Wondering How Inflation and The Talent Gap Affects Workers’ Comp? It’s Not as Straightforward as You May Think

A recent webinar examines how inflation could wind up affecting the workers’ comp industry.
By: | July 15, 2022

Anyone who’s been to a grocery store or gas station recently knows that inflation is on the rise.

In the first quarter of 2022 inflation was up 8%, per Pew Research center. 

As prices rise, workers have been demanding higher wages from employers, with many switching jobs or even careers entirely, to find options better suited to their pay and benefits needs.  

All of this affects workers’ compensation. Whether it be because higher wages affect payroll which in turn affects premiums, or because the cost of medical treatments and technologies are rising.  

“No other line of businesses is as directly affected by macroeconomic factors as is workers’ compensation,” said Matt Zender, senior vice president, workers’ comp strategy, AmTrust Financial Services.

A June webinar from AmTrust, “Inflation and Other Macroeconomic Trends: How Do They Impact the Workers’ Comp Market?” dives into how inflation is affecting the sector. Zender spoke alongside Bryan Ware, actuarial director, AmTrust Financial Services. Here’s a look at what they discussed. 

Inflation Trends and Workers’ Comp

When people think of inflation, they typically think of how it affects consumer goods. Say, how sticker shock at the gas pump or rising food costs affect a household’s monthly budget.  

Though workers’ comp isn’t affected by consumer goods inflation, the industry is impacted by medical inflation, which is when prices for medical devices, treatment, supplies and pharmaceuticals rise.  

Many of the same factors driving consumer inflation — supply chain issues, Russia’s assault on Ukraine, labor shortages, the ongoing effects of the COVID-19 pandemic — could affect medical fields as well. 

But prices for health care services are generally set a year in advance through Medicare and private insurance contracts using projections of how inflation could affect the next year’s prices. Medicare set its annual payment rates for 2022 in the first half of 2021, before inflation skyrocketed, CNN reported in April.  

Consequently, medical inflation has remained fairly low. The consumer price index, which is commonly used to track inflation, notes that from May 2021 to May 2022, prices are up 8.6% on the whole, but for medical care and services that rate is much lower. 

“At the start of all of this inflation increasing, the medical inflation was down around 1% or even lower,” Ware said. “The medical CPI has remained pretty low. It’s actually close to 3% at this point.”

Medical inflation can lead to higher claims costs, something payers may be particularly concerned about, especially if prices continue to rise. 

“If the medical inflation is going to go up and stay high, that would be a problem for us,” Ware said. 

Still, workers’ comp tends to fare slightly better than group health when medical prices are high. Many states have fee schedules for workers’ comp services, which can help keep costs more reasonable, according to Ware.  

“Workers’ comp, because of all of those fee schedules and everything, tends to run a little bit below the CPI, just for medical,” Ware said. 

The Great Resignation: What Role Does It Play?

Workers’ comp may not be as hard hit by inflation as other sectors, but it is being affected by other macroeconomic trends that are dominating the world today. Namely, the Great Resignation — a phenomenon where workers have been leaving their jobs en masse as the pandemic has waxed and waned over the last year.   

“There’s still a gap of about 1.2 million jobs that are missing,” Zender said. 

Workers are leaving for a number of reasons. Some are switching jobs in search of better benefits or the ability to continue working remotely. While others, predominantly women, are exiting the workforce to focus on caregiving responsibilities. 

During the height of the pandemic, exiting or going part time at work to take care of a child or sick family member was a necessity. Schools went virtual, day cares closed and family members sometimes fell ill for extended periods of time. Now, with inflation driving up the cost of childcare, some are making a more permanent move out of the workforce. 

“Families are making different quality of life choices than they were prior to COVID. They’re sitting around that dinner table and they’re reaching conclusions based on maybe having their eyes opened a little bit during COVID as to what they can do, how they can work it [out] and make the finances work,” Zender said.     

Whatever a worker’s individual reasons for leaving are, the Great Resignation as a whole has led to higher wages as employers compete for workers. 

Tying back to inflation, Ware believes higher premiums as the result of increased payroll could be a good thing for workers’ comp.

“High wage growth actually kind of works for our benefit if it’s higher than the medical inflation,” Ware said. &

Courtney DuChene is an associate editor at Risk & Insurance. She can be reached at [email protected]

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