A basic article of belief in the field of workers’ compensation claims is that a small number of claims are particularly difficult to manage and account for a large share of claims costs.
An applied Pareto Principle, expressed in a “20-80” rule, would say that 20% of the claims account for 80% of claims costs. A claims-cost estimation calculator, available through the Official Disability Guidelines (ODG), provides the workers’ compensation professional with a nuanced view into the Pareto Principle.
I’m finding it hard to contain my excitement for ODG making this cost estimation tool available.
The industry has been starved of useful information about the exceptional claim. Actuaries typically say little to nothing about them. I’ve had no luck, for example, in finding the incidence and costs of catastrophic claims in relation to the entire book of claims.
Claims organizations have been using predictive models, constructed for their internal use, to isolate claims they expect may be high cost. Researchers have been studying the predictors of delayed recovery for years. Anyone who has spent time trying to tease out problem claims in advance will likely agree with the aphorism, “all models are wrong; some are useful.”
The ODG cost estimation service is extremely useful, despite the instances where it might be incomplete. The cost estimation service is useful in several ways, all stemming from the ODG’s success with inducing claims payers to share their claims data, which allows the ODG to offer an estimation service at a cost of relative pennies in contrast to home-grown, consultant-heavy estimation systems.
At the individual user level, a provisional reserve can be created, and as more information about the diagnosis and worker characteristics are obtained, the reserve can be adjusted. ODG provides for a “best practice” cost, the average cost for a 95% sample of claims sharing the same variables, and an average cost for the 5% most costly claims.
For example, the average cost of a temporary total claim by a 42-year-old sedentary worker with a diagnosis of lumbar disc herniation, for the 95% sample, is about $34,900 in Michigan, $29,000 in Indiana and $46,500 in California. These relative costs match what is known about their relative ranking in workers’ compensation insurance costs. It is not surprising that “best practice” results in costs less than a third of these averages. The 5% of outlier cases cost about 45% more than the 95% sample. Duration of disability estimates are included.
(My thanks to Stephanie Ragsdale of the Louisiana Hospital Association Trust Funds for showing how she uses the calculator on a daily basis.)
There are limitations. The current version has only TTD data. Permanent Disability data will be available in the future, according to Phil LeFevre of the Work Loss Data Institute, ODG’s publisher. Further, as I tested the service and discussed it with others, problems common to outlier prediction arose. One is how to understand the impact of an accumulation of factors, such as obesity, age and lawyer involvement. Another is the very high risk that some factors, such as depression, are greatly under-recorded.
These limitations do not prevent us from harvesting from ODG’s calculator what may be the best-ever profile of the ravages of opioids on claims costs, worker outcomes and the workers’ compensation industry. Ongoing use of opioids, especially when they are introduced at initial care, introduced into workers’ compensation a new class of fatality unrecorded by OSHA and severe risks of dependency, addiction and extended disability.
All states I tested showed roughly the same adverse impact; let’s pick Louisiana. The 95% sample average for a 42-year-old sedentary worker with lumbar disc herniation in Louisiana has an average TTD cost of $36,900. Add opioid use over 30 days, and the average rises to $90,000. Then add smoking and depression and/or psychosocial issues and the average rises to $133,400. Add attorney representation, and the 5% outlier average comes to $446,000.
The only factor in ODG’s calculator over which the workers’ compensation system has a modicum of influence is ongoing opioid treatment. There have been some advances. Opioid-prescribing practices peaked a few years ago. To estimate what the system’s $60 billion claims costs would be had opioid treatment been severely constrained (as it is in some states) is a charming but impractical task, as constraining opioids may leave unaltered other adverse factors that are present in a case.
But let’s not lose sight of the value of this service, which is similar to many other innovations in workers’ compensation. In the words of Curtis Smith, executive vice president of Medcor, these innovations often free up staff and provide data to help them be more productive. Incrementally, the system gets smarter.