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FACTORING MANAGED CARE INTO
WORKERS’ COMPENSATION RATEMAKING
1999 Special Interest Seminar
Health and Managed Care
Hilton Head, South Carolina
Prepared By:
Brian Z. Brown, F.C.A.S., M.A.A.A.
October 18-19, 1999
Managed Care Activities
 Historical Savings have been between 7% and 60%
 Future savings can still be significant (10% - 15%)

Depends on type of product and layer of coverage
1
Outline of Paper
 Describe how MC can be factored into pricing
methodologies for primary layers
 Discuss how MC can be factored into pricing
excess layers
2
Pricing Reflecting MC - Primary Layer
 Segregate data prior to and subsequent to MC
 Otherwise pricing errors will occur
 Assumptions

Pure Premiums trending at 6%

MC has one-time impact of 10% in 1996
3
Background
Assumptions
Policy Year
Developed
Pure Premium
1993
2.00
1994
2.12
6.0%
1995
2.25
6.0%
1996
2.15*
-4.4%
1997
2.28
6.0%
1993-1997
*Due to one time MC Savings
Annual
Implied Trend
3.3%
4
Incorrect Example
Policy Year
Developed
Pure Premium
Trended to
1998 at 3.3%
Managed
Care Credit
1993
2.00
1.176
0.90
2.12
1994
2.12
1.139
0.90
2.17
1995
2.25
1.102
0.90
2.23
1996
2.15
1.067
0.90
2.06
1997
2.28
1.033
0.90
2.12
Average
Projected 1998
Pure Premium
2.14
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Example
1
2
3
4 = 2x3
5
6
7
8 = 4x6x7
Policy
Year
Developed
Pure
Premium
Adjustment
to Remove
MC
Adjusted
Pure
Premium
Annual
Implied
Trend
Trend Factor
to 1998 at
6.0%
Managed
Care
Credit
Projected
1998 Pure
Premium
1993
2.00
1.00
2.00
1.338
0.90
2.41
1994
2.12
1.00
2.12
6.0%
1.262
0.90
2.41
1995
2.25
1.00
2.25
6.0%
1.191
0.90
2.41
1996
2.15
1.11
2.39
6.0%
1.124
0.90
2.41
1997
2.28
1.11
2.53
6.0%
1.060
0.90
2.41
Average
6.0%
2.41
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Difficulties in Performing Analysis
 Different MC inititives may be introduced at
different points in time
 Data does not display trends as clearly as this
hypothetical example
 Necessary to accurately measure the annual loss
cost trend
 Measuring the effect of trend separately from MC
is difficult
7
Ways to Measure MC Savings
 Evaluate claims before introduction of MC
and after introduction of MC

Adjust to current cost levels

Measure average severities (assuming no frequency
impact)
 Measure the effect of MC separately from
trend

Economic models

Individual claim studies

Utilization of assumptions and judgement
8
Measuring Managed Care Impacts
 Actuarial Perspective
 Claims Perspective
 Clinical Perspectiave
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Actuarial Perspective
 Review key statistics (in aggregate)

Paid and Incurred Severities

Loss Ratios

Pure Premiums

Claim Frequencies

Average days off work

Report lags
10
Actuarial Perspective
 Analysis of individual claims statistics

Group claims into those treated by MC and not
treated by MC

If not at same time period, adjust for claim cost
inflation and benefit level changes

Regression analysis

Independent variables (body part, nature of
injury, age, industry group, employer size)

Dependent variable - claim value at a selected
maturity
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Claims or Clinical Perspective
 Analysis by type of claim and MC activity
 Analysis of individual claims statistics

How long employees are out of work

Duration of medical treatment

Average costs of claims
12
Pricing MC - Excess Layers
 MC impacts vary depending on
 Type
 Size
of claim
of Claim
13
Adjusting Excess Ratios for MC
 NCCI Size of Loss Procedure
 Four types of claim distributions

Fatalities

Permanent total and major permanent partial
(PT/Major)

Minor permanent partial and temporary total
(Minor/TT)

Medical-only claims
 (Excess Ratios) x (Expected Losses) = pure
loss charge for excess losses
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Assumptions for Example
 Expected Ultimate Losses $ 50 Million
 NCCI ELF table is appropriate for risk
 Pricing large deductible policy - risk retains
first $100,000
 Prior to MC - excess ratio 18.4%
 Therefore, expected excess losses are $9.2
million
($50 Million x 18.4%)
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Excess Ratio Calculation
National Council on Compensation Insurance
State M
Effective 01/01/89
Limited Fatal Benefits - Nonescalating PT/Major Benefits
Excess Loss Factors Calculation
Hazard Group II
Fatal
(1)
(2)
Ratio to
Loss
Avg / 1.1
Limit (Entry Ratio)
$
10,000
15,000
20,000
25,000
30,000
35,000
40,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
0.10
0.14
0.19
0.24
0.29
0.33
0.38
0.48
0.71
0.95
1.19
1.43
1.67
1.91
2.14
2.38
PT/Major
(3)
Injury
Wgt
(4)
Excess
Ratio
0.011
0.908
0.874
0.834
0.796
0.760
0.733
0.700
0.640
0.521
0.422
0.342
0.278
0.226
0.184
0.151
0.123
(5)
Excess
Ratio x
Inj. Wgt
0.010
0.010
0.010
0.009
0.009
0.008
0.008
0.007
0.006
0.005
0.004
0.003
0.003
0.002
0.002
0.001
(6)
Ratio to
Avg / 1.1
(Entry Ratio)
0.09
0.13
0.18
0.22
0.27
0.31
0.35
0.44
0.66
0.88
1.11
1.33
1.55
1.77
1.99
2.21
(7)
Injury
Wgt
0.631
Minor/TT
(8)
Excess
Ratio
0.910
0.870
0.820
0.780
0.730
0.690
0.650
0.562
0.387
0.284
0.220
0.181
0.153
0.132
0.116
0.103
(9)
Excess
Ratio x
Inj. Wgt
0.575
0.549
0.518
0.493
0.461
0.436
0.410
0.355
0.244
0.179
0.139
0.114
0.097
0.083
0.073
0.065
(10)
Ratio to
Avg / 1.1
(Entry Ratio)
1.79
2.68
3.58
4.47
5.36
6.26
7.15
8.94
13.41
17.88
22.35
26.82
31.29
35.76
40.23
44.70
11)
Injury
Wgt
0.288
(12)
Excess
Ratio
0.361
0.223
0.138
0.085
0.053
0.034
0.022
0.010
0.002
0.000
0.000
0.000
0.000
0.000
0.000
0.000
(13)
Excess
Ratio x
Inj. Wgt
(14)
Average
Excess
Ratio
0.104
0.064
0.040
0.024
0.015
0.010
0.006
0.003
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.689
0.624
0.567
0.526
0.485
0.454
0.425
0.365
0.251
0.184
0.143
0.117
0.099
0.085
0.075
0.066
Fatal Average Cost Per Case $95,273
PT/Major Average Cost Per Case 102,784
Minor/TT Average Cost Per Case 5,084
From Mr. Gilliam’s paper “Retrospective Rating:; Excess Loss Factors”
Note: Any differences from the paper are due to rounding
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Average Costs and Weights by Type of Claim
Before MC
Total
Average
Cost
Fatal
Medical*
Indemnity*
Component Component
Frequency
(Number
of Claims)
Inj. Weight
95,372
19,074
76,298
0.07%
1.2%
PT/Major
102,784
61,670
41,114
3.55%
63.1%
Minor/TT
5,084
2,542
2,542
32.75%
28.8%
625
625
0
63.63%
6.9%
5,778
3,433
2,345
100.00%
100.0%
Medical
Total
*Split based on judgement, for illustrative purposes only
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Estimates of Managed Care Savings and Impacts
 Overall Medical Savings 20%
 Overall Indemnity Savings 17%
 Overall savings will vary by type of claim
18
Managed Care Savings
ASSUMPTIONS
 Fatalities - No impact
 PT/Major - Indemnity 5%

MC will not effect all claims(those unable to return
to work)

MC will reduce % of PT/Major, thereby increasing
severity on remaining claims
 PT/Major - Medical 5%

MC programs already in place for these claims

Smaller claims will shift to Minor/TT, increasing
severity on remaining claims
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Managed Care Savings
ASSUMPTIONS
 Minor/TT - Indemnity 8%
 Minor/TT - Medical 20%

Historically MC not fully utilized
 Distribution

20% of PT/Major claims move to Minor/TT
claims
20
Average Costs and Weights by Type of claim
After MC
Total
Average
Cost
Medical
Indemnity
Frequency
Component Component
Inj. Weight
Fatal
95,372
19,074
76,298
0.07%
1.4%
PT/Major
97,645
58,587
39,058
2.84%
59.0%
Minor/TT
4,373
2,034
2,339
33.46%
31.1%
625
625
0
63.63%
8.5%
4,701
2,755
1,945
100.00%
100.0%
Medical
Total
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Effect of Managed Care Savings
National Council on Compensation Insurance
State M
Effective 01/01/89
Limited Fatal Benefits - Nonescalating PT/Major Benefits
Excess Loss Factors Calculation
Hazard Group II
Fatal
(1)
(2)
Ratio to
Loss
Avg / 1.1
Limit (Entry Ratio)
$
10,000
15,000
20,000
25,000
30,000
35,000
40,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
0.10
0.14
0.19
0.24
0.29
0.33
0.38
0.48
0.71
0.95
1.19
1.43
1.67
1.91
2.14
2.38
(3)
Injury
Wgt
0.014
PT/Major
(4)
Excess
Ratio
(5)
Excess
Ratio x
Inj. Wgt
0.908
0.874
0.834
0.796
0.760
0.733
0.700
0.640
0.521
0.422
0.342
0.278
0.226
0.184
0.151
0.123
0.013
0.012
0.012
0.011
0.011
0.010
0.010
0.009
0.007
0.006
0.005
0.004
0.003
0.003
0.002
0.002
(6)
Ratio to
Avg / 1.1
(Entry Ratio)
0.09
0.14
0.19
0.23
0.28
0.33
0.37
0.47
0.70
0.93
1.16
1.40
1.63
1.86
2.09
2.33
(7)
Injury
Wgt
0.590
Minor/TT
(8)
Excess
Ratio
0.906
0.862
0.812
0.767
0.717
0.675
0.631
0.544
0.371
0.271
0.210
0.172
0.145
0.125
0.110
0.098
(9)
Excess
Ratio x
Inj. Wgt
0.534
0.509
0.479
0.452
0.423
0.398
0.373
0.321
0.219
0.160
0.124
0.102
0.086
0.074
0.065
0.058
(10)
Ratio to
Avg / 1.1
(Entry Ratio)
2.08
3.12
4.16
5.20
6.24
7.28
8.32
10.39
15.59
20.79
25.99
31.18
36.38
41.58
46.77
51.97
11)
Injury
Wgt
0.311
(12)
Excess
Ratio
0.316
0.182
0.104
0.059
0.034
0.020
0.014
0.007
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
(13)
Excess
Ratio x
Inj. Wgt
(14)
Average
Excess
Ratio
0.098
0.057
0.032
0.018
0.011
0.006
0.004
0.002
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.646
0.578
0.523
0.482
0.445
0.415
0.387
0.332
0.226
0.166
0.129
0.106
0.089
0.077
0.067
0.059
Fatal Average Cost Per Case $95,372
PT/Major Average Cost Per Case 97,645
Minor/TT Average Cost Per Cast 4,373
22
Impact after MC
 Pricing large deductible policy - risk retains first
$100,000
 Expected Ultimate Losses $ 40.7 Million (18.6%
savings of costs of $50 million)
 New excess loss table
 After MC - excess ratio 16.6% (compared to 18.4%)

Excess ratio reduction from 18.4% to 16.6% due to lower injury
weight of PT/Major claims and results in cost reduction of
$732,000
 Therefore expected excess losses are now $6.8 million
($40.7 million x 16.6%) compared to $9.2 million
23
Summary
 Insurers have recently instituted more aggressive MC
programs for WC
 Activities include more comprehensive

Fee discounts

Utilization review

Case management

Capitated arrangements
 To reflect MC in pricing

Important to appropriately measure MC savings

Reflect MC savings by type of claim and size of claim
24