Workers Comp Medical Inflation Much Lower Than CPI
Workers Comp medical inflation does not equal overall inflation. The following numbers surprised me.
I was watching a presentation hosted by NCCI on a multi-rating bureau view of COVID-19 yesterday. I decided to check out some of the articles that NCCI had on their website that would be good information for the WC community.
As usual, it did not take long to find a great article that should make claims adjusters, actuaries, and underwriters rethink how much the current inflation trends should affect setting or increasing the medical reserves on files.
Using Inflation To Justify Higher Medical Reserves
In our loss run and file reviews for clients, one of the justifications for increased reserves is inflation. If one goes here and reads the NCCI article, then that justification may not hold water. This situation could change over the next few years, but I doubt it.
One component of the articles that I liked was the sliders/pull-down menus where comparisons can be made for all the NCCI states.
Workers Comp Medical Inflation – Key Observations
According to the article:
- Medical inflation in WC has been moderate for the past decade. But with the recent dramatic rise in consumer prices, concerns have emerged about medical inflation rising at similar levels.
- Two factors drive changes in medical claims costs: the price of medical services and utilization, which measures the mix and number of services provided to an injured worker.
- NCCI’s most recent medical data shows that drug costs are declining, physician costs are up slightly, and facility costs are rising in the WC system.
- In recent years, facility services are the dominant contributor to changes in WC medical costs across regions—most prominently in the Southeastern region.
The CPI-M figure according to the Bureau of Labor Statistics (BLS) is
The medical care index is one of eight major groups in the Consumer Price Index (CPI) and is divided into two main components: medical care services and medical care commodities, each containing several item categories. Medical care services, the larger component in terms of weight in the CPI, is organized into three categories: professional services, hospital, and related services, and health insurance. Medical care commodities, the other major component, include medicinal drugs and medical equipment and supplies.
A quick look at the above NCCI chart shows that workers comp medical inflation has been much lower than the overall general economic medical cost inflation over the past 10 years. The CMS actuarial team even thought that medical inflation was going to tally at 2.5% after 2023.
How To Use This Information – Bottom Line
Medical costs in a workers comp file previously covered 40% or less of the file payouts. Now, it has approached 70% over the last few years. Adjusters, actuaries, underwriters, agents, and other insurance personnel should not equate overall economic inflation at 9.1% as workers comp medical inflation.
Employers should pay attention if, on a workers comp loss run, the medical reserves seem high.
The graph above says it best – overall inflation now outpaces workers comp medical inflation by a significant amount that should not be appearing in medical reserving.