***This article is part of a series. If you haven’t read from the beginning please start here: WC 2.0- The Work Comp Claims Managment Program.***
This is the blog that will show you just how much indemnity losses cost you. The numbers are UNBELIEVABLE …literally. It does not seem possible that the formula is structured this way, but it is. If you do not have someone paying attention to your claims, you can pay 10’s or 100’s of thousands of dollars more than necessary in WC premiums. This blog will show you actual cases that illustrate that.
First, one quick point for you to ponder- For the majority of claims, WC insurance is not really insurance at all, rather a FINANCING MECHANISM for your losses. The exception to this is large claims, known as shock losses. When they occur, your WC coverage truly is insurance, as it protects you from catastrophic financial loss.
This article will show you the massive difference to your pocket book an indemnity claim makes versus a medical only (MO) claim. If you have not read the previous post- WC 2.2 Types of Claims- Medical Only vs. Indemnity. I highly recommend you do so before continuing.
Ok, to understand the huge discrepancy between the two types of claims, we need to understand a little history. Decades ago, there was no difference between indemnity and MO claims. But this ended up with unexpected consequences. NCCI, the National Council on Compensation Insurance (the people who gather data on every claim, develop your specific Mod and most states WC rates), found that employers were not reporting small claims. They were simply paying them directly and not reporting them to the insurance carrier. This was unacceptable to NCCI, as their primary function is to compile data on all claims and use that to produce statistically appropriate rates. The data was becoming skewed.
Their answer was to use a carrot in the form of the Experience Rating Adjustment or ERA. This adjustment has been approved by 33 states, including FL, and it states that the dollar amount of Medical only claims will be reduced by 70% when calculating your company’s Experience Mod. This means if you have a $5,000 MO claim, only $1,500 would be used in your Mod calculation…very minor impact compared to $5,000.
Now the kicker. If your claim becomes an indemnity claim, not only does the claim increase due to the indemnity payout, but 100% of the medical costs are included in your Mod calculation! Goodbye carrot, hello stick.
The best way to understand the impact of this is to see a few real world claim examples. These are cases that occurred with current clients BEFORE they moved to our agency. Our system of claims management eliminates nearly all of these type situations:
Case #1- Large AC contractor, generally has about 35-40 claims per year. Annual WC premium around $570,000 per year when these claims occurred. Here are a few claims that illustrate the above dramatically:
3 Yr. Increased Prem.
What is this saying? The Indemnity Paid is the actual amount the insurance company paid in Lost Time, the Medical is the actual amount paid in medical costs and the 3 Yr. Increased Premium is the amount the employer paid in INCREASED PREMIUM over the next 3 years BECAUSE it was an indemnity claim as opposed to a Medical Only claim!!! Don’t get me wrong, they will still pay a higher premium if it was a MO claim, but the medical amount would be reduced by 70%. The 3 Yr. figure shown above is the ADDITIONAL PREMIUM OVER AND ABOVE THE MEDICAL ONLY COST THEY WILL PAY. Staggering. This particular employer had at least 10 claims like this over the 2 year period prior to becoming our client that. I believe we could have saved them $243,073 in premium by utilizing our claims management system…real money in anyone’s book.
Case #2- Home Repair Service, has about 10-15 claims per year. Annual WC premium around $150,000 per year when these claims occurred.
3 Yr. Increased Prem.
Case #3- Paving Contractor, has maybe 2-3 claims per year. Annual WC premium around $50,000 per year when these claims occurred.
3 Yr. Increased Prem.
Case #4- Hotel, has 2-3 claims per year. Annual WC premium around $23,000 per year when these claims occurred.
3 Yr. Increased Prem.
I show you these because they illustrate the absurd amount of money in additional premium you will pay when a claim goes to indemnity rather than staying MO. And this is true of ANY employer who generates a Mod. Obviously, the higher your premiums, the larger the impact, but that $7,809 increase for that small hotel owner was probably more hurtful than the $27,729 hit the large AC contractor experienced!
The good news is there are effective tools out there to eliminate those senseless claims that cost you thousands because a small amount of indemnity is paid out.
This is why I have developed this program. I think this method of calculating Mods is crazy, but it is the WC system as it currently exists. Crazier still, I have not met a small to medium sized employer who is aware of these rules. They simply file their claims expecting their insurance to cover it (which it does) and go on with their business, having no idea of the penalty they will incur or the fact that there are ways they could have prevented it.
I have become an evangelist about this because I believe EVERY employer in Florida who develops a Mod should be aware of this and what they can do to protect themselves.
There is MUCH more to learn on this topic and I will be posting another 40 or so blogs on the topic, but if you see the value of what I am saying please call me at 239-280-3209 or my cell at 239-293-7772. Or email me at JCarraher@lutgertinsurance.com and I will be happy to explain all of this and more In greater detail.
TL;DR Takeaways- Indemnity claims cost you dramatically more than MO claims. The math is unbelievably unfair in many cases. There are tools you can use to avoid getting pummeled by this system. I believe every employer should know about this and be able to manage their claims accordingly.
Next blog post:
WC 2.4- What We Can and Can’t Do- Part One
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