Reinsurers handling workers' compensation can reduce liability and increase profitability by partnering with a consultant, writes Marcia DeWitt.
Change. It's not something that comes easily for most business people. Change brings risks, uncertainty and anxiety. But change can also be rewarding, as many reinsurers are finding as they take the bold step of trying alternative ways of doing business to reduce losses and increase profits. And in today's market of rapid consolidation and fierce competition, reinsurers, and especially those that are not fully integrated service providers, are looking to outside experts for viable options to reduce liability and produce the most profitable book of business possible.
Those reinsurers who assume risk on workers' compensation lines are even more in need of help - as with few other lines of insurance, workers' compensation can carry a tremendously long, and costly, tail of liability.
Without proper management, the liability associated with these claims can live on for decades.
The Guilford Group has been working with reinsurers that assume workers' compensation risk to close their open cases and actively manage claims to reduce short and long-term liability. While this approach is highly successful, reducing clients' costs up to 50%, it is not a conventional one.
Even though reinsurers may be seeking alternative ways of doing business, theirs can be a heavy door to open. Our strategy requires commitment and investment in time and resources, which runs counter to traditional practices in the reinsurance industry. Historically, many reinsurers are not deeply involved in the management of assumed cases and the associated liability - even though they have a significant stake in how that liability is managed.
Our philosophy differs from more traditional methods because it focuses on managing all factors affecting workers' compensation expenditures, including medical, legal, financial and lost-time issues. By doing so, The Guilford Group is able to realize savings by returning employees to work more quickly, by closing or containing open cases and in turn, reducing reserves and freeing those dollars for investment as they go.
Reinsurers are, understandably, driven by bottom line considerations. Before seriously considering a new approach, they had two questions for us: "How does it work? Can you prove it?"
Most reinsurers own books of workers' compensation business with hundreds of thousands of open cases that run virtually unmanaged, with the exception of the occasional sample audit. While medical and disability payments may be paid out efficiently, the original awards often haven't been reviewed for years. By making an up-front investment in reducing liability, and by teaming with a workers' compensation consultant, each and every claim can be reviewed and managed to resolution - realizing reinsurers substantial benefits. Guilford has a ten-year successful track record of controlling and reducing escalating financial liability situations - some existing liabilities as old as thirty years.
While we didn't start out partnering with reinsurers, our business with reinsurers is a natural extension of the work we've done to control escalating costs for large insured and self-insured employers nationwide. I've worked with senior management to implement a total workers' compensation system, which restores the employer's ability to effectively control the process. Unlike discounted fee-for-service or case management models, the Guilford Group focuses much energy at the beginning of the injury process to develop an integrated plan to provide appropriate medical care and return the injured employee to health and to work. For one client, a large hospital, our approach saved them approximately 80%. They were paying over a million dollars a year in costs with their book of open workers' comp cases. After implementing a new, more aggressive approach, their costs were reduced from $1 million a year to $200,000. We knew that the root of business with reinsurers would be the same - reduce the overtreatment, waste and fraud in the system by actively managing and closing open cases. Confident in our method, we focused our efforts on designing a relationship that would be attractive to both the reinsurer and the consultant. We know our approach works, but how do we overcome the hesitation to invest upfront dollars for an uncertain future return? We have structured a variety of incentive payment plans based on performance, such as percentages of achieved reduction in loss rates, reduction in reserves, or ultimate payouts. Early evidence indicates that a reinsurer could reap as much as a 15 -1 benefit for the investment in such a program.
However, once we began working with reinsurers, we discovered the fee arrangement was much less of an issue than the general confusion that surrounds TPAs, lawyers and consultants - and what role each plays in the system. It would be easy to view consultants as simply an additional cost, competing with or duplicating work done by a TPA or lawyers. However, the traditional payment methodology has been to pay the TPA and others on a transactional basis without incentivizing control of costs and outcomes. Once reinsurers widen their field of view to take in the bigger picture of paying their partners based on total costs and outcomes, they see instead immediate cost reductions.
But what of the argument of duplication? Of course, no one suggests that TPAs, lawyers and consultants all be paid to manage the same cases. What we have found is that they are not all "managing" these cases. TPA case management is usually limited to paying claims and recording the history of each claimant. But are TPAs implementing a comprehensive management system utilizing a complete medical network, injury management protocol, and return-to-work guidelines and analyzing the financial impact of these decisions? Is the "case manager" solely making decisions about whether second opinions are needed before deciding on a surgery over rehabilitation therapy? Are the administrators managing cases with the goal of reducing short and long term liability for the reinsurer? In many cases, the answer is no.
And while lawyers may be working to settle cases and reduce total long-term liability, they tend to create an adversarial environment rather than managing by resolution. They do so at expensive hourly rates, while doing nothing to examine or reduce medical costs and resulting reserve allocations. In fact, in many states the lawyers don't get paid unless there are significant costs - incentivizing attorneys to drive up the costs in order to get paid.
We are working with reinsurers to manage the direct and indirect costs associated with the liability the company has assumed. Together, a proactive workers' compensation/ disability consultant and reinsurer can identify problem areas and monitor provider performance in key areas, such as:
• Return-to-work. This is one of the most important results both employer and insurer can achieve because early return-to-work cuts to the heart of workers' compensation system waste, overtreatment, fraud, and undermanagement.
• Quality care outcomes. This is critical to keeping long-term medical costs down while it insures best care for the injured worker.
• Actual long-term costs. These will have an effect on the bottom line for reinsurers and the ultimate success or failure of any cost-control approach. Individual action plans can be mapped out for each case. We examine whether an individual is capable of returning to work in some capacity, whether past and current medical care and drug use is in keeping with the nature of the injury, and whether the opportunity exists to buy out medicals and/or reach a full and final settlement.
Beyond the medical costs of a case, what often causes the long tail of Workers' comp claims are the indemnity costs, including allocated funds for TPA and lawyers' fees, and lost workdays. For insurers and reinsurers, these hidden costs are the true waste in the workers' compensation system, because they are seldom identified and quantified in a consistent manner.
Implementing an aggressive, managed cost-control approach, with an eye toward quality medical care and returning the injured or ill employee to some form of productive work enables sizeable reductions in liability, as well as providing better outcomes for the worker.
Of course, by the time workers' compensation cases find their way to a reinsurer, the cases may be many years old and the management of the cases may be following a steady, and costly, pattern. While the TPA or claims manager may seem to be running a tight ship, paying out medical and disability awards in a timely fashion, little is being done to ensure that the specific medical needs and disability payments - which may have been set years ago - are still appropriate today. Reinsurers typically audit the claims management process, but few reinsurers have the infrastructure in place or the desire to aggressively manage individual cases to achieve administrative and medical savings and case closure where possible.
Over the past decade, the Guilford Group has worked as partners with companies to limit workers' compensation costs through injury prevention, early incident intervention and aggressive return to work efforts.
Obviously, that type of effort cannot fully be applied to this batch of inherited cases. In projects with reinsurers, we have adapted our approach and applied our experience to examine individual cases and identify ways to shorten the liability tail of each case. An examination of a fictional example sheds some light on how short-term payouts and long-term liability can be limited through this approach.
We start with an in-depth examination of an individual case file. In this instance, the case involves a 44- year old man who sustained a work-related injury six years ago. The employee was awarded a 25% permanent partial disability with lifetime medical benefits in 1995.
While this employee elected to take a lump sum settlement on indemnity, the medical treatment remains ongoing. The doctor who performed his surgery placed him on maintenance medication indefinitely. In addition, the man sees a chiropractor, who is a neighbor, at least once a week. The chiropractor has diagnosed him with severe and chronic epidural fibrosis. Currently, two doctors are submitting bills, the chiropractor and the man's primary care physician who prescribes his medication. Outstanding medical reserves are set at $18,000 and indemnity is fully paid out.
The expectation is that the man will have ongoing medical treatment. If he continues at this level of treatment, one can anticipate an expense of $3-4,000 per year for the next 30 years. Current reserves would only cover four years. However, the unending chiropractic treatment by his neighbor reflects that the underlying medical condition is not improving. Also, the file reflects that this man travels extensively overseas, yet does not state his treatment for those periods of time. All efforts should be made to have this individual re-evaluated and influence proper medical treatment.
There are a number of steps we would take in moving forward.
• Refer the individual to a pain management specialist for evaluation and medical recommendations.
• Confer with legal counsel regarding strategies for entering into a full and final settlement - depending on the state law - to buy out medicals. File a motion to reopen the case if necessary.
• Adjust medical reserves based on the most recent medical report if a settlement agreement cannot be reached.
• Aggressively manage future medical care to anticipate needs and implement preventive measures.
• Review claim payment history and reserves on a three-month basis to ensure that only appropriate medical care is being provided.
While this type of approach is applied to every case in the liability group, some cases will certainly yield more savings than others will. It requires a leap of faith or perhaps a savvy assessment for profitability on the part of the reinsurer to invest money in a consultant to reduce short and long-term costs, rather than simply invest money in the hopes of covering those same costs.
Granted, reinsurance is traditionally a conservative industry, facing the same obstacles of risk, uncertainty and anxiety when presented with change. But by implementing this pilot approach, reinsurers can make a positive change in their bottom line. Clearly, our clients have recognized that innovative approaches may enhance profitability in today's soft market.
It's an approach that more and more insurers may examine as a new way to compete. In this climate of mergers, acquisitions and consolidation where weaker players in the commercial insurance market are bought out, it will be critical for those reinsurers who handle workers' compensation to open their doors to new ways of increasing profitability on a line of business with a long and costly liability tail.
Marcia DeWitt is president and ceo of The Guilford Group.