Workers' compensation premium hikes linked with stock losses, rather than claims
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Skyrocketing workers' compensation claims are often blamed for rising premiums, but a UC Davis study has found that the number of claims has dropped during the past two decades. Published in the September-October issue of Public Health Reports, the study shows that higher premiums are instead associated with decreases in the Dow Jones Industrial Average and interest rates on U.S. Treasury bonds.
"Insurance companies appear to have been setting premiums according to their returns on the stock and bond markets, not according to the number of claims they have," said J. Paul Leigh, UC Davis professor of public health sciences and senior author of the study. "They invest because they need a financial cushion to pay for claims and, if they lose, raise premiums to recoup their losses."
Understanding workers' compensation trends is important so policymakers can establish regulations that protect workers and contain costs, said Leigh, who noted that, in 2009, between 3 and 4 million cases of job-related injury or illness were recorded and costs to employers were close to $74 billion.
In conducting the study, Leigh and UC Davis postdoctoral scholar Abhinav Bhushan examined U.S. Bureau of Labor Statistics data on incidence rates for injuries and illnesses, along with data from the National Academy of Social Insurance on workers' compensation costs (to employers) and benefits (to workers and medical providers) from 1973 through 2007. Beginning in 1992, the Bureau of Labor Statistics began identifying cases involving more than 30 days away from work, providing the study team with the opportunity to evaluate the impact of more severe work-related injuries and illnesses on premiums. That information was compared with Dow Jones Industrial Average indices and Treasury bond interest rates.
The researchers found that while premiums increased from 1992-2007, claims decreased 1 to 2 percent each year. Claims for serious illnesses and injuries varied, but decreased overall.
The team also discovered that for the entire 35-year timeframe of the study, rising premium rates were closely linked with the Dow Jones Industrial Average or Treasury bonds. As either the Dow or interest rates on Treasury bonds fell, premiums rose, and vice versa.
"The association of premiums with the stock market and Treasury bonds was consistent and strong," said Leigh. "Increasing premiums had nothing to do with the number of injured workers, who often are incorrectly blamed for increasing premiums for employers."
The study also explored the decline in workers' compensation claims over the last two decades. This trend is often linked with the establishment of the Occupational Safety and Health Administration, created by Congress to ensure safe working conditions nationwide. The agency, however, was established in 1970, and the downward trend in claims was not evident until 1993.
Leigh suspects the decline may be related to the transition of some high-injury jobs, such as construction and janitorial services, from large companies to smaller companies, where employees may not belong to unions and could be more fearful of losing their jobs if they complain of work-related injuries or illnesses. According to Leigh, small companies are also less likely to keep complete records, so injuries are recorded and reported less often.
"Insurance commissioners and legislators who regulate premium increases should pay greater attention to trends in claims rather than to insurance companies' returns on investments in allowing premium increases," Leigh said. "More effort should also be directed toward policing contractors and smaller businesses to assure they aren't circumventing workers' compensation laws."
Leigh is affiliated with the UC Davis Center for Healthcare Policy and Research. Bhushan is currently with Massachusetts General Hospital. Their study, "National Trends in Occupational Injuries Before and After 1992 and Predictors of Workers' Compensation Costs," was funded in part by the National Institute for Occupational Safety and Health.
About the UC Davis Center for Healthcare Policy and Research:
The Center for Healthcare Policy Research conducts research on health-care access, delivery, costs, outcomes and policy to improve the practice of medicine, especially primary care. Established as an interdisciplinary unit, the center includes more than 80 health-care researchers who represent disciplines ranging from business management and epidemiology to psychiatry and pediatrics. For more information, visit the center's website.