Twenty percent of all workers’ compensation cost is incurred on less than one percent of the claims. These high dollar claims are often referred to as catastrophic claims. The term ‘catastrophic claim’ applies to the nature of the claim, not the dollar cost, even though the severe nature of the claim and the high dollar cost are closely related.
Catastrophic Claims Create Permanent Disability
A catastrophic claim is defined as any claim that creates a high level of permanent disability. Catastrophic injuries significantly alter the life of the employee in general. Catastrophic injuries prevent the employee from returning to any type of work, even when occupational therapy and vocational rehabilitation is provided. Examples of catastrophic claims include:
- Quadriplegia
- Paraplegia
- Brain/brain stem injuries
- Second and/or third degree burns over 50% of more of the body
- Death
- Total vision loss
- Multiple amputations
- Mesothelioma, asbestosis and other lung diseases
- Severe damage to internal organs
Almost all catastrophic claims result in the employee being classified by workers’ compensation as having permanent total disability. The cost of the catastrophic claim will be influenced by the state laws. While all states provide unlimited medical treatment, the indemnity cost can vary widely. Some state provide life time indemnity benefits while other states will cap the indemnity benefits at a maximum number of weeks, often 400 weeks or 500 weeks.
Employee Income Prior To Injury Is Major Factor
A major factor in the cost of catastrophic claims is the income of the employee prior to the injury. The higher the wages of the employee prior to the injury, the higher the indemnity cost. For example, the catastrophic claim indemnity payments of an employee who was earning $600 a week would be double the indemnity payments of an employee who was earning $300 a week.
The employee’s life expectancy will also impact the cost of a catastrophic claim. If the employee is 30 years old when the catastrophic injury occurs, the amount of future medical bills, and indemnity cost in a state with lifetime indemnity benefits, will be significantly higher than the cost of the same type injury to an employee who is 60 years old, simply due to the longer number of years the benefits will be paid.
In addition to the high cost of medical care and the high cost of indemnity benefits, the claim handling expenses can be significant on catastrophic claims. The expense factors can include:
- Nurse case managers
- Rehabilitation specialists
- Actuarial experts
- Remodeling of the home to make it handicap accessible
- Home attendants
- Defense attorneys
- Specialized equipment
Catastrophic Claims Often Resolved With Structured Settlement
Due to the high cost of catastrophic claims, the claims are often resolved with a structured settlement, a type of life time annuity that the workers’ compensation insurance company purchases to make periodic future payments. This often benefits the injured employee by providing the employee with a higher level of income, or in states where the number of weeks of indemnity benefits has a cap, a life time income stream not tied to the maximum number of weeks. It also provides the insurer with a known fixed cost for the claim, allowing the insurance company to free up its reserves for other claims.
Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, and founder of COMPClub an interactive training program teaching workers’ comp cost containment best practices. Through this platform he is in the trenches on a monthly basis with risk managers, brokers, consultants, attorney’s, and adjusters teaching timeless workers’ comp cost containment strategies, as well as working with members to develop new tactics and systems to address the issues facing organizations today. This unique position allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: mstack@reduceyourworkerscomp.com.
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