Does Paying Small Medical Only Claims Reduce the Experience Modification Factor?

Not any more, is the simple answer in most states. The National Council on Compensation
Insurance (NCCI) is the governing body of the Workers’ Compensation insurance industry
and provides rules and rates and Mods for most states. The ratemaking part of the mission is
the focus of this discussion.
NCCI wants and needs accurate data to develop actuarially sound rates, called Loss Cost
Rates. This is the pure cost of injuries for each class code or type of business. This is the root
basis of rates to which carrier adds their operating expenses and load for profit. So to ensure
the data is credible it is imperative to have a data set that accurately reflects the actual cost of
injuries. The only way to get an accurate cost of injuries is for employers to report the
injuries to the carriers, who then pay the claims and then report the data to NCCI at various
intervals. Just as with computers; garbage in = garbage out.
For years, insurance agent and consultants have explained to customers that frequency
breeds severity on their Mod Factor. That is to say if an employer had 1 claim that cost
$10,000 ($10,000 in Incurred Losses) and 10 claims that cost $1000 ($10,000 in Incurred
Losses) the Experience Mod would increase more due to the 10 individual claims. To off set
this impact, insureds’ were educated to pay small claims. The internal cost to the employer,
$10,000, was less than the collective three-year impact on the Mod. However, this skewed
the NCCI Loss Cost as the true cost of injuries was not being reported to the carrier and
therefore not to NCCI.
To correct the employers’ attempts at Mod manipulation the NCCI has launched the
Experience Rating Adjustment program. The Mod calculation works like this. The first
$5000 of any claim is considered primary. Any losses exceeding $5000 is considered excess.
Under the 1998 ERA program only 30% of the actual primary and excess portion of the
medical only claim will be included in the calculation of the mod. This new way to input
claims data discounts Medical Only claims by 70%. So a $1000 Medical Only claim would
go into the employers’ Mod as $300. A $7000 Medical Only claim would be split with
$5000 primary loss using 30% or $1500 as primary loss. The remaining $2000 excess would
go into the formula at $600 ($2000 x 30%). This significantly decreases the impact that
Medical Only claims have on the Mod factor. Therefore, the benefit to the employer has now
been substantially reduced.
To level the rating filed the Weighting Value will be increased which will increase the actual
excess loss used in the Mod calculation.

In summary, it is fair to say that employers would obtain more benefits to report all claims to
the carrier and let the carrier pay those claims. NCCI has eliminated the benefit to employers
for paying Medical Only claims. They have done this through the ERA program which only
uses 30% of primary and excess losses in the Mod Calculation formula. Other benefits are
that the carrier will pay the medical bill according to the State Fee Schedule, which is
usually less than the employer would pay. Additionally, if a Medical Only claim becomes a
Lost Time claim, the carrier could deny coverage stating that the employer had a duty to
report the injury timely. By not reporting timely, the cost of the claim is elevated because, if
the carrier had received timely notice it would have managed the claim with an improved
outcome. An example may be a Medical Only laceration turns into an infection and Lost
Time. As of January 2004 this program was applicable in the following states:
Alabama, Arkansas, Arizona, Connecticut, District of Columbia, Florida, Hawaii, Idaho,
Illinois, Indiana, Kansas, Kentucky, Maryland, Maine, Mississippi, Montana, Nebraska,
North Carolina, New Hampshire, Oklahoma, Rhode Island, South Carolina, South Dakota,
Tennessee, Utah, Virginia, Vermont, Wisconsin.