For years, the workers' compensation business has been an unholy mess: exorbitantly expensive, rife with fraud, and battered with brutal boom-and-bust price cycles that cost insurers billions. Many insurers have quit the business in disgust.
Now all of that is changing dramatically. The $60 billion-a-year industry is being revitalized. A series of state regulatory reforms has relaxed rules that had hamstrung insurers. The change has brought about a number of alliances and mergers among workers' comp insurers and managed-care providers.
Traditionally, workers' comp plans allowed workers to visit any doctor or hospital they wanted, with employers or their insurers picking up 100% of the tab. Currently, medical costs consume nearly 45 cents of every workers' comp claim dollar. But by collaborating with health-maintenance organizations and other managed-care companies, insurers are sharply cutting costs by taking advantage of current penny-pinching case-management and volume-discount techniques. In return, health-care companies receive a generous flow of new customers for their sprawling but underutilized networks of doctors and other health professionals. "It's the most dramatic period of change I've witnessed since I've been in the business," says Executive Vice-President Thomas Ramey at Liberty Mutual Insurance Co.
PARTNERSHIPS. The leader in this trend has been California. In 1993, the state passed a series of legislative reforms that effectively opened up the state's comp system, allowing HMOs to freely link up with insurers. Competitors are now quoting risks at 30% to 40% off published rates. Early this year, the State Compensation Insurance Fund, made up of 255,000 policyholders, allied itself with the state's leading managed-care company, 4.6 million-member Kaiser Permanente. The deal brings together the state's largest comp and managed-health-care providers.
Deals to link big insurers with health-care networks are flourishing: ITT Hartford Group Inc. formed partnerships with a subsidiary of US Healthcare Inc., while CIGNA Corp. has teamed up with Community Care Network, a big California medical network specializing in occupational health injuries. HMOs such as Foundation Health Corp. are buying up regional workers' comp insurers. "I see the shaping of a new industry," says Ron Williams, executive vice-president of network services at Blue Cross of California, which bought UniCARE, a state workers' comp carrier, in 1994.
Some states are mandating that compensation insurers work with health-care providers. In Florida, all employers must offer some form of managed care for comp claims by January. In that state alone, Liberty claims savings of $106 million from using managed care since 1994. In Connecticut, companies that offer managed care to cover workers' comp can force their employees to seek out company-approved doctors. Arkansas requires that workers who are out of work for more than five weeks with an on-the-job injury must submit to a claim review by an independent nurse.
Cost savings to companies have been substantial. Some insurers are offering employers who sign up discounts of anywhere from 5% to 10%. At Coca-Cola Bottling Co. of New York, the company paid an average $3,164 in comp claims in 1989, when it turned to managed care and addressed long-standing safety issues in its plants. Today, its average comp claim is $1,257--a 60% reduction. Prior to the change in approach, "there was not a lot of focus at the company about what was happening," says Margaret Hill, director of risk management.
RAKING IN BILLIONS. The restructurings have also been a bonanza for the comp insurance industry. During the late 1980s and early 1990s, when the comp market was severely depressed, the industry's combined losses topped $4 billion. Insurance analysts Conning & Co. estimate that comp insurers should reap more than $4 billion in operating profits this year even as the total volume of premiums shrink due to falling prices. "There's been a remarkable turnaround in workers' comp," says William D. Hager, president of the National Council on Compensation Insurance, which helps set workers' comp rates nationwide.
For the health-care industry, managed care proved a valuable, albeit controversial, tool for cost-cutting. Workers' comp is likely to benefit hugely from a strong dose of the same medicine.