PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

ESTIMATING THE WORKERS COMPENSATION TAIL 609incremental severities for these DYs (see Section C.3 of AppendixC). The fact that SAIF’s historical PLDFs for DYs 40—54 are noticeably higher than those predicted by this model (seeFigure 1.1) is evidence that there are additional costs associatedwith caring for elderly claimants, who comprise the majority ofclaimants during these DYs.The basis for our selection of 9% as the long-term rate of medicalcost escalation is presented in Section C.3 of Appendix C.This assumed annual rate of change in the total cost per claimshould be expected to be noticeably greater than the change inthe medical component of the CPI. Key reasons for this are1. Larger increases in unit costs. The types of servicesprovided to permanently disabled claimants will likelyinflate at a greater rate than that of overall medical services.Examples of these include prosthetic devices, newdrugs, surgeries and so on.2. Increasing utilization. The rate at which claimants utilizegiven services has tended to increase over time.3. Shifting mix of services. There has been a trend towardthe greater utilization of more expensive alternatives ofcare.Because of these three factors, SAIF’s historical rate of medicalcost escalation for PD claims has consistently exceeded thechange in the medical CPI by a discernable margin. As shownin Table C.4.1, the average rate of MPD cost escalation from1966 to 2003 was 9.2%, while the average annual change in themedical CPI was 6.8%. Therefore, the average annual change inutilization and mix for 1966—2003 was 2.4%. For 1998—2003,the average utilization and mix change was much larger (i.e.,7.4%, per Table C.4.3).In Table 3.2 incremental payments continue to increase untilage 40 because the impact of claims inflation is greater than theforce of mortality in closing existing claims.