In the complex world of workers’ compensation, setting accurate reserves is a critical task for adjusters. Reserves are the funds set aside by an insurer to cover the future costs of a claim, including medical expenses, lost wages, and other associated costs.

However, even the most experienced adjuster can sometimes under-reserve a claim, leading to financial surprises later on.

5 Reasons Why Workers’ Compensation Reserves Are Higher Than Expected:

1. Is the Cost for the Claim for Life?

One primary reason reserves may be higher than expected is if the claim turns out to be “long-term”—in other words, a claim for life. Unlike temporary claims, which have a foreseeable end, long-term claims continue indefinitely, often requiring ongoing medical treatment and wage replacement. When setting initial reserves, adjusters must consider the possibility that a claim could extend over the claimant’s lifetime.

Failing to recognize this can result in significant under-reserving.

2. Will the Injury Require Future Medical or Surgical Interventions?

Surgical cases are particularly concerning when it comes to reserve calculations. The need for surgery often signals more serious injuries, which not only have higher immediate costs but also pose substantial risks for future complications. Surgeries can lead to additional medical procedures, prolonged rehabilitation, and the possibility of long-term disability.

Adjusters must carefully evaluate the potential for future medical needs, including the likelihood of multiple surgeries or the necessity of ongoing treatments, to avoid under-reserving.

3. What Are the Costs of Ongoing Medications?

Prescription medication costs are a critical factor that can drive reserves higher than expected. The cost of medications tends to rise over time, especially for long-term prescriptions that manage chronic conditions resulting from workplace injuries. Adjusters must account for the escalating costs of these medications when setting reserves.

Overlooking this factor can lead to significant financial shortfalls as the claim progresses.

4. Will a Medicare Set-Aside Be Needed?

A Medicare Set-Aside (MSA) is a financial arrangement where a portion of the workers’ compensation settlement is set aside to cover future medical expenses that would otherwise be paid by Medicare. The need for an MSA is one of the most expensive obstacles in settling a workers’ compensation claim. If an adjuster fails to anticipate the need for an MSA, the reserves may be grossly insufficient, leading to costly adjustments later.

The potential requirement for an MSA should be thoroughly evaluated when establishing the initial reserve amount.

5. What Is the Age and General Health of the Claimant?

The claimant’s age and overall health play a significant role in their recovery and, consequently, in the cost of the claim. Generally, healthier and younger workers recover more quickly and return to work sooner, thereby reducing the overall costs associated with their claim. Conversely, older workers or those with pre-existing health conditions may require longer recovery times and more extensive medical care, leading to higher reserves.

Adjusters should take into account the claimant’s age and health status when setting reserves to ensure they are adequate.

Verifying Reserve Accuracy Throughout the Claim

While initial reserves may be set with care, the dynamic nature of workers’ compensation claims necessitates ongoing verification of reserve accuracy. Failing to regularly reassess reserves can result in over- or under-reserving, both of which can have significant financial consequences. Here are some scenarios where reserves should be revisited:

• Medical Treatment Duration: If the employee’s medical treatment lasts longer or shorter than initially estimated, reserves should be adjusted accordingly. Unexpected extensions in treatment can lead to higher medical costs, necessitating an increase in reserves.
• Work Status Changes: If the employee remains off work longer than expected or returns to work sooner, this change directly impacts wage replacement costs and should trigger a reserve review.
• Changes in Medical Condition: Any deterioration in the employee’s medical status or faster-than-expected recovery requires a reassessment of reserves. These changes can affect the long-term costs associated with the claim.
• Disability Rating Adjustments: If the employee’s disability rating is higher or lower than initially predicted, this will affect the compensation they are entitled to, necessitating a reserve adjustment.
• Claim is Contested: If the claim becomes contested before the workers’ compensation board, legal costs and potential delays must be factored into the reserves.
• Attorney Involvement: The involvement of attorneys often increases the complexity and cost of a claim, which should be reflected in the reserve amount.

Conclusion

Setting accurate reserves is crucial for the financial stability of any workers’ compensation program. By considering factors such as the potential for long-term claims, the need for future surgeries, the rising cost of medications, the possibility of Medicare Set-Asides, and the health of the claimant, adjusters can set more accurate reserves and avoid costly surprises.

Regularly verifying and adjusting reserves as the claim progresses is equally important to ensure that the reserves remain sufficient throughout the life of the claim. By staying vigilant and proactive, adjusters can better manage reserves and contribute to the overall success of the workers’ compensation program.

Michael Stack, CEO of Amaxx LLC, is an expert in workers’ compensation cost containment systems and provides education, training, and consulting to help employers reduce their workers’ compensation costs by 20{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c} to 50{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c}. He is co-author of the #1 selling comprehensive training guide “Your Ultimate Guide to Mastering Workers’ Comp Costs: Reduce Costs 20{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c} to 50{c9b670b3c77d807bdd7060c9fc0a99121cc6b184676c9335f3481a95c383dd4c}.” Stack is the creator of Injury Management Results (IMR) software and founder of Amaxx Workers’ Comp Training Center. WC Mastery Training teaching injury management best practices such as return to work, communication, claims best practices, medical management, and working with vendors. IMR software simplifies the implementation of these best practices for employers and ties results to a Critical Metrics Dashboard.

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/

Injury Management Results (IMR) Software: https://imrsoftware.com/

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