Deconstructing report lag

Transcription

1 Deconstructing report lag June 2018 Lockton Companies Report lag has been a hot topic in the workers compensation arena for years. This is primarily due to the belief that reducing report lag will reduce claim costs. However, Lockton s extensive analysis of our claims data has found that belief is not necessarily true. As we share in the paper entitled Report lag: Truths and myths, report lag is important to monitor because it is a strong indicator of the health of a claims management program, but solely focusing on report lag won t necessarily reduce costs. It is important to get to the root cause of what is driving claims costs. In this paper, we highlight three conclusions from our research: MARK MOITOSO, FCAS, MAAA Executive Vice President Risk Practices Leader mmoitoso@lockton.com BECKY KIES Assistant Vice President Project Manager Claims and Policy Analytics rkies@lockton.com ERIC MORHISER Senior Data Analyst emorhiser@lockton.com Report lag has no statistically significant relationship with claim cost if reported within 12 days of injury. After 12 days of report lag, the correlation between report lag and claim cost is largely driven by the type of claim. Increases in allocated loss adjustment expenses are correlated with increases in report lag. Below, you will find detailed information about each of these conclusions based on data from Lockton s proprietary database (Infolock P&C) with more than $21 billion in workers compensation claims. L O C K T O N C O M P A N I E S

2 To provide an accurate assessment of the impacts of report lag, we analyzed closed, lost-time claims with 36 to 84 months of development (2011 through 2015, valued as of Dec. 31, 2017), excluding claims over $250,000. This approach removes outliers (catastrophic claims and zerodollar claims) and includes plenty of development for assessment. Additional information on the selection of this criteria is presented near the conclusion of this paper. Report lag has no statistically significant relationship with claim cost if reported within 12 days of injury. Many studies stop here and draw the conclusion that extended report lag causes increased claim costs. However, correlation does not imply causation, so Lockton continued to test this relationship. After 12 days of report lag, the correlation between report lag and claim cost is largely driven by the type of claim. Several factors cloud the relationship between cost and report lag: Initial analysis reveals there is very little difference in average claim cost within the first two weeks of report lag, with slight increases after two weeks. Additionally, 85 percent of claims are reported within two weeks of injury. Lockton s Infolock P&C database provides a large enough sample of claims that we can consider each day of lag within the first 14 days as its own credible data point. We tested the relationship of report lag to claim cost for each of these days and found that for the first 12 days there is no statistically significant relationship between report lag and claim cost. After 12 days of report lag, there is a statistically significant positive correlation to claim cost. Average claim costs and report distribution by days of report lag $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 53% 24% 8% 6% 3% 0-2 days 3-7 days 8-14 days days 31+ days Avg. cost per claim Report lag Percent of claims reported 2 Report lag has potential to act as both a cause and an effect. Report lag has the potential to cause claims costs to go up in situations where the delay in reporting falls to the employer. An example is an employee promptly reporting an injury to their supervisor, but because the supervisor doesn t report the claim, the employee receives no medical attention. This can drive up costs because the injured worker may seek legal representation. Report lag can also be the result of the type of injury. For instance, if pain comes on slowly from repetitive motion, it may be a while before it rises to the level where the employee decides to seek medical attention. In this case, the lag is a result of the nature of the injury. Claim attributes do not follow a normal distribution with respect to report lag. In the same way that catastrophic claims are disproportionally reported within the first day, giving the false appearance that it is costly to report claims immediately, other claim attributes are associated with both report lag and claim costs, resulting in autocorrelation. The most prevalent example is soft tissue injuries.

3 Examining soft tissue injuries To examine the relationship between report lag and claim cost, additional independent variables were evaluated such as: Cause of injury. Jurisdiction state. Seasonality. Claimants tenure at time of injury. Soft tissue injuries are injuries to tissues that connect, support Nature of injury. Client s industry. Occupation class code. Age of claimant. Claim conversion from medicalonly to lost-time. Body part injured Claim development Lost-time days. or surround other structures and organs of the body. This includes muscles, tendons, ligaments, fascia, nerves, fibrous tissues, fat, blood vessels and synovial membranes. The only statistically significant relationship to the claim cost with respect to report lag was the combination of cause and the nature of the injury. While other variables showed minor impact, results were not statistically significant. Based on further analysis of this relationship, claims were grouped into two broad categories based on cause/nature combinations: soft tissue injuries and non-soft tissue injuries. Soft tissue injuries by their nature often have extended report lag. While some soft tissue injuries may be known immediately, such as a thrown-out back or ankle sprain, many take weeks, months or even years to develop. These types of claims also tend to be more costly than other types of claims, with or without extended report lag. When soft tissue claims are removed from the analysis, there is no longer a statistically significant relationship between cost and report lag. Examination of soft tissue claims alone shows a strong relationship between claim cost and report lag. Additional research focusing on soft tissue injuries shows that claims with extended report lag are often also associated with more missed work or partial duty days. While report lag is correlated with costs for soft tissue injuries, it is usually the nature of the injury that drives both the report lag and the cost. Identifying the reason your company is experiencing soft tissue injuries can reduce your costs far more than focusing on report lag alone. Soft tissue claims: Average claim costs and report distribution by days of report lag $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ % 25.22% 9.47% 6.67% Avg. cost per claim Report lag Percent of claims reported 60.00% 50.00% 40.00% 30.00% 20.00% 9.89% 10.00% 0.00% 3

4 Increases in allocated loss adjustment expenses are correlated with increases in report lag. Allocated loss adjustment expenses (ALAE) are costs that fall outside of medical payments or wage replacements, such as legal fees, handling fees and investigation fees. Lockton found that when costs increased with report lag, ALAE was the primary driver of the increase. The correlation between ALAE and report lag can be attributed to a number of factors: Denied claims. Failure to report accident timely is a reason commonly cited for denying a claim. Two out of every three claims denied for this reason eventually get paid. The expenses associated with investigation and litigation of denied claims contribute to higher ALAE. For more information on denied claims, see Lockton s Claims denied white paper. Litigated claims. The prevalence of litigation increases with increasing report lag. There are several possible explanations: The types of injuries associated with report lag (e.g., complex soft tissue) also tend to require settlement through litigation. Claims not reported in a timely manner have higher likelihood of denial, which typically leads to litigation (see above). Percent of claims litigated Litigation rates by days of report lag 60.00% 49.00% 50.00% 40.00% 32.50% 30.00% 26.50% 23.30% 22.70% 20.00% 10.00% 0.00% Report lag in days Injured workers who do not report a claim within the state s regulatory reporting window may turn to an attorney to pursue alternate options for filing a claim or to show reasonable cause why the claim was reported late. Because of the exclusive remedy rule, companies may be required to compensate for legal fees, as well as potentially retaining counsel of their own, which results in elevated ALAE. On average, litigated claims are two to 2 1/2 times more expensive than non-litigated claims. Typically, ALAE accounts for about 25 percent of the cost of litigated claims. Interestingly, we see that the average cost of a litigated claim actually decreases with increased report lag, but the average ALAE amount tends to stay the same. This means ALAE accounts for an increasing proportion of the cost of litigated claims that have increased report lag. This suggests that claims that may not otherwise become litigated due to their medical severity are becoming litigated because of other factors. 4

5 Data selection matters Mark Twain popularized the phrase, There are three kinds of lies: lies, damned lies and statistics. In the spirit of Mr. Twain s view, Lockton thoroughly examined the preparation and presentation of this data. As discussed at the beginning of this paper, we analyzed closed, lost-time claims with 36 to 84 months of development (2011 through 2015, valued as of Dec. 31, 2017), excluding claims over $250,000. This approach removes outliers (catastrophic claims and zero-dollar claims) and includes plenty of development for assessment. More than 95 percent of claims reported in this time frame were closed at the time of valuation. Catastrophic claims tend to be associated with obvious and immediate injuries, like burns or amputations, and are reported right away. Claims over $250,000 account for only 2 percent of lost-time claims, and 25 percent of incurred costs these claims were excluded from analysis to account for the effect of catastrophic claims on the dataset. Average cost per claim Average claim costs for claims under $50K by days of report lag $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 To demonstrate the impact of data $0 selection on this study and examine why the results of Lockton s research might be contradictory to prior research published on this topic, the Report lag in days figure to the right shows closed lost-time claims valued at 12 months of development, excluding claims over $50,000. Based on this, it would be easy to conclude that report lag has a direct, positive relationship with average claim cost. The issue with this snap judgment is that most lost-time claims are still open at 12 months and will continue to develop. The exclusion of claims over $50,000 also excludes more than 60 percent of incurred dollars. And finally, without further testing, it would be very easy to draw a causal link between report lag and claim outcome. 5

6 Looking beyond report lag Because controlling report lag has been a hot topic in risk management for decades, employees and employers typically report injuries in a timely manner. The median report lag is two days, which means over half of claims are reported in fewer than 48 hours. Within a week of the injury, 75 percent of claims are reported, and almost 90 percent of claims are reported within 12 days of the injury, which means that cost increases related to report lag become apparent for only 10 percent of claims. We accounted for the skewed distribution described above by analyzing report lag using partial dependence showing how increased report lag impacts costs with all other variables held constant. We found no direct link between report lag and increasing costs. Therefore, reducing report lag on its own will not reduce costs. In Report lag: Truths and myths, we discussed keeping an eye on report lag to monitor the overall health of your claims management program. If your report lag indicates that you may have an issue, potential cost savings and program improvements can be accomplished through root-cause problem solving. Lockton INSIGHT TM can help identify the key drivers behind your program s report lag and highlight favorable and unfavorable variations from a variety of dynamic benchmarks. For more information, visit lockton.com/insight. KC: