Significant Changes in the Factors Driving Medical Severity 1996–2001 vs. 2001–2006
An Update to Measuring the Factors Driving Medical Severity: Price, Utilization, Mix
A previous study published in January 2007 examined the significant increase in medical severity over the period 1996/97 to 2001/02. A simple “model” of claim costs was used to identify and quantify the factors that explained that overall increase. The model of claim costs is defined as follows:
Cost = Price x Utilization, where utilization consists of both quantity and mix.
We examined the impacts of:
- Mix—Differences in diagnosis mix
- Quantity—Differences in the average number of treatments per claim
- Price—Differences in the average price of treatments
Key findings from that study were:
- The primary driver of the increase in medical severity was utilization, as measured by increases in the number of treatments per claim after accounting for the shift to more severe injuries
- This shift toward relatively more severe injuries accounted for a modest portion of the increase in medical severity
- The estimated impact of price was consistent with changes in the medical Consumer Price Index
This is an update to that study, using more current data and extending the time frame through 2006. As before, the calculations are based on lost-time claims closed within 24 months of date of injury for NCCI states. Exhibit 1 contains a graph of paid medical severity from Accident Years 1996 to 2006. Since there seems to be a shift in the increase in medical severity in 2001, this update splits the analysis into two time periods and compares the results for 1996/97 to 2000/01 with the results for 2001/02 to 2005/06.
- The increase in medical severity was significantly less in the most recent period (21% vs. 51%).
- There are significant differences in the drivers of medical severity between the two time periods.
- Changes in “quantity,” as measured by treatments per claim after accounting for the shift to more severe injuries, were the primary driver of the increase in severity in the first period. However, the impact of this component of utilization diminished significantly in the second period as the number of treatments per claim remained steady. In fact, the leveling off in utilization accounts for nearly the entire observed decline in medical severity growth between the two periods.
- Changes in price after controlling for the change in the mix of injuries are the primary driver in the second period.
- Changes in diagnosis mix account for a small share of the increase in both periods due to the continued relative shift from less severe to more severe injuries.