Each year the Workers' Compensation Insurance Ratings Board prepares a report on California workers’ compensation losses and expenses during the preceding year. And each summer the WCIRB does a State of the System analysis.

Julius Young

The workers’ comp system involves people, not just stats and charts. We must never lose sight of that, with the life story of injured individuals and their families on the line.

But these WCIRB reports provide great insight into system trends. While the WCIRB reports look at results from insured employers and not self-insureds, and in some instances include estimates of payments by the California Insurance Guarantee Association, the reports are broadly representative of California trends.

These reports should be required reading for everyone in the California workers’ comp community.

The 2018 State of the System (SOS) report has just been unveiled. I’ll focus on that in more depth in a different post soon but will note a few highlights here.

But what can we learn from the 2017 loss and expense report? I’ll reference some of the tables in the report as I comment.

Overall, Table 1 shows that medical losses declined to a small degree ($4.7 billion in calendar year 2017 versus $4.8 billion in calendar year 2016.

While a few categories of medical losses saw an increase, the drop was significant for pharmaceuticals ($170 million for calendar year 2017 versus $230 million in 2016). And this is before the 2018 rollout of California’s prescription drug formulary.

According to Exhibit 1.2, pharmaceuticals are 4% of paid medical costs for 2017. Interestingly, however, other studies have noted that a high percentage of independent medical review disputes involve pharma issues. Exhibit 1.4 notes that in 2013 pharma was 9.5% of total medical payments. That’s a huge decline.

Looking at another metric, the 2018 State of the System report notes that there has been a 60% decrease in pharmaceutical transactions since 2012.

Another interesting data point is that medical-legal evaluations costs declined in 2017 ($320 million) versus 2016 ($370 million). 

In 2017 and 2018 we have seen much controversy over medical-legal billing issues. In the spring of 2018 the Division of Workers' Compensation proposed new billing regulations after settling a lawsuit challenging delays in qualified medical evaluators' recertification due to billing issues.

Many QMEs lodged comments objecting to proposed new billing rules, and it is not clear what path the DWC intends to take now.

According to Exhibit 1.2, med-legal is 7% of paid medical costs for 2017. The 2018 SOS report uses a different metric, finding that medical-legal costs are 9% of 2017 paid frictional costs.

Table 2 compares the total paid cost of medical cost containment programs over the past nine years. In 2017 those costs moderated from 2016 and from a high point in 2015.

Table 4 shows that the mix of physician service payments changed somewhat. The cost categories of evaluation and management and physical medicine increased, while specialties of surgery, radiology, and special services and reports decreased.

According to Exhibit 1.4, there has been a significant reduction in the percentage of total medical for interpreter services (0.7% in 2017 versus 1.6% in 2013) and for copy services (0.6% in 2017 versus 1.1% in 2013).

Perhaps reflecting the fact that carriers are trying to close out cases, the categories of medical payments made directly to injured workers and medical payments related to Medicare set-asides increased significantly from 2013 to 2017. Med-legal costs increased as a percentage of total paid medical from 2013 to 2016, but as noted above, moderated in 2017.

Exhibit 2.1 shows that med-legal costs for psychology and psychiatry reports as a percentage of overall med-legal costs continued to decline from 2014 levels.

What does the report say about indemnity costs?

Indemnity payments (including voucher payments) in 2017 were $3.7 billion (44% of total loss payments). By comparison, for 2016 it was $3.6 billion (43% of loss payments) and in 2015, $3.5 billion (41% of loss payments).

Temporary disability was the leading indemnity cost paid (49.4% in 2017 versus 40% for permanent partial disability and 4.1% for permanent total). Vouchers were but 2.2% of the overall indemnity losses in 2017.

Exhibit 7 (PD summary for carpal tunnel/repetitive motion injuries) and Exhibit 8 (PD summary for other cumulative injuries), and Exhibits 10.1 and 10.2, may be of interest, since cumulative trauma claims, particularly in the Los Angeles Basin, have been a source of debate among some stakeholders. These charts are for policy year 2015, a different metric than the calendar year charts otherwise noted.

The June 2018 WCIRB report notes that total insurer paid losses (excluding payments made by CIGA) for 2017 were $8.3 billion, amounting to 47% of earned premium (versus 46% for 2016 and 48% for 2015). If CIGA is included, paid losses in 2017 were $8.5 billion, “48% of insurer calendar year premium.”

When a “$1.2 billion increase in total insurer loss reserves” is factored in, the figure jumps to 53% of earned premium (versus 60% in 2016).

So what else are insurers doing with the premium dollar if paid medical and indemnity losses are less than 50% of the earned premium?

The answer is partly incurred allocated loss adjustment expense and unallocated loss adjustment expense, which are the cost of administering, adjudicating and settling claims. In 2017 this was $3.3 billion, or 19% of earned premium. That is a significant increase from 2016, when incurred loss adjustment expenses were 16% of earned premium.

Another metric is the total for all California insurer expenses. In 2017 it was $6.7 billion, or 38% of earned premium, versus 34% for 2016.

Overall, it seems medical and indemnity losses are relatively flat, but expenses of handling claims are up. As the 2018 SOS report notes, total overhead expenses now comprise 42% of all costs, and benefits (medical and indemnity) 58% of all costs.

Frictional costs ($3.5 billion in 2017) exceed the cost of paid indemnity benefits, once applicant attorney fees are factored out (2018 SOS report).

Which is more expensive for the system, applicant attorney fees or defense attorney fees? Defense attorney fees by a long shot ($894 million in 2017 versus $827 million in 2016). By comparison, applicant attorney fees were paid $413 million in 2017, a modest increase over the $408 million in 2016.

Looking at it another way, the 2018 SOS report notes that defense attorney costs were 25% of 2017 paid frictional costs (versus 13% for applicant attorneys).

The insurance industry remains very profitable. In 2017 the WCIRB reports an underwriting profit of $1.5 billion, or 8.4% of premium. By comparison, in 2016 the profit was 5.8% of premium, or $1.0 billion. The WCIRB report will be seen by insurance advocates as proof of a healthy market.

But in the last year California’s insurance commissioner has noted that actual charged rates are often considerably higher than state-recommended rates, and insurers may now be poised to benefit from the Trump tax reform. The WCIRB report does not delve into these issues.

Again, I’ll be commenting on the 2018 SOS report soon. But I can’t close this post without noting an atrocious statistic, a stat that should be an embarrassment to the whole comp community.

What is it?

The 2017 State of the System report noted that the cost to deliver $1 of benefits is 53 cents for California workers’ compensation, versus 02 cents for Medicare, $18 cents for private group health insurance and 22 cents for the median state in the U.S.

Guess what? That hasn’t improved. In 2018 it still costs 53 cents to deliver a dollar of benefits.

From a policy standpoint, this terrible cost/benefit ratio is likely to be a focus of future studies and policy initiatives.

Julius Young is a claimants' attorney for the Boxer & Gerson law firm in Oakland. This column was reprinted with his permission from his blog, www.workerscompzone.com.