By Joe Paduda, Principal, Health Strategy Associates
Last week we debunked unwarranted fears that workers’ comp is in a profit-crushing “COVID crisis” – mostly because COVID-19 claim costs and claim counts are relatively low. Reality is COVID-19 costs will be more than offset by the massive decrease in new claims seen so far, a decrease that may deepen as jobs continue to disappear.
The latest from WCIRB California supports that assessment, forecasting insurers’ COVID-19 costs will total $800 million in 2020. That may even be too high. WCIRB estimates cost per claim will be almost $34,000, a figure that far exceeds anecdotal reports from my consulting clients.
Given California’s presumption laws are the broadest of all states (so far) and therefore costs are likely higher there than anywhere else, it’s unlikely COVID-19’s impact will be to crush insurer profits.
No, the real issue for insurers, TPAs, and service entities is the decline in revenue. Here’s why.
Over 70,000 businesses have permanently closed or entered bankruptcy due to the pandemic; the vast majority are small businesses, others include Hertz, JCPenney, and Brooks Brothers
Those that made it through the initial employment crisis did so thanks to trillions in federal aid. Now those dollars are exhausted, and Congress and the White House are unable to agree on additional support.
Without a massive injection – as in multiple trillions – of new funds for employers, the unemployed, healthcare providers, and governments hammered by low sales tax revenues, economic activity will slow. More jobs will be lost, more businesses will close – and even more premiums will disappear.
Among the hardest hit are small- and medium-sized employers in “main street” businesses and their suppliers – those midway through the supply chain. Doctors and dentists, restaurants and bars, arts and entertainment, recreation and tourism, retail, schools, colleges, and universities are all hurting. And, that pain flows backwards to their suppliers. As business dries up, they need less of everything. That means less bookkeeping services, beer delivery, janitorial supplies, vehicle maintenance, IT support, fuel supplies, raw material and food, warehouse space and–workers’ comp insurance.
Small to medium enterprises are more vulnerable than their larger cousins; when I can’t pay my mortgage, its my problem; when GE can’t pay its bills, it’s their bank’s problem.
With federal aid uncertain at best and commercials viewing SMEs as riskier than big companies, cash is tight – and getting tighter. Plus, those large customers have forced SME suppliers into extended payment terms while reducing orders and demanding price concessions, all of which has led to less revenue and cash flow problems for SMEs.
We are already seeing the impact of the demise of 70,000 SMEs and larger employers. Last week WCIRB estimated 2020 premiums in California will drop by $3.5 billion, a 22% decline from last year. That means 22% fewer dollars for administrative expense, margins, salaries, IT investment, cyber-security, training, and loss prevention.
By its nature workers’ comp is a highly risk-averse, conservative, change-resisting industry, as are its leaders. That’s just fine when things rarely change, and never change much – which is the history of workers’ comp. For 108 years, workers’ comp has been focused on musculoskeletal injury prevention and treatment, with a relatively stable employer base (even in times of deep recession) and no need to be creative or dynamic.
Those days are over.
About Joe Paduda
A nationally recognized expert in medical management and pharmacy, Joe Paduda is the principal of Health Strategy Associates, a consulting firm that works with workers’ compensation insurers, employers, medical and pharmacy management companies, healthcare providers, government entities, and investors. He also conducts industry research and writes the thought-provoking www.ManagedCareMatters.com.
In addition, Mr. Paduda is also president of CompPharma, LLC, a consulting firm dedicated to analyzing and improving pharmacy programs in workers’ compensation. He has conducted an annual survey of pharmacy benefit management for 16 years.
Before starting his consulting business in 1997, Mr. Paduda held executive positions with major insurers, including Traveler’s, United Healthcare and Liberty Mutual. He has a Master of Science degree in Health Management from the American University.
Mr. Paduda serves on the Board of Directors of the Commonwealth Care Alliance, a Massachusetts-based not-for-profit healthcare organization serving individuals with complex medical, behavioral health, and social needs and who are dually eligible for Medicaid and Medicare. He is the 2012 recipient of the of IAIABC’s President’s Award, recognizing his efforts to identify solutions to the opioid problem in workers’ compensation.
About Health Strategy Associates
Based near Syracuse in Skaneateles, New York, Health Strategy Associates consults with insurers, employers, medical management companies, health care providers, and investors. Its highly customized services encompass research, competitive analysis along with operational, marketing and sales improvements. Health Strategy Associates’ Principal is Joe Paduda whose expertise spans Medicaid, group health, workers’ compensation, and pharmacy. Paduda is the author of the thought-provoking www.ManagedCareMatters.com blog and a popular speaker. For more information, please see www.healthstrategyassoc.com and www.CompPharma.com.