John Burton reports that the workers compensation industry had an excellent year in 2004, delivering an operating ratio of 93.7. According to Burton, the”operating ratio” is the best overall indicator of sector performance as it considers investment income as well as operating results.
The combined ratio (all losses combined plus dividends excluding investment income results) was also strong at 104.9, continuing a four year trend of improvements.
The factors contributing to these returns are expenses, defined as claims, loss adjustment expenses, dividends and underwriting expenses, as well as investment income. It will come as no surprise that investment returns in recent years have been less than stellar; the tepid equity markets and low returns on debt vehicles have combined to make it difficult for investment returns to hit the 20%+ results seen at the end of the last decade.
As noted here previously, the strong financials may not continue for much longer, as there are some indications that the market is softening. The key will be what happens with reinsurance rates and availability. After the hurricane season’s record losses, many reinsurers may be looking to recoup losses by increasing their prices. This will have a rapid and notable trickle-down effect on primary insurance rates.
What does this mean for you?
Manage losses and prevent them where possible. There is little the average employer or insurer can do to impact the reinsurance market, but there is a lot that can be done to mitigate the underlying driver – claims costs. Start with prevention and make sure your managed care program drives lower total claims costs, not just discounts on bills.

The State of Texas has at long last released rules governing how workers compensation networks can be set up, operated, evaluated, and regulated by the state. The announcement by Insurance Commissioner Mike Geeslin addresses one major issue we have long had problems with; the focus of most WC networks is discounts, not quality. Here’s Geeslin addressing this issue.
“I want to address a concern that has been raised concerning network care, that it is merely a discount program that will cut corners to save money. If workers’ comp health networks are viewed only as a tool to reduce medical costs, without adding any value to the rehabilitation and care of the injured employee, then the networks are headed to failure. Many employers and injured workers with whom I have spoken have emphasized the need for best value, not care on the cheap or, conversely, excessive care. The more effective medical care that a worker receives, the sooner he or she will be back to productive work or to a point where their injury is manageable.
To that end, our network rules incorporate a number of quality assurance tools. Workers’ compensation networks are required to be credentialed and must demonstrate that they have a formal complaint and dispute process in place. The networks are also required to track return-to-work statistics to see how well they are getting injured workers back on the job.
In addition, TDI researchers will compile data to assess each network’s performance on a yearly basis in the form of a “network report card.” The report card will allow comparisons between networks on a variety of measures, including access to care, health-related outcomes, return-to-work outcomes, employee satisfaction with quality of care, and health care costs and utilization of care.”
I’ll address some of the high points in a future post, but here are a couple of significant aspects of the new law.
1. Employees can choose their provider from any contracted provider in the approved network.

First Health’s performance to date was addressed in a presentation by Coventry CFO Shawn Guertin earlier this week. First Health, a subsidiary of Coventry, produced revenues for Workers Comp of $53.7 mm in Q1 (corrected for acquisition timing), $53.65 in Q2, and $50.7 in Q3.
Workers Comp is disproportionably profitable for Coventry; previous statements from the company indicated WC drives 11% of profits and 3% of revenues. Thus, the decrease in top line has a multiplier effect on profitability.
During the investor call last week CFO Shawn Guertin noted that the company “feel(s) real good about (the workers compensation sector’s) prospects…” Coventry may also be looking at acquisitions in the workers comp space (as well as in network rental and the Medicaid/public sector).
According to Coventry, First Health’s performance to date has been “consistent with expectations”, and the division is poised for growth in 2006, especially in the workers comp sector. This may well be the case, but my sense is the performance to date is likely on the low end of those expectations.
Three other items may bear on the success of First Health’s workers comp sector in the near term.
First Health’s largest WC customer, Liberty Mutual, continues its’ evaluation of network providers. There has been no indication of where Liberty will end up, but given the size of the relationship it will be important for First Health to retain a significant portion of the business. Unfortunately for Coventry, there does not appear to be much upside; as FH is Liberty’s network in the vast majority of states, it does not stand to gain much if it lands new business (the states FH does not service are relatively small). However, the downside could be significant if Liberty chooses to move some states, particularly the larger ones such as California, Florida, Texas, Illinois, New Jersey and/or New York to other networks.
Second, to date there has been no announcement regarding the company’s search for an executive leader for the workers comp sector. The search by Spencer Stuart has been in process for some months now; the right leader could add significantly to FH’s future prospects.
Finally, Aetna’s Aetna Workers Compensation Access (AWCA) has gained some traction as of late with some of First Health’s present customers, and may well be poised to take additional market share. Sources indicate that 2006 may see several larger payers replacing First Health with AWCA, albeit only in a few states.
What does this mean for you?
Clearly, the WC managed care market is maturing. First Health, long the dominant network provider, is at a crucial point in its life cycle. The next few months should provide some clues as to the company’s future direction and strategy, both of which will bear heavily on the managed care programs at many workers comp payers.