Use of workers' compensation data for occupational safety and health: proceedings from June 2012 workshop. Utterback DF, Schnorr TM, eds. Cincinnati, OH: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Institute for Occupational Safety and Health, DHHS (NIOSH) Publication No. 2013-147, 2013 May; :147-151
The purpose of this study was to compare and contrast three workers compensation (WC) claim cost-valuation methods using data from the Ohio Bureau of Workers Compensation (OBWC). WC claims are composed of several cost components including payments for medical procedures, payments for indemnity (replacement wages), and claim reserves, which are anticipated future medical and indemnity costs. All paid and reserve costs combined for the claim are defined as the "total incurred" claim cost. WC claims can be open for extended periods of time, such that payments can be made over the course of months or years. As a claim ages, reserve cost totals diminish as the reserves are converted to paid totals. Once a claim is closed, the reserve cost is $0. The "Most-Recent" method calculates costs as of a recent available date. This method is often used by insurers for both individual and aggregated claims to report losses back to insured clients. The purpose is to track current expected costs for the company and benchmark to insured peers for a given time period based on industry type and company size. Although the Most-Recent method is one of most commonly applied methods for benchmarking purposes, a possible basic drawback with the method for evaluating cost trends over time is that older claims are allowed more time to develop costs than newer claims. This means that a higher proportion of the total cost of older claims will be actual costs paid to date rather than reserves for future costs. This will bias the total cost estimate of older claims relative to more recent claims. At OBWC, reserve amounts for each claim are calculated using the proprietary "MIRA" system. These reserves represent estimates of the most likely future cost of the claim, which approximates the mode of the distribution of claims of that type, rather than the mean (or expected value). The Most-Recent method does not include inflation adjustments. The "30-Month" method calculates costs after claims have been aged for a more consistent period of time. Costs of all claims are valued 30 months after January 1 of the calendar year in which the claim occurred (i.e. each claim is aged between 18-30 months). This method is used for both individual and aggregated claims to represent cost trends over time and to evaluate the effectiveness of interventions (e.g. compare losses before and after implementation). The 30-Month method is specifically designed to address the issue of differences in the valuation of claims associated with differences in the age of claims. The 30-Month method, like the Most-Recent method, includes reserve amounts that are estimates of the mode (most likely) future cost of claims of the same type, and does not include inflation adjustments. One potential drawback of the 30-Month method is that the claim values are locked into past values that may be reflective of insurer system characteristics that were operating at that time. For example, OBWC changed reserving systems (e.g. MIRA I to MIRA II) such that, for the 30-Month method, reserves for claims prior to 2007 were calculated using MIRA I and reserves for claims 2007 and after were calculated using MIRA II. In contrast, the Most-Recent method (if applied 2007 and after) uses MIRA II for all claims, even for claims prior to 2007. OBWC has determined that MIRA II generally calculates smaller reserves for the same type of claim compared to MIRA I. Therefore, if trends over time using 30-Month reserve costs span the 2007 period, trend estimates will be biased downward, reflecting reserve system changes as well as changes of interest (e.g. industry exposure changes or intervention effects etc.). A drawback of both the 30-Month and Most- Recent methods is that they do not represent the best estimate of the absolute values of claims. The Factor-Adjusted method addresses this limitation. It calculates costs by applying actuarial loss development factors that attempt to estimate the ultimate payout amounts for the claims. Reserves therefore represent the mean future cost of claims of the same type. This method is used by insurance underwriters for the purpose of analyzing aggregated claims for loss trends. A potential drawback with the Factor-Adjusted method is that it is intended to be applied to groups of claims, and its values are usually higher than actual individual claim values (since the mean is always higher than the mode and median in claim cost distributions). Another limitation of the Factor-Adjusted method is that the factors being used are based on all OBWC claims, so applying the factors to one industry may distort results. Unlike the other methods, the Factor-Adjusted method includes inflation adjustments for medical payments and projections of future costs are stated not in current year dollars, but dollars of future years.