• Direct written premium was flat,
• combined ratio stayed low,
• loss costs decrease, and
• reserve deficiencies disappeared.

Later this week I’m going to do a series of posts unpacking these findings and opining on what it means for you. For now, here are the key takeaways

The big number – the combined ratio – got a lot better – declining to 83 from 2017’s 89. That is a historically low number.

Here’s the entire presentation.

We’ll focus on indemnity and medical expenses for a moment, as these are key cost drivers. Note that these data are ONLY for NCCI states – which don’t include some big states such as New York.

The graph below shows that indemnity claim severity – the cost per claims did increase – albeit modestly.

Medical costs barely increased last year. I’ll have a lot more to say about this in a future post.

Kathy does an excellent job making really complex data understandable while making it relevant.

For example, payroll increased by 5.3% in 2018, more than offset by total loss costs (driven by frequency and claim costs) which dropped almost 9%. The takeaway – claim costs decreases are more than offsetting increases in payroll and employment. That happened despite a big increase in employment in construction, which is a higher frequency, higher severity industry.

The result, only 5 percent of surveyed respondents saw an increase in their WC premium rate this year; almost everyone had no increase or a decline.

Let’s pause here.

This has never happened in workers’ comp. We have never seen this level of financial performance, and it is clear insurers are still trying to figure out why this is happening, when it will end, what will cause a change, and what the warning signs will be.

What does this mean for you?

Life is pretty great right now. We do know it will end.  We do NOT know what will cause that event.

Yesterday was post 2 of Pharmacy Week at MCM, an intro to drug pricing. Today we’ll get you up to speed on why the list prices for drugs are irrelevant – mostly. 

Recall that almost all work comp drug fee schedules are based on Average Wholesale Price – a metric that is three falsehoods in one, as it is neither “average”, “wholesale”, or the “price”.  Regardless, when calculating the “savings” from a PBM contract, buyers almost always use AWP as the baseline. And that’s what buyers report to their bosses and customers; here’s what we saved below states’ fee schedules…

As we discussed yesterday, brand drug manufacturers pay PBMs (and other entities in the drug supply chain) rebates on their drugs so the PBMs will allow patients to get those drugs without going thru the Prior Authorization process.

That’s quite effective in the commercial health insurance world, where insurers have complete control on what drugs are “on formulary” and drive consumer behavior by setting co-pay amounts. It’s a lot less effective in work comp, where formularies are driven by a) state regulations and/or b) treatment guidelines. In either case, work comp payers can’t encourage patients to use preferred brand drugs by setting the co-pay lower than non-preferred brand drugs.

That’s not to say work comp PBMs don’t get paid rebates for brand drugs – in many cases they do, although the amounts can be a lot lower for comp.  And, PBMs often, and with some justification, use these rebates to offset price reductions.

You’re wondering: “well, how many dollars are we talking about?” I’ve heard different things from different people, from an average of $35 per brand script to $74.  Or, in percentage terms, up to 30%. Those payments aren’t for ALL brand drugs, and it’s highly likely the manufacturers don’t even know they are sending those dollars to work comp PBMs and payers; Work comp is such a tiny piece of total drug spend that most entities don’t bother to track it.

What does this mean for you?

Rebates are being paid to work comp PBMs and payers. Some payers don’t want the rebate payments; they’re afraid those payments could be construed as affecting decisions about medical treatment.

Others look at this as a fiduciary responsibility issue; they want to know so they can better manage their customers’ dollars.

With all the attention being paid to pharmacy prices, it’s time we dug deep into  PBM pricing, rebates, and what this all means to you.

We’ve learned from all the lawsuits, Congressional hearings, media blitzes and punditry is that this is everyone else’s fault.

We’ve heard that Ohio is suing Optum over alleged improprieties related to the state’s work comp and Medicaid pharmacy programs [to be clear, Optum’s Ohio work comp problems arose from Optum’s acquisition of Catamaran, which served BWC. The ensuing debacle was not due to Optum’s work comp PBM.]

We’ve heard testimony before Congress that it’s the manufacturers’ fault, the PBMs’ fault, the gubmint’s fault, employers’ fault.

To unpack the issue we have to begin with the list price of drugs vs the actual price.

And we have to separate brand drugs vs generics;  most of the press about prices pertains to brand drugs. These are medications that are still covered by patents; only the patent holder can sell the drug, and they can set any price they want. In work comp, brand drugs account for about 15% of scripts, but a bit over half of total drug costs; as the manufacturer has monopoly pricing power, that’s not surprising.

(Generics are drugs that have lost patent protection and can be made and sold by any FDA-approved manufacturer.)

In work comp, most states with fee schedules use “Average Wholesale Price”, a metric that is published by several entities- Medispan is one of the more common. It’s critical to understand that AWP is NOT the real “average wholesale price”, it is merely the price the manufacturer sent to Medispan et al. There’s no checking, auditing, or verification of this price by any outside entity; there’s no independent confirmation that the manufacturer’s AWP is what it charges for the pill.

To estimate the actual price, one has to factor in rebates and other financial mechanisms used by manufacturers to market their drugs. Rebates are paid to Pharmacy Benefit Managers – that then pass most of the rebate $$ along to employers and insurers – to encourage the PBM to “put the drug on formulary.” In English, that means the PBM makes it easy and cheap for you, the consumer, to get that medication.

source – Milliman

If a medication is not on a preferred formulary, it will cost a lot more, and you have to go thru the “prior authorization” process to get approval for it.

Clearly manufacturers are highly motivated to get their drugs “on formulary” – and they use rebates to incent PBMs, insurers, and employers to do just that.

So, when calculating the price of the pill, one has to factor in the rebate paid to the PBM/insurer/employer to get to the TRUE price – which is usually a lot less than the published AWP price.

Tomorrow, what this actually looks like – and a few more pricing definitions.

What does this mean for you?

Rebates are critical to understanding pharmacy pricing.