Workers’ Compensation Managed Care Pricing Considerations

1. SESSION: CPP-48 Workers’ Compensation Managed Care Pricing Considerations Prepared By: Brian Z. Brown, F.C.A.S., M.A.A.A. Lori E. Stoeberl, A.C.A.S., M.A.A.A.

2. Managed Care Activities • Historical Savings have been between 7% and 60% • Future savings can still be significant (10% - 15%) • Depends on type of product and layer of coverage

3. Outline of Paper • Briefly describe Managed Care (MC) initiatives • Describe how MC can be factored into pricing methodologies for primary layers • Discuss how MC can be factored into pricing excess layers

4. Managed Care Initiatives • Fee Discounts • Utilization Review • Case Management • Capitated Arrangements

5. Fee Discounts • Reduced medical fees from a particular medical provider • In return for commitment to channel a large number of injured workers to provider • Discounts vary by type of claim • Impact may be greater for smaller claims • Aggressive fee discounts already pursued for severe claims

6. Utilization Review • Employees or subcontractors review the procedures and practices of physicians to determine if appropriate medical treatments are utilized • Three common procedures • Concurrent Review • Retrospective Review • Pre-admission Certification

7. Case Management • Involves a qualified professional (usually a nurse) overseeing the progress of an injured employee to assure appropriate and timely care • Works with all parties • Employee • Employer • Physician • Reduce costs of all claims (except medical-only and fatalities) • Reduce the frequency of large claims • Emphasis on return to work

8. Capitated Arrangements • Health Care provider receives a flat fee for medical services provided for all injured workers during a certain time period • Catastrophic claims have a predetermined dollar limit on medical treatment costs • Transfers predictable expenses to a MC organization • Greater effect on smaller and medium size claims

9. Pricing Reflecting MC - Primary Layer • Segregate data prior to and subsequent to MC • Otherwise pricing errors will occur • Assumptions • Pure Premiums trending at 6% • MC has one-time impact of 10% in 1996

10. Background

11. Incorrect Example

12. Example

13. Difficulties in Performing Analysis • Different MC inititives may be introduced at different points in time • Data does not display trends as clearly as this hypothetical example • Necessary to accurately measure the annual loss cost trend • Measuring the effect of trend separately from MC is difficult

14. Ways to Measure MC Savings • Evaluate claims before introduction of MC and after introduction of MC • Adjust to current cost levels • Measure average severities (assuming no frequency impact) • Measure the effect of MC separately from trend • Economic models • Individual claim studies • Utilization of assumptions and judgement

15. Measuring Managed Care Impacts • Actuarial Perspective • Claims Perspective • Clinical Perspective

16. Actuarial Perspective • Review key statistics (in aggregate) • Paid and Incurred Severities • Loss Ratios • Pure Premiums • Claim Frequencies • Average days off work • Report lags

17. Actuarial Perspective • Analysis of individual claims statistics • Group claims into those treated by MC and not treated by MC • If not at same time period, adjust for claim cost inflation and benefit level changes • Regression analysis • Independent variables (body part, nature of injury, age, industry group, employer size) • Dependent variable - claim value at a selected maturity

18. Claims or Clinical Perspective • Analysis by type of claim and MC activity • Analysis of individual claims statistics • How long employees are out of work • Duration of medical treatment • Average costs of claims

19. Pricing MC - Excess Layers • MC impacts vary depending on • Type of claim • Size of Claim

20. Adjusting Excess Ratios for MC • NCCI Size of Loss Procedure • Four types of claim distributions • Fatalities • Permanent total and major permanent partial (PT/Major) • Minor permanent partial and temporary total (Minor/TT) • Medical-only claims • (Excess Ratios) x (Expected Losses) = pure loss charge for excess losses

21. Assumptions for Example • Expected Ultimate Losses $ 50 Million • NCCI ELF table is appropriate for risk • Pricing large deductible policy - risk retains first $100,000 • Prior to MC - excess ratio 18.4% • Therefore, expected excess losses are $9.2 million ($50 Million x 18.4%)

22. Excess Ratio Calculation Fatal Average Cost Per Case $95,273 PT/Major Average Cost Per Case 102,784 Minor/TT Average Cost Per Case 5,084 From Mr. Gilliam’s paper “Retrospective Rating:; Excess Loss Factors” Note: Any differences from the paper are due to rounding

23. Average Costs and Weights by Type of Claim

24. Estimates of Managed Care Savings and Impacts • Overall Medical Savings 20% • Overall Indemnity Savings 17% • Overall savings will vary by type of claim

25. Managed Care SavingsASSUMPTIONS • Fatalities - No impact • PT/Major - Indemnity 5% • MC will not effect all claims(those unable to return to work) • MC will reduce % of PT/Major, thereby increasing severity on remaining claims • PT/Major - Medical 5% • MC programs already in place for these claims • Smaller claims will shift to Minor/TT, increasing severity on remaining claims

26. Managed Care SavingsASSUMPTIONS • Minor/TT - Indemnity 8% • Minor/TT - Medical 20% • Historically MC not fully utilized • Distribution • 20% of PT/Major claims move to Minor/TT claims

27. Average Costs and Weights by Type of claim

28. Effect of Managed Care Savings Fatal Average Cost Per Case $95,372 PT/Major Average Cost Per Case 97,645 Minor/TT Average Cost Per Cast 4,373 27

29. Impact after MC • Pricing large deductible policy - risk retains first $100,000 • Expected Ultimate Losses $ 40.7 Million (18.6% savings of costs of $50 million) • New excess loss table • After MC - excess ratio 16.6% (compared to 18.4%) • Excess ratio reduction from 18.4% to 16.6% due to lower injury weight of PT/Major claims and results in cost reduction of $732,000 • Therefore expected excess losses are now $6.8 million ($40.7 million x 16.6%) compared to $9.2 million

30. Summary • Insurers have recently instituted more aggressive MC programs for WC • Activities include more comprehensive • Fee discounts • Utilization review • Case management • Capitated arrangements • To reflect MC in pricing • Important to appropriately measure MC savings • Reflect MC savings by type of claim and size of claim