Inflation and Workers Compensation Medical Costs—Overall Medical
Posted Date: October 10, 2022 ``
Key Observations
- Medical inflation in WC has been moderate for the past decade. But with the recent dramatic rise in consumer prices, concerns have emerged about medical inflation rising at similar levels.
- Two factors drive changes in medical claims costs: the price of medical services and utilization, which measures the mix and number of services provided to an injured worker.
- NCCI’s most recent medical data shows that drug costs are declining, physician costs are up slightly, and facility costs are rising in the WC system.
- In recent years, facility services are the dominant contributor to changes in WC medical costs across regions—most prominently in the Southeastern region.
About this article: This is the first of four installments in NCCI’s series on inflation and workers compensation medical costs. It explores price and utilization trends in medical services, and how each contributes to workers compensation costs in the four US geographical regions. This article also provides state-specific results.
Introduction
In August 2022, the US Bureau of Labor Statistics (BLS) published an updated Consumer Price Index (CPI) for All Urban Consumers, which increased by 8.3 percent over the previous 12 months. That number was down from the largest year-over-year change in four decades reported back in June (9.1%). Medical costs are the largest share of expenditure in workers compensation (WC), and those costs are not immune to inflationary forces.
So, the question is: How is the current inflationary environment affecting WC medical costs? In short, “it’s complicated.” This article explores this question by showing how different types of medical services contribute to countrywide (CW)1 and regional2 WC medical cost trends.
Price Indexes and WC Costs
Medical cost trends as measured by the paid medical cost per claim are a function of two main factors:
Price—the amount paid per unit of medical service
Utilization—the quantity and the mix of medical services
We first examine changes in paid medical costs and compare them to various price indexes. The CPI has a Medical Care component (CPI-M) that measures price inflation for medical care services, medical care commodities, and health insurance. An alternative measure of price change is the Producer Price Index (PPI), which has a healthcare component. In simple terms, the PPI measures what is paid to service providers. NCCI’s review3 of price indexes indicates that the price index that most closely reflects medical cost distributions in WC is the Personal Health Care (PHC) index, which is a mix of the two and calculated by the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS).
The chart on the right compares the change in CW WC paid costs per claim to these three indexes from 2012 to 20204. Notice that paid cost trends seem to follow a different path than the CPI, and that trends in payments are more closely aligned with the PPI and PHC. Between 2012 and 2019, WC paid costs increased at a relatively stable rate of 1.5% annually. The year 2020 experience reflects the exceptional drop in new WC claims due to the pandemic (see appendix). Subsequent experience in 2021 shows that paid medical costs per claim rose at 2%, slightly above the eight-year average preceding 2020. The CMS Actuary projects the PHC to run higher at 3.7% in 2022. In fact, the CMS Actuary projects the PHC to revert to something in the 2.5% to 3% range beyond 2022.
As we examine regional trends, we observe that WC medical costs in the Southeastern region have increased at a slightly faster rate than the CW average. Trending below CW, the Northeastern and Western regions have experienced a more modest increase. However, in 2021 WC medical costs in the Northeastern and the Southeastern regions each increased by an estimated 3%, while the Western and Midwestern regions increased by 2% and 1%, respectively. Every region except the Midwestern region had a slightly larger increase in 2021 WC medical costs relative to those observed between 2012 and 2019.
Cumulative Change in Overall WC Medical Costs
How do these regional trends compare to the regional price indexes? Neither the PHC nor PPI is available by region. But the Medical Component of the CPI (CPI-M) is available at the regional level. The regional comparison charts indicate that, in all four regions, the WC paid medical trends have been increasing at a slower pace than the corresponding regional CPI-M indexes. This is particularly the case in the Northeastern and Western regions.
To understand reasons behind these varying trends, we need to consider several factors:
- The types of medical services that make up the total medical expenditure per claim
- The level of maturity of WC claims
- The regulatory environment, including how fee schedules compare to general market prices and how they are updated
- Other market conditions such as network penetration
Trends for Different Types of Medical Services
WC medical costs provide for many types of medical services to treat various workplace injuries at different stages. Due to differences in the nature of the service and the entity getting reimbursed, it is useful to analyze costs for different types of medical services separately. From physician, facilities,5 drugs, and other services, each contribute to overall WC medical costs but with varying degree and direction.
The charts below illustrate the distribution of WC medical costs by type of service on a CW and regional basis. The CW distribution indicates approximately 80% of WC medical costs are for physician and facility services—drugs and all other services make up the remainder. While drugs paid in a calendar year seem rather small in comparison, it is helpful to recognize that the distribution is based on payments made directly to service providers at the bill line level. As such, the distribution does not reflect payments to settle future medical benefits, which typically include a significant amount for prescription drugs. The All Other category consists of durable medical equipment, prosthetics, home healthcare, and the like.
Examining the 2021 distribution of medical services for each of the regions we note that, while they exhibit some differences, physician and facility combined represent the bulk of WC medical costs for each of the regions. Physician costs are as substantial as facility costs in all but the Southeastern, where the share of facility costs exceeds that of physicians.
Distribution of Medical Costs in Service Year 2021
The distributions across services change over time depending on the relative changes in the costs of the underlying categories. The chart on the right illustrates that, over time, the share of WC medical costs related to facility payments have been growing modestly in each of the regions with the largest growth rate in the Southeastern.
The distribution of medical services illustrates differences in types of services for all claims during any given calendar year. However, when we look at claims across different maturity groups, treatment patterns emerge over the different stages. Examining the chart below, we observe that, during the first year of an injury, facility and physician services make up the largest share of treatments. These services diminish over the next few years, as we see the onset of a larger share of prescription drugs and physical medicine. Differences in medical treatment as a claim matures are important because WC is a long-tail line of business and claims at different ages will be subject to different price forces.
When looking at these payment patterns by region, we observe modest differences. But the overall evolution of services shifting from specialized physician services and hospitals to prescription drugs and All Other by maturity is generally consistent across regions.
Distribution of Medical Payments by Claim Maturity
WC Costs Contributors
Between 2012 and 2021, countrywide WC medical costs increased at 2% per year. The Southeastern and Midwestern regions grew the fastest at 2.3% and 2.0%, respectively. The other regions, Northeastern and Western, saw overall medical costs per claim growing at a slower average annual rate of 1.5% and 1.4%, respectively.
Average Annual Change in Overall WC Medical Costs Between SY 2012 and SY 2021
To better understand what underlies the overall annual medical cost changes, we break down the cost per claim into the contributing type of services. Here we observe that facility services have contributed the most to WC medical cost changes. The chart below illustrates that, for CW, the average annual contribution from facilities of 1.2% primarily drives the overall 2% average annual change. The contribution of facility costs to the average annual change in WC medical costs is evident across the regions and helps explain the observed differences. The Southeastern and Midwestern regions have had faster growth in WC medical costs, and the chart below demonstrates that this is mostly due to facility costs. Although WC medical costs have been on the rise, the costs associated with prescription drugs have dampened overall medical cost increases. CW prescription drug costs on average contributed to a decrease of 0.3% in overall medical costs. And similar patterns are observed across all the regions, ranging from –0.2% to –0.4%.
Average Annual Change in Overall Medical Cost by Type of Medical Service
More to Come
As the first installment in NCCI’s Inflation and WC Medical Costs series, this article provides insight into the drivers of overall WC medical costs and trend differences by US region. Future installments will expand on each of the different types of medical services discussed here—physicians, facilities, and prescription drugs. Subsequent articles in the series will include more in-depth regional differences in cost changes, and details about the make-up of the underlying services.
Appendix
The data source this study uses is NCCI’s Medical Data Call (MDC). The MDC captures transaction-level details on medical bills, including dates of service, charges, payments, and numerous other items typically found in medical billing statements. It does not include lump-sum medical settlement dollars.
This study consists of services provided between 2012 and 2021 for transactions received up to three months after the end of the calendar year. For example, 2021 includes services rendered in 2021 for which the billing transaction was received prior to April 1, 2022. Similarly, 2020 includes services rendered in 2020 for which the billing transaction was received prior to April 1, 2021. This restriction in billing received date is to allow the comparison of different years at similar points in time. Furthermore, 2021 data is adjusted to account for late reporting. Discussed indexes are on a calendar year basis.
In SY 2020, there is some distortion in trends due to the impact of the COVID-19 pandemic. In SY 2020, there were roughly 15% fewer claims than in SY 2019. This decrease was more pronounced for new, rather than existing, claims6 decreasing by 20% and 2%, respectively. In analyzing the change in average cost per claim and accounting for the shift in new vs. existing claims, medical costs per claim would have increased only 2% instead of 5% in 2020 due to the shift in claim maturity.
Countrywide includes AK, AL, AR, AZ, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MD, ME, MI, MN, MO, MS, MT, NC, NE, NH, NJ, NM, NV, OK, OR, RI, SC, SD, TN, UT, VA, VT, WI, and WV.↩︎
Regions are based on the National Association of Insurance Commissioners designations for states included in the countrywide list above, except NJ and WI.↩︎
https://www.ncci.com/Articles/Pages/II_Medical-Price-Index-Analysis.aspx↩︎
This study consists of services provided between 2012 and 2021 for transactions received up to three months after the end of the calendar year. These are referenced to as Service Year (SY).↩︎
Facility costs are the costs associated with the functions of the medical facility. Facilities include hospital outpatient, hospital inpatient, and ambulatory surgery center.↩︎
New claims are claims with an accident date within the referenced year of medical service; existing claims are claims with an accident date prior to the referenced year of medical service.↩︎