In many states, keeping a claim in "medical-only" status will save you mod points - and premium. Plus it's better for the employee's morale and recovery! The number of days you have to get an employee back to work varies by state. (Illustration copyright Specific Software Solutions.)

Many of you are undoubtedly familiar with the importance of medical-only claims to the experience modification rating process. In a great majority of states, these claims, also known as injury or IJ code type 6 losses, are reduced by 70% for the purposes of the mod calculation. This reduction is also known as the experience rating adjustment (ERA). Reducing medical-only losses for the purposes of the mod calculation can result in a considerably lower mod factor and, in turn, workers compensation premium.

A Change for Medical-Only Losses in New Mexico and Colorado

It’s timely to revisit medical-only losses right now because of two reasons:

1. New Mexico has recently approved the medical-only reduction, effective 9/1/2010. If you’re a ModMaster user, this reduction will only take effect on NM mods with an effective date of 9/1/2010 or later – IF you’ve applied ModMaster update 10.04 or later. This update also includes new NM rates, also effective 9/1/2010.
2. The Colorado legislature has recently DISAPPROVED the medical-only reduction, effective 1/1/2011. This change is part of Senate Bill 10-112, which also says that deductibles paid by employers cannot be used in determining the experience mod. NCCI has not yet published anything about this change (and we really wouldn’t expect them to for a while), but those of you who do business in Colorado may want to start thinking about this change now. We anticipate that mods with effective dates of 1/1/2008 through 12/31/2010 will still reduce medical-only losses by 70% and mods with an effective date on or after 1/1/2011 will NOT reduce such losses, but we hope this will be clarified by forthcoming documentation from the appropriate authorities. In the meantime, your best bet for anticipating this change on a certain risk in ModMaster  is to:

> Use File Utilities/Copy a file to make a copy of the desired mod file.

> On the Small Loss page, change all CO losses that are coded as IJ type 6 to any other code (usually 5 will be the most appropriate code for something that was previously medical only).

> On the Large Loss page, change all CO losses that are coded as IJ type 6 to any other code (again, usually 5).

> Now recalculate the mod.

You can use the Mod Comparison Report to compare your original file to your copy of the file with the IJ types changed – HOWEVER, before you get too excited, it’s important to remember that your new calculation is still using 2010 rates, AND the claims coded as med-only may fall under the deductible and not apply to the mod calculation. So you may also want to make a copy of your original file and DELETE some or all of the type 6 losses (depending on the deductible level you anticipate) and recalculate to see what that impact will be. We also anticipate that the 2011 rates will change somewhat to reflect these new rules.

We will continue to monitor the forthcoming changes in Colorado and write more about this as information becomes available. We appreciate our clients and readers sharing any information that you learn from other sources, too!

A Brief History of the Experience Rating Adjustment

The experience rating adjustment was first implemented in 1998 as a way to encourage employers to report ALL losses, not just those involving lost-time claims. Prior to the ERA (and still today in states that have not approved the ERA), companies would often pay their small claims to avoid having these claims count against the mod. Interested in collecting all possible data for actuarial purposes, NCCI implemented the ERA method of reducing medical-only claims by 70% for the purposes of the mod calculation.

This change in turn has considerably increased awareness of the importance of keeping claims medical-only through:

• optimal injury management, especially in the first 24 hours after an injury
• early return-to-work/modified duty
• and good communications between everyone involved in an injury: the injured employee, the supervisor, HR, and medical and insurance staff.

All of the above principles we explain in great detail on WorkCompEdge.com.

The ERA shows up in key strategy #8 in our 9 Key Strategies to Better Work Comp Sales and Service which we’re unveiling this summer. Look for a 2-minute video on this topic soon! In the meantime, for more about the ERA itself, don’t miss this related reading:

• ModMaster FAQ: What is the experience rating adjustment?
• ModMaster FAQ: What states have approved the experience rating adjustment?
• WorkCompEdge Blog: Small Medical-Only Claims: To Pay or Not to Pay?

]]> http://workcompedgeblog.com/2010/06/01/workers-compensation-medical-only-losses-for-all-states-update-newmexico-colorado/feed/ 1 WorkCompEdge Blog Editor med-only http://workcompedgeblog.com/2010/03/11/pitfalls-when-workers-compensation-rates-decline/ http://workcompedgeblog.com/2010/03/11/pitfalls-when-workers-compensation-rates-decline/#comments Thu, 11 Mar 2010 21:46:14 +0000 WorkCompEdge Blog Editor http://workcompedgeblog.com/?p=775 ]]> by Frank Pennachio, WorkCompEdge Regular Contributor

Lower rates can act like a Trojan horse and pose great dangers for the employer.

With few exceptions, workers compensation rates have been declining across the country for several years.  Declining rates appear to offer employers relief, especially during these tough economic times.  But declining rates can be deceiving and ultimately lead to greater total workers compensation costs. Here are three pitfalls employers should be alert to avoid when workers compensation rates go down.

Pitfall #1 – Assuming that when rates decline, premium costs will decline.

Paradoxically, declining rates may actually drive up the employer’s costs and pose greater risks to their business.  Many employers are often surprised to learn that a reduction in rates does not always mean a reduction in direct workers compensation costs.

As regular readers of this blog probably know, rates alone do not determine the premium cost. An experience modification factor (mod) adjusts the cost of insurance to the individual loss performance of an employer. The workers compensation premium is calculated to be:

Rate x $100 Payroll x Experience Modifier = Premium Cost

The calculation of the mod factor itself is somewhat complex, but its overall purpose is to compare an employer with similar employers in the same industry classification. If an employer’s past losses are lower than average, a credit rating reduces the premium. Conversely, if past losses are higher than average, a debit rating can actually increase costs in spite of lower rates.

If an employer’s injury costs increase, then their mod will likely increase and not only nullify the benefit of the lower rates, but actually increase the employer’s costs.  In addition, when rates go down, the employer’s injury costs are expected to go down, as well.  If an employer’s injury costs stay the same or go up, then it is almost certain the mod will increase even more.

Pitfall #2 – Focusing only on direct costs

Employers tend to focus more attention on injury prevention when workers compensation rates are increasing and less when rates are declining.  Yet injury prevention and management is critical regardless of the direction rates are trending.  Rates have little to do with ultimate workers compensation costs.

Workers compensation insurance premiums are the direct costs of funding workplace injuries.  However, when an injury occurs, the indirect costs can be much greater.  These indirect costs include:

• overtime wages
• temporary labor
• increased training
• supervisor time
• production delays
• unhappy customers
• increased stress, and
• property or equipment damage.

While it’s difficult to track some of these costs directly back to a workers compensation claim, they indisputably add to the overall indirect costs. However, employers recognize if they lose a key employee to an injury, then their business will suffer.  An employee injury is costly, regardless of the direct insurance costs, and lower premiums have no impact on indirect costs.

Pitfall #3 – Failing to recognize the threat to business

It’s increasingly common for employers bidding on new business to find that their injury record and experience mod are important factors in whether or not they win a contract.  This is most prevalent in the construction industry; however, it’s emerging in other industries as well.  Suppliers are finding that they are not allowed to deliver goods to a business if their experience mod is above an acceptable number.

If an employer cannot secure new business or loses existing contracts, then lower workers compensation premiums are useless.  As stated above, lower premium rates imply an expectation that employers will experience fewer injuries and lower costs.  If they do not, then their experience modification goes up.  Their increased experience mod may now limit their ability to grow or sustain their business.

As you can see, lower rates can act like a Trojan horse and pose great dangers for the employer.  It seems ironic that an employer can be endangered by lower workers compensation premiums, but it is true.

Many of our readers have found themselves, at one time or another, in the unfortunate position of trying to explain why the workers compensation mod went up from the previous experience period. The possible culprits are numerous and have a lot of moving parts: changes in

• expected loss rates,
• payroll,
• overall loss experience, or
• the mix of loss types (frequency, severity and/or medical-only losses)

all contribute to a change in the mod. Of course, a change can be positive or negative depending on all the moving parts. Mod increases will occur, even if loss levels remain the same, if expected loss rates fall. Business owners don’t expect to pay more in premium when their business is down, but it’s definitely possible. So how do you get a handle on what exactly is influencing a mod – and premium costs – from one experience period to the next?

We know you already use ModMaster to calculate and analyze the experience mod calculation (What? You don’t? Learn more about ModMaster now), so in the past you would’ve undoubtedly used one of our many reports – perhaps the Loss Analysis by Policy Period, for example – to help see what’s happened with the mod from one rating effective date to the next. Still, that involved selecting the desired mod file and requesting the desired reports, then opening up the mod file for the previous experience period and requesting those reports. So much paper and time and looking back and forth from one page to another.

Find the new Mod Comparison report on the Reports and Graphs page of ModMaster.

But now (drum roll, please), that’s all changed. The new Mod Comparison Report, available in ModMaster update 09.08 and later, produces a two-page report that shows critical information for both the current mod file and a second mod file of your choice. Here’s how to use this report for best results:

1. First, let’s say that you have the 2009 mod for Favorite Client already loaded into ModMaster. You’re ready to put in data for the 2010 mod. Start by doing a File Utilities/Rollover of the Favorite Client 2009 to a new name, let’s say Favorite Client 2010. This deletes the oldest policy year of data (in this case the 2005 policy year) and “scoots” all the other data over on the payroll and small loss pages so that the newest column is empty and awaits your data input.

2. Input payroll and loss data (either estimates or actuals, if you have the data) for the newest policy data into the Favorite Client 2010 file. This would be the 2008 policy period for our example. Also make any other adjustments to existing payroll or losses to match the bureau worksheet.

3. Calculate the mod. If there are no errors, then proceed to the Reports Menu.

4. You’ll see that the Mod Comparison report is now a choice on the Reports Menu. When you click on this report and then click “Print Preview” or “Print Now,” the following dialog appears:

Mod Comparison report dialog

5. Now, here’s the important part: when you pull down the list of mod files, be sure to select the mod file for the same risk but only one year earlier. While ModMaster will attempt to compare any two files you indicate, this report is designed to compare mods that differ by one and only one experience period.  If you try to compare other mods, unpredictable results may occur, as we say in the software business.

6. After you select the mod file to compare to, click the “Run Comparison” button, and something like the following will print or preview. (Click the report image to view the report as a pdf.)

Mod Comparison sample report, page 1

Mod Comparison sample report, page 2

At a glance, you can see how much the mod changed from year to year, but just as importantly, how much the minimum and controllable mods have changed. You can also see what’s happened with the expected and actual losses: whether they’ve gone up or down, and what’s happening with actual to expected ratios.

In this case, we can see that the mod went up, not only because expected losses were down but also because the actual losses which dropped out of the calculation were less than the actual losses which were added for the 2008 policy period.

The new Mod Comparison report is based on a user suggestion we greatly appreciate. We’ve already had a new suggestion from a different user that we should also list payroll totals, not just expected losses. Give the report a try today and let us know what you think!

Workers  compensation policy premiums are usually based on estimated payrolls. The final earned premium is determined during a premium audit after the policy expires and is based on actual payroll. When payroll is higher than estimated, the employer owes additional premium, and when payroll is lower than estimated, money is returned. In current economic conditions, many employers’ payrolls are declining, so an employer may be paying higher than necessary monthly installments due to an overstated payroll estimate at the inception of the policy.

In these challenging times where cash flow is king, employers might want to consider another work comp insurance option known as Pay-As-You-Go.

Pay-As-You-Go integrates payroll processing with the payment of workers compensation premiums.  The employer pays their work comp premiums each pay period based on actual payroll.  Also, there are no upfront deposits or down payments.The advantages of Pay-As-You-Go plans include improved cash flow since your workers compensation premiums will be immediately reduced if your payroll declines during any given pay period.  In addition, should you have an upward spike in payroll, you will not be surprised with a significant amount of premium due after the premium audit.

However, to participate in a Pay-As-You-Go program, an employer usually must outsource its payroll processing.  If you have already outsourced payroll processing, you may want to explore whether Pay-As-You-Go is available through your current provider.  If you have been considering outsourcing payroll, but have not yet done so, Pay-As-You-Go may be a tipping point in your decision.

Pay-As-You-Go plans are often touted as alleviating premium audit problems, but it is still critical for the employer to make sure a premium audit is done correctly. While it’s true that you won’t get a surprise with understated or overstated payroll estimates if you’re using a Pay-As-You-Go plan, that doesn’t absolve you from making sure you take all the right steps in providing and verifying information, such as the payroll classes to which your employees belong.  The WorkCompEdge training module “Eliminate Overcharges by Taking Control of the Premium Audit” assists employers with avoiding errors and mistakes in their premium audit.

Pay-As-You-Go plans are available through several insurance companies and payroll processing services.  If you’re interested in exploring this option, your insurance agent will be able to help you connect with providers of this type of program.

Improving cash flow and freeing up capital has likely never been more important for many businesses.  Every little bit helps.  Pay-As-You-Go plans may offer some relief.

Related WorkCompEdge blog articles: Playing by the Rules for Fun and Profit

The recent posts to the WorkCompEdge blog and forum about Vicki’s premium audit experience struck a chord with me. Sometimes it gets terribly lonely feeling you are the only sane person engaged in a dialog. There have been many times in my experience as a work comp agent when I’ve wanted to throw my hands up and say to an auditor or underwriter, “What color is the sky in your universe?”

In other words, “What are the rules you’re playing by?”

Now, before any auditors or underwriters get upset with me, let me be quick to point out that they do have rules, and they are playing by those rules. From my perspective, those rules sometimes require me to suspend common sense and my orientation toward what seems fair as I address issues related to a workers compensation insurance policy. But I’ve already wasted too much of my life force debating fairness and common sense with insurance company underwriters and auditors.

You’ve got to know those rules! If you have trouble viewing the video, try this link.

What I’ve come to appreciate is that the rules are the rules regardless of what may seem logical or fair in a certain case. So, instead of cursing the dark, let’s turn on a light. Our best strategy – as employers and the agents or other professionals who help employers – is to learn the rules.

This could not be truer than in the premium audit process. Commonly, numerous rules are never explained to the employer; sometimes, those numerous rules are executed incorrectly, resulting in overcharges to the employer. In no way do I suggest the auditor or insurance company has nefarious intentions. It’s simply a difficult business challenge – for both insurance companies and employers – to complete an accurate premium audit.

Premium auditors have a thankless job. They are not usually treated as a welcome guest when they arrive, but as an interruption to an already busy day. Auditors are usually facing deadlines and under pressure to get audits done fast. Pressure to get things done fast does not create an environment conducive to education and accuracy.

As an employer, therefore, you must commit to educating yourself – and following through with the processes that will assure an accurate audit.

If you’re a WorkCompEdge member, there’s a module and workbook to help you do that. But as Vicki’s experience attests, you can also root out this information from manuals from the appropriate rating bureau (such as the NCCI Scopes Manual). I heartily agree with her mention of the Ed Priz guide as a great way to become familiar with the process. Here’s a sampling of issues that, when addressed appropriately, may save you money:

• Are your employees classified appropriately for their job function? If your administrative assistants are accidentally placed in the same class as your construction workers, then you’re being overcharged. If any subcontractors – who in almost all cases should have their own wc insurance – are listed on your audit, then you’re likely being overcharged.
• Are your corporate officers exempt or non-exempt from workers comp insurance?
• Are excluded remunerations – such as tips, incentive payments, employee discounts, payment for active military duty, certain overtime payments and a host of other things – really being excluded from your audit bill?

Kory and I entitled this entry “Playing by the Rules for Fun and Profit.” We have to admit that maybe there’s not a lot of fun in navigating the intricacies of a premium audit – but those same intricacies really can be a source of overcharges you can eliminate. And who doesn’t have fun saving money?

Are your premium audit experiences an aggravating mystery to you, a triumph of good recordkeeping and cost savings, or something in between? Let us hear from you.

http://www.WorkCompEdge.com