Reprinted with permission from Risk & Insurance.

By Marcia DeWitt.

The commercial insurance marketplace is undergoing rapid consolidation into a relative handful of big businesses. Upheavals in other markets, the cost-trimming focus of management, and the emergence of investment and financial companies as players in the marketplace have all created a hotly competitive market and prompted a tightening of the belts. Throw in to that mix companies of all shapes and sizes looking to off-load liability to spruce themselves up for possible mergers and acquisitions, and you’ve got a reinsurance market rife with opportunities — and challenges.

Reinsurers, particularly those that are not fully integrated service providers, are looking for alternatives to the traditional ways of doing business to reduce current and future liability and stay competitive. For reinsurers in this competitive marketplace, squeezing costs and making a book of workers’ compensation business as profitable as possible is a tall order. That’s why some reinsurers are identifying new partners to help them reduce the liability tail.

Perhaps no other line of insurance comes with the long – and costly – tail of liability that workers’ compensation carries. When not properly managed, the liability associated with these claims can live on for decades. Using a workers’ compensation consultant to close open cases and actively manage claims to reduce short- and long-term liability is one way to cut that tail. But the commitment and investment in time and resources to do so 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. One insurer, Commercial Risk, has taken the bold step of moving beyond reliance on the original insurer or third-party administrator to manage claims. By teaming with GuilfordPare on a pilot program, Commercial Risk hopes to realize substantial short- and long-term benefits by making an up-front investment in reducing liability.

It would be easy to view consultants as simply an additional costs, competing with or duplicating work done by TPAs or lawyers. But 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 – closing open cases, reducing reserves, freeing up those dollars for investment as they go.

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 using 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 do so at expensive hourly rates, while doing nothing to examine or reduce medical costs and resulting reserves allocations. In fact, in many states the lawyers don’t get paid unless there are significant costs so the incentive is to drive up the costs in order to get paid.

Early Reinsurer Involvement.

We are working with Commercial Risk 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 ensures the 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 to examine. 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 work days. 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 be seemingly 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 appetite to aggressively manage individual cases to achieve administrative and medical savings and case closure where possible.

Partners in Cost Control

Over the past decade, we have worked as partners with companies to limit workers’ compensation costs through injury prevention, and aggressive return-to-work efforts. Obviously, that type of effort cannot fully be applied to this batch of inherited cases. In the pilot project with Commercial Risk, Guilford has 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 will shed 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 49-year-old man who sustained a work-related injury six years ago. This shipping clerk was awarded a 15 percent permanent partial disability with lifetime medical benefits in 1997.

The man has a new employer and is earning more now than at the time of the accident. The clerk suffered a lower leg injury that resulted in surgery to repair nerve damage and has experienced ongoing skin problems on the leg that suffered the injury. Documents supporting the award indicated that the worker still is being treated by a dermatologist and that a physician has indicated future surgery may be necessary. Outstanding medical reserves are set at $36,000 and indemnity at $3,900.

The established reserves indicate a clear expectation that the individual will incur further lost time and extensive medical treatment. The medical reserves, however, were set within one year of the period of acute medical care – and experience shows that medical care will not continue at such an intense level. It’s a clear indication that the case may be overreserved. An up-to-date evaluation of medical needs and clear determination of whether future surgery will be needed may well produce results leading to a reduction of reserves or even provide an opportunity for a resolution at a cost substantially below the current reserves.

There are a number of steps we would take in moving forward:

• Determine the individual’s employment status and availability of health coverage.
• Refer the individual back to the surgeon who performed the original procedure and determine the likelihood of a second procedure.
• Discuss legal strategies for entering into a full and final settlement – depending on the state law – including a buyout of the medicals. File a motion to reopen the case if necessary.
• Aggressively manage future medical care to anticipate needs and implement preventive measures.
• Review claim payment history and reserves on quarterly basis to ensure that only appropriate medical care is being provided.

A similar approach is applied to every case in the liability group. Some cases will certainly yield more savings than others. 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.

Commercial Risk has been supportive of this arrangement, while acknowledging there is much yet to learn and navigate in such a partnership. Paul Ballone, senior vice president at Commercial Risk, admits that working with a specialist has brought to light significant potential reductions, as GuilfordPare has worked to aggressively manage individual cases and chart a course for medical care with the ultimate goal of reducing their liability.

One potential hurdle already overcome is how to structure such a consulting arrangement to make it attractive to both the reinsurer and consultant. But it’s possible to structure a variety of incentive payment plans based on 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 to 1 benefit for the investment in such a program.

This pilot approach is a bold step in what is traditionally a very conservative business. Clearly, Ballone and Commercial Risk president and chief executive officer Graham Pewter 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 enhance the bottom line on a line of business with a long and costly liability trail.