Comparison of Cost Drivers in Group Health and Workers Compensation Insurance

1. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance CLRS 2008 Meeting Washington, DC September, 2008

2. Overview • Introduction • Statement of Issue • Current WC Medical Expense Trends • Global Perspective • Total US Medical Expenditures • Medicare Cost Projections • Cost Drivers • WC vs GH • Cost Drivers • Cost Comparisons • Price Comparison • Utilization Comparison • Conclusion • Appendix - Cost Controls

3. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance Panelists • Bill Miller, F.C.A.S., M.A.A.A., SVP & Actuary, ACE INA • Pete Rauner, F.C.A.S., M.A.A.A. Moderator • Eric Johnson, FCAS, MAAA, Aon

4. Background on CHCI and Why This Panel Was Formed • CHCI is the Committee on Health Care Initiatives • Committee is fostering research with FSA and other groups on healthcare in various lines of insurance. • Was formed in response to CAS members’ response to survey

5. WC Medical Inflation:A Critical Issue For P&C Insurers, Employers Although WC medical is still small compared to government and group health programs: • WC the largest commercial line (10% of P&C Prem); • WC the largest source of industry loss reserves ($120B, or about 22% of total); • Medical expenses are a large (59%) and growing portion of WC benefits; and • WC Medical severities are growing at a rate well above the Medical CPI growth rate.

6. 2006p 1996 Medical Indemnity 1986 Indemnity Medical Indemnity Medical Workers Compensation Medical LossesAre More Than Half of Total LossesAll Claims—NCCI States 2006p: Preliminary based on data valued as of 12/31/2006 1986, 1996: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies SOURCE:

7. WC Medical Claim Cost Trends—Growth Continues in 2006 Lost-Time Claims WC Medical Costs in $Billions Annual Change 1991–1996: +4.1% Annual Change 1997–2005: +9.5% Accident Year 2006p: Preliminary based on data valued as of 12/31/2006 1991–2005: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies SOURCE:

8. WC Medical Severity vs Medical CPILost-Time Claims %Change Medical severity 2006p: Preliminary based on data valued as of 12/31/2006 Medical severity 1995–2005: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source: Medical CPI—All states, Economy.com; Accident year medical severity—NCCI states, NCCI

9. The Share of Diagnoses with “Low” Medical Severity Has Declined While the Share of “Mid” and “High” Has Increased All Lost-Time Claims at 24 Months After Date of Injury Accident Year Injuries by diagnosis were classified as high, mid, and low based on paid medical severity in accident year 1998. Source: NCCI

10. Changes in Utilization Explain More than Half of the Increase in Paid Medical Severity Source: NCCI

11. Distribution of Total US Medical Expenditures At over $21B paid per year, WC Medical is only 2.4% of Total Medical SOURCE:

12. US Medical Costs in Perspective NOTE: In 2007, Medicare as a % of total Federal expenditures increased to 15.2%, and as a % of GDP increased to 3.1% SOURCE: Medicare Trustee Reports

13. Medicare Is Projected to Grow Dramatically SOURCE: Medicare Trustee Reports

14. Factors Driving Medical Costs • National Macro Economic Drivers • Inflation: • Medical • Wage • Economic Growth • Wealth effect increases demand with a lag • Provider Consolidation • Cost Shifting from Public to Private • Lifestyle factors, e.g., like increasing obesity and diabetes

15. Workers Compensation Medical Costs • Workers compensation (WC) medical costs per claim grew 7% to 14% per year over the last several years • WC uses fee schedules to control costs in most states • Use of treatment guidelines in WC is growing • But medical costs in WC can be high due to overutilization • How do WC medical costs compare to Group Health (GH)? Source:

16. WC Medical vs Group Health Costs • Utilize basically the same resources • Compare Differences: • Coverages and policy terms • Political and Regulatory • Duration of medical payout

17. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance • Lack of WC coinsurance payment by injured worker • WC medical coverage guaranteed for life of claim and injury treatment • Limitations on cost controls in WC system • WC fee schedule markups over medicare vary by state but can be significant • Limits on ability to direct care to an MPN • Limits on ability to manage medical utilization

18. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance • As costs get squeezed in Gov’t and Group programs, Hospitals have reasons to seek out higher-margin payers • Steady declines in inpatient volumes • Rising number of uninsured patients • Hospitals employing more physicians and specialists, raising fixed costs • Hospitals looking to recoup substantial capital investemnts in expensive diagostic imaging machines

19. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance • Hospital office administration is undergoing an evolution • More dedicated, professional business managers intent on maximizing revenues • Hospitals and Physician Groups able to enforce discriminating pricing schemes • Advancements in technology • Budding industry of revenue consulting companies

20. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance • WC Claim Documentation • To prove injury exists • To document that recovery is not yet complete and that continued wage replacement benefits are warranted • To document that the employee has reached maximum medical improvement

21. WC Medical vs Group Health Costs • 2007 NCCI Research – 2003 Data • 2006 WCRI – 2006 Data

22. WC and GH Utilization of Medical Services • Study looks directly at utilization for 12 injuries • Hospital charges are not included in utilization comparisons (due to data availability issues) • Comparisons reflect services provided within three months of injury

23. Cost Difference Components Cost = Price × Utilization Cost Difference = Price Component + Utilization Component

24. WC Medical Costs • Changes in prices and utilization for medical services over time • Prices and utilization compared to Group Health (GH) • Impact of WC medical fee schedules

25. Cost Differences Vary by StateWorkers Compensation Versus Group Health Percent High Cost Medium Cost Low Cost

26. Price Differences and Cost DifferencesBetween WC and GH Correlate by State Percent

27. Where Does the Dollar Go?Distributions of Medical CostsFirst three months following injury SOURCE:

28. Contributions to Cost Difference by Service CategoryFirst three months following injury, GH=100%Office Visits and Physical Therapy Stand Out WC costs 71% more than GH across the 12 injuries SOURCE:

29. Price and Utilization Impacts Vary by Service Workers Compensation Versus Group Health Percent SOURCE:

30. Cost Difference Is Bigger for Chronic and Complex Injuries Due to UtilizationWorkers Compensation Versus Group Health Percent

31. WC vs. GH Costs:Office Visits and Physical Therapy Percent SOURCE:

32. WC vs. GH Costs: Radiology Percent SOURCE:

33. WC vs GH: Medical Service Costs • WC costs more than GH to treat similar injuries, mostly because of differences in utilization • WC has more intense and costly treatments earlier on than does GH • Cost differences are smaller than average for acute injuries and trauma-related conditions like fractures or sprains • Cost differences are greater for chronic and complex injuries Includes hospitals Medical services provided 1997 to 2001 States reviewed: FL, GA, IL, KY, TN

34. WC vs GH: Medical Service Fees • Prices paid for medical services in WC and GH are generally comparable • In states with fee schedules, WC paid prices similar to GH • In states without fee schedules, WC paid higher prices than GH • Networks have the biggest impact on prices in states without fee schedules Excludes hospitals Medical services provided 1997 to 2001 States reviewed: FL, GA, IL, KY, TN Footnote years used, etc.

35. WCRI Fee Schedule Comparisons

36. WC and GH Utilization of Medical Services • Study looks directly at utilization for 12 injuries • Hospital charges are not included in utilization comparisons (due to data availability issues) • Comparisons reflect services provided within three months of injury

37. Utilization Is the Largest Driver of Cost Differences Between WC and GH Percent

38. Comparison of Cost Drivers in Group Health and Workers Compensation Insurance • More than half the increase in WC medical severities due to utilization, according to NCCI study

39. Key Findings on Utilization • WC pays more than GH for medical services in the first three months following injury, largely due to utilization • Cost differences among injuries are largely due to utilization differences • Cost differences among states are largely due to price differences • Fee Schedules, Utilization Review, Managed Provider Networks, and Pharmacy Benefit Management Programs are all key to containing utilization

40. Conclusion • WC costs more than GH to treat similar injuries, largely due to greater utilization of medical services in WC • As US medical costs continue to increase as a percentage of federal expenditures and GNP, the potential for more cost shifting to WC is great • States, insurers and large employers have done much in the way of laws and initiatives to control medical costs in WC, but the nature and politicization of WC act as offsets to these controls

41. Appendix Components of Medical Cost Control in Workers Compensation 40

42. Components of Medical Cost Control in Workers Compensation Fee Schedules Limits per unit charges Most states use Fee Schedules Based on Mark-ups over either Medicare fees or Usual and Customary Using medicare as basis is found to control costs better Magnitude of Mark-up varies quite a bit The larger the Mark-up, the more costly medical costs are Even with low Mark-ups, Fee Schedules alone are not effective 41

43. Components of Medical Cost Control in Workers Compensation Employer vs. Employee Choice of Physician Level of utilization varies greatly by medical provider Return to work outcomes vary significantly by provider Insurers can obtain volume based discounts if they can direct a lot of business to particualr providers States vary as to the extent to which the employer can direct injured worker to preferred provider 42

44. Components of Medical Cost Control in Workers Compensation Provider Networks Provider Networks exist in all states Even if the employee has the choice of provider, employer can usually successfully recommend a list of preferred providers WC is unique: employer/insurer and injured worker have common goal: quality medical care to get better quickly and get back to work Best providers for insurers often best providers for injured worker As long as injured worker feels he is getting quality care, usually OK. 43

45. Components of Medical Cost Control in Workers Compensation Medical Utilization Utilization review of some kind or other is allowed in most states Medical Treatment Guidelines - Oversight of the treatment based on medical community protocols ACOEM guidelines – used in some states as basis for determining Treatment guidelines 44

46. Components of Medical Cost Control in Workers Compensation Pharmacy Costs Last frontier of WC medical cost containment Pharmacy costs had been increasing 12 to 15% a year to where they represent 15% of total medical Often a bigger share of medical on longer duration claims Pain medications a big component 45

47. Components of Medical Cost Control in Workers Compensation Brand Names vs. Generics Many of the most commonly prescribed drugs for WC were until recently only available in Brand names Movement to generics a key component of WC medical cost controls Large drug companies typically come out with new and improved version of pain medication with new name and new patent protection Industry is applying new techniques to manage pharmacy costs 46

48. Components of Medical Cost Control in Workers Compensation Pharmacy Fee Schedules Caps per unit prices Does not control utilization Pharmacy Benefit Management Programs Volume discounts Use of generics Utilization review Peer to Peer program 47

49. Components of Medical Cost Control in Workers Compensation Pharmacy Utilization Review Can identify providers who prescribe excessively Prescribe outside of guidelines Develop initiatives to identify excessive length of drug use and recommend program to phase out drug use Predictive Modeling Predict claim outcomes based on type, level, mix and length of drug use 48