs of medical services. These costs will affect your business any time you have a workers’ comp claim.
Best-in-class retailers will place an even greater emphasis on loss control to avoid potential claims. And they will look to get more aggressive with claims management and explore ways to get their workers back to work at a faster rate. It is important to develop a defined strategy with your insurance broker on the best ways to avoid, reduce and transfer risk in this area.
Dollars and Cents Formula
What a company pays for any good or service can be captured in this formula: price multiplied by use equals cost. How much you purchase multiplied by the price per unit is your total expense. Health care within either employee benefits or workers’ compensation insurance is no different.
Workers’ compensation claim costs are made up of indemnity (lost time) and medical expenses. Indemnity expenses accounted for the majority of claim dollars in the 1980s. Indemnity and medical expenses were roughly equal in the 1990s. Medical-expense inflation has made the medical component the dominant expense since the 2000s.
The trend rate for cost per claim in workers’ compensation is eerily similar to, if not worse than, health insurance inflation rates.
The bottom line is workers’ compensation costs cannot be controlled unlessspecific steps are taken to ensure the price paid per medical service represents value, the services provided are appropriate and accidents and injuries are avoided, thereby eliminating the claim altogether.
Increased Accountability
The potential effect on an individual employer is heightened by the recent change in the split point calculation. The National Council on Compensation Insurance (NCCI) has dramatically increased the employer accountability for workers’ compensation claim costs. In most states, insurance carriers use NCCI’s Experience Rating Plan and its Experience Modification factor to adjust an employer’s premium. This is b
ased on that employer’s actual claims experience compared to expected average losses. Employers’ reported claims experience is separated by primary losses and excess losses. This separation is known as the split point. Historically, a primary loss was any claim up to $5,000. Amounts over $5,000 were considered excess loss. Only primary losses receive full weight in the rating formula. As average claim amounts have increased over time, the effective credibility of an employer’s Experience Modification has decreased because more claims have been subjected to the pooled excess loss portion of the formula.
In response, the NCCI has instituted a three-year transition to increase individual employer claims accountability:
Year 1: Effective 2013, the split point moved from $5,000 to $10,000.
Year 2: Effective 2014, the split point increases to $13,500.
Year 3: Effective 2015, the split point moves to $15,000 plus two years of inflation rounded to the nearest $500.
This change is designed to better reflect an employer’s ability to positively influence claim frequency and severity. Employers with favorable claims experience will see a decrease in cost, while employers with unfavorable claims experience will see an increase.
As medical providers attempt to make up for government losses through increased per-unit medical prices and services per injury, the cost shift combined with the split point reformulation will put added pressure on retailers. It will be critical to evaluate processes and procedures to avoid and reduce claims to achieve the most favorable experience modification.
Lessening the Effects
Analytics and tools are available to help operators better understand what drives their workers’ comp premium. These resources are designed to help companies identify areas for operational improvement. This drives an enhanced process while providing greater cost containment.
Most operators have been faced with reevaluating the makeup of their workforce as a result of health-care reform. Some companies were considering reducing their entire employee base to less than 30 hours, while others discussed moving all employees to full time. It is important to consider the effects that any significant adjustment would have on employee turnover. Over the years we have measured turnover and the effect it has on the workers’ compensation experience modification factor. There is a direct correlation between high turnover and high workers’ comp costs.
Retailers can employ several strategies to mitigate the effects of these costs. Focus on ways your organization can better avoid, reduce and transfer risk specific to workers’ compensation. An experienced insurance consultant who understands your industry can help usher you through this process. Your organization could benefit from a risk assessment that helps to determine if there are areas in need of operational improvement.
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