By Joe Paduda, Principal, Health Strategy Associates
What do we KNOW about COVID-19’s impact on workers’ comp?
Actually, we know a lot. We know relatively few claims have been accepted. We know most of the accepted claims have incurred little to no expense beyond a couple weeks of indemnity payments.
We know about one-fifth of those with COVID-19 need hospitalization. We know the average cost for a person covered by private health insurance hospitalized with this coronavirus is less than $25,000. We know that the victims most severely affected by COVID are mostly over 65, older than most of the working population.
Add it all up, it’s pretty clear COVID-19 doesn’t amount to a lot of comp claims, and certainly not a lot of cost.
That is not to say COVID-19 won’t have a big impact on workers’ comp – it already has, and that impact will likely grow. But it isn’t the disease itself, it is our inept response and the resulting economic devastation that will have deep and broad effects.
The problem is, too many are paying too much attention to COVID-19 and worrying about profitability. That is a big mistake; COVID’s impact won’t be on profits, it will be on revenues.
There are two reasons I don’t see profitability as an issue.
First, there aren’t that many COVID claims and they aren’t that expensive. On average, they don’t cost as much as the typical indemnity claim. Sure, there are outliers – just like there are outliers from motor vehicle accidents, slip-and-falls, trauma, and the like. But unlike these other claims, COVID claims tend to resolve fairly quickly, and even the costliest don’t approach anywhere near cat claim expense levels.
Second, the workers’ comp industry has been hugely profitable of late, so profitable that it would take a massive increase in medical expense and claim duration to put profitability in doubt. Here’s why.
The industry’s combined ratio has been positive for a half-dozen years and was a breathtakingly wonderful 85% last year. That generates some huge underwriting profits.
Meanwhile, investment income gain was 11 percent last year – generating even higher profits for work comp insurers. Combining investment income with underwriting margins resulted in a whopping 26% pretax operating margin. Yes, insurers buying new bonds will earn less than they get from older bonds held in insurers’ portfolio’s – future interest income will decline. But let’s not exaggerate the effect of the drop in interest rates; most bonds are held for several years so the decline will be spread over years.
We also know that the number of injury claims has dropped – by about 30% for the first half of 2020. Thirty five payers and service providers surveyed in June believe claim counts will be 20% lower this year than predicted as employees with relatively minor injuries choose not to file claims. That’s a lot of claims and a lot of expense that won’t show up on insurers’ financials.
Oh, and let’s not forget that at the end of last year the industry was over-reserved to the tune of $10 billion, according to the National Council on Compensation Insurance (NCCI). That is a lot of excess cash that would pay for COVID many times over.
Combine COVID-19’s relatively minor cost with the ramifications of the drop in injury claims, and the argument that COVID’s going to slash profits sort of melts away; profitability isn’t going to be an issue.
But revenues will be, and that’s what we’ll dig into next week.
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.