Industry Custom Pricing

I originally removed this submission but have re-posted it given some interesting developments with the WCB proposal. In short, WCB is now proposing the new pricing model with the option of keeping "pre-existing cost relief." I had a behind the scenes role with the Canadian Association of Petroleum Producers (CAPP) committee which evaluated this proposal. The recommendation from the committee was for an option that allowed pre-existing cost relief to be retained. On the surface this appears to a complete reversal of WCB's position to eliminate cost relief. However, my greater fear is that this is merely a "fall back" position and nothing has really changed. I will explain further in a subsequent blog. The blog below provides the context for the next submission "The Demise of Pre-Existing Condition Cost Relief".

Introduction

WCB Account Managers and Employer Services representatives are making presentations and contacting large employer individually to gain approval for their Industry Custom Pricing (ICP) initiative. They are also sending out survey letters to company contact people looking for approval for the proposal. The people who are being contacted may or may not know the implications of their response and in many cases may not have the authority to make such a decision. This is being done by industry sectors utilizing WCB industry account codes making it more challenging for industry to organize and launch an effective opposition campaign to combat this proposal or negotiate a better deal.

Employers need to have all the facts and be aware of the unspoken consequences of the proposal before agreeing to it.  The intent of this blog is to provide you with the information that is not being told and provide a course of action and negotiation items to obtain a fair deal that provides accountability and responsibility for all stakeholders including WCB decision-makers!

Proposal Synopsis

In brief, the WCB is stating that the current experience rating (ER) program may have worked well as a “base” program but ER is no longer a “one size” fits all program. They are offering to allow industry to customize certain features of ER that will send a stronger message to industry code competitors about the importance of safer workplaces:

·         Employers who do well will pay less; employers who do poorly will pay more.

·         Greater accountability for performance creates fewer subsidies and greater incentives to manage claims.

·         Better outcomes for workers.

·         Premium rates will be lowered immediately for most employers.

·         Value added disability management and administration.

Features of ER that can be modified include:

1.     Experience ratio

2.     Maximum discount surcharge (up to 60%)

3.     Participation Factor

WCB will only agree to these changes if 51% of the industry code payroll agrees to it and and will lower premiums immediately with agreeing to  the elimination of “pre-existing cost relief”. For detailed information on the proposal see http://www.wcb.ab.ca/employers/ICP.asp

As an incentive to agreeing to the proposal WCB will reduce industry rates. Examples of rate reductions by industry codes are as follows:

Industry Number	Description	Proposed Decrease In Industry Base Rate
51502	NDT Testing Incl Visual Inspection	$0.02
30801	Machining	$0.02
09911	Downhole Servicing	$0.02
30100	Steel/Metal Fabrication	$0.03
40400	Construction, Industrial	$0.05
10100	Meat Processing	$0.08

At first glance this seems like a deal that is too good to be true. Everyone wants more accountability and if it means there is an opportunity to pay less then so much the better. In fact in the case of industry code 40400 they are offering an immediate industry rate discount of $0.05 per $100 of payroll. WCB states that approximately 13% of their time is spent managing and applying pre-existing cost relief. By eliminating this policy they will put these additional resources towards enhanced disability management on your behalf. WCB has not provided any details on what the value added disability management looks like or how it will be delivered.

To date 46 industry codes have agreed to this proposal with two industry groups meat packing and automobile dealerships voting for all proposal options.

What is Not Being Told

WCB experience rating is very sensitive and changing on or more elements create consequences that may be deemed as unfavourable. It is necessary to have a strong understanding of how ER works and how these changes can impact your premiums.

As an example I will utilize a large construction company industry code 40400 that is at the industry rate to run a simulation on the consequences.

•          Industry rate: $2.23

•          Payroll: $40,000,000

•          Premiums: $892,000

Premiums payable to WCB ($2.23/$100 x $40,000,000)

This simulation will provide some of the basic information which is necessary before you make a decision as to whether or not accept the WCB proposal. This will only hit on the highlights as it is not possible to explain all the nuances of the ER system and the proposal impact using this medium. Although a general statement does suffice in that WCB does have all the numbers, have run their own simulations, and you can be assured they are not giving up anything!

The WCB is offering an immediate discount on premiums of $0.05/$100 for this industry code. This is a premium savings of $20,000 annually.

($0.05/$100 x $40,000,000)

However, this number is not completely accurate as the WCB is clawing back the premium net savings through their incentive rebate program (Certificate of Recognition and Partnership in Injury Reduction)

	Rate Reduction	Premium Savings
Industry Custom Pricing	$0.05	$     20,00.00

WCB Rebates	Current	ICP	WCB Savings
Certificate of Recognition	$44,600.00	$     43,600.00		$1,000.00
Self-Comparison	$66,900.00	$     65,400.00		$1,500.00
Safety Leadership	$66,900.00	$     65,400.00		$1,500.00
Total	$178,400.00	$    174,400.00		$4,000.00

	Rate Reduction	Incentive Rebate Reduction	Total Company Savings
Company Net Benefit	$20,000	$4,000	$16,000

Once this “claw back” is considered the net savings is only $16,000. Interestingly this negative impact only affects good performers that have established audited safety programs and are actively managing return-to-work.

Of greater impact is the condition that pre-existing cost relief policy be removed. Pre-existing cost relief is applied to claims where an injured workers recovery is impacted and prolonged by a pre-existing condition this also includes back claims.

This is best illustrated through a real case example which involved a worker who picking up an object and strains his upper spine and neck. This relatively simple injury was exacerbated by a pre-existing degenerative disc disease condition. This simple lifting incident resulted in the need for a surgical intervention with extensive medical expenses and time loss. This claim easily exceeded the maximum per claim costs of $72,600 for 2009. The cost relief policy states that you are not responsible for the pre-existing portion and for spinal (back) claims they will remove all costs in excess of eight weeks at the maximum compensation rate $7,341.04. What this means is that if you have a claim such as this and you had the knowledge and applied for cost relief then WCB would use the $7,341.04 for calculation of your employer ratio rather than the $72,600 if you did not apply. Given the above you we were able to run the following simulation:

The difference between the maximum per claim cost and the remaining costs from application of cost relief is $65,258.96. This number was used to simulate the impact of utilizing this policy upon premiums. The immediate impact is at $0.39 cent reduction totalling $156,000 in premiums. In agreeing to the ICP proposal you would be giving up an important loss control to reduce premiums by this method.

	Rate Reduction	Incentive Rebate Reduction	Total Company Savings
Company Net Benefit	$0.05	Less incentive ($4,000)	$16,000
Pre-Existing Cost Relief	$0.39		$156,000

 

It would take 9.75 years through ICP to actualize this savings. You need to ask yourself with an aging workforce (greater likelihood of pre-existing conditions) if this makes financial sense. In fact by eliminating pre-existing cost relief which by the WCB’s own admission is the greatest utilized you are actually increasing your risk of a obtaining a poor performance surcharge which has the potential of increasing premiums by an additional 200%

  

Max Surcharge Year	Year 1	Year 2	Year 3	Year 4	Year 5
Poor Performance Charge	0%	25%	50%	100%	200%
Rate Adjustment	40.00%	65.00%	90.00%	140.00%	240.00%
Employer Rate	$3.12	$3.68	$4.24	$5.35	$7.58
Premium Impact	$1,248,800	$1,471,800	$1,694,800	$2,140,800	$3,032,800

If this policy were to be removed the only recourse available to protect your interests demands increased surveillance on hiring through the use of post offer employment testing i.e. functional testing. While it is our opinion that these should be done regardless it does add extra costs that need to be considered.

All safety sensitive positions need to be identified and analyzed by a certified professional (kinesiologist) to obtain a physical demands analysis (PDA) and bonafide occupational requirements. These are then used, post employment offer, to measure functional capabilities of an employee, to ensure that they are capable of engaging in all the required job tasks. The development costs of PDAs average around $1000 per occupation. The PDA is then used as a measure against functional screening. Mid level functional screening; ones that have some validity in measuring physical capabilities, costs approximately $450 each. It should be noted that even the best functional screening program has only an 80% success rate. Depending on turnover rates this can become a costly proposition.

Proactive Costs	Amount	Number	Total
Safety Sensitve Physical Demands Analysis	$1,000.00	25	$25,000.00
Post Offer Functional Pre-screens	$450.00	100	$45,000.00
Annual Loss with ICP			$29,000.00

Elimination of pre-existing condition cost relief will make functional testing a business necessity. It is important to note that even if the functional screen indicates the individual is NOT capable of engaging in all aspects of the occupation requirements human rights legislation implicitly states that you have a “duty to accommodate.”

The ICP is less about increased accountability and a more flexible ER system than it is about the elimination of pre-existing cost relief. The proposed model has greatest benefits for WCB as they will increase revenues while reducing work load. The promise of “value added disability management” is a non-starter without a tangible plan along with performance measures to achieve the objective.

The current ICP proposal is not favourable to large employers. However, you may not have any say unless you can obtain 51% of your competitors (based on payroll) to agree. This requires that they take the time to understand the implications.

Negotiate a Better Deal

It is my opinion that WCB will find a way to eliminate pre-existing cost relief or make it exceedingly challenging to apply for it regardless of employer sentiment. Therefore, industry needs to take this opportunity to organize and lobby for meaningful changes to WCB operations. Immediate requirements are to find ways to get the message out to industry about the ICP proposal and what to negotiate for to ensure a better deal which is the intent of this blog.

I am happy to make myself available if you would like to discuss the ICP proposal in further detail or would like an analysis of how this impacts your WCB premiums.