Catastrophic injuries make up less than 1% of all workers’ compensation claims, but various studies have shown that catastrophic injuries can consume 20% of all claim dollars. The dollars spent on a few catastrophic injury claims can be the difference in where the employer’s work comp insurance premiums increase or decrease. The best way to control, or at least have an impact on the cost of catastrophic injuries, is through the use of a structured settlement.
Catastrophic injuries that disable an employee to the point where they will always have a permanent partial or permanent total disability, are often difficult to evaluate for settlement purposes. To establish the settlement value and the amount of money that should be used to purchase a structured settlement, the future cost of indemnity, medical and claim related expenses has to be calculated and established.
Future Indemnity Calculations:
- The injured employee’s average weekly wage and the amount of the weekly indemnity benefit
- The amount of time the weekly indemnity benefit will be paid, including whether or not the number of weeks is limited by state statute, or will be paid for the remainder of the employee’s life
- Any change in the amount of the employee’s indemnity payment when the nature of the indemnity payment is changed from temporary total disability to permanent partial disability or permanent total disability
- Life expectancy of the employee base on the employee’s actual age or the rated age (how long the employee is project to live given the medical condition)
- Any offset available due to the claimant receiving social security benefits or social security disability benefits
This example will show how the futurity indemnity cost has a major impact on the amount of money that can be spent on a structured settlement. Example: The permanent total disability prevents the employee from ever returning to work. The injured employee is man with a weekly indemnity benefit of $600 per week that drops to $500 per week when the medical provider determines he will be permanently totally disabled, at the age of 50. With a 25 year life expectancy, in a state that does not provide for an offset of indemnity benefits when the employee starts to draw social security, the future indemnity exposure is: $500 X 52 weeks = $26,000; $26,000 X 25 years = $650,000.
Future Medical Calculations:
While the future indemnity exposure is normally a straight forward calculation based on the laws of the state where the claim is pursued, the future cost of medical care and the calculations of the amount of money needed for future medical expenses is more complex. Often the adjuster will bring in a certified life care consultant to calculate the future medical cost based on:
- The cost of routine on-going medical care
- The cost of any planned or projected surgical interventions
- The cost of modifications to the employee’s home or vehicle (and future vehicles)
- The cost of home health-care services
- The cost of institutional medical care
- The cost of durable medical equipment (wheelchairs, hospital beds, oxygen supplies, artificial limbs, etc.)
Depending on the nature and extent of injury, the future cost of medical care could be anywhere from a few thousand dollars to a few million dollars, hence the need for an expert to project the future medical cost, including the amount needed for a Medicare Set-Aside Agreement. If significant, the future medical cost should be a separated structure settlement created to pay the future medical expenses.
In addition to the calculations of future indemnity cost and future medical cost in the determination of how much future money will be spent on the claim, consideration must be made for the expenses associated with an on-going workers’ compensation claim. This would include the cost of:
- Defense attorney
- Nurse case manager
- Rehabilitation specialist
- Vocational consultant
- Actuarial expert
Structured Settlement Can Create Savings of 30% – 40%
Once the future cost of the claim has been established, the amount of money that can be spent on a structured settlement can be calculated. Using the above example where the future indemnity exposure was $650,000, let’s estimate a future medical exposure of $300,000 and a future claim expense of $50,000. On this hypothetical claim the total exposure is $1,000,000. The claim can be settled for a lump sum payment of $1 million dollars, but it makes a lot more sense to settle the claim with a structured settlement.
The cost of a structure settlement, where annuities are purchased now to cover future indemnity and medical cost, there is often a savings of 30% to 40% of the long term cost of the claim. This is because the life insurance company providing the annuity or annuities will invest the amount paid for the annuity or annuities to provide the future structured settlement payments as they become due. With this example the exposure to the insurer or self-insured employer created by the catastrophic workers’ compensation claim is $1 million. With the structure settlement, the insurer or self-insured employer could save $300,000 to $400,000.
Outside of the cost savings component, structured settlements provide future protection. The employee with the catastrophic injury is often worried about his/her future. Conscientious attorneys will explain to their employee clients how a structured settlement protects them by providing guaranteed future payments of both income and medical care, while also providing them with peace of mind. Hence, the structured settlement reduces claims cost, facilitates the settlement of the catastrophic injury claim and offers the benefits that come with future protection.
Author Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: email@example.com.
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