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July 20, 2017 – Collateral requirements for workers’ compensation

When employers are self-insured or retain risk associated with their workers’ compensation program, it is easy for collateral costs to spin out of control. It is essential that risk managers and claims examiners understand the collateral process in order to make appropriate, conscious and focused business decisions associated with their workers’ compensation process.

Collateral calculations

Independent actuarial analysis determines the amount of collateral required based on projected ultimate retained loss, which may include claims administration expenses, IBNR claims, as well as total-known outstanding liabilities. Actuaries also calculate the annual projected exposure for the employers. This is determined in tandem with the financial rating of the company and current market forces for collateral insurance. Companies with an AAA+ financial rating will pay much less for $100M of collateral than a company with a B+++ rating.  While actuarial calculations are typically done annually, they may be completed more frequently if there is a significant increase or decrease in the company’s level or exposure, risk retention, or financial rating during the year.

If a company does not have a financial rating, due to private holdings or a religious affiliation, the underwriting of the collateral will depend on market forces.

Retained risk and collateral requirements

Some self-insured employers are not completely self-insured. They typically have an umbrella, an excess or high retention insurance policy, to protect them from a potential catastrophic event. If an employer retains some of the risk associated with their workers’ compensation losses, they are usually required to post collateral with their excess insurance company for the outstanding amount of risk that they retain, as determined by utilizing actuaries.

Additionally, self-insured companies are required to post collateral in every state that they do business in, since there remains no national policy governing self-insurance certificates. These states have different organizations which approve self-insurance certificates. In addition to assessing collateral, most state organizations assess the self-insurers ability to pay benefits to legitimately injured workers.  The different state laws and approaches can turn collateral jurisdiction into a nightmare, affecting workers’ compensation claims, as they typically take much longer to be closed due to differing state regulations.

Many large employers opt out of self-insurance due to government financial requirements, administrative and reporting costs, claims oversight, and the collateral requirements of being self- insured. They usually have a high cost deductible or high retention insurance program where they retain a significant amount of risk. In this situation, it can be difficult to extract the posted collateral from the insurance company, even if all claims have been closed. The insurance company might try to lower rates for collateral or lower projected outstanding exposures as a financial enticement to retain the insurance business.

Either way an employer goes (self-insurance or fully insured) there is not an exact science as to how collateral requirements go, but it is important to know what can affect different decisions and programs.

Impact of the claims process on the collateral requirements

Collateral requirements within workers’ compensation are significantly impacted by benefit provision, settlement philosophy and the reserve practices. This is in part due to the impact these processes have on the actuarial projection for the ultimate loss.

As long as the file is open, collateral will be required for all of the outstanding projected liability and expenses. It is typically more cost effective to settle a claim than stipulate that life time future medical care for a specific injury be given. Delays in claims reporting, the re-opening claims, the number of IBNR files, and the cost of closing files can all significantly impact the actuarial projections and may increase overall collateral costs.

Companies need to be honest with themselves when it comes to total liabilities and outstanding reserves. Skimping on an actuarial analysis could end up costing millions of dollars in the long run, as reserves are adjusted upward over time An actuary will calculate the final numbers using the paid and reserve triangles, making the company’s liability explicit.

Collateral expense can be a significant cost for a company’s workers’ compensation program.  A good claims administration process, the use of an actuary and a clear settlement philosophy can render a more effective strategy and account for collateral exposure and expense.

William M. Zachry, Senior Fellow, Sedgwick Institute

March 29, 2017 – Trump Immigration Rhetoric and Actions | Risk Higher Workers’ Compensation Costs and Slower Return to Work

The Trump immigration actions and rhetoric will significantly worsen the doctor shortage. The Association of American Medical Colleges (AAMC) reports a deficit of 8,200 primary care doctors in 2016. It predicts a shortage of nearly 95,000 doctors by 2025. As of 2010, 27 percent of U.S. physicians were foreign born – 230,000 physicians. Fortunately for U.S. patients, that number has increased each year. Given the large number of baby-boomer physicians who will retire in the next decade, we increasingly rely for our care on foreign-born doctors.

The Trump travel ban, rhetoric and recent actions to detain and deport immigrants are creating direct impediments to immigration of needed medical personnel, and a hostile environment for many health care workers who consider immigrating to the U.S. for training or jobs. It is in our self-interest to encourage the best and brightest to come to the U.S. rather than embracing public policies and rhetoric that repel them.

Seven thousand U.S. physicians were born in the six countries covered by the Trump travel ban. These doctors provide 14 million patient visits each year. Especially affected are patients in Michigan (1.2 million visits), Ohio (880,000 visits), Pennsylvania (700,000 visits) and West Virginia (210,000 visits). In areas with current doctor shortages, the doctors born in these six countries provide 2.3 million patient visits each year. [The Immigrant Doctors Project used U.S. government data to create a map showing the adverse effects on each local area in the U.S.]

The negative impact of the Trump travel ban on our health care system is much broader than this. First, the rhetoric and initial actions have created substantial uncertainty (and inhospitality) for immigrants from many countries, not just the six listed in the travel ban. The best and the brightest of these have many options other than the U.S.

Second, both those currently working and training in the U.S. and those considering immigration for training and/or better living conditions are also affected. For those currently training in the U.S., they wonder if they leave the U.S. to visit family, will they be allowed to return? When their training is completed, will they be allowed to stay? For those considering training or relocating to the U.S., they are making a multi-year commitment – mid-course disruption would be very costly to them. The uncertainty created by the recent rhetoric and government actions makes the decision to come to the U.S. an increasingly risky one.

Third, we rely heavily on non-physician healthcare workers – one in six of U.S. health care workers is foreign born (nearly 2 million). Forty percent of foreign-born health care workers are from Asia and the Middle East.

Each year, the U.S. health care system depends heavily on immigration to meet the growing demand for health care services in the U.S. Between 2006 and 2010, the number of foreign-born U.S. health care workers grew from 1.5 million to 1.8 million – adding 300,000 new immigrant health care workers.

The U.S. health care system relies heavily on foreign-born doctors and other health care workers. Each year, its reliance grows. The demands on our health care system are growing substantially with the aging of the population. Current doctor shortages are predicted to grow dramatically, even if the past patterns of immigration continue. The Trump rhetoric and actions on immigration will impair the flow of health care workers immigrating to the U.S. We will all be worse off as wait times grow and access to needed services becomes more difficult.

Foreign-born doctors have choices about where they work. Opponents of single-payer models of health care financing often cite the longer wait times for patients in single-payer systems like Canada and Britain. How ironic if U.S. immigration policies end up reducing wait times in Canada while increasing our wait times.

March 7, 2017 – HOW TO ACCURATELY REPORT FAKE NEWS ABOUT WC

It’s just a matter of time until fake news infiltrates public policy debates in workers’ compensation. Here is some unsolicited advice to bloggers and WC media about how to report on fake news that is both accurate and avoids being manipulated by the purveyors of fake news.

Fake news serves two purposes. First, it may be used to distract from an emerging scandal or embarrassing setback. Second, it may be used to undermine the legitimacy of proven facts. To be successful, the purveyors of fake news need credible media outlets to report the fake news. The mere act of reporting fake news gives it certain amount of legitimacy. And the way that the fake news is reported on determines how much legitimacy is conferred by the reporting.

Although national media outlets have begun to evolve their approach, they still convey enough legitimacy to the fake news for the purveyors to celebrate and to implicitly encourage more fake news. The initial media reporting reflected the “newsworthiness” of improbable and often bizarre statements made by individuals in leadership positions (when we have expected those in such positions to avoid repeating or fostering fake news). If such a person were to state that President Reagan was really born in Argentina the media would report that person X alleged that President Reagan was born in Argentina followed by a panel of  ”experts” debating the veracity of that statement. That approach confers some legitimacy on the allegation. Why would a major media outlet repeat the claim and focus its “experts” on it for 15-30 minutes if it were patently absurd?

Recently, some media outlets have attempted a pivot; reporting the allegation and then saying that no evidence was offered in support, or saying that evidence contradicts the allegation. But they continue to lead the story with the allegation.  In doing so, they continue to confer undeserved legitimacy on the allegation about where Reagan was born. As long as the media confer legitimacy on fake news, the purveyors will continue to issue fake news.

Instead, the media should lead (headline) with the true facts and then report what person X alleged.  Studies of cognition find that the item mentioned first is what is most likely to be (1) seen as most important and (2) be remembered and repeated.

As to workers’ compensation, consider the following hypothetical examples of fake news.

* A press conference is held or a press release is issued by payers in Indiana saying that WC costs in Indiana are the highest in the US and rising 25% per year.

* Or a press conference by worker advocates in Illinois saying that injured workers in Illinois receive the lowest benefits in the country.

Following the current model of CNN or other mainstream media, one might be tempted to report “Indiana WC costs are the highest in the nation and getting worse each year, according to payers in Indiana.”  Or “Illinois injured workers get the lowest benefits in the US, say Illinois worker advocates.”  Both are true statements because each headline reports correctly that someone offered the fake news.  But the phrasing gives the appearance that what they said (the fake news) is legitimate. That phrasing by the media effectively legitimizes the fake news.

How to frame it accurately without legitimizing fake news?  Lead with the evidence, and then report what the advocacy groups have said. That legitimizes the evidence, not the fake news.

In the examples above, the following is a better approach:

Evidence shows that Indiana WC costs are among the lowest in the nation.  Surprisingly, payers claim (without supporting evidence) that Indiana has the highest WC costs in the US.

Or

Studies show that Illinois injured workers get among the highest benefits in the US.  However, worker advocates say that Illinois workers get among the lowest benefits in the US – but offer no evidence.

When the media leads a story with the fake news and then reports that no evidence was offered, they are effectively legitimizing the fake news and encouraging the fake news purveyors to release more fake news.  Using the approach illustrated above has the potential to discourage fake news or at least blunt its influence.

The downside for the media is that leading with the fake news (as absurd as it may be) may well produce better ratings and more clicks.  A conundrum – unless we remember that we are either part of the problem or part of the solution.  It’s a choice!

August 24 – Beware the Case-Shifting Monster

Two recent studies by the Workers Compensation Research Institute (WCRI) found consistent evidence that providers shift cases from commercial insurers to workers’ compensation (WC) payers. This occurs when providers understand that they would be paid materially more under workers’ compensation than by commercial insurers. In particular, the providers were more likely to call soft tissue injuries work-related and shift liability to the WC payer.[1]

Some comments received by the authors expressed skepticism that providers were sufficiently motivated by financial rewards or sufficiently sophisticated to engage in such practices.

On August 23, 2016, the Centers for Medicare & Medicaid Services (CMS) will publish a request for comments driven by a similar concern about providers who shift cases to higher reimbursement insurance plans. In particular, CMS has received information about “health care providers and provider-affiliated organizations steering people eligible for or receiving Medicare and/or Medicaid benefits to an individual market plan for the purpose of obtaining higher payment rates.”[2]

This phenomenon is consistent with the WCRI findings that some providers shift cases among different payers/systems in order to increase reimbursements.

Implications for Workers’ Compensation:

  1. CASE-SHIFTING RAISES COSTS TO EMPLOYERS.  Both because (1) workers’ compensation typically pays more than commercial insurers, and (2) because workers’ compensation also pays indemnity benefits to workers.
  2. CASE-SHIFTING TO WORKERS’ COMPENSATION PAYERS WILL INCREASE AS MORE PATIENTS ENROLL IN CAPITATED OR QUASI-CAPITATED COMMERCIAL INSURANCE PLANS. Under these plans, providers are paid less or not at all if a patient’s injury is not work-related, but receive fee for service if the injury is deemed work-related and paid by WC.
  3. WHETHER A WORKER IS COVERED BY A CAPITATED OR QUASI-CAPITATED PLAN BECOMES RELEVANT INFORMATION FOR ADJUDICATORS WHEN EVALUATING WORK-RELATEDNESS. Assessment of causation by the treating provider creates a potential conflict of interest because the decision has financial consequences for the treating provider.

Citations:
[1] Will The Affordable Care Act Shift Claims To Workers’ Compensation Payors?  Richard A. Victor, Olesya Fomenko, and Jonathan Gruber. September 2015. (Workers Compensation Research Institute) WC-15-26.  Do Higher Fee Schedules Increase the Number of Workers’ Compensation Cases? Olesya Fomenko and Jonathan Gruber.  April 2016. (Workers Compensation Research Institute) WC-16-21.

[2] Request for Information: Inappropriate Steering of Individuals Eligible for or Receiving Medicare and Medicaid Benefits to Individual Market Plans.  https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-20034.pdf

July 25 – Reimagining opt out: A thought experiment

Over the past several years, we have seen a national debate picking up about the desirability of legislation to permit employers to opt out of state workers’ compensation (WC) systems in favor of employer-designed, ERISA-authorized benefit plans. Proponents of opt out cite very large cost savings for employers and  lower friction costs, and argue that opt out plans stimulate faster return to work, faster reporting of injuries, better care for workers, no waiting periods for workers, and other benefits. Opponents argue that these plans may provide inadequate benefits, especially for more serious injuries, or that the plans strip workers of important protections against what they consider unfair design or administration of the plans, and provide inadequate remedies and appeals processes when disputes arise.

Is there a win-win (worker and employer) version of opt out?  If so, what might it look like?

Consider the following thought experiment:

For a given state (or employer), representatives of workers and employers are locked in the basement of the state governor’s residence and told they have to agree on a plan design – and cannot leave or see their families until a plan is agreed upon. Further, the meeting starts one week before Thanksgiving – hence, there is a looming deadline of value. Imagine the strong motivation this type of scenario could stir up to find areas of agreement (well, except for maybe in participants whose children are teenagers)!

They are also told that the plan design must reduce WC costs to employers by at least 20 percent on average, and half of the savings will go to raise benefits for injured workers.

What might the terms of the agreed opt out plan contain?

July 8, 2016 – The 80/20 rule

I am always impressed with how often the 80/20 rule of thumb turns out to be a good description for a phenomenon. Why am I surprised? A rule of thumb, by definition, is just an assumption to use when precise information is lacking, not the result of any law of physics or economics. The 80/20 rule was postulated by management consultant Joseph Juran in 1941. Juran was a leader in the development of quality control processes. His rule of thumb was that 80% of a problem is caused by 20% of the causes.  Juran dubbed his rule of thumb the “Pareto Principle,” naming it after Vilfredo Pareto – an Italian economist who, in 1896, found that approximately 80% of the land on Italy was owned by 20% of the people.

That said, a surprising number of phenomena are observed to fit this rule of thumb. Coincidence? Maybe. My point is that there are no natural laws that mandate the truth of the 80/20 rule of thumb. But we refer to the 80/20 rule so often that sometimes we treat it as a truism.

Why is this relevant to analysis of workers’ compensation (WC)? A recent post in one of LinkedIn’s interest groups invoked the 80/20 rule, “80% of the system is working appropriately, but 20% needs addressing.”

The post continues to argue that the 20% is a normal amount of dysfunction and it is futile to try to reduce the amount of dysfunction. “I submit that it is mandatory that we realize this 20% is a societal-social-human element which no part of the WC vendor arsenal can nor should be expected to fix. We need to stop addressing the 20% as it is has any outcome potential for normal cure, RTW and resolution.”

I heartily disagree because the evidence does not support such a fatalistic view. First, as I demonstrated in my post “Are WC Systems Broken?” WC systems typically deliver good outcomes to injured workers in far more than 80% of cases. Second, there is significant interstate variation in the costs and outcomes of these systems. Since some states do better than others, it is very likely that underperforming states can improve. Wouldn’t it be wiser to consider the 80/20 rule and focus more effort on the 20% of the WC system in need of improvement rather than ignoring it, in theory, as the percentage that can’t be fixed?

Good news! We have more control over the costs and outcomes than described in that post. We often have the information to guide improvements. We must continue to support states in which improvements can be made and work together to find and implement appropriate solutions as part of the political change process. What is your view?

June 8, 2016 – ARE WORKERS’ COMPENSATION SYSTEMS “BROKEN”?

As national conversations occur about the direction of workers’ compensation (WC) systems, I sometimes hear comments that assert or presume “WC systems are broken.” Rarely are public programs either all black or all white. The material below summarizes relevant information from a variety of published Workers Compensation Research Institute (WCRI) studies about how most workers fare in WC systems. How workers fare is critical to assessing the performance of WC systems, and the effectiveness of these systems affects the competitiveness of American business.

The data from WCRI illustrates that the majority of workers in the workers’ compensation system:

  • Return to work within a few weeks of the injury, typically to their pre-injury employers at the same jobs and pay as before the injury
  • Receive their first income benefit payment in 30 days or less from the time that the payer is notified of the claim
  • Report that they were satisfied with the overall medical care received, including the time to the first non-emergency visit with a provider and access to the desired medical services

While the systems may serve most workers reasonably well, the data also shows that there are injured workers with certain attributes that make them less likely to receive these good outcomes. A subsequent post will highlight the evidence on who these workers are. Discussions that focus on system changes that improve outcomes for these injured workers have high impact potential.

Return to work and recovery of earnings capacity

The overwhelming majority of injured workers return to work and do so to their pre-injury employer at the same or higher pay:

  • 75-85% of workers had less than 1 week of lost time[1]
  • 80-90% of workers had 4 weeks of lost time or less[2]
  • 85-95% of workers had 6 weeks or less of lost time[3]
  • Only 5-10% said they earned a lot less when they first returned to work (for those who returned to work)[4]
  • 87-95% said they returned to their pre-injury employer[5]
  • Half of those changing employers reported that the change was not due to the injury[6]

Timely payment

Most workers receive their first indemnity payment without dispute or substantial delay:[7]

  • 40-50% in 14 days or less from the time payer was notified of injury
  • 60-75% in 30 days or less

Satisfaction and access to medical care

By an overwhelming majority, most workers were satisfied with medical care received (workers with more than 7 days of lost time):

  • 75-85% reported somewhat or very satisfied[8]
  • 85-90% reported no problems or small problems getting desired care[9]
  • 80-90% reported being somewhat or very satisfied with the time to first nonemergency care[10]

Citations:

[1] Compscope™ Benchmarks, 15th edition: The Databook (April 2015), Table 2.12. Data for claims with 2013 injuries valued in 2014.

[2] Ibid.

[3] Ibid.

[4] Comparing Outcomes For Injured Workers In Michigan, (June 2009), Belton S. and Liu T., Workers Compensation Research Institute Table SA.24.

[5] Ibid., Table SA.20

[6] Ibid., Table SA.20

[7] Compscope™ Benchmarks, 15th edition: The Databook (April 2015), Table 2.1.

[8] Comparing Outcomes For Injured Workers In Michigan, (June 2009), Belton S. and Liu T., Workers Compensation Research Institute Table SA.52. Date for claims from various years, Table SA.52.

[9] Ibid., Table SA.40

[10] Ibid., Table, SA.34