Water Well Journal
Issue link: https://read.dmtmag.com/i/1330849
W hen it comes to a company's insurance coverage, medical-only claims are an important factor in the experience modification rating process. In many states, these claims, also known as injury or IJ code type 6 losses, are reduced by 70% for the MOD calculation. This re- duction is known as the experience rating adjustment (ERA). The ERA was implemented in many states in the late 1990s to encourage employers to report all losses, not just those involving lost-time claims. At that time, it was common for companies to pay, rather than report, their small claims in order to avoid having those claims count against the experience modification factor (also known as the MOD). The National Council on Compensation Insurance (NCCI) and other stakeholders were interested in collecting all possible data for statistical and actuarial purposes, so the ERA was introduced. More than 20 years later, a reduction of medical-only losses now applies in 38 states, but there is still a fair amount of talk about employers self-paying small workers' compensation claims—even in ERA states. This raises the question: Is paying small medical-only claims out of pocket ever a good idea? By examining a few hypothetical scenarios you'll be able to answer the question analytically. Key Factors to Keep in Mind Before examining the scenarios to determine whether self-payment saves or costs the employer, keep the following in mind: • Self-payment of small claims is not legal in all states and may be subject to fines or penalties. Specific rules are determined by state workers' compensation statutes. For example, the Missouri Department of Insurance specifically suggests that employers take advantage of that state's Employers Paid Medical Program to reduce the cost of their workers' compensation average. It's im- portant to know the rules in your state. • Self-payment of claims also has implications at the fed- eral level if injured employees are eligible for Medicare. • Employer access to state or "reasonable and customary" fee schedules is an important consideration in the cost of self-paid claims. • Employers paying small claims out of pocket may risk liability if those claims develop into something more costly. Scenario 1: ERA States To analyze a scenario where the use of ERA is approved, imagine Mike's Machine Shop is a small business operating in Missouri and Indiana (both ERA states). Here's some back- ground information on Mike's Machine Shop: • Effective date of MOD is January 1, 2014 • About $1.7 million to $1.8 million in payroll each year in codes 3632 and 8810, generating a minimum MOD of 0.73 • Three itemized losses, all type 5: $8000, $12,000, and $45,000 • The assumption that the shop had only one $1000 medical- only claim per month in 2012, for a total of $12,000 in type 6 losses. In 2014, Mike will save three points on his MOD and $1500 on his premium if he doesn't report those small claims. And be- cause those claims are not affecting his MOD for two more years, PAYING SMALL WORK COMP CLAIMS OUT OF POCKET Read through scenarios to find out if it is ever a good idea. INSURANCE CORNER waterwelljournal.com 40 n February 2021 WWJ ERA States – Year 1 For type 6 losses in a state where ERA is approved No Losses Less Than $1000 Reported One $1000 Loss per Month Reported in 2012 Potential Savings of Reporting MOD Effective January 1, 2014 MOD factor 0.95 0.98 –0.03 Estimated premium due (MOD × $50,000 man- ual premium) $47,500 $49,000 –$1500 The $1500 cost in premium impact of 2012 reported losses will also apply to the 2015 and 2016 MODs. Self-paid claims cost (one $1000 loss per month) $12,000 0.00 $12,000 Year 1 total cost of risk $59,500 $49,000 $10,500