Want to Lower Workers’ Compensation Premiums? Look to Texas

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Workers' Compensation Premiums
According to the 2014 Oregon Workers’ Compensation Premium Rate Ranking Summary, the state of Texas has some of the lowest workers’ compensation premiums in the U.S. Texas ranks number 36 out of 51 (a higher ranking means lower premiums) on a list that includes all 50 states and the District of Columbia. Workers’ compensation premiums in Texas are about 13 percent below the median cost. It should come as no surprise, then, that businesses looking to lower their costs see Texas as an attractive option. What can other states learn from Texas to help lower their own workers’ compensation premiums?

Understanding the Three Components of a Workers’ Compensation Claim

Before answering that pressing question, it is best to explore the costs associated with workers’ compensation claims in general. Doing so will help provide an understanding of Texas’ example.

Every workers’ compensation claim consists of three portions: the indemnity portion, the medical portion, and the costs of administering the benefits.

The indemnity portion is generally 66 percent of the injured worker’s monthly income.
The medical portion consists of the money allocated to pay medical expenses incurred as a result of the work-related injury or illness.
The costs to administer the benefits, also called frictional costs, includes the costs related to the workers’ compensation system itself. For example, these costs cover things like medical and legal evaluations, attorneys’ fees, interpreter fees, copy fees and other administrative and operational fees.

There is a troubling trend in the U.S. today: the costs of the medical portions of claims are rising and growing larger than the costs of the indemnity portion. Therefore, for a state to combat rising premiums, its best bet is to tackle rising medical costs, and save money there. With this in mind, we can turn to Texas for insight on controlling workers’ compensation medical costs.

The Importance of Medical Cost Containment: Lessons From the Workers’ Compensations Research Institute (WCRI)

At a recent meeting of the WCRI Texas State Advisory Committee, Carol Telles, senior analyst with the WCRI, stated that Texas spends 9 percent more on medical cost containment than the median amount that other states spend, according to data collected by the WRCI. This includes spending on processes such as utilization review and bill review.

While Texas pays more for medical cost containment, it pays less for the medical portion of workers’ compensation claims. Texas’ spending on hospitalization, surgery, physical therapy, prescription drugs and other treatments and services, is 13 percent lower than the median, as mentioned above.

The 2014 Oregon Workers’ Compensation Premium Rating Ranking includes insurance premium rates in its calculations, while the data collected by the WCRI does not. Therefore, we cannot necessarily say that premiums in Texas are 13 percent lower than the median solely because Texas spends 9 percent more on medical cost containment. For example, claim frequency per 100,000 workers in Texas was at the bottom end of the WCRI’s list, and fewer claims helps lower workers’ compensation premiums.

Clearly, Texas has lowered its workers’ compensation premiums by utilizing a number of cost-saving initiatives, as reflected by the increased spending in medical cost containment. Texas became a true utilization review state in the early 2000s, and the state has implemented other cost-saving strategies as well, including a drug formulary, which helps practitioners better understand which drugs offer the best value. The state also has a benefit review system that minimizes the need for costly litigation.

Because medical costs make up such a large percentage of the overall cost of workers’ compensation claims, must these reduce medical costs, if only by a small amount, in order to lower workers’ compensation premiums. Given Texas’ success in mitigating medical costs, it is safe to say that the state is a model for other high cost states engaged in trying to lower workers’ compensation premiums.

Tom Swiatek

As Assistant Vice President of Regulatory Services and General Counsel, Tom Swiatek draws on his experience as an insurance attorney on both the general liability side, as well as on workers’ compensation matters. As a Workers’ Compensation Section Member, Tom is leading the discussion with respect to the regulatory challenges and opportunities facing the workers’ compensation system.