RE: WCIRB s July 1, 2012 Pure Premium Rate Filing - Cost of Medical Cost Containment Programs

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1 WCIRBCalifornia April 20, 2012 Christopher A. Citko, Esq. Senior Staff Counsel California Department of Insurance Government Law Bureau 300 Capitol Mall, 17 th Floor Sacramento, CA Market Street, Suite 800 San Francisco, CA Voice Fax David M. Bellusci Senior Vice President and Chief Actuary RE: WCIRB s July 1, 2012 Pure Premium Rate Filing - Cost of Medical Cost Containment Programs Dear Mr. Citko: The WCIRB addressed the issue of medical cost containment program (MCCP) costs in Part A, Section B of its July 1, 2012 Pure Premium Rate Filing and indicated that a more complete summary would be provided under separate cover. Following is the WCIRB s summary of the adjustment made to medical losses to reflect the change in reporting requirements related to MCCP costs. Background MCCP costs in California have historically been included in the medical dollar amount both for purposes of individual claim reporting pursuant to the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) and the aggregate accident year loss reporting that forms the basis of the WCIRB s advisory pure premium rate filings. However, the reported medical costs by individual claim or accident year aggregated total did not include a segregation of MCCP costs from the remainder of medical costs. MCCP paid costs by calendar year are reported to the WCIRB and are summarized on an annual basis. 1 In the January 1, 2010 Pure Premium Rate Filing, the WCIRB proposed, and the Insurance Commissioner adopted, changes to the USRP to require that MCCP costs be reported as allocated loss adjustment expense (ALAE) rather than as medical loss beginning on policies incepting on or after July 1, The WCIRB then amended its aggregate loss and expense reporting requirements to be consistent with the adopted changes in USRP reporting requirements and to specify that MCCP costs included as ALAE on policies incepting on or after July 1, 2010 be reported separately by accident year. Adjustment Made to Medical Losses in WCIRB s July 1, 2012 Pure Premium Rate Filing With respect to aggregate accident year reporting, in accordance with the changes in reporting requirements for policies incepting on or after July 1, 2010, portions of accident year 2010 and accident year 2011 MCCP costs are included in medical loss and portions are included in ALAE. 2 All of the MCCP costs incurred on 2009 and prior accident years are included in reported medical losses, as no segregation of MCCP costs from other medical costs is available for those accident years. Consequently, if no adjustment were made, comparisons of accident year medical loss trends would be misleading since the cost components included in medical losses for different accident years may differ. 1 See 2010 California Workers Compensation Losses and Expenses, WCIRB, June 21, 2011 for the WCIRB s most recent summary of paid MCCP costs. 2 For accident year 2010, MCCP costs paid on 2010 injuries occurring on 2009 policies and on 2010 policies incepting before July 1, 2010 are reported as medical loss. For accident year 2011, MCCP costs paid on 2011 injuries occurring on policies incepting before July 1, 2010 are reported as medical loss. Workers Compensation Insurance Rating Bureau of California

2 California Department of Insurance April 20, 2012 WCIRBCalifornia To avoid any distortion of the data and ensure that accident year experience is presented and analyzed on a consistent basis, the portions of accident years 2010 and 2011 MCCP paid costs that were reported as paid ALAE were included in the paid medical dollars in the summary of accident year experience shown on Part A, Section B, Exhibit 1 of the WCIRB s July 1, 2012 Pure Premium Rate Filing. The amounts of reported MCCP costs added to the paid medical dollars were approximately $22 million for accident year 2010 and $55 million for accident year In this way, the medical loss projection reflected in the WCIRB s July 1, 2012 Pure Premium Rate Filing contemplated all MCCP costs. Similarly, all components of the ALAE projection in the WCIRB s July 1, 2012 Pure Premium Rate Filing excluded MCCP costs. Summary of MCCP Costs In the California Department of Insurance (CDI) Decision on the WCIRB s January 1, 2012 Pure Premium Rate Filing, the WCIRB was directed to include a summary of disaggregated MCCP costs in the next pure premium rate filing. As noted, the aggregate medical losses reported to the WCIRB for accident years 2011 and prior cannot be segregated between MCCP costs and other medical costs. However, the WCIRB annually collects information on the total medical paid in each calendar year that does include separate reporting of paid MCCP costs. Table 1 shows that paid MCCP cost as a percentage of total paid medical cost has grown significantly since Paid MCCP Costs Reported as Medical (in millions) Table 1: Reported Paid MCCP Costs by Calendar Year Paid MCCP Costs Reported as ALAE (in millions) Total Paid MCCP Costs as % of Total Paid Medical 4 Calendar Year Total Paid MCCP Costs (in millions) 2003 $ $ % 2004 $ $ % 2005 $ $ % 2006 $ $ % 2007 $ $ % 2008 $ $ % 2009 $ $ % 2010 $340 $7 $ % The California Workers Compensation Institute (CWCI) also provides the WCIRB with annual summaries of paid MCCP costs per claim, based on annual summaries of medical transactions provided by a number of insurers. Exhibit 1 summarizes the MCCP cost per indemnity claim based on CWCI data. 5 The CWCI data summarized in Exhibit 1 also shows a sharp increase in MCCP costs over the last several years. As discussed, the historical accident year aggregate data upon which the WCIRB s ultimate loss projections have been predicated does not allow for the segregation of MCCP costs from other medical costs. However, the WCIRB used two sources of MCCP cost information in an attempt to approximate the impact of MCCP cost trends on the overall medical loss trends by accident year. Exhibit 2 shows this summary for accident years 2003 through The information for calendar year 2011 is not yet available, but will be provided as part of the WCIRB s January 1, 2013 Pure Premium Rate Filing to be submitted this August. 4 Total Paid Medical includes medical treatment costs, medical-legal costs, the cost of MCCP, and the cost of medical benefits paid directly to injured workers primarily for future medical benefits. 5 See Analysis of Medical and Indemnity Benefit Payments, Medical Treatment and Pharmaceutical Cost Trends in the California Workers Compensation System, CWCI, August 2011 for a summary of this information. 6 The information required to estimate accident year 2011 ultimate medical severities adjusted for MCCP is not yet available, but will be provided as part of the WCIRB s January 1, 2013 Pure Premium Rate Filing to be submitted this August. 2 Workers Compensation Insurance Rating Bureau of California

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4 Exhibit 1 MCCP Cost Per Indemnity Claim at 9 Months Based on CWCI Transactional Data 1,500 1, $ Dollars 1,289 1,171 1, % Change Accident Year WCIRB California. All Rights Reserved. WCIRBCalifornia

5 Exhibit 2 Projection of Medical Severity Trends by Accident Year Adjusted to Remove the Cost of Medical Cost Containment Programs (MCCP) Based on Experience as of December 31, 2011 MCCP Removed Based on MCCP Removed Based on WCIRB Aggregate CWCI Report of Medical No Adjustment for MCCP Calendar Year Data Calls (b) Payments through 24 Mos. (c) (1) (2) (3) (4) (5) (6) (7) Estimated Estimated Estimated Accident Ultimate Annual Ultimate Annual Ultimate Annual Year Severity (a) % Change Severity (a) % Change Severity (a) % Change , , , , % 27, % 26, % , % 28, % 27, % , % 31, % 30, % , % 35, % 33, % , % 37, % 36, % , % 39, % 38, % , % 39, % 38, % Estimated Annual Exponential Trend Based on 2005 to 2010: 7.9% 7.0% 7.4% (a) Estimated ultimate severities for all accident years are derived by dividing ultimate losses by ultimate claim counts that exclude medical-only types of injuries. The estimated ultimate medical severities shown for accident years 2004 and prior were derived from ultimate loss ratios shown in Part A, Section B, Exhibit 3 of the WCIRB's July 1, 2012 Pure Premium Rate Filing, adjusted to reflect the reported paid medical losses as of December 31, (b) Based on WCIRB s Annual Calls for Direct California Workers Compensation Aggregate Indemnity and Medical Costs. (c) See Analysis of Medical and Indemnity Benefit Payments, Medical Treatment and Pharmaceutical Cost Trends in the California Workers Compensation System, CWCI, August 2011.