Lockton: Higher Costs Associated With Denied Workers’ Comp Claims

October 24, 2018

Workers’ compensation claim denial rates increased a little over one percent between 2014 and 2017, according to a white paper published earlier this year by Lockton. The increase is significant because of the increased costs associated with denied claims.

The analysis examined denial rates and focused on answering two questions:

What’s driving the increase?

Is a high denial rate in the best interest of the employer?

The top 10 most common reasons for workers’ comp claim denials include:

  1. No medical evidence of injury.
  2. No injury per statutory definition.
  3. Reservation of rights.
  4. Pre-existing condition.
  5. Idiopathic condition.
  6. Intoxication or drug-related violation.
  7. Stress non-work related.
  8. Failure to report accident timely.
  9. Doesn’t meet statutory definition of employee.
  10. Misrepresentation

On average, 67 percent of initial denials converted to paid claims within about 12 months, according to Lockton Analytics data.

The benchmarking study found certain reasons for denials were linked with conversion rates, such as misrepresentation, willful intent to injure oneself and reservation of rights.

The study also found that there a substantial increase in the cost of for a claim initially denied and then paid out, about 55 percent. In addition, expenses paid out on denied claims are close to triple the amount of non-denied claim expenses.

Denials only impacted medical costs in a beneficial way, and only showed an average of $548 decrease in spend.

The type of industry does impact claims volume and costs, with manufacturing, administrative and waste management services, and healthcare as three industries with the highest claim volume.

Geography makes a difference in denial decisions, according to the Lockton analysis. The three states that averaged the highest claim counts were California, Florida and Texas. California’s higher conversion rate may be due to an increased likelihood of litigation in that state which translates to the highest ratio of loss adjustment expenses to losses.

The study found that nearly 71 percent of denied lost time claims will be litigated, twice the litigation rate for non-denied claims. A significant cost driver is attorney involvement.

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