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By Vernon Sumwalt, Esq.
In the NCCI brief “Workers’ Compensation Claims Frequency” (August 2011), Jim Davis and Yair Bar-Chaim look at the consequences of the Great Recession of 2007-2009 upon workers’ compensation claims frequency in 2010. To a variable extent, the conclusions drawn in similar studies match up to our “real world” experiences as advocates for parties in workers’ compensation claims, but there are a few differences. This article looks at some of NCCI’s conclusions and their relevance to our day-to-day experience while keeping in mind, of course, that NCCI studies are for a different purpose—ratemaking services for its members.
The NCCI brief (in brief)
For the first time since 1997, NCCI reported an increase in claims frequency compared to previous years—in fact, the frequency was 3% higher in 2010 than the previous frequency for 2009. Claims involving less than $50,000 in loss declined more steeply than those with more loss. Generally speaking, this decline prevailed (1) particularly in claims under assigned risk policies, but also for those under policies purchased in voluntary markets, (2) across all geographic regions, (3) in all states, and (4) throughout industry groups, and even among the largest classes of employers within each industry group. The decline in claims frequency also characterized different employers when classified by the size of their (1) payroll, with larger employers ($100 million in payroll or greater) enjoying a greater decline, (2) workers’ compensation premium, with employers paying more than $1 million in annual premiums enjoying the greatest decline, and (3) average rate of claims payout compared to premium paid. Under these conclusions, this means that self-insured employers will enjoy heightened profitability, particularly under the current economic climate in which they have recently taken advantage through widespread “reform” efforts in workers’ compensation systems throughout many states.
NCCI looks at claims frequency with several angles in mind, one of them being a comparison to payroll dollar. NCCI proposed three reasons for the decline in claims frequency when compared to payroll dollar. First, a decrease in construction jobs since the start of the Great Recession has resulted from a corresponding contraction in claims frequency per payroll dollar, but an increase in the frequency per premium dollar. NCCI explains that the construction industry has a lower frequency in the latter, but a higher frequency in the former. In plain English, what this means is that the construction industry generally has higher premiums to accommodate the severity of the injuries sustained in that industry, but fewer people on the payroll. With smaller payrolls, the significance of a single claim grows. Although the evidence is anecdotal, this seems to make sense. Our practices have seen a reduction in the number of construction-related clients compared to, say, the period between 2000 and 2005.
Second, NCCI concludes that the decline in claims frequency accounts for an increase in the average number of hours worked per week. There was a 0.6% increase in those hours in 2010, compared to decreases in 2008 and 2009. This, too, is consistent with the author’s experience, at least over the past few years. The economic downturn has resulted in less overtime pay—and less injuries from a fatigued workforce—and cut backs in schedules worked due to tight cash flows with employers.
Third, and more significantly according to NCCI, the shrinking volume of premium dollars has forced a corresponding increase in the frequency of claims per premium dollar. This was notable in policies whose terms completed by the end of 2009. Shrinking payrolls might have had something to do with this factor, since end-term premium audits would have resulted in refunds if the contraction occurred during the term of the policy. Generally speaking, employers had fewer employees on the payroll and at lesser pay in 2010 compared to previous years. Increased demands from fewer employees during work hours did not dilute the risk of injury associated with those jobs, particularly in situations where a single employee covered the work previously performed by multiple employees, and this increased risk exerted upward pressure on the frequency of claims per premium dollar.
Why the pressure?
The NCCI brief proposed three possible factors for this upward pressure. First, with the economy trying to get on its feet again, employers have started to hire new employees. Newer employees are injured more frequently than older, experienced ones. The data plays out more in some industries than others—for example, fast-food workers tend to be younger and prone to less severe injuries than workers in other industrial classes. Second, employees who once feared losing their jobs if they filed claims might have become braver in light of the economic improvement in 2010. Third, there was a higher incidence of small lost-time claims in 2010 that, in previous years, might have been classified as medical-only claims. According to NCCI, this last factor has possibly led to a decline in not only indemnity costs, but also medical costs, per claim. For the first time since 1995, the average medical costs per workers’ compensation claim trailed behind the Medical Consumer Price Index.
But there might be another reason, and it is one that we see frequently in our day-to-day practices. Some employees, who once feared to file claims due to workplace retaliation in a fragile and uncertain economy, are now fearful of losing the right to pursue a remedy for their workplace injuries due to the passage of time, particularly if the employees are still out of work. This would explain the higher incidence of lost-time claims that might previously have qualified as medical-only claims. The data assumed by NCCI is provided to NCCI by its members, of course, which means that the data is only as valid as the assumptions underlying it. From the author’s experience, this data involves allocations by employers and carriers all towards indemnity, and none towards medicals, in lump sum settlements, even in claims where there are significant medical expenses involved. An invalid premise of this type would produce a discrepancy in the conclusions drawn by NCCI and how real life plays out our practices, where everyone knows that medical costs for work-related injuries are the primary cost driver for the system.
Why claims frequency is important
In order to improve the accuracy of its ratemaking services, NCCI also uses three main categories to analyze claims frequency as predictors of future risk: (1) claims that are likely to develop versus those that are not likely, (2) the body part injured, and (3) whether claims are closed or open. With respect to the first category, NCCI tries to predict the types of claims that will evolve into significant exposure for its members, as opposed to those claims that will resolve quickly. Generally speaking, NCCI proposes that injuries to the head, skull, neck, trunk, spinal cord, upper and lower back or multiple body parts are likely to develop into more significant claims. On the other hand, injuries to the fingers, hand, arm, wrist, toes, foot, and ankle are not as likely to develop into significant claims. This, too, appears to play out in our practices, since injuries to the former group of body parts involve more vocationally significant limitations than injuries to the latter group. Soft-tissue injuries such as sprains and strains significantly declined across the board, but still constitute a large share of injuries.
The second category—“injury type”—uses the well-known categories of “fatal,” “permanent total,” “permanent partial,” “temporary total,” and “lost-time” to classify claims. However, NCCI classifies injury type based on the initial report of injury. For example, an employee may initially fall under the classification of “temporary total disability” just after the date of accident, but later end up under the category of “permanent total disability” once all consequences of the injury are patent. NCCI uses the former, not the latter. To the author, this is perhaps the aspect of the NCCI system that is at odds with our experience in representation. Sometimes, the consequences of an injury do not become significant for many years. This is particularly true in occupational disease claims. Litigated claims also do not mature for several years under some state systems. This lag, too, could skew the data.
The most prominent aspect of NCCI’s conclusion is that claims frequency increased slightly in 2010, but it had declined over the past several years. The brief proposed three factors contributing to this long-term decline, including (1) increased automation in manufacturing processes, (2) that older workers file less claims than younger workers, and (3) the improvement of workplace safety and loss control. Although not in complete disagreement with these factors, the undersigned has not seen them play out in his practice to the degree alleged by the NCCI brief. When discussing potential claims with employees and whether to even file those claims, the largest concerns have been beating limitations periods and whether to file a claim to begin with due to the possibility of retaliation in a poor economy. These are valid concerns.
To paraphrase the adage that became popular during the Clinton years, “It’s still the economy, stupid.” And this is no less true now than it was back then. Statistics and data only look at claims that were actually filed and reported to NCCI by its members. The undersigned would venture to say that since the onset of the Great Recession, there were many potential claims that did not ripen out of self-concern by the employees with those claims. Even so, NCCI’s conclusions were generally consistent when compared to external sources, such as the United States Department of Labor Bureau of Labor Statistics, which were also based on data of claims actually filed, and this is encouraging. As practitioners on the front lines of these claims, however, we have to remember that the motives for filing claims, the fear of filing them, and self-preservation in the choice of not filing them are all extant, but difficult—if not impossible—to capture in statistical analysis.
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