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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