There are some differing opinions on this issue; I heard from several colleagues with different views on wage replacement caps; two somewhat different perspectives are provided below. [original post and reader comments are here]

From Bruce Wood – former Vice President and Associate General Counsel at AIA; retired after 27 years, currently consulting (AIA is a client):

The amount of the maximum weekly benefit amount (WBA) is a major cost element in workers’ compensation. Industry (surely, AIA) policy has always deferred to business and labor on the amount of the maximum WBA, lest the insurance industry be accused of seeking to inflate insurance premiums by supporting more generous benefits. It would be interesting to see if many others in the business community go along with increasing the maximum, much less completely eliminating it even for workers with annual incomes of hundreds of thousands of dollars, who typically have alternative sources of income support.   I would expect policyholders to be reluctant to accept this increased expense.  

All states have a maximum WBA, in nearly all instances indexed to a percentage of the statewide average weekly wage (SAWW). Most – 36 — today cap benefits at 100 percent of SAWW.  Sixteen states exceed 100 percent, with one at 200 percent.  Eleven states fall below 100 percent; and the maximum temporary total disability benefit in two states is a fixed dollar amount that can be changed only by the legislature.  In the early 1970s, when the National Commission issued its report, many states did not use a maximum WBA equal to even two-thirds of SAWW.  The Commission recommended an immediate step-up to two-thirds, with a phased increase thereafter, to 100 percent (by 1975), 133 1/3 percent (by 1977), 166 2/3 percent (by 1979), and 200 percent (1981); and it further recommended the maximum be indexed annually (for new injuries) to the state’s current average weekly wage.  After the Commission report, the states all raised their maximums, but as noted few were willing to go above 100% because a higher maximum is very costly. Nowhere in the Commission’s narrative is there consideration for eliminating any cap.  Thus, the Commission seems to have accepted the premise that some cap on benefit levels was essential in balancing overall system costs and in lending greater actuarial predictability to those costs. Public policymakers need to obtain actuarially credible pricing estimates before reaching any conclusions about raising, let alone eliminating, any cap.

It should be noted that any serious consideration to significantly increasing benefit caps should necessarily include examination of the wage replacement rate (typically 2/3 of gross pay) as well as using net pay rather than gross pay as the wage base. The National Commission recommended that states adopt a net pay basis for benefits, at 80 percent of “spendable income.” The Commission’s recommendation took cognizance that workers’ compensation indemnity benefits are not subject to income and payroll taxes, and thus a more generous WBA for higher income individuals may reduce return to work incentives by replacing a higher percentage of pre-injury net pay, or in some cases, exceeding it. Replacing a percentage of net pay would better-preserve return-to-work incentives and more equitably pay benefits to workers in different income tax brackets.     

As with everything in comp, it is all more complex than might appear.

From a current C-suite Executive and former Chief Claims Officer:

I’ve been asking this question [why is there a limit pegged to AWW] since I was a 22 year old claim trainee and have pissed off a number of insurance executives and mid-level managers in the process of simply being honestly curious.   The pricing argument is a red herring – with loss data and payroll data available to the level of detail it is, I don’t buy it.   I’ll take the question a step further…why do some states limit the number of weeks of indemnity for someone who remains off work and is legitimately disabled?  Seems to be against the concept of equity and the ‘grand bargain’ that was originally intended.

Wonder why we as an industry have the reputation we do????

What does this mean for you?

It’s always helpful to hear different opinions from folks with deep, relevant experience.

That’s a question that’s been bouncing around between my neurons for some years.

These neurons finally fired intelligently when I got an email from good friend Todd Brown. Todd is Medata’s Compliance and Regulatory Affairs Practice Leader and he tracks pretty much everything and anything going on in work comp regulatory and legislative affairs around the country.

Todd’s latest summary included news that several states just re-set the maximum wage replacement payout for workers comp patients who are not working.

I don’t understand, or more accurately, don’t “get” why workers who make more than a certain arbitrarily set amount don’t get adequate wage replacement when injured and out of work. If you make more than the “AWW” (average weekly wage) you likely have expenses higher than folks who make less than the AWW, expenses that won’t be covered by even the maximum payout in most states.

So, Todd being way smarter than me on this, I asked him for his take.  Here’s what he said:

In fact in my 30 years in this business I have never seen serious discussion regarding the capping issue except for the number of weeks for certain benefit types.  As far back as I can research I have not come across the reasoning behind it.  My supposition is that it makes the pricing of policies easier for actuaries.  But that is just a guess.  Years ago it wasn’t much of an issue as the gap between the high wage earners (excluding corporate officers) and low wage earners was not what it is today. 

In 1970 a senior level professional made 3.6 times what the entry level person made.  Today the senior level professional makes 6.6 times

In 1970 mid level professional made 1.9 time what entry level person made.  Today the mid level makes 4.3 times

As the wage gap continues to widen between professionals and unskilled the situation will continue.  For those at the bottom rung the statewide cap based on AWW will not affect them but for those midway and up the statewide cap based on AWW will be adversely affected.  

Unless I’m missing something this seems eminently unfair.

Yesterday’s post prognosticated about macro-drivers of workers comp; employment, investment returns, medical costs.

Today’s focus is on what those macro-drivers mean for discrete parts of the work comp world – so here are the next five predictions.

6.  Winners will focus on execution.
Execution – customer service and end-user experience, defining and delivering the service customers want in the way/when/how they want it; accuracy in reporting/billing/communicating; integration between vendors and customers – will continue to determine which work comp service providers win and who they beat. Notice I lead with customer service – for without focusing on the customer and their experience with your company, the rest doesn’t matter.

7. Telemedicine is coming fast
What it will look like; who will win (see above); how it will impact patient care and outcomes; what types of medical services are most likely/suitable for telemedicine are all going to be clearer in twelve months. What we do know now is there is a lot of experimentation going on today, much of it driven by smaller companies. Among the models, there’s work comp specific company CHC Telehealth, a partnership between clinic giant Concentra and American Well, and giant TPA Sedgwick is deep into developing a telemedicine initiative.

Several other entities are quietly working on different approaches.

8.  Mitchell will continue to add work comp services businesses via acquisition.
The tech company is working hard to expand beyond its traditional auto insurance business, with acquisitions in pharmacy benefit management and specialty bill review in 2016. Expect Mitchell to keep looking for “tuck-in” businesses in PBM and cost management in work comp and other P&C lines.

9. Drug cost decreases will flatten out somewhat, while reductions in opioid spend will continue to increase.
Regulators, payers and PBMs are slowly getting their arms around the issue; kudos to work comp for being in the forefront of this issue.  The group and public sector health insurers will learn a lot from you.

10. More value-based payment pilots will hit work comp.
That’s a really easy prediction, so I’ll quantify it – there will be more than five new pilots or program seeking to deliver care via bundled payments or similar mechanisms that will start in 2017.

11. Bonus pick – more consolidation in case management
As frequency and severity continue to slide, field case management businesses are going to have to find new revenues from new services they can offer to current clients/cases and get more revenue from current cases.

That’s a really heavy lift. A much easier way to grow revenue is to buy other CM companies, cut expenses…you know the drill.

There you have it – Paduda once again standing out on a limb.

It’s time to polish up the HSA crystal ball and prognosticate on what the next year will bring for workers’ comp.

Today we’ll keep it at a high level, examining 5 key drivers that will affect insurers, employers, regulators.

Tomorrow we’ll predict how those high level drivers will affect different stakeholders.

Here goes…

1. Premiums will rise as employment and wages continue to grow.
   GDP is growing strongly, (predictions are for growth above 3.2% for the last half of this year) employment and wages are up, consumer spending and housing prices are increasing. As long as as the new administration doesn’t start a trade war, things are looking good for employment and payroll, which are key drivers of work comp premiums.
   Note – this is NOT to say work comp insurance rates will rise, but rather there will be more payroll and more people working, so the impact of flat or lower rates will be overcome by higher employment.
2. Medical costs will remain flat or close to it.
   The first “official” indicator will come when NCCI Chief Actuary and all-around really smart person Kathy Antonello reports preliminary data on WC medical inflation at the Annual Issues Symposium in May. My bet is we’ll see inflation in the very low single digits – or even less.
3. Frequency will continue to decline.
   Because it always does.
4. Insurers will double down on efforts to reduce administrative expenses.
   With frequency down, investment returns decreasing, and medical costs flat, premium rates are headed down as well. Many work comp insurers seem to think the only thing they can really control is admin expense.
   So, we will see increased efforts to cut Unallocated Loss Adjustment Expense – cost categories such as general office expense, staffing, IT. And, payers will look to assign admin expense to individual claims whenever and wherever they can (more on this in a later post).
   That’s not to say they won’t be working on reducing Allocated Loss Adjustment expense (costs that are allocated, or assigned, to specific claims).  They will.
5. More payers will move their claims adjusters to home offices.
   Okay, one not-macro-level prediction.
   A good friend and colleague reminded me of this trend; I’ve been seeing it for some time, but didn’t realize how widespread the trend is until he made that observation. There are many reasons for this trend; lower administrative expense, easier to hire and retain good staff, dramatic improvements in technology and communications,

What does this mean for you?

Methinks this is the calm before the storm. The new administration may well be highly disruptive, however we won’t see any real impact until 2018 at the earliest.

Fortune favors the prepared. (quoting Dr Louis Pasteur)

Way back in February I finally got around to making my annual “here’s how I make a fool of myself publicly predicting what I think will happen this year” post.

It’s that time of year – when I have to own up to reality.  So, here’s how I did.

1. The comp market will soften pretty much everywhere*.
   Rate this a Yes, altho it was a gimme.
2. *Except in California, where rates are up – and will stay there.
   Nope.  Effective rates are down this year – welcome news indeed.
3. Liberty Mutual will continue to de-emphasize workers’ comp.
   Looks that way.  Mother Liberty dropped to number 7 on the list of largest workers’ comp insurers in 2015. The move away from WC and towards personal lines has helped Liberty’s financial status, with rating agencies improving the company’s status.
4. Private equity’s role in the vendor market will decrease – a lot
   Yup. A couple PE firms have been looking hard but these are relatively new entrants to the space.  While there are a bunch of small (<$2 million in earnings) companies doing well, they aren’t big enough to hit the radar of private equity investors.  Yet.
   And, there’s been so much consolidation that the big companies are too big for any but the largest investment firms.
   And OneCall’s struggles have made PE firms leery of the space.
5. A half-dozen – or more – states will adopt drug formularies
   Wrong.  This is taking far longer than I anticipated.  While a few have moved forward, many others are moving pretty slowly. Tennessee adopted a formulary, California is working on theirs, while things have stalled in Louisiana, North Carolina, Nebraska, and other states. Arizona implemented their chronic pain guidelines in October, which cover all the meds dealing with that condition.
6. Opt-Out will not gain much traction
   True.  Yeah, I know a bill was introduced in Florida, but that’s the only new news in opt-out this year besides the demise of the Oklahoma experiment.
7. We will see a couple/several bundled payment pilots
   Rising Medical has initiated one program in a handful of states, UCLA is working on a bundled treatment plan for opioid addiction, Wisconsin state employees are accessing programs (this started last year). So, this is a Yes – albeit not a loud one.
8. PBMs and payers will make even more progress reducing the use of opioids
   Yes.  Kudos to all for making significant gains in the fight against overuse of opioids.  This has been especially notable in the reduction of opioid scripts for new claims.  We’ve still a loooooong way to go in addressing legacy claims.
9. A couple of large, vertically integrated delivery systems will make significant moves into occupational medicine
   While there have been a couple reports of joint ventures and expansions, I haven’t seen evidence of much movement here. So, count this as a No.
10. There will be big changes at OneCall
    Yes.  New senior management; a reduction in sales staff; automation, offshoring and outsourcing of key functions have kept folks in Jacksonville hopping all year.

The net – 7 out of 10 predictions were correct.

Later, I’ll do my prognostications for 2017 – a year that is shaping up to be increasingly hard to predict.