California, New York, and Texas are all in various stages of reforming their workers comp systems. Florida’s reforms have been in place for several years, and rates have dropped thru the floor. WC premiums have decreased even more, with some employers seeing cuts of 50%. South Carolina may also see changes, and there are initiatives on the table in several other states as well.
Lower costs are great, for the buyer. Employers can move on to other important issues, shoving risk management initiatives to the bottom of the pile. They can move their business easily, as there are more work comp insurers clamoring for their business, eager to lower premiums even further in an effort to capture market share.
But there can be a significant downside to successful reform efforts.
When rates drop, so do the dollars available for loss prevention, internal medical management, and regular old-fashioned claims handling. If an employer is paying $1 million in premium, and over three years that premium declines to $600,000, their insurer’s admin fees drop proportionally – from about $220,000 to $132,000.
That kind of decline pressures claims shops to increase case loads, short-cut processes and systems, and push work out to vendors (who can bill the file separately, taking work off the adjuster).
There is typically a decline in self-insurance, as employers can often get fully-insured programs for less than they are paying a TPA for their entire program (claims, claims handling, reinsurance and fees). This in turn puts pressure on TPAs to cut their prices.
Don’t get me wrong, competition is great. It forces suppliers to get better, cheaper, faster. But when customers stop buying smart and force their suppliers to cut into bone, the result is inevitable. The suppliers will have to make up that lost revenue and margin somehow. Cutting staff (and that usually means the most expensive, longest-tenured, best workers), off-loading claims handling to case management firms (and getting a commission for the referral), and reducing investment in systems and training are all common responses to price pressure from buyers.
What does this mean for you?
Sometimes the best deal is not the cheapest. Actually, it’s probably most times.
