Comparison of Cost Drivers in Group Health and Workers Compensation Insurance CAS Spring 2007 Meeting Orlando, FL June 18, 2007

1 Comparison of Cost Drivers in Group Health and Workers Compensation Insurance Panelists John Cookson, F.S.A., Milliman Inc., Wayne, PA John Robertson, F.C.A.S., M.A.A.A., NCCI Inc., Boca Raton, FL Moderator Bill Miller, F.C.A.S., M.A.A.A., Philadelphia, PA

2 Background on CHCI and Why This Panel Was Formed CHCI is the Committee on Health Care Initiatives Committee, chaired by Teresa, 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 last year. Look for additional topics on Medical Malpractice and other healthcare related areas. WE NEED YOU(r feedback and participation)!

Comparison of Medical Insurance Systems

4 Where Does the Dollar Go? Distributions of Medical Costs First three months following injury Source: "Workers Compensation vs. Group Health: A Comparison of Utilization," NCCI, 2006 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

5 Office Visits and Physical Therapy Stand Out Contributions to Cost Difference by Service Category First three months following injury, GH=100% WC costs 71% more than GH across the 12 injuries Source: "Workers Compensation vs. Group Health: A Comparison of Utilization," NCCI, 2006 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

Factors Driving Costs in Group Health Insurance John Cookson, F.S.A., Milliman Inc., Wayne, PA CAS Spring 2007 Meeting Orlando, FL June 18, 2007

7 Driving Economic Factors National Macro Economic Drivers Inflation Economic Growth Technology

8 An Economic View Momentum is important Inflation adjusts wages Wealth effect increases demand with a lag Aging relatively constant in population Interventions DRG RBRVS Managed Care Effect early 1990s Back lash in late 1990s Cost Shift

9 Health Cost Index vs. CPI-W All Items Less Energy vs. Unlagged Personal Income Health Cost Index represents a $0 deductible plan

10 Health Cost Index vs. CPI-W All Items Less Energy (Lagged 1 Year) vs. Unlagged Personal Income Health Cost Index represents a $0 deductible plan

11 CPI-W All Items Less Energy (Lagged 1 Year) vs. Health Cost Index vs. Personal Income (3 yr average, lagged 18 months) vs. Hospital Costshift (2 Year Smoothed) Health Cost Index represents a $0 deductible plan

12 CPI-W All Items Less Energy (Lagged 1 Year) plus Personal Income (3 yr average, lagged 18 Months) plus Adjusted Hospital Costshift vs. Health Cost Index Health Cost Index represents a $0 deductible plan

13 Micro Factors High Concentration of Resources and Especially Specialist Physician Higher Spending More use of high-cost, non-evidence based care Quality no better and possible poorer Implication Growth in Physicians/Capita increasing trends Growth in Specialist/Physician increases trends

14 Important Trend Issues Local Differences Affect Local Trends Physicians Specialist Hospital Beds Health Employment and Wage Rates Hospital Beds Replacement Specialty Hospital New Technology MRIs, PETs, etc.

15 Important Trend Issues New ASC and OP Hospital Facilities Influenza Outbreaks Benefit Changes National Working days

16 Workers Compensation vs. Full Medical Mix of Services Mix of Diagnoses Mix of Providers Provider Contracting Medical Management Business Cycle Effects Potential for Prevention

17 Health Cost Index vs. Large Employer Annual Trend Health Cost Index represents a $250 deductible plan with $1,000 OOP

18 Health Cost Index vs. Large Employer Two Year Smoothing Health Cost Index represents a $250 deductible plan with $1,000 OOP

19 Health Cost Index vs. Large Employer Five Year Smoothing Health Cost Index represents a $250 deductible plan with $1,000 OOP

20 CDC – Morbidity and Mortality

21 Suggestions for Improving Forecasts Working Day (my non-RX estimate)

22 Government Healthcare Data Physician

23 Government Healthcare Data Physician

24 Government Healthcare Data Hospital

25 Government Healthcare Data Hospital

26 Illustrative Impact of Cost Shifting and Payments Based on Billed Charges

Price, Utilization, and Cost for Workers Compensation Medical Services John Robertson, FCAS, MAAA June 18, 2007 Orlando, FL

28 Medical Claim Cost (000s) 2006p: Preliminary based on data valued as of 12/31/ –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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. WC Medical Claim Cost Trends— Growth Continues in 2006 Lost-Time Claims Accident Year Annual Change 1991–1996:+4.1% Annual Change 1997–2005:+9.5%

29 WC Medical Severity Still Growing Much Faster Than the Medical CPI Lost-Time Claims Percent 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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. Year

Medical Indemnity 1996 Indemnity Medical 2006p Indemnity Medical 2006p: Preliminary based on data valued as of 12/31/ , 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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. Workers Compensation Medical Losses Are More Than Half of Total Losses All Claims—NCCI States

31 WC Medical Costs We will look at: Changes in prices and utilization for medical services over time Prices and utilization in WC compared to Group Health (GH) © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

32 Cost Difference Is Sum of Price and Utilization Components Cost = Price × Utilization Cost Difference = Price Component + Utilization Component © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

33 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 Injuries by diagnosis were classified as high, mid, and low based on paid medical severity in accident year © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. Accident Year

34 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved. Changes in Utilization Explain More than Half of the Increase in Paid Medical Severity Paid Medical Severities on Lost-Time Claims Closed Within 24 Months of Date of Injury Increase in Severity, Accident Years 2001/02 vs. 1996/97 Percent of Severity Increase, Accident Years 2001/02 vs. 1996/97 Unadjusted Medical Severities on Lost-Time Claims73%100% Increase Due to Diagnosis Mix Differences15%21% Increase Due to Number of Treatments38%52% Remaining Increase Due to Price and Other Factors20%27%

35 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 and utilization compare to Group Health (GH)? Medical Costs in Workers Compensation © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

36 WC and GH Prices for Medical Services 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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

37 WC and GH Costs for Medical Services 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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

38 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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

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 © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

40 Utilization Is the Largest Driver of Cost Differences Between WC and GH Percent © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

41 Cost Differences Vary by State Workers Compensation Versus Group Health Percent Low Cost Medium Cost High Cost © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

42 Price Differences and Cost Differences Between WC and GH Correlate by State Percent © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

43 Percent Cost Difference Is Bigger for Chronic and Complex Injuries Due to Utilization Workers Compensation Versus Group Health © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

44 WC Pays More Than GH for Many Services Due to Utilization Office visits are a significant contributor to cost difference despite lower average price in WC Office visits are the predominant contributor to the cost difference for acute and trauma-related injuries Physical therapy contributes to cost difference due to utilization Physical therapy is the biggest driver of the cost difference for chronic and complex injuries © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

45 Price and Utilization Impacts Vary by Service Workers Compensation Versus Group Health Percent © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

46 Utilization of Office Visits and Physical Therapy Is Higher in WC Percent © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

47 Radiology Has Higher Prices and Utilization in WC Percent © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

48 Medical Costs Are Higher in WC Than GH Because of Utilization Differences in costs of treating injuries correlate with differences in utilization Differences in costs across states correlate with differences in prices Utilization of office visits and physical therapy is the biggest driver of cost differences © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.

49 Conclusion WC costs more than GH to treat similar injuries, largely due to greater utilization of medical services in WC Greater network penetration reduces costs RVS schedules with lower markups relative to Medicare work the best Fee schedules reduce WC medical costs © Copyright 2007 National Council on Compensation Insurance, Inc. All Rights Reserved.