Medical malpractice is often the most considered exposure in a healthcare entity’s self-insurance program. However, these organizations should closely evaluate their workers’ compensation losses as well. In his article “Workers’ compensation: The other self-insured liability,” Richard Frese provides steps that self-insured healthcare entities should take to understand, report, and control their exposure to workers’ compensation risk.
Here is an excerpt:
Understanding exposures and estimating losses
From the date of loss to the final payment, the development of workers’ compensation losses can extend over a period of a few years on average and up to 40 or 50 years in severe cases. Losses are usually estimated on an occurrence or accident-year basis, which considers when an accident occurs, regardless of when it is reported. Occurrence losses account for losses that are already known, such as payments and case reserves, as well as unknown losses, which are referred to as incurred but not reported (IBNR).
Elements of IBNR. IBNR comprises pure late reportings, case development on known claims, development on reopened claims, and known instances that will be presented as future claims. Case development on known claims and development on reopened claims are significant components of workers’ compensation IBNR.
For example, consider a workers’ compensation back injury. This type of injury usually is reported soon after it occurs but can easily take an adverse course if symptoms reoccur and additional surgeries are needed after a claim is initially closed. In contrast, pure late reportings represent a relatively minor category for workers’ compensation. At the end of any given year, roughly 5 to 15 percent of losses that occurred in that year will still be unknown. This percentage is significantly lower than the corresponding percentage of medical malpractice cases; more than half of malpractice losses are still unknown at the end of a typical year.
Unique characteristics. In developing loss estimations, several considerations unique to workers’ compensation should be taken into account:
• The medical inflation component of workers’ compensation losses is increasing at a faster rate than inflation of lost-time claims, and becoming a larger share of payments.
• Healthcare entities can offer treatment to their own workers at a discounted fee.
• The frequency of losses may be affected by the economy and reductions in workforce as some workers try to supplement lost income through workers’ compensation benefits.
• Structured settlements may be used as a mechanism to manage annual payments, especially for a permanent total disability.
• Workers’ Compensation Medicare Set-Aside Arrangements (WCMSAs) typically extend employer liability.
• Workers’ compensation benefits vary by state.
Actuarial estimates are based on the theory that the past is indicative of the future. When using an actuary, management should communicate to the actuary any program change that affects the timing and valuation of claim payment (e.g., paying or reserving claims quickly and a new level of conservatism versus prior slower, undervalued reserves), claim definition (e.g., when a bandage that might have been excluded previously is coded as a medical-only claim), or claim handling (e.g., changes made by a third-party administrator). In addition, the actuary should be informed of any retention change or mix in the class of workers, such as an increase in nursing exposures. Actuaries will typically give credit to a program’s own development in workers’ compensation, but when incorporating industry information, they should consider the program’s retention to avoid overstating IBNR.
For more Milliman perspective on workers’ compensation, click here.