What does the recession mean for workers' comp?

Friday, January 25, 2008 | 0

--By Joe Paduda

The U.S. is either in a recession or about to be. What does that mean for workers' comp?

Broadly speaking, there are no studies that indicate WC costs decline as a result of recessions; in general costs tend to increase. An analysis of Minnesota data published in 2002 indicated that costs rise during recessions for two reasons - claims rates (by far the most important factor) increase as does disability duration.

Frequency
Common knowledge holds that claims frequency increases as workers fearing layoffs 'incur' injuries that keep them out of work, and receiving benefits.

But 'common knowledge' is not entirely supported by solid research - while injury rates rose during the 'recession' in the early nineties, they usually decline.

In addition to the Minnesota study, there is also anecdotal evidence that specific layoffs are preceded by 'flurries' of claims (free reg req). I experienced this first hand while working on a project at a McDonnell-Douglas airplane manufacturing plant in Fort Worth Texas. The Air Force had decided to stop buying the plant's product, the F-16 fighter, and the injury rate among the workers (typically male, mid-forties, high school educated making very high wages compared to the region) skyrocketed.

Anecdotes do not a trend make, and while workers fearing for their jobs may try to go out on WC, others may well do whatever they can to stay in the good graces of their employers. It may well be that injury rates continue their decline during this recession, both for factors unrelated to the recession, and because the production rate will slow and the workforce still employed will be more experienced than those laid off.

Indemnity expense
Expect indemnity costs to increase at a faster rate than wages, as recessions are marked by flat or even declining incomes. Research (May 2002 bulletin) conducted by Minnesota's Department of Labor and Industry showed that "declines in employment appear to have caused modest, temporary increases in workers compensation payments. The data suggests a decline in hours worked in an industry will lead to a nearly proportionate increase in the next month's workers compensation costs in that industry."

The net
There are other factors that may well have a larger impact on WC than the recession - rising drug costs; cost-shifting by providers hammered by reductions in Medicare and Medicaid reimbursement; higher facility costs; a de-emphasis on loss prevention; the soft market; and declining investment returns; the 15-year decline in frequency; WC reforms in NY and TX.

That said, payers would do well to carefully monitor policyholders teetering on the edge of layoffs, as the evidence suggests claims may spike, and during a recession it is tougher to place workers.

<i>Joseph Paduda's Weblog, managedcarematters.com, on managed care for group health, workers compensation and auto insurance, covering health care cost containment, health policy, health research, and medical news for insurers, employers, and healthcare providers. Paduda is the principal of Health Strategy Associates.</i>