In many workers’ compensation systems, the premium rate charged to an organization depends on the degree to which that organization’s injury claims costs are higher or lower than the industry average.
This mechanism, called experience rating, is meant to provide workplaces with a financial incentive to invest in programs that prevent work-related injuries. This incentive may also sometimes lead to improvements in accommodations to facilitate sustainable return to work of employees who experience work injuries. However, some studies have shown that experience rating programs may also encourage some organizations to focus more on managing claims costs.
To examine the impact of financial incentives on claim activity, a new study by the Institute for Work & Health (IWH) examines two very different experience rating programs: those of Ontario and British Columbia.
In B.C.’s program, premiums are adjusted at the beginning of an insurance period based on an organization’s historical claims costs. Adjustments are gradual based on performance over the long term, and as a result premium rates do not change dramatically from one year to the next.
In contrast, organizations in Ontario pay a premium rate based on the average for their respective industrial sectors. Premiums are then adjusted through rebates and surcharges at the end of the annual insurance period. Compared to those of the B.C. program, premium adjustments in Ontario are more immediate and can be large.
The study finds that Ontario’s more immediate premium adjustments from the industry average are linked to greater and more immediate claims reductions than B.C.’s more gradual, phased-in premium adjustments process. However, the relative impact of premium adjustments on claim rates are more enduring in B.C.
“Both Ontario’s and B.C.’s experience rating programs are effective incentives for reducing various types of claims outcomes,” says Dr. Emile Tompa, a labour economist and senior scientist at IWH and the lead author of the study. “However, the effect is larger and more immediate in Ontario.”
Comparing two provinces
Tompa’s study, published in the July 2016 issue of the Journal of Occupational and Environmental Medicine (doi:10.1097/ JOM.0000000000000754), is one of the first to compare two very distinct experience rating programs.
The study team tracked claims rates of 6,600 organizations in B.C. and 13,000 in Ontario over five years. The types of claims examined included no-lost-time claims, short-term disability claims and long-term disability claims, among others. The team looked for changes in claims rates across more than a dozen industries. They also took into account many factors that may have affected an organization’s claims rates, such as whether the organization experienced growth or downsizing, or operated in a climate of high employment in the sector.
“Most studies about the use of experience rating in workers’ compensation schemes treat it as a singular concept, as though differences in experience rating programs don’t matter,” says Tompa. “This study shows us that the design options in experience rating programs make a difference and should be taken into consideration.”
Asked to weigh the merits of the two programs, Tompa says there are pros and cons to both. “If you are an organization in B.C. and you have one really good year—you have no claims and you do an amazing job on health and safety—it’s not going to make a dramatic impact on the premiums you pay that year,” says Tompa. “You have to sustain your performance over many years and gradually build up your credibility before you see that reflected significantly in your premium rate.” Likewise, organizations that otherwise have good track records would not be too severely penalized for one year of poor performance.
As a result, such a program might lessen the temptation to manage claims aggressively for a short period of time to simply rein in costs. However, it might also weaken the incentive for organizations to invest in costly changes needed to address health and safety issues if the organization does not see a quick payback, he adds.
“There are no easy answers,” says Tompa. “If the time frame is too large and you don’t see the rewards immediately and it takes years to recoup the costs, will the financial incentives be meaningful? How would that align with the decisions that organizations need to make about investing in health and safety?” Conversely, you may not want to encourage short-term, quick-fix responses that are not sustainable, he says.
This study comes out as Ontario’s Workplace Safety and Insurance Board reviews its experience rating program. Goals of the WSIB’s Rate Framework Modernization initiative include a new streamlined and simpler classification, and greater premium rate stability.
The study also adds insight to related research by Tompa on experience rating conducted in 2012. That research found that Ontario firms with a higher degree of experience rating (those facing potentially larger adjustments) are more likely to have outcomes that suggest claims cost management practices (i.e. fewer lost-time claims but more no-lost-time claims).
The study also found that a higher degree of experience rating was linked to more permanent impairment claims that result in no lost time from work, more denied claims and more claims that reopen after the window of organizational financial responsibility closes. That study was published in Policy and Practice in Health and Safety, in an issue exploring experience rating (doi: 10.1080/14774003.2012.11667772).