Postal employees are covered by the Federal Employees’ Compensation Act, administered by the Department of Labor (DOL) Office of Workers’ Compensation Programs (OWCP), which makes all decisions regarding injured workers’ eligibility for benefits and administers payment of claims. We reimburse the DOL for all workers’ compensation claims paid on our behalf and pay an administrative fee to DOL.
We use an estimation model that combines four generally accepted actuarial valuation techniques to project future claim payments based upon currently open claims and past claim payment experience.
We record a liability for the present value of estimated future payments to postal employees, or their qualified survivors, who have been injured through the end of the period. The estimated total cost of a claim is based on the date of the injury, pattern of historical payments, frequency or severity of the claim-related injury or injuries, and the expected trend in future costs. The liability for claims arising more than 10 years ago is determined by an independent actuary. The payout of the estimated liability will, in some cases, be for the rest of the lives of the claimants.
As noted above, the liability for estimated future workers’ compensation payments is recorded at its present value. To record the liability and annual expense, we must estimate the amount of funding that would need to be invested at current interest rates, in order to fully fund all estimated future payments. We update inflation and discount (interest) rates as of the date of our financial statements to determine the present value of our workers’ compensation liability at fair value in accordance with GAAP. The impact of changes in the discount and inflation rates is accounted for as a change in accounting estimate and included in operating expenses.
The estimation of the liability is highly sensitive to changes in inflation and discount rates. An increase of 1% in the discount rate would decrease the September 30, 2010 liability and 2010 expense, by $1,029 million. A discount rate decrease of 1% would increase the September 30, 2010 liability and 2010 expense, by $1,255 million.
At September 30, 2010, the present value of the liability for future workers’ compensation payments is $12,589 million, an increase of $2,456 million, or 24.2%, from $10,133 million at September 30, 2009. The current portion of the liability is $1,115 million and $1,069 million at September 30, 2010 and 2009, respectively. At September 30, 2009, our liability increased $2,165 million, or 27.2%, from September 30, 2008.
Changes in the workers’ compensation liability are primarily attributable to the combined impact of changes in the discount and inflation rates, and, to a lesser extent, routine changes in actuarial estimation, new compensation and medical cases and the progression of existing cases. The impact of the changes in discount and inflation rates accounted for $2,017 million and $718 million of the increase in the 2010 liability and 2009 liability, respectively.
Beginning in Quarter III, 2009, we experienced a significant change in the discount and inflation rates used to estimate the workers’ compensation liability. The economic recession that began in December 2007 and corresponding response by the Federal Reserve resulted in interest rates declining significantly. GAAP requires us to use discount rates based on the best available information at the measurement date. Accordingly, discount rates used in estimating the present value of the workers’ compensation liability decreased significantly for both 2009 and 2010.
The inflation and discount rates used to estimate our liability at September 30, 2010, 2009, and 2008 are shown in the following table.
In 2010, we began to use the average rate of medical inflation experienced by our workers’ compensation claimants over the past five years as an estimate for future medical inflation. Prior to 2010 we had used forecasted medical inflation rates published by an independent source. During 2010, we determined that our own history served as a better indicator of future costs and revised our estimation accordingly. The impact of this change was to increase our liability by $50 million and is accounted for as a change in accounting estimate.
In 2010, workers’ compensation expense was $3,566 million, an increase of $1,343 million, or 60.4% compared to 2009. The 2009 expense of $2,223 million increased $996 million, or 81.2% from 2008. The components of workers’ compensation expense are as follows:
In 2010, we experienced a $48 million or 4.6% increase in total claims paid on our behalf to $1,085 million. Medical claims payments increased 7.2% or $30 million while payments of compensation claims increased 2.9% or $18 million compared to 2009. Actual claim payments in 2009 increased $78 million, or 8.1%, over 2008.
Also significantly impacting the increase in the 2009 liability was a change in the timing of the annual payment to DOL for claims paid on our behalf. In 2009, we began making the payment on the statutorily-required deadline of October 15, instead of September 15 as had been done in previous years. This timing change resulted in a one-time increase of $1,051 million to our 2009 year-end liability.
