Challenges and solutions of workers' comp

Air date: 1/11/23
Record date: November 2022

Workers' compensation insurance is the sixth largest line of insurance in the United States. But what is workers' comp? How does it work? And what are the challenges that companies face to control costs and keep workers working?

Guest:

Mauro Garcia
Technical Director, Workers’ Compensation
Zurich North America

As an accomplished insurance professional with over 15 years of experience in the insurance industry, Mauro Garcia brings valuable expertise and dedication to his role as Technical Director, Workers’ Compensation at Zurich North America. Prior to working at Zurich, Garcia was an Associate Actuary with Farmers Insurance in the greater Los Angeles area.

Host:

David Hilgen
Editorial Content Manager
Zurich North America

David is Editorial Content Manager for Zurich North America, working primarily with the company’s brand journalism site, Future of Risk. In addition to co-hosting the Future of Risk podcast, he works on external communications in support of Zurich’s sustainability efforts, manages media interactions with Zurich spokespeople and writes articles and thought leadership pieces.

Episode Transcript:

DAVID HILGEN: Workers’ compensation insurance is the sixth largest line of insurance in the United States, according to the National Association of Insurance Commissioners. Total direct written premiums were more than $52 billion last year. Despite the numbers, you'd be hard-pressed to find many people who could explain what workers’ comp is, but that's part of what we're going to find out now. What is workers’ comp? How does it work? Why is it necessary? And what are the challenges that companies face to control costs and keep workers working? Hello, I'm David Hilgen. Welcome to Future of Risk, presented by Zurich North America. Our guest today is Mauro Garcia, Technical Director and Head of Workers’ Compensation Underwriting for Zurich North America. Hi Mauro, welcome to the podcast.

MAURO GARCIA: Thanks for having me.

HILGEN: Mauro, I was surprised by how big of a market workers’ comp is and that Zurich is the fourth biggest writer of workers’ comp in the U.S. Can we start off with a basic question? What exactly is workers’ compensation insurance?

GARCIA: Great question. Workers' compensation is a mandated insurance that employers are required to provide for their employees and what this does is provide protection for the employees who become injured on the job. What this includes is going to be your medical benefits — it'll cover your loss of wages, the opportunity for rehabilitation in the event that you have a serious claim that would require rehabilitation and the unlikely event of death. For example, if you were injured on the job and you hurt your back lifting something heavier than you probably should have, what workers’ compensation would do is come in and cover the medical losses resulting from the injury. It would cover your loss of wages since you're unable to work and would help you with a rehabilitation to make sure that you are able to return to a meaningful job as you get back to work. Workers’ compensation is also an exclusive remedy following a workplace injury. And what this means is, in exchange for the benefits that I just described, a worker is not able to sue the employee for the workplace injury, regardless of the negligence by the employer or the employee.

HILGEN: Okay. Wow. That's a lot and it goes a long way to explain why it is such a large part of the insurance market. In the news lately there's been a lot of reports about employee wages being on the rise. How does this trend and the larger trend of economic inflation impact the workers’ compensation market?

GARCIA: Well, workers' compensation is fortunate compared to some of the other lines of insurance where the exposure base used in calculating premium is inflation-sensitive. So, as wages go up, the losses go up. And ultimately what this does is keeps the rate in balance. The premiums and benefits stay in balance as the two go up. So as your wages go up, your premium would go up. As your wages go up as well, your losses would go up. Because again, we're covering the losses as you're unable to work. So, this helps to keep the two in balance to make sure that inflation isn't really impacting the line of business as much. Now, in addition, we also have the opportunity to address this through the rate-making process that happens every year within all the states. So, if there was an opportunity for an unbalanced situation, we would then have the opportunity to go back and adjust the rates to make sure that these two are in balance.

HILGEN: Well, that makes sense. I often hear stories about people committing fraud in workers' comp. It seems like workers' comp fraud has been around as long as insurance has been around. How does fraud typically work in workers' comp? Can you give me an example?

GARCIA: So, fraud and workers’ compensation could take many different forms, right? So, if you think about claimant fraud, you'll see the opportunity for an individual to fake or exaggerate an injury that they've had. You've probably heard of the Monday morning accident? Somebody that got hurt over the weekend comes in Monday morning and claims that they got hurt on the job, reporting that as a workers’ compensation claim. You'll also see medical provider fraud. So, the doctor is claiming that the injuries that the individual have are much larger than what they really are. Or you'll even see them padding some claims to make them seem much larger and lining their pockets with the money that insureds are required to pay for these claims. There's also the opportunity for employer fraud as well. So, you could have an employer under-report the payroll, right? Because payroll is used and calculated the premium that we would charge, if they only reported half of their employee’s payroll in the premium calculation, it would grossly understate the amount of premium really needed for the insured. Or you can also have them misclassify that. So, you can call a construction worker an office worker and the rate is significantly different and you can see events like that would cause fraud.

HILGEN: Yeah, there has to be an easier way to make money than causing fraud. But I guess not for some people. Are there any statistics on how much fraud cost the industry?

GARCIA: According to the FBI, they calculated that workers’ compensation fraud costs the industry between six to seven billion dollars. There was one story that I read recently in California, where there was a fraud ring where you had corrupt doctors, attorneys, medical service providers, [and a] handful of other people targeting minority workers to bring them into the system. What these guys were doing was ultimately exaggerating the severity of these injuries, padding the claims. The attorneys were settling these claims and taking cut of this. This example costs the California system more than $200 million of expense. And, at the end of the day, all of this additional expense, all of this fraud makes it back into the rates and what we charge in premium for the industry. So, all of this has an adverse impact to the industry and it pushes the rates up and what we collect this premium in the industry. What we do — and handful of other carriers — is we put together these Special Investigation Units that help to tackle the fraud and address this and prevent some of this stuff from happening.

HILGEN: Yeah, I am familiar with Zurich's Special Investigation Unit. It's amazing the stories you hear from them.

GARCIA: Always is.

HILGEN: So, I want to talk about telemedicine. We know that the use of telemedicine has skyrocketed during the COVID-19 pandemic. What impact has telemedicine had on the workers' comp industry?

GARCIA: Well, if you were to think about COVID, telemedicine was one of the favorable impacts coming out of COVID, right? During lockdown, what you saw is a huge increase in the amount of telemedicine being used during the pandemic. We've seen that drop off now that things are back to “normal times.” But what this allowed us to do is avoid the delays in care, right? Delaying the care ultimately has an impact on the overall cost of the claim. What this allowed us to do is continue to treat injured employees, even during lockdown. Some of the other advantages and things that we were able to see is … you think of the remote worker that doesn't have access to specialized care. What this also gave us is the ability to offer that specialized care to somebody that was in a remote location sooner than we ever have in the past. This also eliminates the cost of somebody going in and getting treatment and having the ability to do this at your home. Not having to schedule and make it into a doctor's office makes it a lot easier. So ultimately, I could see this huge benefit for the workers’ comp system. Now some of the challenges that we saw were the technology part of it, right? A lot of doctors aren't familiar with the technology and putting it together, but the way that I see it is the future of telemedicine will be very favorable, because now it seems like we've built the infrastructure to make a lot of this happen and I think there's just going to be an increased use of this going forward.

HILGEN: Oh, it's amazing how the pandemic has forced us all into these remote communications, like what we're doing now — we're speaking on a Teams call. So fascinating. I want to talk about the opioid epidemic it seems like we would be over that by now, but I've been reading about this for years and years. It's caused incredible harm and financial loss. Reports have said that over-prescribing opioids led to addiction to painkillers and kept workers off the job for much longer than anticipated. How has it impacted workers' comp?

GARCIA: Yeah, I agree with you. This epidemic has just been awful for workers' compensation as well as the individuals that are on these opioids. Opioids are known to have many negative impacts on one's health. The worst of it all is, of course, the overdoses and deaths from these prescribed drugs. As soon as we see a claim come in that has a chronic or long-term opioid prescription attached to it, we already have it known that the probability of this individual recovering sooner compared to somebody with a similar claim is just going to be much longer. So, these individuals are out multiple times longer than the average individual, which increases the amount that this claim is going to cost. And obviously the higher the cost, the higher the premium for this individual as well for this policy.

Opioids are prescribed painkillers, right? So, we take a step back and kind of think about what opioids are doing. What these do, [they] are ultimately intended to block the pain signals from the brain and create this feeling of euphoria or relaxation, which has been making this drug addictive. So put all of this together, it’s just been an awful impact to the industry. You think of the individuals that have recovered and are back to work … they're still addicted to this drug. And what you're seeing is them potentially creating an additional risk by being under the influence of the opioid and having less alert time, slower reaction and having the potential to create more injuries for themselves or other employees or colleagues in the workplace. Now, the good thing is, given all the awareness, we have seen the usage of opioids drop significantly, which is saving the industry billions of dollars and, most importantly, [improving] the health of the individuals. A lot of this has been driven by the drug formularies that have been put in place by certain states; making sure that we're not prescribing opioids at a high rate. There's been law enforcement actions targeting “pill mills” that are prescribing much more than what they probably should do, as well as the application of evidence-based treatment guidelines — helping doctors to understand what's the right amount of opioids that should be given to an intern/employee in the case opioids need to be prescribed.

HILGEN: It sounds like the solution to a worker’s comp claim — pain killers — can be worse than the original claim sometimes, especially if you're over-prescribing them. So, I wanted to ask you next about flexible payroll reporting. I know some insurers like Zurich offer flexible payroll reporting for workers' comp insurance. What is it and why would a company opt for that?

GARCIA: This is actually a great product that I'm really excited to be offering. To really understand the benefit of flexible pay reporting, what I want to do is kind of explain how a traditional workers’ compensation policy works. If you're employer, in order to calculate the premium of what you're going to be charged for your policy, what you need to do is estimate the amount of payroll that you're going to have on your policy for the entire year, right? So, given the amount of turmoil that we've been seeing due to COVID, if you're a seasonal employer, you really don't know the specific business needs that you need. So, your payroll may go up and down. How traditional workers’ comp works is you estimate that payroll upfront, you pay for the vast majority of it in your first payment inception of the policy, and then three months after the expiration of your policy, you go through an audit process that trues up the amount of payroll that you had throughout that one year time period, and there's a final bill, or potentially [a] return of premium at the end of that audit to reflect the true amount of exposure.

Now, the way that flexible payroll reporting works is on a monthly basis, you have the opportunity to report your payrolls of what you actually had working during that month and pay the premium at the end of that month to reflect your actual true exposure. So, what this does is gives the policyholder the ability to really kind of control their cash flows, right? You don't have to put a down payment. There's no large amount of money due up front. You can pay based on the amount of exposure that you have, the amount of payroll, the amount of work that you're doing throughout the month. So, it's a huge benefit to the customer. Then comes the audit at the end of your policy. There will be an audit done, but the amount of premium that's going to be required to return is going to be much lower than what you would see on a traditional workers’ comp policy. So, it makes it a lot easier for the customer to control their finances a little bit better.

HILGEN: Well, it sounds like it’s very convenient for our customers. Finally, Mauro, I want to ask what are some of the things that companies can do to reduce their workers' comp costs and avoid losses?

GARCIA: Yeah, that's a good question. That's one of the questions we receive pretty frequently. The way that I would look at it is in three parts: The first, obvious one would be to reduce your exposure to loss. If you have lower losses, you should have a lower premium to reflect your potential for loss. The easiest way to do that is training. Educate your employees on workplace safety. Make sure that they understand what is a risk and what isn't a risk. There's also opportunity to create a risk management area within your organization, safety committees or even contracting with the risk engineer to help you to understand and identify the opportunities of workplace injuries. A lot of times, we're so involved in the details of the work that we do that we don't really understand the potential for injury and what the risk engineer would do is give you that opportunity to identify it and mitigate.

Another piece that I would address is the reporting. So, one of the things that we've noticed is the sooner you're able to report a claim, the sooner you're able to get that medical provider on the claim and making sure that you address the injuries that have incurred. This gives you the opportunity to hopefully reduce the amount of times that the employee’s out of work and reduce the ultimate cost. With that, you can also create a return-to-work program which would help the employees come back, even if it's at a lower capacity. It gives them the ability to return to work, which would reduce your losses by you not having to pay the loss of wages, as the employee is still working. The last piece that I want to add is adjusting your program structure. So, just like your auto insurance that you've got for your personal auto, putting a deductible on it — or a higher deductible — would also give you the opportunity to reduce the cost that you've got on your workers’ comp policy.

HILGEN: Well, that's good advice. I'm interested in hearing more about the Return-to-Work Program. What is that like?

GARCIA: That's a good question. The Return-to-Work program helps the employee come back to a position, even if it's not their original position, just to help them kind of get back into the workforce to help them get on their feet. An example of this would be if you had a construction worker that was injured on the job and he didn't have the ability to lift. What Return-to-Work does is gives them the ability to potentially come back. Maybe they come back as an office employee, right? Working at a desk … something a little more hands-off.

HILGEN: Okay. That makes sense.

GARCIA: What this does is help the employee to get back into the workforce, which helps them mentally and helps with the cost of the individual claim. Again, because we're not paying those indemnity losses — those losses of wages with the employee. So, this helps not only the employee but the employer by reducing their loss exposure in an event of an injury.

HILGEN: Very good. Well, Mauro, I appreciate you taking the time to speak with me today.

GARCIA: Thank you. Glad I could be here.

HILGEN: And I want to thank our listeners for tuning in. I am David Hilgen and this is Future of Risk.