Workers’ compensation premiums are rising steadily across the United States, reflecting natural cycles in the insurance industry, but also rising benefit costs, especially medical expenses, a new study led by the National Academy of Social Insurance shows.
Employer workers’ comp costs, which include premiums as well as direct payouts and administrative costs for self-insured companies, hit an all-time high in the late 1980s and early 1990s, averaging $2.18 per $100 of covered wages nationwide in 1990, the study shows.
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State reforms and managed care helped drive employer costs down to a low of $1.32 per $100 in 2000, the study shows, but since then they’ve been rising steadily again, to an average of $1.71 per $100 in 2003.
The study does not provide state-by-state premium figures, but data provided by The Beacon Mutual Insurance Co., which last year collected 76 percent of total premiums in Rhode Island, from about 90 percent of employers, show a similar trend:
In 1993, The Beacon’s first year in business, premiums averaged $3.93 per $100, the company says, and they declined steadily to a low of $1.62 per $100 in 2000. In 2001, they rose to $1.75, however, and by 2003 they were up to $2.18 per $100, where they remained last year.
The Beacon is the state’s insurer of last resort, so its figures may be higher than the state average. But while Beacon premiums are higher than the U.S. average, the NASI study shows that since 1999 at least (the farthest back the state-by-state charts go), Rhode Island benefit payouts have been consistently lower than the United States as a whole.
And while benefit payouts in Massachusetts and the nation have risen slightly, Rhode Island’s have dropped steadily, from 85 cents per $100 covered, to 67 cents – just 5 cents more than the Bay State’s 2003 benefit payouts. (The U.S. average was $1.13.)
This is consistent with the latest National Council on Compensation Insurance loss-cost filing for Rhode Island, which, as approved by state officials, would cut rates by an average of 20.2 percent from their 1998 levels.
On a national level, the NASI study shows, employer costs are rising more sharply than benefit payouts: by 29.5 percent from 2000 to 2003, compared with 11.5 percent for payouts.
In Rhode Island, however, The Beacon’s premiums have risen even as statewide benefit payouts declined. Beacon executives wouldn’t discuss the NASI study, saying they hadn’t had a chance to review it, but at least a partial explanation may be found in the study itself.
Workers’ comp is a “long tail” line, meaning payouts for an employee insured today might, in the worst case scenario, stretch out for decades – say, if a 20-year-old is permanently disabled, or a mother with a newborn is killed. For The Beacon, which only wrote its first policies in 1993, this means its share of losses for the first several years would likely have been far smaller than its market share. Indeed, in 1999, the company paid only 30.7 percent of benefits in Rhode Island, according to a NASI chart, while in 2003, it was up to 46.6 percent.
On a national level, the study says, carriers seem to have raised premiums more sharply than their losses were increasing because they were losing money.
Workers’ comp was very profitable in the 1990s, the study says, with operating ratios under 100 (the break-even point) every year from 1993 to 2000, and as low as 81.8 to 83.8 in 1995 to 1997. This led to “fierce underwriting competition,” and by 2001, the ratio had risen to 108.1.
“The insurance industry got itself into an unusual and untenable situation in several states, with substantial underwriting losses,” said John F. Burton Jr., a professor at Rutgers University and chair of the study panel. “They’ve been trying to raise premiums to bring themselves up to where they need to be.” The good news, Burton said, is that the industry was profitable again in 2003, with a ratio of 97.8, suggesting “we’ve pretty much run through the cycle.” Even if carriers try to go higher, he said, “once you get higher profits, competition tends to kick in. It’s really hard to sustain really high profits.”
Burton said he’s much more concerned with the long-term impact of medical costs, whose rise shows no sign of abating. The study shows that while cash benefits rose by only 3 cents per $100 covered between 2000 and 2003 (to 62 cents), medical benefits rose by 9 cents, to 54 cents. Nationwide, medical benefits now account for 47.9 percent of workers’ comp benefit payouts (not counting federal benefits), and in some states they now exceed 60 percent.
Four of the New England states are within 9 percentage points of the national average, but Massachusetts and Rhode Island differ sharply, at 25.4 percent and 22.8 percent, respectively (the latter is an estimate, as NASI couldn’t obtain exact figures from the state).
Burton said he didn’t know what, precisely, Rhode Island’s very low medical cost share meant. It’s not that its cash benefits are proportionally higher; a PBN analysis showed they amounted to 52 cents per $100 in covered payroll in 2003, compared with 56 cents in Connecticut and 47 cents in Massachusetts.
But while Rhode Island’s system paid out 15 cents per $100 toward medical costs in 2003, and Massachusetts’ system paid 16 cents, in Connecticut they amounted to 42 cents per $100.
In the long run, however, every state should be concerned about mounting medical costs, Burton said, because the trend in the health care industry is so powerful. Workers’ comp doesn’t get the full brunt of cost increases because care for the elderly – who are usually outside the work force – is part of what’s driving them, Burton said. But costs for everyone are rising, he added, and the work force is also getting older overall.
“I think that’s the factor that is of greatest concern, because I don’t see anything in the health care system that suggests workers’ comp is going to be immune” from the trends, he said.
The NASI study is at www.nasi.org. Beacon figures through 2001 are posted on the company’s Web site, www.beaconmutual.com.
