Industry Watch

No Reprieve from Medical Costs Amid Rising Price of Care

Payers must remain focused on preventing claims and mitigating severity.
By: | January 17, 2018 • 4 min read

Medical expenses rattled workers’ compensation payers when they reached 60 percent of claim costs, exceeding indemnity as the most expensive portion of addressing worker injuries.

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Now, rising medical costs are pushing that 60 percent squarely into the rearview mirror. They have reached 69.3 percent of a claim’s expense in Florida and are running 64 percent – 65 percent in other states.

Claim-severity drivers such as obesity and an aging-worker population will extend the trend.

“That is going to continue to gradually inch even higher in terms of the percent of payment going to medical expenses versus indemnity,” said David Dwortz, president of Helmsman Management Services. “With the increase in severity, medical is definitely going to continue to be a major concern, a huge focus for keeping control of payers’ overall costs.”

Meanwhile, nationwide medical inflation is expected to grow at 2.3 percent for 2018, faster than at any time since 2010. That rate of medical inflation, however, is not significant enough to sound alarm bells.

It is also not surprising because medical inflation had been at historically low levels going back to 2010, Dwortz said.

“I don’t think anyone expected that to continue into perpetuity,” Dwortz commented.

Although a percentage point higher than the average over the last few years, the 2.3 percent growth in expected 2018 medical pricing is not historically unusual, said Patrick Cote, an economist at NCCI Holdings Inc., the workers’ comp research and rating organization.

While the current rate of medical inflation is worth keeping an eye on, it is a “middle of the road” level of increase, he added.

David Dwortz, president, Helmsman Management Services

But the continued overall creeping up of medical expenses, including medical price increases, is a potent reminder that employers and other claims payers must remain constantly engaged in the battle to prevent claims and mitigate their severity when they do occur.

It also calls for understanding price increases — in contrast to addressing the utilization of different components of medical care — to judge whether various drivers of medical price movement realistically can be mitigated, said George Furlong, senior VP, managed care program outcomes and analytics at Sedgwick Claims Management Services Inc.

For example, many state fee schedules do not control hospital pricing. If that pricing spikes, there are limited measures for addressing it when employers already have proven cost-containment practices in place, such as medical provider networks.

Similarly, Average Wholesale Price, influenced by pharmaceutical manufacturers, drives drug pricing and can’t be controlled like the utilization of prescriptions.

“With the increase in severity, medical is definitely going to continue to be a major concern, a huge focus for keeping control of payers’ overall costs.” — David Dwortz, president, Helmsman Management Services

Understanding the influence of price changes will help payers better determine whether focusing on controlling utilization will or won’t be productive, Furlong explained.

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“I’ll give you a quick example,” Furlong said. “In California they had a significant increase in physical therapy services (pricing) over the last couple of years. It had a lot of people looking for utilization issues when they didn’t exist.”

NCCI’s expectation of medical inflation growth for 2018 is based on its monitoring of the Personal Health Care deflator from the Centers for Medicare & Medicaid Services.

Medical inflation expected to increase during 2018 will follow from the nation’s expanding economy and the accompanying overall inflation driving up wages in the labor-intensive healthcare industry, states a Medical Cost Trend report from PwC.

Advances in technology and pharmaceuticals will also contribute to nudging up the price of medical care.

Jeff Kuss, chief claims officer, AF Group

Increasing prices, however, are not all bad news, explained Jeff Kuss, chief claims officer at insurer AF Group.

“They come up with new processes or procedures that may be more expensive on the front end, but ultimately they are going to get the better outcome at the back end for the injured worker,” Kuss said. “Some of that is progress and how we improve the care and delivery system.”

The ultimate impact of 2018 medical inflation on employers’ total worker’s comp expenses will depend on factors driving utilization, such as their worker-population demographics and safety efforts.

Most claims cost increases, for instance, are falling on those involving older workers with little cost changes attributed to claims involving younger employees, Furlong said.

Insurance rates are down in most states due to continually declining frequency, added Frank Pennachio, a partner at Oceanus Partners. Despite medical inflation, some employers who have managed to reduce their claims frequency may actually pay less in total worker’s comp expense, Pennachio elaborated. &

Roberto Ceniceros is senior editor at Risk & Insurance® and chair of the National Workers' Compensation and Disability Conference® & Expo. He can be reached at [email protected] Read more of his columns and features.

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]