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

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

Assumptions

Policy YearDeveloped

Pure PremiumAnnual

Implied Trend

1993 2.00

1994 2.12 6.0%

1995 2.25 6.0%

1996 2.15* -4.4%

1997 2.28 6.0%

1993-1997 3.3%

*Due to one time MC Savings

11

Incorrect Example

Policy YearDeveloped

Pure PremiumTrended to

1998 at 3.3%Managed

Care CreditProjected 1998Pure Premium

1993 2.00 1.176 0.90 2.12

1994 2.12 1.139 0.90 2.17

1995 2.25 1.102 0.90 2.23

1996 2.15 1.067 0.90 2.06

1997 2.28 1.033 0.90 2.12

Average 2.14

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Example

1 2 3 4 = 2x3 5 6 7 8 = 4x6x7

PolicyYear

DevelopedPure

Premium

Adjustmentto Remove

MC

AdjustedPure

Premium

AnnualImpliedTrend

Trend Factorto 1998 at

6.0%

ManagedCare

Credit

Projected1998 PurePremium

1993 2.00 1.00 2.00 1.338 0.90 2.41

1994 2.12 1.00 2.12 6.0% 1.262 0.90 2.41

1995 2.25 1.00 2.25 6.0% 1.191 0.90 2.41

1996 2.15 1.11 2.39 6.0% 1.124 0.90 2.41

1997 2.28 1.11 2.53 6.0% 1.060 0.90 2.41

Average 6.0% 2.41

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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

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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

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Measuring Managed Care Impacts

• Actuarial Perspective

• Claims Perspective

• Clinical Perspective

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Actuarial Perspective

• Review key statistics (in aggregate)– Paid and Incurred Severities

– Loss Ratios

– Pure Premiums

– Claim Frequencies

– Average days off work

– Report lags

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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

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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

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Pricing MC - Excess Layers

• MC impacts vary depending on– Type of claim

– Size of Claim

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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

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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%)

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Excess Ratio CalculationNational Council on Compensation Insurance

State MEffective 01/01/89

Limited Fatal Benefits - Nonescalating PT/Major BenefitsExcess Loss Factors Calculation

Hazard Group II

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 11) (12) (13) (14)Ratio to Excess Ratio to Excess Ratio to Excess Average

Loss Avg / 1.1 Injury Excess Ratio x Avg / 1.1 Injury Excess Ratio x Avg / 1.1 Injury Excess Ratio x ExcessLimit (Entry Ratio) Wgt Ratio Inj. Wgt (Entry Ratio) Wgt Ratio Inj. Wgt (Entry Ratio) Wgt Ratio Inj. Wgt Ratio

10,000$ 0.10 0.011 0.908 0.010 0.09 0.631 0.910 0.575 1.79 0.288 0.361 0.104 0.68915,000 0.14 0.874 0.010 0.13 0.870 0.549 2.68 0.223 0.064 0.62420,000 0.19 0.834 0.010 0.18 0.820 0.518 3.58 0.138 0.040 0.56725,000 0.24 0.796 0.009 0.22 0.780 0.493 4.47 0.085 0.024 0.52630,000 0.29 0.760 0.009 0.27 0.730 0.461 5.36 0.053 0.015 0.48535,000 0.33 0.733 0.008 0.31 0.690 0.436 6.26 0.034 0.010 0.45440,000 0.38 0.700 0.008 0.35 0.650 0.410 7.15 0.022 0.006 0.42550,000 0.48 0.640 0.007 0.44 0.562 0.355 8.94 0.010 0.003 0.36575,000 0.71 0.521 0.006 0.66 0.387 0.244 13.41 0.002 0.001 0.251

100,000 0.95 0.422 0.005 0.88 0.284 0.179 17.88 0.000 0.000 0.184125,000 1.19 0.342 0.004 1.11 0.220 0.139 22.35 0.000 0.000 0.143150,000 1.43 0.278 0.003 1.33 0.181 0.114 26.82 0.000 0.000 0.117175,000 1.67 0.226 0.003 1.55 0.153 0.097 31.29 0.000 0.000 0.099200,000 1.91 0.184 0.002 1.77 0.132 0.083 35.76 0.000 0.000 0.085225,000 2.14 0.151 0.002 1.99 0.116 0.073 40.23 0.000 0.000 0.075250,000 2.38 0.123 0.001 2.21 0.103 0.065 44.70 0.000 0.000 0.066

Minor/TTFatal PT/Major

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

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Average Costs and Weights by Type of Claim

Before MC

TotalAverage

Cost

Medical*Component

Indemnity*Component

Frequency(Number

of Claims)Inj. Weight

Fatal 95,372 19,074 76,298 0.07% 1.2%

PT/Major 102,784 61,670 41,114 3.55% 63.1%

Minor/TT 5,084 2,542 2,542 32.75% 28.8%

Medical 625 625 0 63.63% 6.9%

Total 5,778 3,433 2,345 100.00% 100.0%

*Split based on judgement, for illustrative purposes only

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Estimates of Managed Care Savings and Impacts

• Overall Medical Savings 20%

• Overall Indemnity Savings 17%

• Overall savings will vary by type of claim

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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

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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

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Average Costs and Weights by Type of claim

After MC

TotalAverage

Cost

MedicalComponent

IndemnityComponent

Frequency Inj. Weight

Fatal 95,372 19,074 76,298 0.07% 1.4%

PT/Major 97,645 58,587 39,058 2.84% 59.0%

Minor/TT 4,373 2,034 2,339 33.46% 31.1%

Medical 625 625 0 63.63% 8.5%

Total 4,701 2,755 1,945 100.00% 100.0%

Fatal Average Cost Per Case $95,372

PT/Major Average Cost Per Case 97,645

Minor/TT Average Cost Per Cast 4,373 28

National Council on Compensation InsuranceState M

Effective 01/01/89Limited Fatal Benefits - Nonescalating PT/Major Benefits

Excess Loss Factors CalculationHazard Group II

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 11) (12) (13) (14)Ratio to Excess Ratio to Excess Ratio to Excess Average

Loss Avg / 1.1 Injury Excess Ratio x Avg / 1.1 Injury Excess Ratio x Avg / 1.1 Injury Excess Ratio x ExcessLimit (Entry Ratio) Wgt Ratio Inj. Wgt (Entry Ratio) Wgt Ratio Inj. Wgt (Entry Ratio) Wgt Ratio Inj. Wgt Ratio

10,000$ 0.10 0.014 0.908 0.013 0.09 0.590 0.906 0.534 2.08 0.311 0.316 0.098 0.64615,000 0.14 0.874 0.012 0.14 0.862 0.509 3.12 0.182 0.057 0.57820,000 0.19 0.834 0.012 0.19 0.812 0.479 4.16 0.104 0.032 0.52325,000 0.24 0.796 0.011 0.23 0.767 0.452 5.20 0.059 0.018 0.48230,000 0.29 0.760 0.011 0.28 0.717 0.423 6.24 0.034 0.011 0.44535,000 0.33 0.733 0.010 0.33 0.675 0.398 7.28 0.020 0.006 0.41540,000 0.38 0.700 0.010 0.37 0.631 0.373 8.32 0.014 0.004 0.38750,000 0.48 0.640 0.009 0.47 0.544 0.321 10.39 0.007 0.002 0.33275,000 0.71 0.521 0.007 0.70 0.371 0.219 15.59 0.001 0.000 0.226

100,000 0.95 0.422 0.006 0.93 0.271 0.160 20.79 0.000 0.000 0.166125,000 1.19 0.342 0.005 1.16 0.210 0.124 25.99 0.000 0.000 0.129150,000 1.43 0.278 0.004 1.40 0.172 0.102 31.18 0.000 0.000 0.106175,000 1.67 0.226 0.003 1.63 0.145 0.086 36.38 0.000 0.000 0.089200,000 1.91 0.184 0.003 1.86 0.125 0.074 41.58 0.000 0.000 0.077225,000 2.14 0.151 0.002 2.09 0.110 0.065 46.77 0.000 0.000 0.067250,000 2.38 0.123 0.002 2.33 0.098 0.058 51.97 0.000 0.000 0.059

Minor/TTFatal PT/Major

Effect of Managed Care Savings

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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

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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