How Regulatory Requirements Drive Workers’ Compensation Costs

On Tuesday, February 9, Safety National hosted a webinar on how the bureaucracy of workers’ compensation drives costs. The hosts of the Out Front Ideas webinar, Mark Walls, vice president of communications and strategic analysis at St. Louis-based Safety National, and Kimberly George, senior vice president and senior health advisor for Sedgwick, and five industry panelists described the major costs drivers arising from the highly regulated line of insurance.

The panelists included:

Todd Brown, former regulator and practice leader Compliance and Regulatory Affairs at Medata; Francine Johnson, vice president Regulatory Business Consulting and Analytics for Coventry; Mark Long, director of the Workers’ Compensation Agency for the State of Michigan; Angelo Williams, vice president – Corporate Compliance at Safety National and Jon Wroten, SVP Compliance & Regulatory Affairs at Sedgwick.

Understanding how the bureaucracy of workers’ compensation system adds costs begins with understanding the government’s role, said Long, a current regulator for the State of Michigan. He explained that the government’s role is to “maintain equilibrium of the process”; to enforce contracts, striking a deal between injured workers and employers. He explained that his agency’s role is to ensure carriers’ required reporting is completed in a timely manner and at the correct rate. In addition, his agency ensures there is workers’ compensation coverage in place to protect workers. In the state of Michigan, he explained that his agency is also responsible for oversight of healthcare services roles, fee schedules and self-insurance groups, as well monitoring insolvencies and wrap up policies.

Some of the biggest challenges and cost drivers to workers’ compensation regulatory compliance include the existence of overlapping regulatory bodies with no uniformity among states and satiating the increasing need for data, said Wroten, a former regulator.

Johnson echoed Wroten’s concerns, noting a lack of time to conform to changes was a real problem for the industry. She added that regulators need to understand the number of players involved when a change is required as well as that the industry constantly grapples with cost containment methodology versus the best treatment for injured workers.

Data requirements was also singled out as a considerable challenge. As a former regulator, Brown said information is needed to ensure that the workers’ comp system is operating correctly, but that the challenge is in determining the exact information needed. He emphasized that it is important to remember that electronic data still takes time to compile and multiple systems are typically used.

He added that it is important for agencies to consider how the information requested will be used to better improve the system.

“Is all the data requested truly necessary just because we’re in an information world today,” Brown said. “If you can’t see a benefit in decreasing costs and improving efficiencies, you’re doing a disservice to the system.”

In addition, he said that added data that is not necessary creates cyber risk.

Responding to different regulator requests can be a daunting challenge, said Wroten, noting that there might be two or three different regulators per state, making compliance incredibly difficult. In addition, there are three different versions of the electronic data interchange used by states. For example, New York uses EDI 3, while California uses EDI 1. This results in carriers having to work with each state’s reporting nuances.

As a state regulator, Long emphasized that his agency spends a great deal of time on education as a result of carriers using multistate adjusters. He explained that in the past, dedicated adjusters based in each state understood the unique laws governing the workers’ comp system.

Compliance requirements add frictional costs to the system, said Wroten, who noted that there is a ripple effect when new regulation comes down it adds cost. Another issue relates to strict liability penalties, Wroten said that regulators often issue blanket penalties for violations at the highest amount allowed. He recommended regulators consider incentivizing insurers for compliance and not issuing a blanket penalty. For example, if a company is 99 percent compliant, then a penalty in the highest amount allowed may not be appropriate.

As far as the most challenging states from a compliance standpoint, Johnson said Virginia, Louisiana, Texas and Florida don’t always answer carrier questions and they won’t offer alternative ways to handle disputes. For example, there is no informal resolution process on deferred regulation on fee schedules in Louisiana, if there is a dispute it heads straight to litigation.

Brown reiterated that some states aren’t willing to provide answers to further clarification. Virginia’s view on a new regulation on fee schedules is that they wouldn’t answer questions, choosing to allow any issues be ironed out in litigation. He said he is seeing more “resistance from states to provide clarification once they establish a rule.” Because many states have outsourced things like medical management, he said they no longer have in house expertise to respond to questions.

One solution to achieving compliance goals while increasing efficiencies and reducing frictional costs, discussed by the panelists, included having carrier representatives attend industry conferences. Long said that some conferences host a regulator roundtable, offering an opportunity for carriers to engage with regulators on the challenges they face.

Wroten explained that in order to improve the compliance process and reduce costs, there needs to be transparency in rulemaking and a baseline established for all states.