The Year 1911
Rise of Medical Costs in Workers' Compensation
It was 105 years ago when Ronald Reagan was born; the Titanic was being constructed, and countries celebrated the first International Women’s Day. You know what else happened in 1911? Workers’ Compensation began in Wisconsin (you knew I was going to throw insurance in there somewhere).
The system was set-up on a fairly simple basis. The employer compensates a worker with medical and indemnity benefits for wage loss (if applicable) for any injuries that occur in the course of employment. By providing these benefits, the employee agrees that the sole remedy for their medical and indemnity claims will be the workers’ compensation system.
Since the 1911 law was enacted, the indemnity costs had been the largest portion of the workers’ compensation system, making up >50% of workers’ compensation claims, up until 1996. The indemnity portion of the claims includes lost wages, death benefits, vocational rehabilitation costs… etc. After 1996, the medical portion of a claim has become a much larger cost to the system. In fact, medical benefits are now >60% of workers’ compensation costs. A 2015 article in Business Insurance predicted that medical benefits would be greater than 2/3 of workers’ compensation claim costs by 2018. How can that be?
There are a number of factors that will likely lead to this outcome:
- Medical inflation – A recent study predicted medical inflation to be 9% in 2016. With medical costs becoming the greatest portion of claims costs, this will have a huge effect in the long-term cost of claims.
- Age of injured workers – The increase in the average age of the workforce is a surprising one. The average age was 40 in 1994 and is now up to 45. As the workforce continues to age, other medical conditions that may not be related to the workplace will have an unwanted effect on workers’ compensation claims. Think obesity, diabetes and other types of common maladies that will complicate rehabilitation.
- Increased cost of medical technology – There’s a price to wanting the best medical care in the world.
- Pharmaceutical utilization – Prescription drugs, especially some of the more specialized ones, can have an extraordinary price tag associated with them.
As an employer, there are certain controls you need to make sure are part of your claims management program. Your insurance company or third party claims administrator (TPA) should be able to explain how they keep medical costs down, including using bill review systems, checking fee schedules in applicable states and monitoring the progress of injured workers towards maximum medical improvement. Controlling medical, and ultimately workers’ compensation, costs will continue to evolve and require greater expertise as we look towards another 100+ years.
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