Workers Compensation Medical Reserving with Calendar Year Payments in a Cost Containment Environment

One of the new challenges facing the workers compensation reserving actuary is the incorporation of cost containment measures into the reserving process. The drastic reduction in medical payments due to these measures distorts historical development patterns and makes the prediction of future development patterns increasingly uncertain. Cost containment programs can affect all medical payments uniformly, or, more likely, affect different types of medical payments by varying degrees. The paper uses actual medical payment data from the Ohio State Insurance Fund to illustrate the potential effects of cost containment measures on medical reserves. This paper explains three reserving methods based on medical payments, and examines the effects of medical inflation and cost containment initiatives on each method. The concept of the persistency of medical payments is explained and the stability of the historical persistency factors is used to illustrate the differences in the methods. Data by medical provider type is shown in the appendix as an example of the type of segregation possible in order to better reflect specific cost containment measures. The data groupings can also be used in reserving to capture specific development patterns inherent in the particular type of medical service. Keywords: Managed Care