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Is Paying Small Work Comp Claims Out of Pocket Ever a Good Idea?

Wednesday, March 12, 2014
Written By
Kory Wells

Many of you are well-versed in the importance of medical-only claims to the experience modification rating process. In the vast majority of states, these claims, also known as injury or IJ code type 6 losses, are reduced by 70% for the purposes of the mod calculation. This reduction is known as the Experience Rating Adjustment (ERA).

The ERA was first implemented in many states in the late 90s as a way to encourage employers to report all losses, not just those involving lost-time claims. At that time, it was common for companies to pay, rather than report, their small claims in order to avoid having those claims count against the mod. NCCI and other stakeholders were interested in collecting all possible data for statistical actuarial purposes, so the ERA was introduced.

More than 15 years later, a reduction of medical-only losses now applies in 38 states, but within the industry I still hear a fair amount of talk about employers self-paying small workers’ compensation claims – even in ERA states. The many responses to the March 9, 2014 question “Do Employers Have to Report First Aid Claims?” on the Work Comp Analysis Group on LinkedIn illustrate how complex this issue can be. (Claims designated as “first aid” often have a different connotation from “small medical-only claims” in some states and to some carriers, but the discussion definitely overlaps with this article.)

All of this talk begs the question of whether we can analytically show that it saves – or costs – the employer to pay small med-only claims “out of pocket.” With the help of ModMaster, that’s what I examine in this article. Before we look at some scenarios, let’s not forget the following points.

Key Factors to Keep in Mind

  • Self-payment of small claims is not legal in all states, or may be subject to fines or penalties. Specific rules are determined by state workers’ compensation statutes. For example, the Missouri Department of Insurance specifically suggests taking advantage of the state’s Employers Paid Medical Program to reduce the cost of their work comp coverage. Clearly, it’s important to know the rules in your state.
  • Self-payment of claims also has implications at the federal level if injured employees are eligible for Medicare.
  • Employer access to state or “reasonable and customary” fee schedules is an important consideration in the cost of self-paid claims.
  • Perhaps most important, employers paying small claims out of pocket may risk liability if those claims should develop into something more costly.

A Sample Scenario in States Where ERA is Approved

For this analysis, I’ve imagined a relatively small business, Mike’s Machine Shop, operating in Missouri and Indiana (both ERA states) with these attributes:

  • An effective date of 1/1/2014
  • Approximately 1.7-1.8 million in payroll each year, in codes 3632 and 8810, generating a minimum mod of 0.73
  • Three itemized losses, all type 5: $8,000, $12,000 and $45,000
  • The assumption that the shop had one $1,000 med-only claim per month in 2012, for a total of $12,000 in type 6 losses. (I chose $1,000 as a value that’s clearly med-only and yet above what might be considered a first-aid only claim in some states.)

If we look at the red and green flags in the chart below, we see the trade-offs of self-paying versus reporting losses. The green-flagged good news is that self-paying creates a lower mod and therefore a lower premium. In 2014, Mike will save 3 points on his mod and $1,500 on his premium if he doesn’t report those 12 small claims. And, because those claims aren’t hanging around on his mod for 2 more years, he’ll save about $1,500 in 2015 and 2016, too. But we’re not done with the story! The red-flagged bad news is that the self-paid claims costs add considerably – in this case $12,000 – to Mike’s year 1 total cost of risk.

Work Comp Claims Out of Pocket Analysis, Year 1
The trade-offs in paying claims out of pocket in an ERA state, year 1: Green-flagged items are to the employer’s advantage while red flags represent higher costs.

Let’s look at year 2 of this scenario, and imagine that Mike has instituted some safety improvements so that the shop has had just one small claim per quarter in 2013, for a total of $4,000 in type 6 losses. Let’s also imagine, for the sake of this analysis, that payroll and the other itemized losses have stayed exactly the same, as have rating values.

If Mike is not reporting small losses, then we see that his mod and premium are the same as 2014 (0.95 and $47,500). If he is reporting the small claims, then the new claims in 2013 drive his mod to 0.99 –one more point than the 2014 mod. Cumulatively, the 2012 and 2013 small reported claims are responsible for 4 points, or approximately $2,000 in premium. Since Mike’s self-paid claims costs are considerably lower this year –$4,000 – then the Year 2 total cost of risk differs only by $2,000 between reporting and not reporting losses. Still, though, Mike has a financial advantage to report claims, especially when considered over the cumulative 2 year total cost of risk.

Work Comp Claims Out of Pocket Analysis, Year 2
The trade-offs in paying claims out of pocket in an ERA state, year 2: Green-flagged items are to the employer’s advantage while red flags represent higher costs.

The Same Scenario in a Non-ERA State

If Mike were operating in a state that has not approved the ERA reduction, then the impact on the mod of small med-only claims is certainly more significant, and it’s easier to see how the scales could tip in favor of not reporting. However, in this example, using all the same assumptions as above, the overall cumulative cost savings still favors reporting of claims.

Work Comp Claims Out of Pocket Analysis, Year 2
In states that have not implemented the ERA reduction, the total cost impact of paying work comp claims out of pocket requires especially close analysis.

Summary

These, of course, are just a couple of scenarios, and there are myriad reasons that ultimate costs could vary from these simple examples. However, in all the scenarios that I’ve constructed (many more than shown here), paying small claims out of pocket seems hard to cost-justify in ERA states. Even in non-ERA states, deciding whether to pay small claims out of pocket demands a detailed analysis that accounts for all associated costs, such as any fines and applicable medical fee schedules. In all cases, knowing your state rules is imperative. Refer to your state’s Department of Insurance or to the NCCI’s Unit Statistical Reporting Guidebook for more information.

As an analytics enthusiast, I tend to believe that claiming all losses results in better data – not just for the bureaus or insurance carriers, but also for employers. And better data, of course, leads to more meaningful analysis opportunities. If an employer is working with an agent, broker, or other risk management professional to analyze and act on their mod data, then why not have the complete picture in order to reveal all trends and drive the most appropriate operational initiatives towards improvement?

– Kory Wells, WorkCompEdge Blog Editor

© 2014 Zywave, Inc.  All rights reserved. For reprint permission, contact us marketing@zywave.com.

11 responses to “Is Paying Small Work Comp Claims Out of Pocket Ever a Good Idea?”

    • Thanks for reading, Dale – and I’m glad to know you agree from your perspective as a long-time safety consultant.

      All best,

      Kory

  1. Very informative article. Intuitively, I was in favor of paying claims out of pocket but now I’m more skeptical. Thanks.

    • I’m glad it may give you some more ideas for evaluating such scenarios, Walt. Thanks for stopping by and taking the time to comment!

      All best,

      Kory

  2. Thanks Kory! I see this arguement all the time. Depending on what a client hears from various sources, they usually expect big decreases in the mod, and then premium, that do not pan out.

    There are some good points to self-paying in a non-era state (such as NY where I am from). One of these is highlighted in that having the insurer pay the claims resulted in a mod over 1.00 and self-paying them resulted in a mod less than 1.00. This is a huge difference for a contractor that may have mod requirements to bid work. In that case the ability to get more work (or continue working- period), may outweigh any extra costs incurred.

    I have done a few analysis of this sort over the years and have a couple of incites to share. If legal to pay medical-only claims out of pocket, the insured should still notify their insurer of the incident and that they are handling the costs. Usually there is no cost to do so and avoids issues later if the injury develops.

    My experience is that the size of the insured’s risk is also a factor. Smaller risks are affected more than larger ones with respect to changes in primary losses. Additionally you have to look at the overall claims picture in general. If medical only claims are a tiny percent of total claims, the mod won’t budge much.

    Lastly, not to sound repetitive, check the state requirements of first-aid programs. I know NY requires detailed records that must be kept for over 10 years. This can be quite burdensome for many employers.

    • Hi, Michael!

      Thanks so much for your excellent points. I am going to be giving a webinar specifically on construction industry considerations in a couple of months, so I’m particularly glad you mentioned that particular motivation for contractors.

      I appreciate you sharing your experience, and am glad to hear from you, as always!

      Kory

  3. Thanks for this excellent article. This is the best analysis of paying small claims that I have seen.
    California is a non-era state so there is a common perception that employers are better off paying their own small claims. While is it legal to pay “first aid” claims the definition of first claim is typically not understood. This leads to the illegal payment of many smaller claims.
    You briefly mention medical fee schedules. I have seen several cases where employers paid the full billed cost of claims where the carrier would pay half or even less based on their MPN contracted payment schedules.

  4. Very interesting article, Kory. I learned a little something.. 🙂

    I do have one question…
    Under the ‘Key Factors to Keep in Mind,’ you stated:
    ‘Self-payment of claims also has implications at the federal level if injured employees are eligible for Medicare.’

    I ‘generally’ see what you mean by that, but would you mind elaborating a bit on that point.?.? I’d be very interested to hear what you have to say. Many thanks!!

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