We are all familiar with preferred provider organizations (PPOs), and many have utilized either subset networks (exclusive provider organizations) or other iterations to control escalating medical claim costs. While these approaches to provider networks had proven successful between 1970 and 2010, based on the impacts of the Affordable Care Act (ACA) they may no longer be sustainable in their current configuration. There are simple strategies that build on the current model for provider networks and that may help improve a health plan’s performance, and I will get into those shortly. But first let’s develop a common understanding of how PPOs contract. The marketability of a PPO is based on reducing the cost of claims and providing access to a large number of providers. Typically, PPOs use a variety of cost mitigation techniques including discounts, per diems, case or global rates and relative value schedules (RVS). For a PPO to negotiate its greatest savings, it must enroll a large number of members and be able to steer utilization. When negotiating for professional services, a PPO typically works with two models, though a third could be added when specialty care is involved. The first model is a discount off billed charges. This is a relatively easy agreement to secure because it doesn’t affect the provider’s practice unless highly utilized. The second model is based on a relative value schedule (RVS), which was implemented in the late 1950s when the California Foundation for Medical Care established a cost for services and applied factors by region. This model was known as the California Relative Value Schedule (CRVS). A similar approach was implemented by Medicare under the title of Regionally Based Relative Value Schedule (RBRVS), which has become a standard for contracting of professional services today. As a result, most professional contracts are now based on Medicare RBRVS plus 10% to 30% depending on the region, type of provider and enrollment population. In some cases, specialty providers may contract based on fixed fees, or a variation of other methods. Contracting with institutions is very different. In a traditional PPO, hospitals may contract through either a discount off what is billed, fixed per diems for room and board, ICU or CCU or a combination. The discount model is relatively straightforward. A contract that includes per diems will typically have a number of variations such as an “outlier.” The outlier or hospital deductible is a dollar threshold that, when exceeded, triggers re-pricing. In outliers' purest form, the claim reverts back to a discount off billed charges to first dollar. Some contracts may allow the re-pricing to begin with amounts above the outlier, but this is not the standard. In situations where treatment is standardized, such as childbirth and knee replacement surgery, a PPO may contract on a case rate basis, which establishes a fixed reimbursement for all care associated with the event. Some of the charges that may fall outside of the event would be physical therapy, durable medical equipment and medications. There will be other treatments, including transplantation, that may include case or global rates. While case and global rates may appear similar, they can vary greatly by network and provider organization. In some cases, the application of a case rate does not limit the claim liability to the contracted amount. As an example, we had an experience with a national network where the $1.8 million transplant charge was paid at $1.3 million even though the PPO had a $250,000 case rate. This method is not characteristic of case or global rate practices, but consultants and clients should be mindful of exposure as it could affect the plan’s claim reserves and medical excess coverage. The Affordable Care Act continues to affect claim costs in both fully insured and self-funded environments. Overall claim trends appear to be manageable, although some specialty care and acute care hospitals have changed billing practices as a result of unlimited lifetime benefits. An example is dialysis, where the total cost per patient has skyrocketed. In an audit of dialysis claim costs, we have identified two national provider groups as being abusive in the billing of services. Claims that prior to implementing ACA would average $28,000 to $40,000 per patient per month are now ranging between $60,000 and $105,000 per patient per month. These patients have not been of major concern to PPO contracting managers because of the low volume of claims. As a result, networks have settled for discounts of 15% to 35% off billed charges. Depending on the patient’s diagnosis, Medicare pricing could come into play, resulting in allowable charges closer to $10,000 per month, which may stabilize the group’s overall health plan spending. These and other tools will be discussed in future articles. In addition to contracting for cost control, most PPO agreements include claim filing requirements and auditing authority. In today’s electronic age, the use of clearing houses such as WebMD have significantly improved claim submission and processing times. As a result, many PPO contracts may require the professional provider to submit claims within 30 to 90 days of treatment, or sacrifice reimbursement. The same principle may apply to institutional contracts, though the timeline for submission may be 90 days. In some cases, a PPO contract may allow an institutional provider to submit claims for a premature birth or transplant patient as long as 150 to 180 days following discharge. Risk managers, consultants and claim payers need to be aware of exceptions to the claim submission rules as they could create a non-reimbursable event if the medical stop loss policy run-out period ends before the processing of the claim. As part of the due diligence process, it is in the client’s best interest to identify any barriers to audits of financial and medical appropriateness. A number of provider networks surrender the client’s audit authority to secure greater pricing concessions. While pricing concessions are important to the overall claim spending, it only takes one catastrophic claim to hurt a health plan’s performance. Many leaders in the PPO industry understand the need for transition, but it could take a few years to re-engineer existing provider contracts in the areas of auditing for appropriate pricing and care setting, cost to charge, captitation or other non-discounted approach to re-pricing, as well as a reduction in network size to efficiently manage the consumption. Now that we have a common understanding of PPO contracts and we agree that change will take time to implement, let’s briefly discuss simple strategies using the current PPO model that may help improve a health plan’s performance. A strong PPO can assist clients in controlling costs when the plan design encourages people to use in-network providers. Therefore, when offering a PPO, it is appropriate to include a minimum 20% differential benefit between in- and out-of-network providers. Additionally, providing for deductibles and out-of-pocket amounts will drive patients to network providers. To avoid emergency room frequent fliers, a health plan should have an appropriate co-payment as an inducement to have patients seek care in a clinical setting. In reviewing our block of business, which includes commercial employers, public agencies and healthcare clients, we have determined that over-utilization is not a significant concern. We have identified a number of areas where a properly crafted plan document coupled with specialty vendors may aid in the control of high-dollar claims. For example, implementing a dialysis management program can reduce average claim cost by 70%. Beware of vendors who require a percentage of savings, as their fees could double the net claim amount. Consider the addition of domestic medical tourism. While medical tourism is a hot topic, and many of these vendors redirect care outside of the U.S., a number of employers are finding local solutions through direct contracting of specialty care and adding these under domestic tourism provisions. An employer might include the addition of cost-plus or in-network allowable amounts and the maximum allowable reimbursements for out-of-network claims. One final concept is to utilize an exclusive provider organization-type plan design packaged with a PPO network. Essentially, the health plan would only offer in-network benefits unless care is on an emergency based outside the network's service area. This is the first in a series addressing all forms of provider networks. Future articles will introduce the reader to establishing local networks, direct provider contracting and capitation of medical groups, which generates provider engagement in health outcomes and financial management. Recent discussions with leaders of a number of national PPO networks found that many are currently attempting to apply these principles with varying success.

These remarks were prepared for testimony at a recent Assembly hearing in Sacramento on California’s consideration of a workers' comp drug formulary. Thank you for the opportunity to be part of this hearing on the potential development of a prescription drug formulary in California. My name is Mark Pew, senior vice president of PRIUM, a nationwide medication management company based in Duluth, GA, that has conducted business in California for more than 15 years and been a utilization review organization since 2009. I have followed the development of workers’ compensation drug formularies in other states since 2010 and, through observation and dialogue and corresponding deployment of services, have come to identify success criteria. I spoke on the subject at the National Workers’ Compensation and Disability Conference in November 2012 and at that time opined that California should consider a drug formulary. Since 2013, I have had several conversations with various California stakeholders to further that discussion, so I’m very pleased to see progress being made towardsthat goal. Because I value the time of this committee hearing, I will be brief in what I consider to be important foundational tenets when constructing a drug formulary. I will forego any statistics or rationale for a drug formulary as that has already been well articulated in the bill’s analysis.

1. A drug formulary should be about better patient clinical outcomes, not cost. My opinion is that if you do what’s right for the patient, all other stakeholders win by side effect. While much of the discussion leading up to this hearing has been about cost savings, it would be shortsighted to think that should be the criteria for success. In my opinion, true success from a drug formulary would be a decrease in disability, a decrease in addiction and dependence, an increase in return-to-work and an increase in the use of less dangerous treatment options. If the focus is on better patient clinical outcomes, there should be no stakeholder in California workers’ compensation that can argue that this isn’t a good thing.
2. A drug formulary should rely on evidence-based medicine. Robust clinical studies that indicate what drugs should be used when, and what non-pharmacological treatment options should be tried in advance, should dictate which drugs require additional evaluation before prescribing. There are some very dangerous drugs that are generic and inexpensive, so the trigger should be what produces the best clinical outcomes in proper sequence. Step therapy, the idea that you start with the most effective, least dangerous option, is built into evidence-based medicine and should be the template for prescribers. The optimal approach to evidence-based medicine is the adoption of third-party, peer-reviewed standards that are regularly updated to reflect contemporary medical practice standards.
3. A drug formulary should not handle new and legacy claims in the same manner. By “legacy claims,” I mean those claims that exist before the formulary rules come into effect. A patient taking his first opioid is different than a patient who has taken opioids for many years. While new claims require primarily process education for the stakeholders, there should be a remediation period for “legacy” claims to allow time for appropriate weaning and development of alternative treatment methods. Based on my observations, there should be a one- to two-year period between the rollout of a drug formulary for new claims vs. “legacy” claims. Both implementation dates should be unchangeably enforced to ensure action is taken. To be clear, any formulary that applies to new claims should also apply to legacy claims, albeit at a later date. Not applying the formulary to legacy claims would result in two different standards of care for injured workers in California depending on when the worker was injured. This is clinically inconsistent with the application of evidence-based medicine.
4. A drug formulary will change prescribing behavior. The extra steps required for a drug that is not allowed by the formulary requires the prescriber to think through the best options as opposed to just maintaining past practice patterns (however they were developed). For example, if carisoprodol was excluded from the formulary, the prescriber either needs to validate the medical necessity through a preponderance of evidence or choose a muscle relaxant that is included (which likely means it has less dangerous side effects, has proven to be more effective for certain conditions and does not have dangerous drug-to-drug interactions). Given experience in other states, the prescriber will often choose the less dangerous drug included in the formulary, which should result in better clinical outcomes for the patient.
5. A drug formulary should be enforced at the point-of-sale. Allowing drugs to be given to the patient and THEN deciding whether they are clinically appropriate allows the start of a potentially dangerous path to polypharmacy regimens that create more harm than good. A workers’ compensation drug formulary, just like those we see in group health plans, should be implemented at pharmacies within their point-of-sale system. The information provided to pharmacists will help them better communicate with the patient and prescriber as necessary for an option that is allowed by the drug formulary. One advantage for California is that pharmacy benefit managers (PBMs) and pharmacy chains already have experience with implementing a workers’ compensation formulary in other states. If California is modeled after that same process, there should be less up-front time required to develop processes for California.
6. A drug formulary should be the result of consensus among all stakeholders. While reaching consensus takes longer, providing a seat at the table for every workers’ compensation stakeholder in a very transparent process will ensure a smoother implementation. It’s extremely important to the ultimate success of a drug formulary that everyone be part of the deliberation process. And if everyone is involved in developing the drug formulary, ultimate implementation will be more easily achieved. A point of clarification: while the process surrounding the drug formulary should be based on stakeholder consensus, the medical treatment guidelines upon which the formulary is built should NOT be based on consensus, but rather on the best contemporary medical evidence available. California stakeholders should focus negotiations on the rules governing the formulary, not on the medical principles that underpin it.
7. A drug formulary should educate all stakeholders clearly and consistently. Clear (and free) education needs to be provided to all prescribers, all attorneys, all payers, all employers and preferably all injured workers as to how the drug formulary was constructed, how it will be implemented and how best to comply. Preferably, this would be led by the Division of Workers’ Compensation. This education should not stop in the lead-up to implementation but should continue in a feedback loop during and after to ensure that issues are identified and resolved quickly.
8. A drug formulary should be simplified for ease of implementation. States with workers’ compensation drug formularies have made the choice of drugs relatively binary. For instance, a drug may be classified as one that is recommended for first line therapy ("Y" drug) or a drug that is not recommended as first line therapy ("N" drug) and should not be used unless it has been reviewed and approved by a second clinical opinion. The definition of what is and is not included in the formulary should not be narrative or interpretive, but something easy to read and -- more importantly -- to program into pharmacy benefit management (PBM), utilization review (UR), independent medical review (IMR) and bill review systems.
9. Drug formulary rules should include a well-defined dispute resolution process and expedited appeal process. The goal of a closed formulary is to ensure that there are safeguards in place to prevent unnecessary medications from being dispensed to injured workers. The exclusion of a drug from the formulary (for example, an "N" drug) should not mean it cannot be utilized, only that the prescriber should be required to validate its medical necessity vs. drugs that are included. California obviously already has that infrastructure, which is why I felt in 2012 that California was a candidate for a workers’ compensation drug formulary. The onus should be on the prescriber to provide necessary evidence as to why this particular drug is required for this patient at this time. If that can be established, then that drug should be allowed to be given to the patient.

If the above steps are taken and appropriate time is given for their completion, a properly constructed and implemented drug formulary in California should result in cost savings to the system. The primary savings will emerge over time as fewer and fewer of California’s injured workers are lost to dependence, addiction and overdose. The ability to settle and close claims more quickly will be a positive result for both employers and employees. A workers’ Compensation drug formulary could have a lasting and significant change in how prescription drugs are prescribed in California. I truly believe that by making everyone in the system think before prescribing, the injured workers will receive better care, and stress on the workers’ compensation system in California will be reduced. I would enjoy being a continued resource to this committee as deliberations evolve. Thank you again for the opportunity to be part of this hearing.

Former President George W. Bush infamously said in 2005, “See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda.” Opt-out supporters and proponents repeat over and over again that opt-out is better for employees. They forgot to tell that to Rachel Jenkins. Jenkins, a 32-year-old single mother of four, was injured while working a double shift at a disabled care center in northwest Oklahoma City owned by ResCare, the nation’s largest privately owned home healthcare agency. Jenkins was injured on March 31 attempting to break up an assault of her disabled client by another patient. The incident was witnessed by Jenkins' supervisor. After her shift, Jenkins went to the emergency room, where she was administered medication and sent home to rest. Her employer sent her to a company doctor the next day. He provided medication and ordered physical therapy. But ResCare's opt-out contract with its employees requires claimants to call a designated toll free number to report accidents within 24 hours, and Jenkins did not call until the 27th hour. Her claim was denied. Three hours late on a phone call, and Jenkins is on her own. Bob Burke, her attorney, just filed a case in the District Court of Southern Oklahoma seeking declaratory judgment, saying the state insurance commissioner has obviated his responsibilities by approving ResCare's opt-out plan and others that don't give workers at least a one-year statute of limitations to report their injury, as required by Oklahoma law. “Every opt-out plan I have seen so far has a 24-hour requirement that bars benefits if notice is not given,” Burke wrote in an op-ed published Monday in the Journal-Record newspaper. “Even though state law requires opt-out plans to have the same one-year statute of limitations as regular workers’ comp, the insurance commissioner continues to approve the plans, and the legislature, in House Bill 2205, is trying to remove the plans from public inspection under the Open Records Act.” This case demonstrates the true intent of at least THIS opt-out participant: to stick it to the worker. The employer cannot claim lack of notice - the injury was witnessed by her supervisor, and Jenkins was sent by the company to its doctor! Burke says the insurance commissioner approves the 24-hour limitation because it is a notice requirement only. Apparently that translation got lost in practice, because ResCare and its administrators clearly are using the provision as a statute of limitations. I'm sure there's another side to the story. Opt-out proponents will have to spin that other side to preserve credibility. In the meantime, the wheel in the opt-out PR repetition machine has a broken cog. Opt-out had me semi-convinced that it was a valid alternative to traditional workers' compensation with its promises of less bureaucracy, better injured worker care, greater efficiency, competition and improved outcomes. Proponents kept repeating the benefits over and over and over again... The propaganda almost got catapulted, and I nearly drank the Kool-Aid. Not now. It smells poisoned.

It was the best of claims; it was the worst of claims… the age of wisdom, the age of foolishness… belief vs. incredulity… hope vs. despair… etc., etc. The iconic opening paragraph from Charles Dickens' A Tale of Two Cities makes one realize such conflicts do exist in the same space and time, albeit through different personal perspectives. Such is the reality in workers’ comp claims, where the single biggest factor in outcome is often the claimant's attitude. A client claim-audit project offers a jarring comparison between two claim files from different parts of the country. The claims exemplify how little control we actually have over an employee’s attitude in the disability management process, and show how vastly different the human tolls can be. Both claims were in excess of 10 years old. Both involved exaggerated and evolving symptoms with eventual narcotic prescriptions for “pain management.” At approximately the same time, however, each took a different path. One claimant found her own reasons and will-power to end the years she spent on prescribed pain-killers. She entered a drug treatment process on her own, eventually stopped her prescriptions and found a full-time job. The other claimant dove deeper into narcotic addiction and exhibited classic drug seeking behavior – such as “losing” his prescriptions and requiring early refills. He tested positive for other illegal drugs once his rightfully suspicious physician initiated a monitoring program. There was no appreciably different set of claim management tools or tactics used for the claims – the stark difference in outcome came down to the want of the individual… an almost impossible aspect for the day-to-day claim practitioner or human-resources manager to reach or control. And, at the time of my audit, the claims were equally easy to close. The woman free of prescriptions and carrying a full-time job was simply no longer a claimant. She was probably very happy to have her case closed and the dark chapter of her life over. We decided on an administrative closure of the claim. On the other hand, the gentleman was barred from his erstwhile treating physician and pain management clinic for abusing meds and refusing a drug treatment program. A host of independent medical opinions indicated the man did not require further meds for the old injury. His everyday behavior was highly unfocused and erratic, apparently causing no attorney to take his WC case. He lived out of a tent in a relative’s backyard. The man’s claim was also an easy administrative closure because of lack of any foreseeable prosecution. I have to admit his situation nicked at my coat of cynicism, the one layered thick from years in this profession. I hated the plain fact that he was a doomed victim of a WC system enabling his addictive conditions. To my good readers, I ask: Which closure would you rather preside over? Quick-Tip: Know When to Hold ‘Em But Don’t Wait to Fold ‘Em Concept: When reasonable medical treatment has no impact, quickly consider other options. A claimant with misguided intentions or extraneous problems and no desire to be “cured” might just be his own worst enemy and using the WC claim as a primary enabler. Suggestions: – Find appropriate ways to incorporate employee assistance programs (EAPs) or other specialty counseling services to support employees or WC claimants who have debilitating outlooks or possible addiction issues. – Maintain a “no-fill” position on narcotic prescriptions. This will give you and your defense team at least an opportunity to block dangerous drugs before they are automatically initiated. – Consider any “chronic pain” diagnosis to indicate maximum medical improvement (MMI). “Chronic” as a term arguably fits MMI. Try to settle the case under that premise. Fight the diagnosis and treatment plan, as a means to pressure settlement. If the plaintiff's side argues against an MMI determination, then demand a treatment outlook and timeline that results in stopping pain medication. – For claims with long-term narcotic situations, seek peer reviews to ascertain if the regimes are excessive and if a recommendation for detoxification is appropriate. Specifically set up medical evaluations to confirm addiction and substance abuse tendencies. – Never presume a claimant with the wrong attitude and bleak outlook will be cured by any type of treatment. Know when you are wasting time and money. You must sense and act on this early. Don’t rely on adjusters to raise questions, as their inclination is to keep treating as long as medical opinion approves. You must take the role of disruptor. Bottom line" It is distressing that workers’ comp enables addiction. Closing such cases is not always pretty. Learn from the disasters and take more responsibility in the future. Recognize that claimant attitude and outlook are of primary importance, for good or for bad.

Please consider this post to be a sort of noodlin' around the ways insurers could apply mobility solutions. I do have a bias: I think that until insurers, and insurance agencies/brokers, can operate entirely using apps on smart devices they can't really call themselves "mobile-next." To find potential insurance mobility solutions, focus on the customer (you know, the rascal who pays the premiums) and enable him to:

• Access the insurance company/insurance agency web site using a smart device. This means that the insurance firm (carrier or agency) has to have the ability to push requested information to the customer's smart device in a manner that fits the smart device. Fit for purpose, as it were.
• Request and consume service on a smart device. This includes getting served in the manner the customer wants, whether text, voice or video and preferably in real time. This means the insurance firm must have the business operational service systems in the "state" necessary to provide effective and efficient service to the customer in the desired manner.
• Self-serve by using a smart device. This would include accessing and downloading documents stored in the insurance firm or perhaps in a private cloud set up for the customer (whether COI, policy forms, claim forms or loan forms).
• Begin and preferably finish a policy application entirely on the smart device using e-signatures (which were approved way back during President Clinton's administration). I realize that quotes/rates and underwriting decisions could very well mean that it is not a "sign on and get it done in one shot" kind of situation. However, whatever stops and starts happen, the policy application process should stay in the mobile realm and never require the customer, anyone in the agency or anyone in the carrier to have to re-enter information.
• File the first notice of a loss and track the entire journey of the claim adjudication from beginning to end, including getting an alert when the claim check is deposited in the customer's requested banking account.
• Use the smart device to pay a premium by taking a picture of a check rather than mailing in a check or even using a payment service to pay the premium amount.
• Collaborate with claim managers, customer service representatives or others in the insurance firm (carrier or agency) using only the smart device.

Next post, I'll discuss potential mobility solutions for producers. Being wildly creative about blog titles, I'll call the post "How to Find Mobility Solutions (Part 2)." But sticking with the insurance customer, what mobility applications would you add to the list above?

ACOEM/AAOHN recently published some guidance for employers on how to deal with the rapidly expanding legalization of marijuana in individual states across the U.S. that I believe are very important and that I wanted to share. Because "presence" -- having marijuana-related chemicals in the worker's body -- does not necessarily mean impairment, and presence lasts a lot longer than impairment, there is a conundrum on how to deal with workplace injuries and on what safety policies to enact to prevent injuries. Many legal issues arise because individual states have policies around medical and recreational use (related to age, amount, location, etc.) that are inconsistent with cannabis’ illegal status at the federal level. So we all need to be thinking about the issues. To quote myself from an article on Lexis-Nexis: “I personally think this should be required reading by general counsel and human resources at every employer, especially in states where legalization has already occurred but even for those where it isn’t, because it’s coming. Clear and proactive policies are absolutely required, and those can only be created by knowing every aspect of federal laws and their intersection with individual state laws (and not just your state, but surrounding states). To quote Facebook, ‘It’s complicated.’”

It’s the beginning of May. That means over the next month a huge group of college students hit graduation day and begin a new journey in their lives. I have many friends who are graduating, and I can already start to sense some panic about what lies ahead for them after graduation. For many of my friends who do not have a clue what field they want to pursue, I often suggest careers in insurance. Aside from working in the industry and selfishly wanting to recruit some friends to join me in the field, I give my friends four other big reasons why they should join the insurance industry: 1. Opportunities Simply said, the talent in the insurance industry is graying. It is estimated that nearly 60% of the insurance industry’s current employees are older than the age of 45 and that by the year 2020 there will be more than 400,000 job opportunities. Those are some substantial numbers, and these numbers are on many insurance employers’ mind. The industry is hungry for young, driven talent to fill the pipelines before current staff disappears. As a young professional, I see the endless opportunities in terms of future leadership roles in the industry. I suggest getting in early and soaking up as much knowledge as you can from many of these soon retiring professionals. 2. Job Security The insurance industry provides a considerable amount of job security, in my eyes. I don’t see insurance going away any time soon. I would argue quite the opposite. No doubt the industry will have to evolve as risk changes (e.g. self-driving cars), but risk assessors and risk advisers are here to stay. 3. Job Variety and Flexibility Insurance is everywhere. You won’t be limited to a particular list of major cities when looking for a career in insurance, and the industry offers an array of professions to pursue, from actuaries analyzing the numbers to the creatives who are fighting today's marketing wars. (Side note: I’m a big fan of Flo from Progressive and Mayhem from Allstate). Whatever your passion is, you can pursue it in the insurance field. Many sales and underwriting professionals in the industry pursue their interest specializing in advising for not-for-profit organizations, tech companies, medical professionals, breweries, etc. Being able to relate and understand how a business works is the essential feature of what makes an insurance professional great. If you aren’t up for an intellectual challenge, I highly advise not pursuing a career in insurance. There is a vast amount of information to learn just to get started, and laws and regulations are changing every day. I learn something every day. But if learning motivates you, come join the fun. 4. Altruism I don’t believe there is anything more satisfying in the industry than the stories I hear about how insurance saved people’s livelihoods. Some accidents are just unpredictable, and whenever insurance companies step up and provide the financial support to rebuild someone’s home or business it really reenergizes my dedication to the industry. The insurance companies that have stuck around for many years are those that are out to make a difference in their customer’s lives whenever those customers call needing help.

Outside accountants – including auditors, those providing other attestation and compilation services, tax preparers and even mere advisers – are increasingly facing allegations that they served their clients in a fiduciary capacity. These are not simply idle observations: In general, they are made by clients and third parties seeking to obtain monetary damages from the accountants as a result of, inter alia, errors in financial reporting, tax positions that are subsequently rejected by the IRS or other authorities and losses incurred by clients or third parties following advice presented by the accountants. The reason adverse parties seek to impute fiduciary obligations to the accountants is that this offers them the opportunity to seek larger settlements or court-imposed awards, if the defending accountants are found liable. Fiduciary duties pose major risk for accountants and for those writing insurance coverage for them. Traditionally, accountants were not considered to be fiduciaries, and in some instances still cannot be held to be such, either because of the nature of the services being rendered or the character of the client organization. However, over time the threshold for finding (or, at least, being permitted to argue in litigation) that the accountants were de facto fiduciaries has been lowered by court rulings. The implications for the accountants are serious – and they warrant taking steps to mitigate, by use of appropriate engagement letter language, and by exercising greater caution in taking on clients and in performing services for them. Those underwriting accountants’ malpractice insurance should be equally concerned with how well, if at all, their insureds have dealt with this risk factor. What makes a party a fiduciary? Fiduciary status is not well defined under the law, and this lack of precision has led, over time, to a creeping extension that now sometimes even reaches to outside accountants. A fiduciary relationship gives rise to fiduciary duties, the primary one of which is that of loyalty. As expressed more expansively in a number of key court decisions, “[a] fiduciary relationship carries with it the duty of candor, rectitude, care, loyalty and good faith.”[1] Fiduciaries are required to hold their beneficiaries’ (i.e., clients) interests uppermost. Generally, fiduciary relationships are characterized as involving two parties, with the one (the fiduciary) acting on behalf of another (the beneficiary). The acting party exerts control over a critical resource that belongs to the other party – for example, the fiduciary invests funds belonging to the beneficiary, or controls the official filings (e.g., financial reports or tax returns) that are the obligation of the other party. The other party must have a relevant vulnerability (lack of investing expertise, technical knowledge, etc.) that places the beneficiary in what amounts to a subservient position vis-à-vis the fiduciary regarding the object of that relationship. A fiduciary duty arises by either of two means: by operation of law or by application of legal factors. The first of these connotes a formal relationship between the parties, whereas the latter arises from informal relationships. Furthermore, in matters that have been elevated to the domain of litigation, there have been various ad hoc determinations that fiduciary obligations have attached, beyond those set forth in established law. Examples of formal relationships to which fiduciary obligations will be ascribed include trusts, guardianships, agency arrangements, partnerships and joint ventures, corporations (regarding the duties of directors and officers) and counseling relationships (this being the most controversial). Counseling relationships may be those of attorneys and accountants and their respective clients, medical doctors and psychiatrists and their respective patients and even clergy and their parishioners. More generally, counseling relationships may include any others where the giving of advice in confidential settings is a central defining condition. Informal relationships may also be interpreted as requiring the duty of loyalty. To rise to this status, there must be “trust” or “confidence” reposed by one person (or entity) in another, and there must be a resulting “domination,” “superiority” or “undue influence” of or over the other party (the putative beneficiary of the fiduciary relationship). It is important to stress that neither trust nor vulnerability alone suffice – it is widely held that both must be present to successfully assert that such an informal relationship creates fiduciary obligations. More generally, if any person solicits another to trust her in matters in which she represents herself to be expert as well as trustworthy, and the other party is not expert and accepts the offer and reposes complete trust in that person, a fiduciary relation is likely established. However, sharing expertise with another party is not, per se, enough: It is clear that not every expert is or can be held to be a fiduciary.[2]  There is a wide range of informal relationships, not all of which will connote fiduciary obligations. As the Restatement of Trusts notes, “Although the relationship between two persons is not a fiduciary relationship, it may nevertheless be a confidential relationship. Conversely, a fiduciary relationship may exist even though the parties do not enjoy a confidential relationship.” Thus, this is a grey area in the law, and this very ambiguity is what creates risk for the unwary. For example, a financial reporting expert may advise a client on the various ways a particular transaction or event might be reported, or even opine that only a single approach would meet professional standards, but the ultimate decision remains that of the client, who may reject such advice or seek other opinions. The accountant does not dictate how the transaction or event has to be reported in the client’s financial report (although, if serving as independent auditor, the accountant may elect to render a less-than-unqualified opinion if the client elects an improper method of accounting having material impact on those financial statements). As already noted, determinations establishing fiduciary obligations have been sometimes made on an ad hoc basis by the courts. Of greatest relevance to the present discussion, this tendency has increasingly brought accountants under the fiduciary duty umbrella, sometimes to the accountants’ great surprise and dismay. Most commonly, in the author’s experience as a practicing accountant, this has involved tax preparers who may rather casually offer investing advice to their clients. For example, upon noting a particular client’s high tax bracket, some tax preparers will make offhand comments about the virtues of, say, municipal bonds or real estate as investment options, or wax enthusiastic about a specific bond issue or mutual fund, which is more of a concern. More recently, this logic – applying fiduciary obligations to accountants offering investment counseling – has been extended to those offering a range of non-tax services, even if tradition and professional standards clearly prohibit the accountants performing those services from also serving in a fiduciary role. What are the duties of a fiduciary? Being defined as a fiduciary (whether or not a formal fiduciary relationship has been documented) brings with it a range of obligations. As noted, the most significant of these is the duty of loyalty. The interest of the principal (the beneficiary, or the client) must come first – even to the exclusion of the interests of the fiduciary. For example, if our hypothetical tax preparer suggests a certain class of investment to his client, it must be believed that this is an optimal investment strategy for the client, unrelated to the accountant’s own investment interests. Touting an investment in the hopes that, e.g., an increased demand will lift prices and thus benefit the accountant’s own holding of the same asset would clearly be a breach of this obligation. In addition to making (or seeking to make) a hidden profit from advice given to the beneficiary, competing against the beneficiary (e.g., putting in a bid for property sought by the beneficiary, or “front running” an investment in securities), or simultaneously acting on behalf of another party whose interests are adverse to the beneficiary, would constitute breaches of the loyalty obligation. Because accountants typically have a large number of clients, there is a real risk that this prohibition could inadvertently be contravened. A fiduciary also has a duty to disclose all relevant facts to its beneficiary. Again harking to the tax preparer/adviser situation, if the accountant is positioned to benefit if the client follows this investment advice (e.g., will obtain a referral fee or commission), this must be clearly communicated to the putative beneficiary. If an accountant is placed in the role of a fiduciary, the duties to exercise reasonable care and to maintain client confidences, found in the professional technical and ethical standards, must still be observed. Additionally, the fiduciary has a duty to maintain client confidences, which might carelessly be disobeyed even in the course of casual conversations with the accountants’ other clients. Why is being held to be a fiduciary a risk for accountants? Being held accountable as a fiduciary has one very crucial implication. Whereas assertions of failure to exercise due care (the normal standard to which outside accountants are held) lie within the domain of tort law, assertions of failure to meet the requirements of loyalty are found within fiduciary obligations. In the instance of allegations of breach of fiduciary duty, the burden of proof shifts to the respondent accountant, who must show, inter alia, that all material facts had been provided to the beneficiary and that all other fiduciary obligations have been satisfied. In the event of a finding of failure to exercise ordinary due care, as defined in the professional standards with which the accountant is obligated to comply, damages are limited, typically, to actual damages suffered by the plaintiff, assuming that the tripartite required demonstrations of liability, reliance and damages have been achieved by the complaining party. In contrast, a failure to meet fiduciary obligations may result in punitive damages as well as the awarding of plaintiff’s legal fees, and thus presents a significantly greater financial risk for the accountants and for their insurers. The burden of proof, coupled with the potentially greater monetary damages, makes defending against well-founded accusations of having been a fiduciary and having breached associated duties to the beneficiary a much more serious concern. The evolution toward fiduciary obligations for accountants has accelerated over the past few decades. During the 1970s and 1980s, claims against CPAs were commonly based on fraudulent misrepresentation and negligence (i.e., professional malpractice), as well as on contractual breaches (in the case of suits by clients against their accountants, who had purportedly failed to perform the assignment for which they had contracted). The 1990s witnessed an increase in claims made against CPAs that argued that they had served as financial advisers. This led to allegations of breach of fiduciary duty and a range of other assertions, such as functioning as an unlicensed investment adviser. In the early 2000s, courts readdressed fiduciary duty claims, as they might pertain to CPA liability matters. In a seminal case, Miller v. Harris, decided in 2013,[3] a state appellate court reversed and remanded the trial court’s dismissal of a complainant’s breach of fiduciary duty claim against the respondent accountants. It found that contracts (such as that between the accountant and his client) between litigating parties do not control a claim for breach of fiduciary duty, because the latter are not based on contract law. This distinction is a vital one, establishing an important principle. Further, the court stated that a claim for breach of fiduciary duty must allege the existence of a fiduciary relationship and a breach of duties imposed as matter of law as a result of that relationship. The net effect of the Miller v. Harris appellate decision was to set a new, lower bar for fiduciary status by operation of law (i.e., for an informal relationship). Given this decision and others, there is an enhanced likelihood that future actions against accountants will attempt to assert as fiduciary those relationships that, in the past, were not deemed to be such. Accountants, and their insurers, thus would be wise to give increased attention to this risk, and take steps to mitigate it, where possible. What steps should be taken in actual practice to guard against this risk? Although the record has been mixed, there has been some expansion of fiduciary duties over past decades to include accountants. Traditionally, of course, accountants generally had not been deemed fiduciaries. Indeed, their obligations to third parties and requirement for independence historically confirmed non-fiduciary status on accountants, inasmuch as duties to third parties could not coexist with loyalty to the client entity’s management. Whereas at one time any attempt to attribute fiduciary status to accountants, for the purpose of alleging breach of fiduciary duty by them, would have been almost automatically dispensed with, today accountant defendants are very unlikely to obtain summary dismissal of breach of fiduciary duty claims. Instead, courts are holding this matter to be a fact issue to be resolved at trial. For the accountants, one important implication is that, even if the defense ultimately prevails, they will be forced to incur costs to defend against such claims. In litigation, even when you win, you often lose. The existence of a fiduciary relationship is now defined to be a question of fact. If the facts support the assertion that an accountant acted as a fiduciary for the client, that accountant will be exposed to liability for breach of fiduciary duty, which may result in economic harm greater than in the situation of a garden-variety failure to exercise due care in a professional negligence suit, including the possibility of punitive damages and attorney’s fees being levied. The burden of proof is essentially placed on the defending party once the existence of a fiduciary relationship has been established by the complainant. Summary dismissals of fiduciary obligation claims against accountants are now unlikely to be obtained, meaning costs of defense must be borne even when ultimate exoneration is achieved. Engagement letter limitation of damages language will often not be effective in precluding punitive damages, so this risk element cannot easily be protected against, if a fiduciary relationship can be established by the complaining party. Contractual language defining the assignment as not implying fiduciary duties may not be sufficient to defend the suit. Nevertheless, having a well-crafted engagement agreement with clients remains an important defensive strategy – and such letters are mandated under professional standards for most ordinary accounting and auditing services. In the author’s opinion, the role of “adviser” should be avoided or severely constrained, if later allegations of breach of a fiduciary relationship-based obligation are to be averted.[4] If advice is provided in circumstances in which the client can later plausibly claim to have been in a subservient role – thus, where the accountant was effectively making decisions for the client – there will be risk. Obtaining “informed consent” for recommendations made to the client would be one procedure providing some reduction in such risk. All recommendations should be couched in language that requires the client to consider and then independently conclude upon the matter, by either accepting and acting upon it, or rejecting it. Finally, for both insureds and insurers, it would be wise to consult with a qualified attorney regarding the language used or proposed for accountants’ engagement letters for the various services being offered. Only in this way will risks, including that of being held accountable for breach of fiduciary duties, be most effectively addressed and, to the extent possible under evolving legal standards, contained.

The human brain thrives on what work gives us: activity, routine, social contact and identity. The act of working gives employees far more than just the benefit of earned income. The World Health Organization names it as a health factor that, when present, contributes to health and, when absent, can increase the chances of ill health. This is particularly relevant in the discussion about mental health. What is it about work that contributes to mental health, and why should employers and insurers consider the health benefits of work? Activity When human beings are engaged in doing things, areas of the brain related to attentiveness are stimulated. When someone is off work, it is harder to find regular daily activity—it is not as easy to find the many everyday behaviors we do when we are working. Work provides a structure that tells us what to do. We then engage in hundreds of behaviors every day. Being in the act of doing these behaviors keeps us healthy. When we are not working, it can be hard to answer the question: “So what did you do today?” This absence of activity can have a profound impact on a person’s sense of accomplishment and purpose, which has an impact on mental health. Routine Work forces us into a rhythm and regular behavioral patterns that are actually good for us, even if sometimes we may resent the structure. Our bodies and brains enjoy the routine and benefit from the repeated predictable patterns of behavior. If we don’t have something to get out of bed for, it can be difficult to get out of bed. When someone is off work for any reason, the lack of daily direction can have a significant impact on well-being. Social contact We spend more waking hours with the people we work with (when we are working full-time hours) than with the people we love and live with. Human beings as mammals are social creatures and seek and thrive on social contact. Neural activity related to social contact is crucial to mental health, and social isolation is a risk factor for mental illness. We are connected to our co-workers because we are social beings who are genetically programmed to monitor and build social connections. We rely on the hundreds of exchanges inside the social context at work to meet our needs for belonging and connection. When people are off work, they lose this continuing social contact, and the isolation has a significant impact on well-being. Identity Work gives us identity. When we work we have a title, a position, a clearly defined set of tasks and a label that provides information to the world about who we are, this informs us about who we are in relation to others, and in how we view ourselves. Loss of this identifier has a significant negative impact on self-esteem and self-worth, with a predictable risk to mental health. When employees are off work, it is hard for them to answer the common question: “So, what do you do?” Any person facing unemployment experiences changes in all of these factors and is at risk for developing mental health issues. A person who already is experiencing mental health challenges, and then goes off work, may find it difficult to build steady recovery, because the essential health need of work is not present. Many disability plans have an all-or-nothing approach to an employee’s ability to work. If employees are off work, they are deemed not able to work. If employees wish to find regular daily activity to help build their recovery, they may put their claim at risk. This approach to disability management may actually be making employees stay off work longer. The longer an employee is off work, the harder it is to return to work. Systems that do not allow employees who are on a disability claim to work, even to perform volunteer work, are preventing employees from tapping into the health benefits of working and may be contributing to needless work disability. Employers may also have the mindset that an employee who is sick should be off work. When it comes to mental health issues, it is not best practice to use this all-or-nothing approach. The key here is for employers to have the capacity to address individual employee needs as they return to work or, better yet, have flexible processes and structures that allow employees to stay at work. Staying at work during early days of recovery could be part-time, with the disability benefit covering the balance of an employee’s income from salary. Continuing activity, routine, social contact and identity build employee recovery and can reduce the cost of the disability claim. There is less work disruption, and continuity can be maintained for the employee and the family, the work team and the organization. This contributes to increased employee health. And healthy employees are productive and engaged employees.

“Innovate or die,” the saying goes. But as companies try to sharpen their competitive edge with new product and service ideas, many don’t realize that their efforts are fundamentally misguided. That’s because their innovation process is often missing one essential ingredient: their customers. Companies establish innovation incubators and idea labs. They hold brainstorming sessions and ideation off-sites. They produce and analyze reams of market research. But if you wander through any of these innovation-fostering instruments, you’d be hard-pressed to run into an actual customer. What you would see are lots of executives and employees discussing what they think customers need and what products or services will help them. Seldom, however, do companies directly include customers in the innovation process, and that is a dangerous misstep. The most brilliant customer insights—the ones that drive game-changing innovation—rarely come from focus group rooms or market research surveys. They come, instead, from observing customers in their natural habitat. Nothing—not the most intense ideation session nor the most robust market research report—can compare with what you learn by simply going out “into the wild,” watching and listening to customers as they navigate through their day, as they use your products and services and as they (sometimes) bastardize those products and services to accommodate their needs. Automobile manufacturer Chrysler owes its dominance in the consumer minivan market to this concept of customer observation (technically called “ethnographic research”). For more than 30 years, the company has been the U.S. minivan sales leader, a position fortified over the decades by a tradition of customer-centric innovation. That approach was perhaps best exemplified by Chrysler’s 1996 introduction of the Dodge Caravan, the first U.S. minivan with two sliding doors. Previous models were equipped with only a passenger-side sliding door. Whereas other auto manufacturers just asked customers if they’d like a second sliding door (and didn’t sense much interest), Chrysler sent a team into the wild to see with their own eyes what minivan owners struggled with but might never have thought to share in a focus group. In a 2012 interview, Chris Theodore, one of the lead design engineers for the 1996 Caravan, recalled his team’s approach to the project: “We really had a great time. We looked at customers. We visited customers. We videotaped customers at rest stops, truck stops and lumber yards. That’s where we came up with all the ideas. From cupholders to tissue holders to rollout seats to the fourth door, these were all things that we saw the customer needed but didn’t volunteer when asked.” As Theodore and his team witnessed firsthand, when you observe customers in the wild, you discover things that even the best internal brainstorming sessions might not have revealed. But they also saw the inherent limitations in merely asking customers for their opinions, because people tend to have needs and frustrations that they would never think to vocalize to a market researcher. A great example of that comes from OXO, maker of popular houseware products like Good Grips. As Alex Lee, president of OXO, recounted at a 2008 conference, when the company was considering reinventing the measuring cup, it went to consumers and asked them straight out: “What’s wrong with your measuring cup?” In response, people mentioned things such as how measuring cups are often made of glass, so if they drop the cup, it breaks. They talked about how measuring cup handles get slippery when your hands are greasy, and how the cup itself can get hot depending on what’s poured into it. And that was pretty much all people had to say. Then the OXO team made a simple request of the consumers with whom they met: Show us how you measure with a measuring cup. And they saw people go through a ritual with which we’re all accustomed. They pour something into the cup, then bend down to check the measurement markings. Then they pour a little more and bend down again. Over and over. Yet no consumer mentioned this as a problem. It’s an aspect of the measuring cup user experience that was so ingrained in everyone’s psyche that no one thought to question it—except the team at OXO. By observing people actually using the product, they exposed inefficiencies in the customer experience that indicated the measuring cup was indeed ripe for reinvention. That led to the launch of OXO’s now famous “angled measuring cup”—a cup that lets you read measurement markings by looking straight down, obviating the need to repeatedly fill, bend and check. The company sold millions of these cups in just the first couple of years they were on the market. It’s worth noting that both OXO and Chrysler, when they sought to incorporate the customer perspective into their innovation efforts, did so by observing and questioning consumers of their product. Both companies at the time relied heavily on distribution partners (houseware retailers and auto dealers)—entities that they might even have viewed as customers. Yet when it came time to look at the world from the customer’s perspective, while they may have engaged distributors in the exercise, it was never done to the exclusion of the end consumer. This is a critical point for any company that works through sales intermediaries but wishes to foster customer-centric innovation. You can’t define “the customer” as simply the next person in the distribution chain. By doing so, you might very well miss out on important insights that are difficult to capture in any other way. While lots of companies tend to exclude customers from their innovation efforts, the oversight is probably even more pronounced within the insurance industry. Many industry executives are puzzled at the idea of observing customers. After all, insurance—unlike cars or housewares—isn’t something people use every day. Even though insurance may be a relatively low-interaction business, there are still plenty of opportunities to observe customers “using” the product. The key is to reject the traditional and very parochial view that customers only use an insurance product at claim time. The insurance customer experience is shaped by many types of episodes and touch points: research and purchase, underwriting and issue, online and offline service, billing and payments, premium audits, loss control reviews and, of course, claims. These are all examples of customers interacting with their insurance product, and as such, they afford meaningful opportunities to observe and learn. If insurers ever do try to incorporate the customer view, it usually happens relative to product development. And while that’s commendable, true customer-centric innovation requires a broader view around when and where to solicit an external perspective. That means spending time observing customers when, for example, they receive their initial policy package. Or watching when they try to interpret a premium billing notice and then pay it online. Or seeing what steps they go through to prepare for a premium audit. Or witnessing every stressor they’re saddled with when their business is interrupted or their home is flooded. Great things happen when you break free from the four walls of your office, venture into the wild and immerse yourself in the customer experience. You see things from an entirely new vantage point. You gain insight into how to enhance your products and services. You spark ideas for satisfying not-yet-obvious customer needs. There’s no single right way to cultivate innovation within a company. However, no matter what ideation approach you employ, the important thing is to make sure customers are included. And not just included in a cursory way, with a few focus groups or research surveys. It’s about including their perspective in an immersive way, by observing customers in their natural habitat, as they interact with your products and services. Once you do that, your company’s innovation engine will really start to fire on all cylinders.