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. SESSION: CPP-48

1 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

2 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

3 Managed Care Initiatives Fee Discounts Utilization Review Case Management Capitated Arrangements

4 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

5 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

6 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

7 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

8 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

9 Background

10 Incorrect Example

11 Example

12 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

13 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

14 Measuring Managed Care Impacts Actuarial Perspective Claims Perspective Clinical Perspective

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

16 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

17 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

18 Pricing MC - Excess Layers MC impacts vary depending on –Type of claim –Size of Claim

19 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

20 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%)

21 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

22 Average Costs and Weights by Type of Claim

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

24 Managed Care Savings ASSUMPTIONS 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

25 Managed Care Savings ASSUMPTIONS Minor/TT - Indemnity 8% Minor/TT - Medical 20% –Historically MC not fully utilized Distribution –20% of PT/Major claims move to Minor/TT claims

26 Average Costs and Weights by Type of claim

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

28 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

29 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