Archive for November 28th, 2007

The Impact of Reform on California Workers’ Comp Costs

November 28, 2007

The Workers’ Compensation Insurance Rating Bureau has released its results on 2006 workers’ compensation costs in California. Reform has saved a great deal of money, as predicted. What’s interesting is where it’s saved money.

Estimated ultimate total loss per indemnity claim is down from the $48,000 range in 2000-02 to $39,851. But most of that savings comes from the indemnity side. Ultimate indemnity’s down from the $20-22,000 range to $13,640. But ultimate medical isn’t down at all. It was $25,567 in 2001, and $26,309 in 2002. But after a u-shaped dip, it was back to $26,211 in 2006.

Hospital payments were down more than 17% from 2005 to 2006. Pharmacy and physician payments dropped slightly in the same one-year period. Total medical was flat for the two years, so cost drivers for this high ultimate medical costs lies elsewhere. (Where isn’t obvious from the available data.)

There is much higher usage of medical networks, from 33% in 2002 to 62% in 2005. That was expected, too. What the report doesn’t state is whether networks themselves had any impact on utilization, or whether their effect was primarily limited to reducing the unit cost of services provided.

Indemnity claims frequency is way down from the last decade, but there’s no reason to assume that the change is driven by reforms. (At least, to my knowledge.)

Physical therapy utilization dropped 66 percent, and chiropractic utilization 82 percent, but both these were the expected result of reforms. The number of medical visits per claim dropped, although the percentage changed based on fee schedule and diagnostic variations. Overall, the number of visits per claim dropped by 9%, whereas visits per claim were increasing at a significant clip before reforms.

It’s reasonable to assume that this reduction in the number of visits also reduced case durations, and therefore had a ‘shadow effect’ that drove indemnity costs down as well.

What’s next? Pushback from the California Applicants’ Attorney Association, for one. Their arguments, especially against reductions in permanent disability costs, may get a sympathetic hearing now that results are so much better for the insurance industry.

What hasn’t changed? Loss adjustment expenses haven’t gone down. That means it still costs the insurance company just as much to administer a claim as it did before. That’s the least surprising result of all.

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Even More On Mandates – and the 80% Solution

November 28, 2007

The mandate question won’t go away because it’s central to most health reform proposals on the books today. And yet in a little-known development, the best known “mandate plan” is no longer “universal,” since Massachusetts has decided not to impose mandates on everybody.

Ezra Klein has responded to my take on his Obama slam. He echoes the pro-mandate consensus when he says this: “You can’t actually have this wonderful system everyone’s talking about without full buy-in.”

Buy-in … buy-in … that word keeps haunting me like a ghost from Dickens, and I don’t know why. Oh, wait … I do know why. Because no other industrialized nation has forced people to “buy” something that is usually provided as a social service. Which gets to my underlying problem with mandates, something I haven’t fully articulated until now:

Insurance premiums as we use them in this country are a market-driven, private-sector mechanism.* Advocates want to mandate that people pay premiums, rather than taxes, to meet a social goal. That’s a functional mismatch between the way governments typically address social goals – through taxation – and the way markets establish the price to be paid for transferring risk.

The end result? Elaborate mechanisms for trying to protect people from unfairly shouldering more of that social cost than they can personally bear. When you factor copayments and deductibles on top of premium costs, that gets very difficult.

As noted by the Progressive States Network, total health costs for some Massachusetts residents could exceed 23% of income – at a wage level where that could have a profound impact. The PSN also notes this:

… although 200,000 previously uninsured residents have obtained health insurance in the past 16 months, anywhere from 150,000 to 300,000 residents have yet to sign up with an insurance plan. …. Any uninsured residents will be penalized in 2008 by losing a $210 tax exemption. In 2009, the penalty will jump to “half the monthly cost of the least expensive plan available …” But officials recognize that the still-high costs of health care in Massachusetts make imposing this penalty unfair.

In other words, mandates are being phased in – just as Obama had initially promised to having a universal coverage law by the end of his first term. (Although, come to think of it, haven’t heard about that pledge lately.) The escalating penalties also indicate that, at least in Massachusetts, officials believe mandates have to be quite severe before enrollment increases significantly.

“The Connector authority is granting waivers to 20% of the state’s uninsured residents,” the PSN adds, “or roughly 65,000 individuals, exempting them from the individual mandate.” So the “universal coverage” plan has become the “80% solution” for the state’s uninsured.

In other words, the Massachusetts universal coverage plan is no longer “universal.”

And Massachusetts is an easy state compared to California and some others. When you’re talking about the entire country, the problems become massive.

So what about fairness? One economist said: “”What the Massachusetts decision will do is put down a marker that other advocates will use to say that costs can’t be more than 10%.”

Let’s think about that for a second: Let’s say that society has decided that the total Federal taxation burden for a middle-class family is 28% of income. Now, through mandates, that could become 38% . How can an “opportunity society” candidate argue that a vital need like healthcare should create a usurious burden on the middle class, yet cost the wealthy a small amount of their income (and nothing for the poor)?

Ezra also repeats his assertion that a plan without mandates will be a political liability. And I repeat mine – that mandates themselves will be a liability. I can see the Republicans scoring huge points with something like this: “They’ll be watching you – every time you go to the doctor’s office, or pay your taxes, or get a driver’s license. And they’ll raise your taxes by 40%. Why? Because they think you shouldn’t decide for yourself how much insurance to have.”

Good luck with that.

The alternative is to say: “We’ll invest in making the system better. Then we’ll figure out a way to finance universal coverage that everyone can live with.” Do I like kicking the financing issue down the road? No. Do I recognize that adverse selection will be tough to manage? Yes. But the only alternative is to say that every American deserves a base level of medical coverage paid for out of general tax revenues. And I don’t see any of the leading candidates saying that any time soon.

In short, there are two ways to do this: If it’s optional, it’s Obama’s plan, or something like it. If it’s universal, it’s taxation. (Maybe with vouchers, and employer tax offsets for offering benefit plans.) The in-between approach – mandates – still seems problematic to me.

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*There are countries with very different premium models, like Germany, and those are models we should seriously consider.  But that’s another day’s work to write about …