In workers’ compensation, the medical provider network philosophy has been in place for years. Most networks were developed using the logic that all doctors are essentially the same. Rather than evaluate performance, the focus was on obtaining discounts on bills, thereby saving money. Physician selection by adjusters and others has frequently been based on subjective criteria. Those include familiarity, repetition, proximity and sometimes just assumption or habit. Often the criteria is something as flimsy as, "We always use this doctor,” or “The staff returns my calls.” The question is, which doctors really are best, and why? The first assumption that must be debunked is that discounts save money. Doctors are smart—no argument there. So to make up the lost revenue for discounted bills, they increase the number of visits or services to the injured worker or extend the duration of claims by prolonging treatment. To uncover these behaviors, examine the data. Amazingly, even doctors do not always make the best choices about other doctors. They may recommend doctors they know socially, professionally or by informal reputation, but they may not know how the doctors actually practice. They may not know a physician upcodes bills, dispenses medications or over-prescribes Schedule II drugs. The data will reveal that information. Doctors may be unaware they are adding to claim complexity by referring to certain specialists. Again, familiarity and habit are often the drivers. On the other hand, duplicity among providers is fraudulent behavior, and it can be uncovered by examining the data. Analysis of data can expose clustering of poorly performing, abusive or fraudulent providers referring to one another. The analysis may also divulge patterns of some providers associated with certain plaintiff attorneys. Treating doctors influence claims and their outcomes in other ways. Management indicators unique to workers’ compensation such as return to work, indemnity costs and disability ratings can be analyzed in the data to spotlight both good and poor medical performance. These outcome indicators are either directed by or influenced by the physician, and they can be uncovered through data analysis. Claims adjusters and other non-medical persons simply cannot evaluate the clinical capability of medical providers, especially doctors. Performance analysis must take place at a higher level. Evaluations for specific ICD-9 diagnoses and clinical procedures such as surgery must be made. Frequency, timing and outcome can be examined in the data in context with diagnoses and procedural codes, thereby disclosing the excellence or incompetency of physicians. Negative clinical outcomes that can be analyzed include hospital readmissions, repeated surgery or infection. Physicians associated with negative medical outcomes should be avoided. When analyzing clinical indicators for performance, care should be taken to compare only similar conditions and procedures. Without such discrimination, the results are dubious. Specificity is critical. When using data analysis to find the best doctors and other medical providers, fairness is also important. Provider performance should be compared only with similar specialty providers for similar diagnoses and procedures. Results will not be accurate or reliable if performance analysis is not apples-to-apples. Medical providers may question data analysis to evaluate performance, claiming they treat the more difficult cases. The data can be analyzed to determine diagnostic severity, as well. Diagnostic codes in claims can be measured and scored, thereby disclosing medical severity. Now is the time to step up to a much more dignified and sophisticated approach to selecting medical providers. Decisions about treating physicians must be based on fact, not assumption or habit. Fortunately, the data can be analyzed to locate the best-in-class and expose the others.

Psychosocial issues can influence chronic pain just as much as the biologic damage from an injury. Job or financial concerns, depression and anxiety, feelings of helplessness, family problems, enabling environments, substance abuse,and past physical or sexual abuse top the list of factors contributing to extended disability. Yet, workers’ compensation has traditionally downplayed psychosocial impacts on the claimant’s motivation to get better and focused instead on “medicalizing” treatment through physician visits, surgery, chiropractic care, a round of physical therapy and especially drugs that, ironically, often make the situation worse.

About 19% of the medical cost of a workers’ compensation claim goes to pharmacy, and a disproportionate amount of those drugs—between 21% and 34%—are opioids. Although neither the Food and Drug Administration (FDA) nor any other treatment guideline recommends opioids for long-term chronic pain, 55% to 86% of claimants are taking them just for that, according to the white paper “Opioids Wreak Havoc on Workers’ Compensation Costs,” published by Keith E. Rosenblum in August 2012.

Its research also found that one-third of claimants who start taking opioids are still on them after a year. Studies show that claimants who take opioids longer than 90 days are not likely to return to work. Patients using prescription painkillers for a long time typically suffer side effects, such as opioid-induced constipation, and experience related diseases such as kidney or liver damage from non-steroidal anti-inflammatory drugs.

There also are side effects from the medications prescribed to combat the side effects of the original prescriptions (for example, Nuvigil often is prescribed to wake patients from over-sedation). Ironically, opioids themselves can create an increased sensitivity to pain (hyperalgesia), thereby feeding the exact problem they are designed to solve. There needs to be a better way.

Behavioral Therapy

All patients bring psychological baggage—both good and bad—to their workers’ compensation injuries. Self-motivation, discipline, self-esteem, a sense of entitlement or victimhood, addictive behaviors and a true desire to get better are factors in recovery.

Some claimants recover and return to work with medical treatment alone; many do not. Claims with unaddressed psychosocial issues are the ones that go off the tracks, drag on for years and pile up costs. In workers’ compensation, “psych” is a four-letter word, but, unless you consider it in the treatment plan, the chances of full restoration are reduced.

Workers’ compensation is just beginning to venture into the psychosocial realm with cognitive behavioral therapy (CBT) to address opioid addiction. CBT's use is fairly new because of the deep-seated, industry-wide phobia of owning a psych claim. Payers fear never-ending psychiatrist visits and a new set of drugs and costs likely to accompany a psych diagnosis.

However, CBT is not the same as traditional psychotherapy. It is a psychotherapeutic treatment tool that does not produce an additional diagnosis. Plus, CBT is surprisingly affordable. Provided in-person or telephonically—both requiring extensive “homework”—it is usually limited to eight to 12 visits at $100 to $150 per visit. In many cases, a payer’s total investment in CBT is less than the claim’s monthly drug spending.

The science and success of CBT are still evolving, but some studies and anecdotal outcomes show that it is a helpful tool, both in workers’ compensation and the healthcare industry in general. The focus is on patients who seem stuck in their treatment plans. CBT works on the concept that a person’s thoughts are the primary cause of that individual’s behaviors and feelings. Thought patterns—not circumstances, events or other people—dictate the individual’s motivation and sense of well-being.

A psychologist or other therapist asks questions and poses statements to help patients open up and self-identify the psychological elements standing in the way of their recovery. In that way, CBT gets to the root of motivation issues. Some claimants hate their jobs or bosses and consciously or subconsciously resist returning to work.

Family members can be motivation-killers and enablers, as in a case where a claimant took so much Celebrex that he developed cirrhosis of the liver. He and his doctor wanted to reduce his opioid intake, which also was damaging his liver, but his wife resisted. She said he was easier to manage when sedated and had to be convinced that he would die prematurely before she acquiesced.

The belief that “I don’t deserve to feel better” churns the cycle of pain for some. Many pain patients have low self-esteem that stems from any number of factors, including: hyper-critical parents, absent or neglectful parents, past sexual or physical abuse or other traumatic experiences.

The goal of CBT is for the patient to self-identify the issue through prompting by a professional and then correct fundamental errors in thinking, such as victimization, generalization or catastrophizing.

To be clear, CBT does not cure motivation problems. Instead, this “talk therapy” helps patients identify barriers to recovery and replace negative thoughts with positive, empowering ones.

Functional Restoration

While CBT is provided as a standalone, it also figures prominently in functional restoration programs (FRP), which help patients work through psychosocial issues while detoxifying and participating in physical therapy and other exercise programs that increase their physical activity and capability.

The whole functional restoration process enables individuals to acquire the knowledge and skills to make the behavioral changes needed to take primary responsibility for their own physical and emotional well-being after an injury. The ultimate goals of FRP and CBT are to implement lifestyle changes that will last a lifetime and manage pain.

A functional restoration clinic should be multidisciplinary, preferably with an addictionology, orthopedic or pain management and rehabilitation (PM&R) specialty, a psychologist and licensed physical therapist acting as a team to customize and coordinate treatment for the patient. Other treatments such as yoga, chiropractic and biofeedback also can be included, along with services like vocational counseling. The best programs involve between 120 and 160 total hours of therapy.

An initial assessment should predict the person’s anticipated compliance, and the better functional restoration clinics have high denial rates (50% or more). Applicants may not be in good enough health, or they may lack the motivation to change. There’s no point in spending $30,000 on a program if the claimant refuses to work or accept responsibility for his health and outcomes. A pre-emptive CBT program can help weed out unmotivated patients.

Vital signs and physical capabilities need to be measured and objectively managed, and a baseline should be taken upon admission, followed by daily to weekly measurements and adjustments. Following patients upon discharge is just as important. Best practices show one year of follow-up, by telephone or in-person, achieves the best results in cementing lifelong change. Without consistent encouragement and personal instruction, claimants may relapse and turn back to drugs.

When selecting an FRP, access to an inpatient program or a strong alliance with a hospital or other inpatient detox facility can be critical. It cannot be overstated how vital the appropriate venue for detoxification is to overall success. Often, the treating physician who prescribed the drug cocktail in the first place is ill-equipped to develop a discontinuance strategy or provide the clinical oversight needed to wean patients off the drugs. Initial inpatient care may be needed if respiratory depression or cardiac issues could significantly complicate the weaning process.

Power of Yoga

Many functional restoration programs offer yoga, an interesting combination of physical and mental/emotional exercise. Studies show that it improves flexibility, strength and balance on the physical side. Its focus on “centering” helps participants calm their minds and relax their bodies, relieving pain and giving them an empowering sense of control.

An Austin, Texas, clinic saw such a positive response to its once-a-week yoga class that it expanded it to five days a week. Not only was patient satisfaction high, but overall functional outcomes improved. Patients say it helps them cope with pain, improves flexibility and increases their functionality, and they plan to make it a permanent part of their lifestyle. Yoga by itself is typically not sufficient, but incorporating it into the multidisciplinary functional restoration strategy can yield very positive results.

A holistic pain management approach can get runaway claims back on track. Weaning a claimant off an opioid-laden cocktail, which often does much more harm than good, is a great thing. Stopping the financial losses on a claim is a great thing. Returning a clear-headed, self-directed employee to work is a great thing.

Adjusting Mindsets

The focus of workers’ compensation, when it was originally created more than 100 years ago, was to return an injured worker to health and function and work as quickly as possible. Historically, it has been an insurance function; after all, workers’ compensation is part of the property/casualty industry. However, over time, workers’ compensation became part of the healthcare industry because restoring function and health is entirely related to the competency of the clinical and psychological strategies employed.

As evidence mounts that patient motivation is vital to actual recovery, it’s time for another transition from a “medicalization-only” mindset to a holistic approach that takes into account all the variables that affect recovery. It’s time for all stakeholders within the system to think more broadly and be open to new concepts that comply with best practices and correspond with treatment guidelines.

In other words, maybe the injured workers are not the only ones who need to have their motivations adjusted.

  SIDEBAR Prevention Is Key

Keep claims from going off track in the first place by having treating physicians conduct risk management before prescribing opioids. Some questions include:

• Has there been past substance abuse?
• Is the patient receiving narcotics from other physicians?
• How many other physicians are prescribing medications?
• Is there depression or anxiety involved?
• Did the claimant experience sexual or physical abuse (a prime predictor of addictive behavior)?
• Will the patient submit to random urine drug tests?

Additionally, there are a number of screening tools to identify potential drug dependency and addiction. Some examples include:

• For prior substance abuse: Diagnostic Criteria for Substance Dependence – DSM-IV from the American Psychiatric Association
• For potential addiction/dependence issues: Opioid Risk Tool (ORT) or Screener and Opioid Assessment for Patients with Pain  (SOAPP)
• For depression: Patient Health Questionnaire (PHQ-9)
• For general psychological analysis: Minnesota Multiphasic Personality Inventory (MMPI)

Unfortunately, most payers do not have a mechanism for reimbursing physicians for conducting a detailed risk analysis. This needs to change. Payers could assign a CPT code for physicians to use to conduct a thorough risk analysis. Spending a few hundred dollars up front can save hundreds of thousands of dollars on a long-term, opioid-laden claim. The assessment would also shed light on the physician’s capabilities to manage a chronic pain situation.

Thousands of insurance defense law firms across the country have built a steady business over the years by defending the claims of insurance carriers and self-insured clients.

The traditional business model for defense lawyers is undergoing significant change, however, as the personal client relationships that served as the foundation for many law firms are giving way to highly sophisticated litigation management programs maintained by carriers.

This article will explore the risks faced by insurance defense law firms in today’s competitive market, as well as risk management actions that can be taken to protect the law firm’s revenue base.

By way of background, it is important to understand that insurance defense law firms must typically be approved in advance by the litigation manager of an insurance carrier before they are assigned any cases. Getting on a “panel” of approved outside counsel can be a difficult process for two primary reasons. First, the market for panel positions is intensely competitive. Secondly, it is not easy for a law firm to determine who is in charge of a panel to get the initial introduction.

Panels of interest to a law firm will vary with the firm’s areas of expertise. Many law firms concentrate their practice in certain types of cases, like the defense of auto injury, inland marine, premises liability, product liability or professional liability. Other firms take more of a full-service approach by handling cases across a wide range of practice areas.

On the carrier side, multiple panels might be managed by a single gatekeeper or could each have a separate panel manager. The litigation management chain of command within an insurance carrier or self-insured varies from firm to firm, adding complexity to the law firm’s business development process.

While rates paid in the insurance defense market can be significantly less than a law firm’s “retail” rates, the attraction is in the high case volume that can result once a law firm gets named to an insurance panel as approved defense counsel.

Insurance defense law firms that have been approved as panel counsel for multiple insurance companies can inadvertently find that their revenue base is threatened by a shrinking number of insurance accounts over time. In the section that follows, we will address the primary revenue risks facing insurance defense law firms.

The Imperative of Client Diversification

Insurance is about risk management, specifically the process of identifying, assessing and quantifying risk. Attorneys practicing in the area of insurance defense may find it beneficial to apply some risk assessment principles to the business development efforts within their own law firms.

There are three primary practice management mistakes that managing partners make, as outlined below. The solution is to establish a business development process that seeks to reduce the risk associated with unexpected account loss.

Risk #1: Too Many Eggs in One Basket

A leading risk facing insurance defense law firms is that a small number of clients can represent a large portion of the firm’s revenue base. In fact, many law firms (large and small) rely on three to five primary insurance clients to generate the majority of their revenue stream. While reliance on a handful of clients is a common situation early in any law firm’s lifecycle, the lack of client diversity puts the long-term viability of a firm in great danger.

There is no hard and fast rule regarding the number of clients needed for the long-term success of a law firm. Rather, the managing partner should start to worry when the loss of any single client would put the firm at a serious financial disadvantage. For many firms, this might be when one client starts to approach 15% to 20% of total revenue.

While the loss of any client is not desirable, an account that represents only 5% of total revenue presumably can be offset relatively easily by the inflow of other small accounts.

A long-term negotiated agreement with one primary client can look appealing initially but suddenly turns into a major risk factor when the viability of the account comes into question.

Risk #2: Failure to Recognize Changing Dynamics Within the Insurance Market

The times they are a-changin, as Bob Dylan warned in his well-known ballad. Listed below are several real-world examples where insurance defense managing partners either lost or risked losing a major insurance account.

The Industry Consolidation Scenario

“We were the lead insurance defense law firm in our state for a respected insurance company,” a managing partner for a Midwest law firm recalls. “Suddenly, without any advance notice, our insurance client was acquired by a larger insurance company. Not only did we lose the work, but many of the claims managers at our insurance client lost their jobs in the post-merger consolidation.”

The “Out for Bid” Scenario

“After its founding, our law firm grew extremely rapidly in response to the needs of our primary client,” a founding member of a Southeastern law firm reports. “We opened new offices and added attorneys simply to keep up with the client’s case load. The quality and pricing for our legal services was widely acclaimed, but a new vice president of claims brought in by the insurance carrier after a reorganization decided that he wanted to put our work out for bid. We eventually retained our work, fortunately, but it was a hard-fought RFP process.”

The Attrition Scenario

“Our insurance defense practice has a 20-year history of success,” explains the managing partner of a six-attorney firm who spends his work day as one of the lead litigators. “Over the years, however, I did not have the time to develop new business while also serving the needs of current clients. We found ourselves overly reliant on one client, and without the benefit of an established business development process.”

The “No One Told Me” Scenario

“I suddenly noticed that we were not receiving the same level of incoming cases,” reports a practice group chair with a long history of providing specialized legal services to one of the country’s leading banks. “In researching the problem, not even our internal contacts could tell us who was now responsible for panel appointment decisions. It took many days to identify the bank’s panel manager and realize that they had decided to favor regional law firms over single-location firms like ours. We ultimately got back on the panel, but it was a very nerve-wracking process.”

Insurance defense law firms also face more routine risks, including:

• Departure of a partner who leaves with her book of business
• Retirement of a founding member who served as the primary rainmaker
• Insurance clients that decide to hire more in-house attorneys
• Centralization of the insurer’s litigation management team

Risk #3: Lack of Time to Expand the Book of Business

Once approved as outside panel counsel, law firms frequently enjoy a steady stream of cases that arrive at their doorstep with little additional business development effort.

Of course, panel members must perform satisfactorily, maintain good relations, be available around-the-clock for the infrequent (one hopes) emergency and offer billing rates that are attractive to the insurance company.

The challenge is that existing clients, particularly large accounts, can easily consume all available capacity within a law firm, leaving little time for courting new clients.

It is indeed a juggling act to manage the day-to-day requirements of meeting court deadlines and responding to client requests, while also trying to devote time to business development.

Looking at the risks, however, it may be easier to make time for marketing after considering what would happen if you lost one of your largest clients. The loss of a major account could result in lay-offs, as well as possible difficulty making lease and other overhead payments. In an extreme case, a law firm may need to quickly affiliate with another firm, thereby losing its independent status.

Minimize Revenue Risk With a Law Firm Marketing Committee

Insurance defense law firms or practice groups that plan for long-term success may find it helpful to create a marketing committee responsible for establishing panel counsel relationships among a broader range of insurance companies and other entities.

Marketing committee members can address issues like:

• Where to expand geographically. This can be a difficult question, because it may involve an acquisition or opening an office.

• Development of new insurance defense skill sets. A firm that handles auto cases may want to expand into related forms of transportation, like trucking, railroads or aviation.

• Exploration of adjacent market segments. Staying with auto for the moment, law firms could try to create business opportunities with fleet managers or delivery services.

• Growth in the self-insured market. Many large retail, municipal or corporate accounts self-insure up to a certain level (known as “self-insured retentions”).

The time to start looking for more clients is now! Attracting a new account takes time, so it is advisable to work on business expansion while the firm has a satisfactory level of business already in place.

In Summary

The best defense is a good offense. Paying close attention to existing clients, while maintaining an active business development process, is an effective way to minimize revenue risk in the insurance defense sector.

Start early. Marketing for insurance defense success is a long-term process that benefits from a continuous focus on business development campaigns.

An associate professor at Harvard Business School recently gave the world an inadvertent lesson on opportunity cost when he spent several days taking a family-owned Chinese restaurant to task, to the point of threatening legal action, for an apparent overcharge of $4. (Happily, he has since offered a sincere apology.)

Opportunity cost is the loss of benefit associated with an option that is not chosen, given a set of mutually exclusive alternatives. In our restaurant example, the professor gave up not only the refund that was immediately offered to him but also the benefit of the myriad other things he could have done instead of composing those emails – from advancing his research to enjoying a nice glass of pinot noir.  In the heat of the moment, it’s easy to overlook the possibility that what we’re doing right now isn’t, in fact, the most beneficial thing to be doing right now.

In my Value Consulting organization, we spend a lot of time with insurers exploring the value of transforming their business with a modern software platform. But recently, we’ve had some really interesting conversations focused on the converse of that: What is the opportunity cost of not moving forward? What is the cost of doing nothing? What is the cost of delaying a decision?

Let’s imagine that you’ve built a case for change in your organization. You’ve estimated that your company could realize a benefit of $12 million a year, beginning at the conclusion of a two-year project that will cost $25 million. But, with limited budgets and scarce human resources, approval for that $25 million could be a long way off.

Overcoming the big-ticket anxiety is difficult, but the math is pretty straightforward. In this simplified example, the investment pays back in year five, with a 10-year net present value of $31 million. So a choice in favor of the status quo will hurt your company by a net of $31 million over the next 10 years. Allocated evenly, that’s a loss of $8,500 per day – every day, including weekends and holidays – for the next 10 years. A six-month delay in moving forward will cost you $1.5 million. In the time you’ve spent reading this blog post, you’ve already lost 20 or 30 bucks.

Of course, an opportunity cost calculation is no guarantee that you’ll actually realize that benefit. The business case must be strong and realistic to begin with. The right software must be chosen, and the right decisions must be made during implementation to ensure success. The hard work of implementing the project must be done. But sometimes a simple, potentially cheeky data point is enough to start a much bigger, more serious conversation.

My recent post on functional capacity exams (FCEs) is a great lead-in to considering another level of related technology. Let’s explore electrodiagnostics as arguably a more powerful arrival in functional exams.

First, let's recap what quality means in a functional capacity exam: An FCE requires a process that is objective and consistent with the proper balance between specificity to body parts and sensitivity to critical indicators, including pain, range of motion and strength. An FCE must indicate illegitimate effort and attempts to “game” the test by subjects.

I submit to you that, the more a functional exam process can move away from human-tester interventions and totally separate testing steps, the closer it gets to nirvana. This construct is the essence of electrodiagnostics.

A routine FCE process involves various separate tests, including nerve conduction, range of motion and strength. Even with the most advanced equipment, this presents separate processes to assess for validity and to try and formulate into a whole-body issue. What if one test did all of this at once?

Contemplate the electrodiagnostic functional assessment (EFA), where a test subject performs a single test sequence on specialized EFA equipment that measures multiple factors. This provides instant objective credibility. Stated simply, combined factors of muscle strength, pain and range of motion and others need to align in a logical pattern as depicted by computerized readout, or the subject is immediately shown as self-limiting his capability.

The EFA is arguably more accurate than the common FCE in assessing work capacity. EFA has also been proven useful in more specific applications, such as determining the need for hardware removal in post-surgical cases with alleged recurring pain problems.

Consider further that, because the EFA is such a consistent test, it is highly credible as a comparison to prior baseline. The EFA used as a base-line test at time of hire can be saved as a data file without opening until an employee might have an alleged injury at some later period. At such occasion, a new EFA can be performed to compare with the baseline to see what, if any, alleged changes in capacity and pain threshold have occurred. This definitive comparison has held up in court cases, making the EFA evidence as worthy as an MRI would be in comparing pre- and post-injury pictures of a joint or body part.

Quick Tip: Learn More About EFA and the Possible Application to Your WC Claims

– Google “electrodiagnostic functional assessment” to review white papers and scholarly details around the EFA and its applications and case studies.

– For more information, search out Emerge Diagnostics, which has pioneered the application of EFA and which is making efforts to bring EFA to the forefront of medical and legal use. I do not promote specific vendors in “Quick Tips,” and this article is for informative purposes only. However, the EFA is currently a sole-source situation, and reviewing the studies and successes of Emerge Diagnostics is of educational benefit.

– If you want to be cutting edge, do a trial. Pick a WC case or two that is stalled without adequate determination of disability, causation, apportionment or need for surgery, etc. Work to get an EFA entered as evidence and see if the case can turn.

– If you do try EFA, let me know your results. I would like to continue related reporting on this and see how much future influence EFA might have on the larger WC landscape.

The breadth and depth of predictive modeling applications have grown, but, of equal importance, the percentage of participants reporting a positive impact on profitability has dramatically increased, Towers Watson's most recent predictive modeling survey finds.

Our 2014 Predictive Modeling Benchmarking Survey indicates the use of predictive modeling in risk selection and rating has increased significantly for all lines of business over the last year, continuing a long-term trend. For instance, in the personal auto business, 97% of participants said that in 2014 they used predictive modeling in underwriting/risk selection or rating/pricing, compared with 80% in 2013, a 17-percentage-point increase. For standard commercial property/commercial multiperil (CMP)/business-owner peril (BOP), the number jumped 19 percentage points, to 51%, during the same time period (Figure 1). In fact, the percentage of participants that currently use predictive modeling increased for every line of business covered in the survey.

Figure 1. The use of predictive modeling in risk selection/rating has increased significantly for all lines of business over the last year

Does your company group currently use or plan to use predictive modeling in underwriting/risk selection or rating/pricing for the following lines of business?

Sophisticated risk selection and rating techniques are particularly important in personal lines, where models have now penetrated most of the market. An overwhelming 92% of survey participants cited these techniques as essential drivers of performance or success. To a significant degree, this was also true for small to mid-sized commercial carriers, with 44% citing sophisticated risk selection and rating techniques as essential and another 42% identifying them as very important.

Even as the use of predictive modeling extends to more lines of business, there is an increasing depth in its use. Predictive modeling applications are increasingly being deployed by insurance companies more broadly across their organizations as their confidence in modeling increases. For example, 57% of survey participants currently use predictive modeling techniques for underwriting and risk selection, and another 33% have plans to use them over the next two years. Although a more modest 28% currently use predictive modeling to evaluate fraud potential, a sizable additional 36% anticipate using it for this purpose over the next two years. Survey participants report plans to deploy predictive modeling applications in areas including claim triage, evaluation of litigation potential, target marketing and agency management. These applications will favorably affect loss costs, expenses and premium growth.

THE BOTTOM LINE

Eighty-seven percent of our survey participants report that predictive modeling improved profitability last year, an increase of eight percentage points over 2013 (Figure 2). The increase continues a pattern of growth over several years.

Figure 2. Companies implementing predictive models have increasingly seen favorable profitability impacts over time

What impact has predictive modeling had in the following areas?

A positive impact on rate accuracy helps explain the improvement. In fact, the percentage of carriers citing a positive impact on rate accuracy has increased every year since 2010, when 70% cited a positive impact. In three of the past four years, the percentage-point increase in carriers citing a positive impact has hovered around 10%. In this year's survey, nearly all (98%) of the respondents reported that predictive modeling has improved their rate accuracy. Improved rate accuracy has both top- and bottom-line benefits: It boosts revenue because it enables insurers to price more effectively in very competitive markets, retaining existing customers and attracting potential customers with rates that accurately reflect their level of risk. At the same time, rate accuracy drives profit because it also helps carriers identify and write more profitable business,and not focus solely on market share and price.

More accurate rates also improve loss ratios, which have improved in parallel, according to our survey participants. In 2014, 91% of survey participants cited the favorable impact of predictive modeling on loss ratios, an increase of 14 percentage points over 2013. When premiums more accurately reflect risk, losses are more likely to be properly funded.

TOP-LINE GROWTH

The bottom-line fundamentals — profitability, rate accuracy and loss ratio improvement — identified in our survey are complemented by top-line benefits. Positive impacts were registered on renewal retention (55%), underwriting appetite (46%) and market share (41%).

THE NEXT STEP

Sophisticated risk selection and rating are cited as essential by many of our participants, but our survey indicates that, despite favorable trends, insurers are still far from leveraging sophisticated modeling techniques to their fullest, even in pricing. Two-thirds of participants aren't currently using price integration (the overlay of customer behavior and loss cost models to create metrics that measure different rate scenarios) for any products. A few are past price integration and are currently implementing price optimization (harnessing a mathematical search algorithm to a price integration framework to maximize profit, volume and other business metrics) for some products.

The disparity between what is viewed as the optimal use of modeling techniques and the current level of implementation needs to be bridged if insurers want to leverage predictive modeling as a competitive advantage to identify and capture profitable business. Increasingly, insurers are making greater use of analytics including by peril rating (which replaces rating at the broad, line-of-business level with specific rating by coverage), proprietary symbol (customizing vehicle classifications for personal automobile policies) and territorial and credit analysis.

Those insurance companies that can't employ sophisticated risk identification and management tools face the possibility of losing profitable business and adverse selection.

MORE PROGRESS IS STILL POSSIBLE

Profitability is hard-earned in the current competitive property/casualty market, and predictive modeling is recognized by a steadily growing number of companies as an invaluable tool to improve both top- and bottom-line performance that ultimately reflects in earnings growth. Our survey suggests that insurers are increasingly comfortable with predictive modeling and are using it in a growing number of capacities. However, participant responses also indicate that there are still many benefits offered by predictive modeling and other more sophisticated analytical tools that have not been achieved, such as treating data as an asset and more effectively using predictive modeling applications to improve claim and other functional results. Improving performance on these issues alone could make a significant difference in the profitability of insurance companies and offers all the more reason to explore new ways to benefit from data-driven analytics and predictive modeling.

ABOUT THE SURVEY

Towers Watson conducted a web-based survey of U.S. and Canadian property/casualty insurance executives from Sept. 3 through Oct. 22, 2014. The results discussed in this article represent the views of 52 U.S. insurance executives. Responding companies represent a significant share of the U.S. property/casualty insurance market for both personal lines carriers (17%) and commercial lines carriers (22%).

Here's a sensitive question for the workers' compensation community: Should workers' compensation insurance companies and third-party administrators be subject to civil "bad faith" lawsuits?

Or should a state's workers' compensation system remain an exclusive remedy, even if a claims payer intentionally commits egregious acts such as denying benefits that it knows are due?

WorkCompCentral Legal Editor Sherri Okamoto reports that about half of the states have done away with any civil bad faith remedy either through legislative or judicial actions, and that the other half retain that remedy.

The contrasts are stark.

Okamoto cites an Iowa jury award an earlier this month of $25 million in punitive damages, along with $284,000 in damages, payable by the former employer's workers' compensation carrier for its bad-faith handling of his claim. The offense was failure to pay permanent total disability benefits after a 2009 accident left the worker with catastrophic injuries.

Other states where there is no civil remedy rely on administrative penalties and administrative judicial enforcement, but those policies, in states such as California, have been criticized for not sufficiently deterring bad behavior such as wrongfully denying medical care to the critically injured.

Okamoto notes that the states that do allow for civil remedies vary widely in the standards and definitions for reprehensible conduct.

Alaska and Arizona, for example, define "bad faith" as a refusal to pay a claim without any arguably reasonable basis. In contrast, Arkansas requires a showing of "affirmative misconduct" or “dishonest purpose” to avoid liability.

Colorado, Maine and Michigan make a carrier's failure to act in good faith a breach-of-contract claim. Hawaii and Mississippi make carrier misconduct redressable in tort.

Texas used to permit bad faith actions until the Supreme Court's decision in Texas Mutual Insurance Co. v. Ruttiger, which held there was no common-law bad-faith action in the Lone Star State for workers' compensation claims handling.

Likewise, two months after Ruttiger came out, the New Jersey Supreme Court held that the state's injured workers do not have a common-law right of action for pain and suffering caused by an insurer's administration of a workers' compensation claim in Stancil v. Ace USA.

The North Carolina Court of Appeals ruled recently that an injured worker cannot bring a tort action to recover damages from an insurance carrier for its alleged bad-faith claims handling.

The split surely raises the passions in people: Civil remedies fly in the face of the concept of administrative expediency that underlies workers' compensation; yet, administrative enforcement needs sufficient "teeth" to encourage compliance and deter bad behavior.

What do you think?

One of the things that I’ve been tossing around is how we frame a risk. Risks are events. But when it comes to putting together risk statements, often organizations will put a cause and a consequence as well as the risk all into one statement.

I’ll give you an example: "Significant delays in retrieving records due to current tools for data storage and retrieval practices may leave the department unable to adequately respond to freedom of information requests." Now, I’m not even sure what that’s saying, but here's another one: "A department may not have a business process in place to adequately manage the programs, which may lead to weakened results."

Now, given what I’ve talked about on other blogs, I wouldn’t even see those as risk statements. However, what we’ve got there is: We’re trying to put a cause and an event and a consequence into one risk statement. The problem is that there is no such thing as a one-cause event, nor is there any such thing as a one-consequence event. If you identify an event, a risk, you will find that there are a range of causes. It’s a system breakdown.

And even if a risk results in injury or death, there are other consequences, such as harm to reputation, perhaps issues with the regulators and maybe legal action taken against us.

So, if we put our statements together such that we put a cause and a consequence in with the risk, we’re limiting our ability to treat that risk properly. We haven’t identified all the causes. We haven’t identified all of the consequences. And it’s only through identifying all the causes that you can truly start to identify whether you have adequate controls already in place or whether you need additional ones.

When you look at your risk statements, identify what the event is, but then go though and list all the causes and all the consequences, plus the controls and their effectiveness. This is when you have a statement able to be managed effectively.

As always, let’s be careful out there.

The OASIS loss modeling framework is an important initiative for the humans standing last in the global queue. To see why, look at the problem that all we humans face: At a global level, the ideal catastrophe modeling process should leverage all the scientific knowledge available to humanity at all points of time to come up with the best estimate of a probability distribution of losses for various horizons of locations and time so that humans and groups can make better choices. The actions of some humans are changing the Earth and its environment (through global warming, climate change, et al.) at a much more rapid rate than before. Along with other natural changes, these human-triggered changes and the increasing knowledge of humanity result in changes in the estimated distribution over time. The insurance industry uses catastrophe models provided by an oligopoly of closed source private providers, causing the following problems:

• The cost of catastrophe modeling is higher than it would be if there were no oligopoly.
• The opaqueness of the models prevents transparent evaluation/comparison/regulation.
• Vested interests may manipulate models and (thereby) choices made by humans and groups.
• The oligopoly makes it difficult to leverage all scientific knowledge in estimating distributions.Because all humans live on the same Earth, and actions of some empire-building humans are changing the loss distribution for other humans without the latter being aware, it is necessary to make information about the global loss distribution as widely available as possible, so that maximum humans or their representatives can transparently make better choices for themselves (including preventing actions by the empire-builders). As the pace of change of the distribution accelerates, this is becoming more and more urgent.

Unfortunately, humans and groups who stand last in the global queue, as usual, are most vulnerable to impacts of actions by those ahead of them in the global queue. They are usually least aware of this distribution and risk making poorer choices than others. Why don't property insurers share the distribution of potential losses at home location with property owners periodically? Why don't property surveys commissioned by property owners provide the distribution of potential losses at property locations? Why should property owners not be able to understand how specific new local actions by local people, firms and governments affect their loss distributions over various time horizons (thereby affecting property values)? Why don't property insurers provide complimentary/paid information services about the risk (overall or event-specific) to the properties? Property owners/managers, their creditors and their investors would all be interested in such services, because they have a financial stake in the properties. The high cost of catastrophe modeling has been a constraint. But as OASIS reduces this constraint, we should see such services. After all, insurers are in the business of helping their customers manage risk rather than the business of selling insurance policies. (See my other blog post on this.) Empire-building humans always seek to manipulate public perceptions about the true consequences of their actions (product/services) over distant time and space horizons. As scale and complexity of technology has grown, the impact for humanity has become difficult to decipher and control. But the need to generate a common understanding of these outcomes has become more critical, because the impact continues to intensify. As a result, there are two imperatives: 1. The transparency of the catastrophe modeling process is very important to prevent empire-builders from manipulating models partly or fully to promote a wrong understanding of the potential outcomes for humanity. 2. Reducing entry barriers for model providers to provide ever better models to the catastrophe modeling process is very important to ensure that global understanding of potential outcomes for humanity is based on up-to-date scientific knowledge. I have written separately on my other blog about why humanity needs to manage intellectual property that is significant for its future differently from mundane intellectual property. The public or private ownership of intellectual property in the catastrophe modeling domain needs to be managed very carefully. While we need to retain the incentive for private model builders to build ever better models, we need to find a mechanism that does not jeopardize the transparency or build entry barriers for newer models. It is in this context that OASIS (an open-source catastrophe modeling toolkit and marketplace) provides the right combination of public and private ownership to evolve the ideal global catastrophe modeling process. Choosing OASIS over other private options is important for your children and their children. I see OASIS as a genuine oasis in this desert where selfish actions of some humans are risking our shared future. If OASIS succeeds in breaking the oligopoly, making it easier to evolve the ideal catastrophe modeling process, I expect the speed of developing global consensus to put the right and tight leashes on empire builders. I strongly endorse OASIS and wish it luck. I plan to do all I can to ensure its success. I hope you will join me, too.

If hacked credit and debit card account numbers are like gold in the cyber underground, then stolen healthcare records, containing patient information, are like diamonds.

Private details such as Social Security numbers, birth dates, physical descriptions and patient account numbers historically have been recorded on paper and stashed away in physical file folders and cabinets.

But the Internet all too rapidly has become our hub of commerce and social interaction. And that shift has included a mandate by the federal government to go paperless. The result: Healthcare records now exist in digital form, stored in ways that make them easy to hack.

Infographic: The ripple effect of medical identity theft

The criminal opportunities have not escaped organized cyber crime gangs that are stepping up hacking and stealing.

The Ponenom Institute found that many healthcare organizations get attacked multiple times each year, suffering losses ranging from several thousands of dollars to more than $1 million per incident. The total loss to the industry can be as much as $5.6 billion annually.

“In the dark Internet, there seems to be more activity around the theft of medical information, not just to commit medical identity fraud, but to farm that data for a very long time (for other purposes),” says Larry Ponemon, chairman of Ponemon Institute, which has been conducting medical identity theft research since 2010.

More: Protecting your digital footprint in the post privacy era

Stolen healthcare data can be worth 10 to 50 times more than payment card data in the cyber underground. Electronic health records fetch around $50 per record, according to the FBI. Some experts put that number as high as $500 for some type of medical records.

Credit and debit card numbers, by contrast, can sell for as little as $1 to $2 per account number.

“There’s an enormous online marketplace for these records,” says Kurt Stammberger, senior vice president of marketing at Norse, a security company that monitors malicious and criminal Internet traffic. “It’s like eBay — people bid, and there’s a ‘buy now’ price.’ ”

Costly exposures

Healthcare companies are taking major financial hits—and writing off this exposure as an extraordinary cost of doing business. Details on the pain level for breached companies are surfacing, thanks to data breach disclosure rules under the Healthcare Insurance Portability and Accountability Act (HIPAA.) For instance:

• WellPoint, a managed-care company, settled a case with the U.S. Department of Health and Human Services for $1.7 million last year. WellPoint allegedly left electronic records of more than 600,000 people accessible over the Internet because of a security weakness.
• New York and Presbyterian Hospital and Columbia University agreed to a $4.8 million settlement earlier this year after substandard security led to 6,800 patient records becoming accessible by search engines online.

Individual consumers are getting harmed financially, as well, to the tune of $12.3 billion last year. Ponemon’s 2013 Survey on Medical Identity Theft found that more than one third of victims paid an average of $18,660 out of pocket to recover from data theft. That included being compelled to reimburse healthcare providers for services supplied to an impersonator.

Prevention hurdles

Healthcare experts, privacy advocates and law enforcement officials acknowledge that the fundamental problem is mushrooming and won’t be easy to stabilize.

Part of the challenge is financial. The Affordable Care Act mandates that providers expend 80% to 85% of premiums on quality care—and that doesn’t include any provisions to prevent services from going to an identity thief.

According to Forrester Research, only 18% of healthcare organizations’ tech spending budget goes to security, compared with 21% across all sectors. And most providers plan a minimal or zero increase in budget.

More: 3 steps for figuring out if your business is secure

“The mission of healthcare providers is to take care of patients, and anything that can interfere with patient care takes a back seat,” says Paul Asadoorian, product-marketing manager at vulnerability management vendor Tenable Network Security. “Security is one of those things.”

Meanwhile, individual victims of healthcare data theft can be left twisting in the wind.

The financial services industry maintains a central database where stolen identities can be flagged; the healthcare industry has nothing of that sort. In fact, it even lacks a simple standard for authenticating the identity of anyone who steps forward to request patient care.

There is no standardized practice for assuring the identity of a patient via an insurance ID card combined with another form of ID, observes Ann Patterson, senior vice president and program director for Medical Identity Fraud Alliance (MIFA). “That poses challenges for healthcare providers, when their main concern is quality of care,” Patterson says.