Workers Comp medical reserves are the most complicated of the three reserves to estimate. Can you imagine trying to predict all of the medical treatment that will occur over the lifetime of a file? There are as many medical treatments as there are CPT codes.. CPT codes number into the thousands.

If we look at CPT coding, there are six kinds of medical treatment

1. Evaluation and Management

2. Anesthesiology

3. Surgery

4. Radiology

5. Pathology and Laboratory

6. Medicine

There are other considerations that have to be taken into account that are not coded such as mileage.

Most of the Workers Comp injuries are orthopaedic in nature. It may be a good idea to review the orthopaedic CPT codes and their costs for each of the states where you company operates in most of the time.

The fee schedules for each state will likely reduce the full value of most medical procedures. Another area in the medical reserves that may help reduce reserves is if the insurance carrier or TPA has their medical networks that allow for a discount for medical services. It is advisable that you ask your claims adjuster if the fee schedules and Workers Compensation treatment networks were taken into account when the reserves were set for the claim.

Medical payments on claims are approaching 60% of the claim values nationwide. In some states, medical payouts are more than 60% of a claim's value. There are many reasons for the increase. Workers Comp indemnity payments are based on wages. Medical inflation has increased much more quickly than wages.

I wish that I could be more specific on medical reserving. There are so many medical treatments that I am only able to cover the surface of medical reserving. The next post will cover the Expense reserves and a few areas that have resulted in confusion over what is a Medical or Expense reserve.

The definitions for most of these terms can be found by clicking on the Definitions tab/button in the menu. I will not reiterate them here to keep the post at a readable length.



The indemnity part of claim reserves is basically the amount that is paid directly to an injured employee for:

• Wage loss - Temporary Total, Temporary Partial, Permanent Total
• Permanent reduction in function to a body part - Permanent Partial, Disfigurement
• Other - Many state-specific indemnity payments

Unlike the medical reserves, the indemnity reserves are more easily forecast. This is not to say that they are easy to predict for the lifetime of a claim. They are usually easier than the medical reserves to estimate.

One of the areas that can cause great unpredictability is if an injured employee is under consideration for a Permanent Total rating. If an adjuster has to consider the employee as being unable to return to work for the rest of his/her life the indemnity reserves can spike tremendously. If an employer can offer a return to work even with a different job function, this is very helpful to avoiding a huge reserve and may be very beneficial to the employee. Quite often, states will have "make-work" laws that prevent an employer from just making up a job for an employee to return to work. This is an area of very heavy litigation in certain states.

Using my Six Secrets/Keys to Cutting Workers Comp Costs will reduce the likelihood of extreme reserve increases and will benefit your employees. The Four Secrets tab will soon be Six Secrets. I will write a quick post after the other two are added to the list.

I may change this post as I write the ones for Medical and Expense Reserves. Check back on this post when you are reading the upcoming ones.

This post could be a very long one as there are hundreds of variables that comprise a Workers Comp claims reserve. Each state is unto itself on the benefits that are provided under Workers Compensation. There is no one list that points out every reserve variable in every state.

There are three main areas of reserving:

• Indemnity
• Medical
• Expense

These three are defined in the Definitions page. Please check there for further clarification. The most important of the three would be the medical reserves. These are growing each year to become the largest percentage of Workers Comp payouts and reserves. Medical payments are approaching 60% of claims value nationwide.

I will cover each one of these three areas over the next few days. I will cover one of the most controversial areas which is what exactly is covered under the Expense Reserve and the Medical Reserve. There seems to be a large amount of confusion on those two reserves.

This subject is one of the most confusing and frustrating budget areas for insureds. Workers Comp reserves are very important to companies with a regular commercial insurance policy or self-insureds. Quite often, I hear self-insureds say that reserves are not as important as they are "out of the Workers Compensation system." Nothing could further from the truth. I will cover this subject in a post later this week.

How do insurance company adjusters set reserves on a Workers Compensation file? It is actually an educated guess at best. Tyring to estimate the lifetime payouts on a claim is very difficult, if not impossible. The healing period from an injury varies from person to person greatly.

The reserving is broken down into indemnity, medical, and expenses. The claims adjuster will almost always have online access to a reserving sheet. These sheets are usually not shared with the employers. In fact, in the next post I will go over what the major variables in the indemnity, medical, and expense reserves. Going over that now will make too long of a post to read.

An adjuster's experience level will usually aid them with making accurate reserve estimates. The adjuster's caseload will determine if they have enough time to calculate exact reserves. Always ask your adjuster for their background and caseload the first time that you talk to them. Adjusters have an authority level to reserve files as they see fit. If the file reserves exceeds the authority level, the supervisor must approve the reserves.

The most inaccurate reserving that I have seen is when an automated reserve is set by some type of software. As I said before, each individual heals differently, so an automated reserve is never accurate unless the adjuster can override the system reserves.

I will cover the variables in each reserve in the next post.

I have received quite a few emails over the last month concerning the NCCI changing their classification codes. The NCCI has had a program in place to review all of the classification codes since 2003. There have been numerous minor tweaks to the class code system. On October 1, 2009, there is going to be a change that will cause major changes to many employers' Experience Modification Factors (E-Mod/X-Mod).

The injury codes and other codes that are included in the reports to the NCCI from the insurance carriers will be just as important as classification codes. What is the best way to prepare for the upcoming changes? As I have posted numerous times, your claims loss runs will be more important than ever in controlling Workers Comp costs. If your company does not have online access, make sure that you receive monthly loss runs that include ALL of the claims data.

I do not want to post any speculative comments. I will wait until NCCI develops their E-Mod worksheets a little further.

One of our blog readers reminded me that I did not post an article on how greeting card companies can be great for reducing Workers Comp claims costs. I usually cover this topic when I am speaking or writing about the fourth of my Six Keys to Reducing Your Workers Comp costs. The Fourth Key is Employee Treatment by The Employer.

Hallmark and American Greetings are very inexpensive ways to keep in contact with injured employees. This is especially true when an employee is first injured. Sending a card or e-card is a great idea as the injured employee is watching a large number of attorney ads on TV. Quite often, the injured employees will receive letters from attorneys not long after their injury. I have heard of some companies sending flowers if the employee was severely injured.

The Workers Compensation insurance carrier will usually send a letter of explanation of benefits to the employee. This is a good business practice. The letter is not a substitute for a card or an e-card. Phone calls are also good if they do not disturb the employee.

Hallmark and American Greetings have free e-cards. The best ones are the e-cards that are provided if your company joins for $13/year. Almost everyone has an email address. If the injured employee does not, it may be a good idea to keep a few cards on hand to mail out in case of an accident.

This suggestion may seem to be a minor one. However, I have seen the savings for many companies that started sending greeting cards to their employees. Good communication between the injured employee and employer usually leads to a quicker return to work, which saves Workers Comp $. As I have said and posted very often, the injured employee is still your employee.

Once again, I am tying up the loose ends of my last several posts. This had to do with one of the Five Keys to Controlling Your Workers Comp Costs. The most important one of the Keys was to direct medical control. One of the other important Keys was to devise and use a full return to work program in your business.

The easiest way to have the treating physicians in your area know the job duties of the various jobs at your employer is to record a full video of all the job duties of each job. This allows the Workers Comp treating physician to virtually visit your job site to examine the duties of each job. When an injured employee sees the treating physician, having a visual record of the job duties makes it much easier for a successful return to work by the physician.

I very often have seen a doctor not release the employee back to work on a modified duty return to work or full return to work as he/she did not have a list of the job duties. If anyone thinks this is not important, the increase in Workers Comp costs by not having the job duties recorded is an increase in cost of 800%.

Most of the Workers Compensation Boards or Courts are not very favorable to having the job duties recorded after an injury. The best way to accomplish this task is before any employee is injured by making a video job bank of all the jobs and their duties. This is a very successful loss reduction strategy. There are many companies that specialize in job duty videos. Make sure the company that makes the videos has a vast knowledge of Workers Compensation return to work. An employer can make their own, but the videos must be specific to each job.

The cost may seem a little exorbitant. However, the 800% increase in claims $ spent would justify the costs. The other side of the coin from loss reduction is aiding the employee in returning to a job safely.

I did not mention modified return to work as the laws vary so much on videos of job duties for modified jobs. As I said before, this would be made post-injury. The Industrial Commissions are not that favorable on making a video after the injury. Your company could still make videos of the job duties. You would need to check with your state laws on videoing the job duties for a modified return to work. Some states have "anti-make work" laws that prohibit just making up a job out of thin air to save on paying Workers Comp benefits.

This was a great question from one of my blog readers. There has been so much news concerning the statistical changes that NCCI (the big Workers Comp rating organization) has instituted over the last few weeks. I actually read the voluminous actuarial paper the changes were based on for the most part.

I have seen quite a few articles, even some from actuaries that miss the mark. I saw one analyzing the D and ELR codes. Those will be minor compared to some of the other changes that I am not sure NCCI thought through or consulted with a claims person before the new rules were issued. I am not going to go into the changes too far. One thing for sure is that now any audits performed for employers will also require someone with a claims background. As the NCCI is a quasi-private organization, I will not talk about the procedures until after 10/01/09 when they will be in effect.

The answer to the question is - no - the recent changes will not change the NCCI class codes. However, the NCCI has been quietly instituting numerous classification code changes for about 5 years. Some of the changes have been major. Are the class code changes detrimental to employers? That remains to be seen in the next few years.

After rejecting any increase in the pure premium rates for California this week, Commissioner Steve Poizner issued a proclamation citing 27 ways to cut Workers Comp Costs in CA. A summary of those recommendations is: :

• All insurers should implement pharmacy networks with or without regulations based upon the example set by Safeway and the fact that the provisions of Labor Code Section 4600.2 do not require regulations as a prerequisite.
  
• Regulations should be implemented regarding physician dispensing of pharmaceuticals. Legislation may be necessary to deal with this.
  Require the prescribing and/or dispensing of generic drug equivalents.
  
• Utilization Review needs some utilization review of itself. If a majority of medical requests are going to utilization review and are approved, it is not effective. Utilization review, as it was intended for health care, was for the outlier circumstance.
  
• Require billing and payment at fee schedule.
  
• DWC should update the fee schedule immediately and continue to do it as an ongoing process.
  
• Regulations for electronic billing and a standard medical bill form need to be implemented.

These recommendations seem to center around pharmaceuticals, utilization review, and billing practices.

Commissioner Poizner also announced the creation of a Workers' Compensation Costs Advisory Group. This group, comprised of a cross-section of all participants, will meet on an ongoing basis. This will accomplish the purpose, similar to the investigatory hearing, of informing the commissioner and CDI staff regarding the key cost drivers in the system and make ongoing recommendations to deal with them

California is usually on the forefront of Workers Compensation. These developments could be coming soon to your state.

Insurance Commissioner Steve Poizner today recommend a 0% rate increase for advisory rates effective July 1, 2009. I was expecting the Commissioner to recommend a 7% - 10% rate increase. The reasons for the recommendation are not that surprising. The amount was the shocker.

The Workers Compensation Action Network (WCAN - of which I am a member) covered the Commissioner's reasoning. The commissioner entirely rejected the 23.7% average rate increase recommended by Workers' Compensation Insurance Rating Bureau (WCIRB) in March, which it based on increasing medical costs and higher permanent disability costs expected to result if recent court decisions (Almaraz-Guzman and Ogilvie) are not overturned on appeal.

The commissioner said although medical inflation is increasing, he believes that certain cost containment tools enacted by recent legislative reforms are not being adequately utilized and does not plan to increase his benchmark rate until all "avoidable" costs are addressed. To address these, the commissioner also released a list of 27 recommendations for increased system efficiency, including new efficiencies from medical providers.

I had to find out what the recommendations were for increasing efficiency by the Commissioner. I will add them in as a post tomorrow. It is 9 pages long including a few surprising angles. Another factor is a 23.7% increase may have been the "death blow" in an extremely fragile business environment for many employers. However, a 0% increase could cause future problems. I will cover that in the next few days.

Why is CA so important? California's Workers Comp system has been the bellwether for the nation's future Workers Compensation market.

I was going back through some of the post over the last few weeks. In The Five Keys To Saving On Workers Compensation post, I had said I would cover #5 - Understanding Your Premium Audit. The premium or payroll audit is one of the most misunderstood areas of Workers Compensation. I thought I would cover some of the myths about your yearly premium audit.

Myth - The premium auditor is trying to help my company.

Truth - The premium auditor is there to collect as much premium as possible allowed under the law.

Myth - My premium audit is a smooth process. The auditor comes in, and I usually owe a bill that I pay right away.

Truth - The audit process should be viewed the same as a tax audit. Please see the preceding audit Myth/Truth for clarification.

Myth - I stand a great chance of getting a refund after my premium audit.

Truth - We have found that over 70% actually result in a premium bill. Less than 10% of premium audits return money to the employer

Myth - The premium auditor works for my insurance carrier.

Truth - There are more subcontractors doing Workers Comp premium audits than insurance company personnel.

Myth - I disputed my premium audit back to my agent and he/she said everything looked great.

Truth - There are specific instructions on how to dispute a premium audit. Appealing to your agent is not one of them.

Myth - My company can ignore the premium audit bill and pay it later.

Truth - You may end up having your current policy canceled if you do not dispute or make arrangement for paying your company's premium billing. I have posted this very often - Never Ignore A Premium Bill

Myth - I received a small refund last year and this premium audit bill is not that large. I am going to go ahead and pay it.

Truth - Just because you have not been hit with a large premium bill does not mean that you are not being overcharged.

Myth - There are no companies out there except my agent that can help me if I have a question on my premium audit.

Truth - There are quite a few companies that aid employers with their premium audits such as J&L.

Myth - I can only dispute the current year's Workers Compensation policy or premium bill.

Truth - Except in a few states, you may "look-back" for three years for any policy or premium audit mistakes that resulted in overcharges.

These are only a few of the myths about the Workers Compensation Premium or Payroll Audit process. If you have any further questions, please contact us at info@cutcompcosts.com or jmoore@cutcompcosts.com

I have posted often over the last few weeks about the possibility that the NCCI will change the way they calculate the Experience Modification Factor (E-Mod). The possibility of the change is now a reality. I just read over a 150 page actuarial report that the NCCI is going to use as a basis for the changes.

The main changes will include:

1. Loss development factors (LDF) will be derived using claim characteristics such as injured body part, the open and closed claim status at 1st report, and the injury type category.
2. The loss development triangles are being expanded from five reports out to 10 reports
3. Large claims will be capped at $500,000 and expected excess factors (derived from the new seven hazard group mapping by class code) will be used to calculate ultimate losses.
4. Serious and non-serious pure premium components will no longer exist. There will only be indemnity and medical components.
5. The computation of the industry group differentials was slightly modified.
6. The full credibility standards for indicated and national pure premiums were slightly modified

What does this mean for employers?

1. As always, I am impressed the NCCI is going to try to improve their processes. I hear too often in the insurance industry "We do it that way because we have always done it that way."
2. After looking over the report, your claims history will be more accurately affected in your E-Mod, which is a good development for employers. I do not see it as a way to find more money for insurance companies.
3. The introduction of quite a few new variables into the equation means the insurance carriers will be relied on more than ever to report accurate data. One mistake may be magnified under the new calculations and there are more areas for mistakes to be made in reporting the data and calculating your E-Mod.
4. An employer is going to have to understand and examine their loss runs very closely now more than ever in the past.

As always, if there are terms that you have questions on, please click the definitions tab on the right side of the page. We have a large number of definitions available.