Catastrophic injury claims make up less than 1% of all workers compensation claims, but different studies show they entail approximately 20% of all workers comp costs. For the small employer, one catastrophic injury claim can distort the severity factor in the workers comp premium calculations and have a major impact on the workers compensation premiums for years into the future.
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Catastrophic Injuries Significantly Alter Employee’s Life
Catastrophic injuries are injuries that disable the employee to the extent the employee can never return to work and significantly alters the employee’s life in general. Common examples of catastrophic injuries are:
- Brain/brain stem injuries.
- Severe burns over 50 % or more of the body.
- Spinal cord injuries.
- Multiple amputations.
- Multiple trauma.
- Total vision loss.
- Occupational lung diseases.
The eventual cost of a catastrophic injury is very difficult to establish early in the life of the claim. Even the experienced adjuster does not have a crystal ball to determine if the overall cost of the claim is going to be $500,000 or $5 million when establishing the initial reserves on the claim. With catastrophic claims, as additional medical and rehabilitation information becomes available, the reserves are often adjusted by large amounts (6 figures or more) several years into the claim.
To establish the value of the catastrophic injury claim, there are various factors the adjuster considers. While it is the adjuster’s responsibility to establish the reserve, the smart risk manager does not leave it all up to the adjuster. It behooves the employer to review the factors that go into reserving to be sure the adjuster is setting the proper reserve and not taking the easy way out by reserving a nice round number like $1 million.
The factors that go into establishing the value of the catastrophic injury claims can be divided into the three areas: indemnity, medical, and claim related expenses. Look for vendors specializing in Life Care Planning.
Lifetime cost of the indemnity includes:
- The employee’s average weekly wage and weekly indemnity benefit.
- The time span of the indemnity; does it last for a set number of weeks, (500 weeks), as it does in about half of the states, or does it last a lifetime, or to a set cut off point in the retirement years?
- The employee’s age and projected life span on the actuarial tables.
- Does the indemnity rate remain the same for permanent total disability as for temporary total disability, or does the compensation rate change?
- What is the amount of the offset for social security disability?
Medical factors in establishing the value of the claim:
- The cost of immediate medical care following the injury.
- The cost of surgical interventions in the first years following the injury.
- The on-going cost of medical care on an annual basis after the medical status is stabilized.
- The cost of modifications to the employee’s home and current and future vehicles.
- The cost of institutional medical care.
- The cost of durable medical equipment (wheelchairs, artificial limbs, hospital beds, oxygen tents, etc.).
Claim handling expenses for catastrophic claims:
- Nurse case managers.
- Rehabilitation specialist.
- Defense attorneys.
- Actuarial experts.
The above items impacting the value of the catastrophic claim are not the only factors to consider when establishing the future claim cost. If the insurance company decides to settle the catastrophic workers comp claim, they work with the Centers for Medicare and Medicaid Services (CMS) to obtain approval of the Medicare Set Aside Agreement (MSA). The value of the settlement has to be high enough that the claimant (in theory) never has any future medical cost paid by CMS.
Another factor impacting the value of the catastrophic injury claim is the availability, in some states, of a Subsequent Injury Trust Fund to cover part of the future cost of the claim. Also consider whether or not the insurance company can resolve the claim with a structured settlement and of the future cost of the claim being sold to another insurance company.
While it is possible to calculate the value of the catastrophic injury claim, keep in mind a catastrophic injury is a major life altering event for the employee. The catastrophic injury impacts almost every area of the employee’s life and family. It is a personal tragedy far beyond the financial cost of the claim.
Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: mstack@reduceyourworkerscomp.com.
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