The Workers' Compensation Crisis; The Hidden Truth 2

Saturday, December 20, 2003 | 0

The Workers' Compensation Crisis; What You Need to Know & What They Don't Want You to Find Out:

"The Hidden Truth"

Part 2 of 5

3 Keys to Reduce Your Work Comp Premiums

The first part of this series set the stage for five articles that will unveil various vendors in the workers' compensation system that claim to be the employer's ally, yet are really traitors, because the only thing they care about is fattening their own wallets.

As I expected, this article caused quite a bit of controversy, which means that I'm doing something right. Sometimes in order to affect change, you may have to upset some people along the way, and this article series is sure to do that.

In the first article, we hinted around at what many of the readers correctly identified as the practices of some of the 'medical bill review' companies doing business today. Deciding to give this a bit of rest, we are now heading into some uncharted territory, one that I know quite well: insurance brokers. The reason I know about insurance brokers is because I am one and have been one for the past 15 years.

My commitment is to unveil the whole truth, even if it means revealing how to stop your insurance broker dead cold and pleading guilty myself to missed opportunities that would have saved my own clients money.

The fact is that there are several actions that can be taken by a broker each year to reduce the workers' compensation costs for their clients. Yet these actions are often overlooked, sometimes misunderstood and thus very rarely utilized. The difference in premiums to the client (and in resulting commission to the broker) can be quite substantial.

It is the role of the insurance broker to work with their clients to make certain these techniques are implemented and utilized. After all, insurance brokers are paid a commission to provide service to their clients. Service should mean utilizing all methods available to ensure that their clients are paying the lowest workers' comp premium allowed by law.

There are numerous ways an insurance broker can work with you to contain or reduce your escalating costs, but we're going to focus on three for the purposes of this article.

The first one deals with your experience modification or 'mod'. It is a commonly known fact that errors are made when mods are calculated. In California, mods are calculated by the insurance company funded Workers' Compensation Insurance Rating Bureau (WCIRB) and in most other states by the National Council on Compensation Insurance (NCCI).

It is estimated that approximately 20% of mods contain an error. The difference in premium for an insured employer can be quite substantial when an error is made. Consider a $250,000 workers' comp premium with an incorrect mod of 125%. If the mod should be 120%, only a 5-point difference, the premium would be $240,000, representing an overpayment of $10,000. Keeping in mind that a mod is used for three years, this becomes $30,000 in overcharged premiums during the three-year period.

There are two types of data that are used when calculating your mod: loss and payroll data. It is important to compare the numbers used in your experience rating worksheet against the source documents such as your payroll records, loss runs and the master unit stat filing to look for inconsistencies. In addition, make certain that any claims that have been subrogated or that resulted in a 'take-nothing', such as proven claim denials (special thanks to a work comp central subscriber for bringing this to my attention), are removed from the current and previous mods. Ask your broker questions about how they audit your mod on an annual basis. Chances are that you now know more then a majority of brokers selling workers' comp policies today.

The second most overlooked method to reduce workers' compensation costs has to do with the classification codes assigned to your operations by the WCIRB or NCCI and the final audit. Most employers are unaware that the WCIRB or NCCI maintain a report on them to justify the classifications assigned. This report is called the 'WCRIB or NCCI Inspection Report' and if you have not seen yours, you should definitely request it from your broker, your insurance carrier or by contacting the WCIRB or NCCI directly.

When an independent review of an employer's final premium audit including their classification codes is conducted, nationwide statistics show that over 50% of the time (this percentage appears to be lower in California) errors are found that result in 8% of charged premiums being returned to employers. If you apply the 8% average to an employer paying $300,000 in workers' comp premiums annually, this would result in a savings of $24,000. If that same error was used for the previous three years, the overpayment would be quite significant: a whopping $96,000.

We could examine the classification codes and final audits in great detail, but for purposes of this article must limit our explanations. Look to future articles for more information.

The third most overlooked tactic to reducing your workers' comp costs hinges on your unit statistical filing date, a.k.a. unit stat date. Most employers are under the impression that the most important date to impact their workers' comp cost policy is the expiration date. This is actually incorrect; the most important date is the unit stat date, which happens 6 months after the expiration of each policy. It is on the unit stat date that the carriers writing coverage for the three previous policy years, known as the experience rating period, take a 'snapshot' of the total incurred costs for each claim and submit this information to the WCIRB or NCCI. Total incurred means the paid amount plus the reserved amount for each of the claims that fall in the experience rating period.

Two of the problems with this system is that reserved amounts count the same as paid amounts and that whatever that total happens to be on the unit stat filing date is the amount that is used. Anything that happens after the unit stat date, bar special circumstances, doesn't matter; you are stuck with the mod for the whole year.

Letting this event go by unchecked each year is like leaving the preparation and filing of your tax return up to the IRS. This is an area where big differences can be made.

Reserves are what the insurance company's claim adjuster estimates the claim will ultimately cost over the lifetime of the claim. Since claims can remain open for years and costs are incurred over the same period of time, the claims adjuster establishes a reserve to cover these costs. Especially in today's times, overworked claims adjusters may not spend the time necessary to properly calculate the reserves for a claim, regardless of whether the reserves are correct, incorrect or overstated. Reserves are usually never reviewed externally because very few employers and brokers ever question them. One way to combat this and drive down your mod is to conduct a unit stat claims review meeting with the carrier(s) writing coverage during the experience rating period. Claims review meetings are a right that employers are afforded (in California it's through the Employer's Bill of Rights) and typically are arranged by the broker each year. If you have not had such a claims review meeting, you should find out why. Those fruitcakes at Christmas are costing you more then you ever imagined.

Stay tuned as we uncover more 'hidden truths' in part 3 of this series.

By Brent Heurter, President of the insurance brokerage firm Pavlo, Weinberg & Associates and the founder of ClearComp. Brent can be reached by e-mail at bheurter@employerbenefits.com or by phone at (818) 591-2663.

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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.