Insurance industry officials see new workers compensation reform laws especially those involving overhauls in system administration, allowing employer opt-outs and privatizing workers compensation funds as potentially resulting in major changes for states and insurers alike.
The overall theme in this session has been the efforts to reduce system costs in Indiana, Oklahoma and Tennessee, and to a lesser extent Florida, said Bruce Wood, associate general counsel, director of workers compensation programs at the American Insurance Association. The moves in Tennessee and Oklahoma to use an administrative system to resolve disputes were positive ones, he said, leaving Alabama as the lone state using the courts to resolve workers compensation disputes.
Oklahoma also passed laws that allowed companies to opt-out of the workers compensation program under certain conditions and mutualized the states insurer of last resort, CompSource.
Trey Gillespie, senior workers compensation director at the Property Casualty Insurers Association of America, the administrative systems provide more efficient dispute resolution systems that result in more consistent claims outcomes and more accountability than court-based systems. The ultimate cost savings are partially dependent on whether or not the workers compensation act in the jurisdiction gives clear direction to the agency concerning what benefits are to be provided and how the system is to be administered, he wrote in an email.
For PricewaterHouse Coopers officials, the opt-out and privatization efforts stand out as important. These really are major changes, said Marc Gallo, principal at PwC. If you look at the workers compensation market, revenues are tight, claims are up. Combined ratios continue to deteriorate in general, and regulations are increasing. A.M. Best analysts issued a 2012 special report showing that state workers' compensation funds increased premium by more than 7% in 2011, ending a slide that began in 2004. The report forecasted that state funds are likely to grow at a faster pace in future years than companies operating in the broader market.
Oklahoma's workers compensation opt-out measure has the greatest potential to have the most impact on the property/casualty insurance industry, Gillespie said. Several states have been monitoring the opt-out debate in the Oklahoma over the past three legislative sessions, he said in a written statement. It is not clear if other states will wait to see what happens to a likely constitutional challenge of the Oklahoma opt-out provisions before introducing similar legislation in their jurisdictions.
AIA opposed the opt-out in Oklahoma, fearing that this type of opt-out could undermine support for the workers compensation system should other states decide to take the same approach. AIA was also disappointed at the larger Oklahoma workers compensation legislation of which the opt-out provision was part, because it would likely would put stress on the entire workers compensation system in the state, Wood said. Questions about whether the new law is even constitutional make the workers compensation insurance environment there unstable, he said.
Efforts toward privatizing state workers compensation agencies have met with only limited success in Oklahoma, where legislation mutualizing CompSource was just signed by Gov. Mary Fallin. AIA was disappointed at the CompSource mutualization effort. CompSource remains a government-sponsored insurance company. They're changing the name on the door and dressing it up as a mutualized company, Wood said.
Efforts in Texas to pass legislation that would have privatized Texas Mutual, appear to have failed in this session. The bill would have created a new residual workers compensation market and given the state insurance department the authority to set up an assigned risk plan. Texas Mutual is the workers compensation insurer of last resort that wrote $935 million in coverage during 2012, more than $100 million beyond it's previous high.
Gallo said privatization options for states are falling into three camps those considering privatization, but deciding to keep the existing system by improving operations; those looking to improve operations but seriously investigating privatization; and those ultimately deciding to privatize or become a mutual company. Then they should ask themselves: Should we offer complementary products? Should we be thinking about acquisitions?'
Privatizing a state system would not be without it's own problems, Gallo said. First, there has to be the right political environment for a state system; then rating approval would be needed, and approval to write insurance in other states must be gained, he said.
But privatization where states suddenly find themselves competing against other carriers should result in workers compensation rates that are more actuarially sound, Gallo said.
In some states, workers compensation issues will carry over to 2014 and prominent among them is the issue of drug repackaging and distribution, a leading driver in workers compensation insurance costs. The issue has provided mixed results in the current legislative sessions. In Maryland, an ongoing battle over repackaged drugs and physician dispensing will continue, Wood said.
Indiana legislators recently passed a law putting a cap on the price of repackaged drugs, similar to what had been accomplished earlier in Illinois and Michigan. Indiana's new laws put in place a workers compensation hospital fee schedule at 200% of federal poverty guidelines in Medicare and caps repackaged drug prices at the average wholesale price set by original manufacturers. Wood said the fee schedule change was an improvement, but not satisfactory. The repackaged drug cap there was favored by both PCI and AIA (Bests News Service, May 13, 2013). Attempts to change the workers compensation medical fee schedules in Virginia failed in this session, despite climbing medical costs, so Wood expects the issue to return in 2014.
Medical costs cover 60% plus of benefit dollars, but there appears to be no easy way to control it's impact on workers compensation insurance prices. I think it's unfortunate, Wood said. But I don't see the medical community as willing to agree to a reasonable approach to control unit prices.
Lawmakers are trending toward filing bills that deal with more medical cost containment initiatives, with a significant focus on drugs; further expansion of compensability, especially for first responders; changes in system administration; and State Fund conversions, said Lori Lovgren, division executive of state relations at the National Council on Compensation Insurance.
NCCI makes annual workers compensation filings for states. Lovgren said legislation in Florida, Oklahoma and Tennessee likely would result in rate decreases for employers, if rate filings were based solely on legislation alone. If the legislative piece gets included with the annual filing, then the experience may impact the final result, she said in an e-mail. It's possible the final result could be a deeper decrease, but right now, that's unknown.