Pharmaceuticals remain a large component of both total claims and medical costs in treating workers' compensation injuries and illnesses. On the plus side, pharmaceuticals lower medical costs by decreasing demand on other health resources, improve health outcomes, including treatment safety, and provide earlier opportunities to return to work. On the negative side, prices can be very high.

States have been trying to address that negative through numerous efforts for many years, yet costs keep climbing. A study finds that a solution exists, if claims administrators become aware at the most granular level about the sources of medications and the prices that suppliers charge.

Background

Pharmaceutical pricing in the U.S. is unregulated. Pharmaceuticals are manufactured through two sources, (1) the originator (i.e. the inventor) of the medication and (2) the generic manufacturer. The originator markets the medication through a brand or trademark name and has sole marketing rights for a period. This period varies from country to country, but the norm is from five to 10 years. On expiration, generic pharmaceutical manufacturers are allowed to produce the medication and introduce price competition into the market. Pharmaceutical Research and Manufacturers of America (PhRMA) reports that generic medications account for 80% of dispensed medications in the U.S.

In an effort to control pharmaceutical pricing in California workers' compensation, a number of legislative changes were introduced.

2002 - Claims administrators could use pharmacy benefit managers (PBMs) and pharmacy benefit networks (PBNs) to establish contract prices below the maximum price established by the legislature and to scrutinize prescribed medications at the time of dispensing. A reduction in pharmaceutical costs was expected, yet a report prepared by the California Workers' Compensation Institute (CWCI) in October 2014, titled "Report to the Industry: Are Formularies a Viable Solution for Controlling Prescription Drug Utilization and Cost in California Workers' Compensation?" showed the average pharmacy cost for the first year of treatment for an indemnity claim increased from $390 in 2002 to $430 in 2003 (an increase of more than 10%).

2004 - The pharmacy formulary (i.e. list of medications) established by California's Medicaid welfare program, called "Medi-Cal," was introduced into workers' compensation. The formulary and price schedule are based on the state’s negotiated price with suppliers. By contrast, most other workers' compensation jurisdictions use schedules based on the supplier's average wholesale price (AWP), with a plus or minus percentage adjustment to establish the maximum price (e.g., AWP + 10% or AWP - 5%). Both the Medi-Cal price and the AWP are established before any off-invoice discounts, rebates or other incentives are applied by the pharmaceutical supplier. Price differences between Medi-Cal and the AWP can vary significantly. For example, paying the lowest Medi-Cal price of 4 cents per unit for the generic medication Meloxicam 7.5mg tablet, instead of paying the AWP, provides a saving of as much as 98%. Once again, expectations for a significant reduction in pharmaceutical costs were anticipated, but, according to the CWCI, the cost only dropped from $321 in 2004 to $282 in 2005 (a reduction of 12%), before increasing to $352 in 2006 (an increase of almost 25%).

2005 - In an effort to control total medical costs, claims administrators in California were allowed to establish their own medical provider networks (MPN). The intent of this legislation was to curtail the adversarial relationship between the medical profession and claims administrators and also provide an opportunity for establishing contract rates with physicians, below the mandated maximum prices, for both services rendered and medications dispensed. This time, the expectation was to see a reduction in costs for both medical treatments and medications dispensed by a physician. Instead, the CWCI showed an increase from $282 in 2005 to $352 in 2006 (almost 25%) and then to $412 in 2007 (a further increase of 17%).

2007 - Legislation was enacted to require that the maximum price paid for a supplier's medication that was not listed in the Medi-Cal formulary be equivalent to similar medications listed in the Medi-Cal formulary; the prior practice was to use the supplier's AWP to calculate the price.

The Medi-Cal formulary includes a number of suppliers providing the same medication. PBMs, PBNs and physicians dispensing medications also have formularies that may have different suppliers to Medi-Cal, especially where a large number of suppliers are involved. For example, Gabapentin is available from more than 55 suppliers, which may include the originator, the generic manufacturers and companies that repackage others' medications in various package sizes. Hydrocodone-Acetaminophen is available from at least 45 suppliers in different strengths and package sizes.

Again, the legislation was expected to lead to a significant decrease in costs, because a number of physicians were dispensing medications from suppliers that were not listed in the Medi-Cal formulary. The cost, however, increased by almost 7%, from $412 in 2007 to $440 in 2008. This percentage increase is baffling. The National Council on Compensation Insurance (NCCI), in its September 2013 report titled "Workers' Compensation Drug Study: 2013 Update," ranked Meloxicam as the highest physician-dispensed medication by dollars paid. By applying the Medi-Cal price, instead of the AWP, cost savings should have been as high as 98%. The savings for Tramadol HCL, the second highest ranked physician dispensed medication by dollars paid, were 89% based on the Medi-Cal price of 9 cents per unit.

So, legislation enacted in California from 2002 through 2007 provided all the means to control and curtail pharmaceutical costs. Yet, according to the CWCI, the average first year pharmaceutical cost per indemnity claim reached $953 in 2012 from $390 in 2002 (an increase of 144%).

The Study -- Huge Range in Prices

This paradox initiated an independent study into pricing based on the medications listed in the NCCI report. The study identified that prices offered by manufacturers of generic medications varied significantly, and that a lack of awareness by claims administrators could be a leading factor in the high cost of pharmaceuticals in workers' compensation. The study excluded repackagers' prices, which are often associated with physician-dispensing. The report published from this study listed the following medications:

• Meloxicam 7.5mg tablet -- prices ranged from four cents through to $5.73.
• Gabapentin 300mg capsule -- six cents through to $1.75.
• Lidocaine 5% transdermal patch (30 patches) -- $102.98 through to $258.97.
• Hydrocodone-Acetaminophen ("APAP") -- from 22 cents through to $2.69 per unit, depending on the strength. The price for Acetaminophen with Codeine ranged from 15 cents through to 90 cents per unit.
• Omeprazole 20mg -- from 29 cents through to 65 cents.
• Cyclobenzaprine HCL 10mg tablet -- from four cents through to $1.13.
• Oxycodone HCL -- from 23 cents through to $1.57 depending on strength.
• OxyContin -- a brand name extended release or long acting Oxycodone HCL, only manufactured by Purdue Pharma and currently under a protection period, ranged from $2.27 through to $14.51 per unit based on strength.

The Solution

For claims administrators to influence a downward trend in pharmaceutical costs associated with pricing, consideration should be given to the following initiatives:

1. Know the suppliers of the medications in the PBM/PBN's formulary.
2. Compare the suppliers of the PBM/PBN's formulary to the Medi-Cal formulary to ensure at least the lower prices available from Medi-Cal suppliers are being paid.
3. Pay only the "no substitute allowed" price when a prescribed medication is not included in the PBM/PBN's formulary.
4. When an MPN's physician dispenses medications, ensure that (a) the "no substitute allowed" price is not paid and (b) the lowest available price is paid for a medication from a supplier listed in the Medi-Cal formulary, unless a lower contracted rate is already in place within the MPN.
5. Analyze the paid price for pharmaceuticals on at least a monthly basis to ensure the lowest price for a medication has been paid regardless of supplier and monitor medications most frequently dispensed along with their quantities to ensure PBMs/PBNs and physicians are dispensing the lowest cost medication identified in the Medi-Cal formulary, unless a lower contracted rate is already in place.

A claims administrator's processes and technologies to manage the pharmacy vendor relationships, pre-authorizations and bill reviews must be seamlessly integrated and be able to capture data at the most granular level, which in the case of pharmaceuticals in the U.S. is the National Drug Code (NDC). Without this detailed integration, pharmaceutical costs associated with pricing will continue to increase, as illustrated in California, regardless of legislation changes enacted in the future.

The report relating to this study is available in PDF format from the website managingdisability.com under the Dialogue tab.

Well, the Oklahoma experiment was fun while it lasted.

Dramatic reforms there in 2013 were intended to move the state workers' compensation system from a court-based model to an administrative one. The experiment established Oklahoma as just the second state where employers can "opt out" of workers' comp entirely, although they are required to offer alternate, privately managed plans.

However, thanks to a court decision a week ago, employers may be opting out of comp a lot more than they intended or even desire. That is because a Pottawatomie County district judge ruled that an injured tire worker can sue his employer for negligence because the injury was "foreseeable."

While courts in the past have allowed tort action based on extreme negligence, the concept of a "foreseeable" accident doesn’t necessarily come close to that standard. The judge's decision certainly risks broadening the definition of when an employee may be entitled to damages. After all, it might be "foreseeable" that a prison guard could get injured in an exercise yard fight, but that doesn't mean his employer was negligent.

Injured tire worker Darrell Duck sued his employer, Hibdon Tire Plus, for injuries to his neck and back that he sustained while using equipment to try to loosen a bolt on a wheel. Workers' compensation attorney Bob Burke, who is representing Duck, said the court "has issued a monumental ruling that challenges the foundation of Oklahoma's workers' compensation system." He says, "The sloppy drafting of that law in 2013 has caused so many problems. It has really created a crisis now.”

A number of attorneys have raised constitutional challenges to the new Oklahoma laws. I have to give them credit. When Florida underwent significant reforms in 2003, it took attorneys in that state more than 10 years of whaling away at it before they tore a few holes in the system. The Oklahoma boys seemingly have done it in less than a year.

At stake here, of course, is the future of "exclusive remedy," not just in Oklahoma but across the nation. There has been some discussion on this over the years, but only recently have court decisions started giving urgency to the dialogue. There are several key elements playing into this new melodrama:

1. The assigning of guilt, or blame, in a no-fault system.
2. The erosion of benefits provided injured workers' to the point they are no longer adequately protected by the system.
3. Increasing burdens on employers, now responsible for co-morbidity and social issues not of their making.

The first item listed, in my view, offers the greatest potential threat to exclusive remedy. I've talked about this before. The case I have cited in Tennessee is a terrific example. An electrical lineman was successfully denied benefits because he failed to follow established safety rules. Employers and insurance people I know loved that decision - after all, if it is the fault of the worker, why should we have to pay? Except, the "grand bargain: and “exclusive remedy” in workers' comp are double-edged swords. When they swing back the other way and start allowing negligence claims that include pain and suffering awards, employers will be singing a different tune. Bottom line: You cannot assign guilt in a no-fault system, either to the employee or the employer, or the entire concept will come crashing to its knees.

The Padgett case in Florida is a good example of item number two, the erosion of benefits. In that case, a judge with very little exposure to workers' comp declared the entire system unconstitutional. The decision was largely based on what he viewed as the continuing degradation of benefits in Florida over many years since the grand bargain. He declared that the erosion undermined the original intent of the program, and that the system no longer serves Florida's injured workers in a fair and constitutionally sound manner. While the case itself will have limited impact for jurisdictional reasons, it is a major shot across the bow for legislators and businesses in that state.

The third item I listed is not one normally cited when discussing threats to exclusive remedy, but I think it is a mistake to ignore it. Employers today are being asked - make that required - to pay for conditions and health issues that have nothing to do with a claim; and social demands along with increasing beliefs of entitlement are pressuring employers to cover much more than they would have had to do 40 years ago. As we all get old, fat, diabetic and mentally unstable, this situation will only get worse. Employers forced to pick up the tab for these significant, yet unrelated, conditions are getting fed up with the system, and are more open to its eventual demise. For these employers, cases like our Tennessee lineman are almost seen as "payback" for what they increasingly view as a lopsided and unjust system.

The fact that their injured workers also feel it is lopsided and unjust should be telling us something.

While it is true that our process-intensive, complex and confusing system has lost its way on some fronts, people anxious to return to the days of unending litigation and open liability should rethink that position. For the vast majority of employers and their injured workers, workers' comp has worked for more than 100 years, and the statistics bear that out. There was a reason both sides worked together to create this mess in the first place; the mess it replaced was even worse.

So we should fix workers' compensation (starting, of course, by calling it workers' recovery) and protect the concept of exclusive remedy for another 100 years.

As for our friends in Oklahoma, appeals to the state Supreme Court are sure to manifest themselves. That story is just beginning. No one can clearly see where this trend will take the nation. Alas, while apparently injuries are "foreseeable" in Oklahoma, the future of exclusive remedy is not.

After 18 states enacted reforms to limit the prices paid to doctors for prescriptions they write and dispense, a new study from the Workers Compensation Research Institute (WCRI) finds that physician-dispensers in Illinois and California discovered a new way to continue charging and to get paid two to three times the price of a drug when compared with pharmacies.

"When prices are reduced by regulation, the regulated parties -- in this case physician-dispensers -- sometimes find new ways to retain the higher revenues they had prior to the reforms," said Dr. Richard Victor, WCRI's executive director. "Although this study uses data from two large states, it raises questions for all states where physician-dispensing prices are regulated."

The study -- Are Physician-Dispensing Reforms Sustainable? -- identifies the mechanism that allows doctors in Illinois and California to dispense drugs from their offices at much higher prices when compared with pharmacies. It involves the creation of an opportunity to, once again, assign a much higher average wholesale price (AWP) to a physician-dispensed drug - a practice targeted by the earlier reforms enacted in many states using language limiting reimbursement to a price based on the AWP assigned by the manufacturer of the original drug.

Consider a drug where the most common strengths are 5 milligrams and 10 milligrams. If a new strength, say 7.5 milligrams, comes to market, the manufacturer of that new strength can assign a new AWP. According to the report, the AWP of the new strength was much higher than the 5-milligram and 10-milligram AWPs set by their original manufacturers.

In Illinois, the average prices paid for cyclobenzaprine HCL of 5 and 10 milligrams ranged from $0.99 to $1.74 per pill. Before 2012, 7.5-milligram cyclobenzaprine HCL was rarely seen in the market. The 7.5-milligram product was introduced in 2012, and almost all were dispensed by physicians at an average price of $3.79 per pill in post-reform Illinois. The market share of physician-dispensed cyclobenzaprine HCL of 7.5 milligrams increased from 0% in the third quarter of 2012 to 21% in the first quarter of 2013.

Similarly, in California, before 2012, 7.5-milligram cyclobenzaprine HCL was rarely seen in the market. The average prices paid for 5- and 10-milligram cyclobenzaprine HCL, the two common strengths, ranged from $0.35 to $0.70 per pill. Since the introduction of the 7.5-milligram product in 2012, the market share of physician-dispensed cyclobenzaprine HCL of 7.5 milligrams increased from 0% in the fourth quarter of 2011 to 47% in the first quarter of 2013, when it became the strength of the drug most commonly dispensed by physicians. The average price paid for the new strength was $2.90 to $3.45 per pill.

From these patterns, the study's authors infer that the shift in strength was unlikely to be driven by new evidence about superior medical practices. Rather, it is likely that financial incentives drove some physicians to choose the strength for their patients. The study cites several reports that provide evidence of behavioral changes in response to price regulations.

For more information about this study, visit http://www.wcrinet.org/result/are_phy_disp_reforms_sustainable_result.html.

The data used for the report came from payers that represented 46% for California and 51% for Illinois. The detailed prescription transaction data were organized by calendar quarter so that, for each quarter, all prescriptions filled for claims with dates of injury within 24 months of the observation quarter were included. On average, for each of the quarters reported, WCRI included 219,572 prescriptions paid for 60,448 claims in California. The same figures were 43,034 prescriptions paid for 12,714 claims in Illinois. The detailed prescription data cover calendar quarters from the first quarter of 2010 though the first quarter of 2013.

 

Last week, I had the pleasure of working with a national retailer whose leadership team has established some bold goals to transform the culture and reinvent the customer experience. It’s a heady vision that, given their size and structure, will likely prove to be ambitious. Yet, given the distance this organization must travel and the importance of the initiative, it's not calling in the brass band, turning the organizational chart on its head or asking associates to ceremonially sign on to the new mission. Rather than taking big steps in the direction of the goals, the organization is consciously and deliberately taking small steps. The first step leaders have chosen to take is modest and simple: They’re preparing store managers to have 10-minute conversations with their associates. That’s it. And they are banking on those small steps driving significant change. The Small Step Advantage The natural assumption that too many leaders make is that big change requires big steps. And certainly that’s one strategy. But the history books and business journals are littered with stories of audacious, big, visible change efforts that failed miserably despite elegant execution and colossal investments of time and money. Small steps are a powerful and effective alternative for a variety of reasons.

• They are doable. Leaders and employees alike operate in a time-starved environment where every minute matters. Give them a 17-step process, and it will likely be discarded before step 4 is even read. Undoable, unrealistic requests breed ambivalence and resistance, which create their own inertia to change. But suggest a small action that can be embedded into the workflow, and implementation is far more likely.
• They are sustainable. Most change requires a long-term commitment on the part of management and employees alike. Genuine transformation doesn’t occur quickly. As a result, everyone must pace themselves. Big requests, extensive demands and complicated actions may be implemented briefly; but people quickly tire, burn out and turn their attention to other matters. By contrast, smaller, incremental steps can be maintained over time, enhancing the chances of ultimate success.
• Missing one or taking a break isn’t a showstopper. When what’s expected of others to support change is substantial, it becomes a bigger piece of the puzzle. Lose a few pieces, and the picture becomes much less clear. But when more people are contributing in smaller ways over time, missing pieces create less significant gaps.
• The effect is cumulative and reinforcing. Small steps beget more small steps, with each building on the other. When leaders or employees take action and experience positive results, the satisfaction creates an upward energy spiral and encourages more of the same behavior. Over time, these small steps can contribute to a self-reinforcing tornado of commitment and action in support of the desired change.

So the next time you’re faced with implementing an ambitious change, challenge the natural inclination to think big. Instead, think small – doable and sustainable. And consider: How do you eat an elephant? One (small) bite at a time.

There are many definitions of risk, with most coming pretty close to each other. Interestingly, most of these definitions put "risk" well beyond the point of "expected losses" (think of the high point on the actuarial loss curve that trails off into infinity as loss becomes less and less likely to occur but more and more severe; see figure 1 below). But are expected losses and those that fall to the right on the loss curve below really "risks?" If risk is the effect of uncertainty on objectives (one common and simple view of risk), then "expected losses" would not be materially "uncertain;" they would be "expected" (though not certain).

[caption id="attachment_7817" align="aligncenter" width="550"] insurance thought leadership managing risk along a curve[/caption] Figure 1

This issue has perplexed many risk professionals, especially those who lean into the traditional realm, which bases risk management on insurance. These professionals perform a very necessary function but, by focusing on managing expected losses, may be limiting their influence and, in some cases, upward mobility. After all, senior managers are typically interested in the unexpected and uncertain potential for disruption to the organization, its strategy and its plans that define success. As one CEO I worked for would say: "Tell me what I don’t know and can’t foresee." That is an understandable interest because the CEO is the person ultimately accountable for success, both short and long term.

Can expected losses prevent that success? The answer is generally "no," assuming these losses have been accounted for in budgets, whether they are funded as retained losses or transferred to others through insurance or contract. Now, budget shortfalls do occur, and some claims may not be paid under certain insurance or contract conditions, but these are typically one-off variances that are typically well within risk appetite (whether defined formally or not) and thus usually wouldn't prevent accomplishment of most objectives.

So, the obvious questions are two: 1] How does your organization define risk, and is it the right definition, which all stakeholders understand, agree upon and can manage to? and 2] Where on the loss curve do you want to manage risk to?

Other questions will emerge in trying to get to the second question, in particular. For example, do you assign more importance to likelihood or impact? I would suggest they are not of equivalent import and get their relative importance from a well-defined risk strategy and the risk culture that undergirds it.

Another question that quickly becomes critical is: How far out on the likelihood axis is relevant to your risk strategy? This is the ultimate question that will define where you focus along the x-axis (likelihood or frequency), what your resource needs are, the level of sophistication of tools and techniques necessary to manage risk effectively, etc.

I urge you to get your key risk stakeholders together and vet these issues to ensure you have the right priorities and focus for managing risk within your organization. Absent this, you'll be flying blind along a curve that presents an infinite number of combinations of likelihood and impact. Can you afford to fly blind in the face of the potential of catastrophic uncertainty?

Baltimore Ravens Coach John Harbaugh complained that Patriots Coach Bill Belichick used deceptive tactics in a playoff game last weekend, after a novel, efficiently executed series of third-quarter plays disoriented the Ravens defense and helped power the Patriots to AFC championship game. But the complaint is short on Henry Wadsworth Longfellow and Ralph Waldo Emerson and overlarded with Edgar Allan Poe.

Everything about the Patriots resounds with innovation, resourcefulness and the persistence celebrated by Longfellow and Emerson.

In "Paul Revere's Ride," Longfellow expressly celebrates those virtues achieving independence against a stronger adversary:

"In the books you have read,

How the British Regulars fired and fled,

--How the farmers gave them ball for ball,

From behind each fence and farmyard-wall,

Chasing the red-coats down the lane,

Then crossing the fields to emerge again

Under the trees at the turn of the road,

And only pausing to fire and load."

Individual and organization, player and team, succeed when all embrace innovation, as Emerson says in "Self-Reliance": "Power...resides in the moment of transition from a past to a new state…. This one fact the world hates, that the soul becomes; for that forever degrades the past.... [A] man or a company of men, plastic and permeable to principles, by the law of nature must overpower and ride all cities, nations, kings, rich men, poets, who are not."

The Patriots' clever disguise of which players were eligible receivers and which ineligible presented a new way of reading, a fresh legibility executing so quickly that the Ravens could not read the play until it had transpired.

The play was simply another of Belichick's irrepressible innovations. A decade or so ago, in two Super Bowls, linebacker Mike Vrabel deployed on offense and caught touchdown passes in both games.

Ravens Coach John Harbaugh's choice of words after last week's deception captures his frustration. "It's a substitution type of a trick type of thing," Harbaugh told journalists. "They don't give you a chance to make the proper substitutions.... It's not something that anybody's ever done before…. They...announce the ineligible player, and then Tom Brady would take them to the line right away and snap the ball before we had a chance to figure out who was lined up where. That was the deception part of it." A complaint got nowhere with the league. Celerity trumped incumbent legibility.

In effect, Coach Harbaugh is perseverating Poe.

Poe portends as much in the team's namesake, the poem "The Raven":

"Prophet!" said I, "thing of evil!-prophet still, if bird or devil!-

Whether Tempter sent, or whether tempest tossed thee here ashore,

Desolate yet all undaunted, on this desert land enchanted-

On this home by Horror haunted-tell me truly, I implore-

Is there—is there balm in Gilead?-tell me-tell me, I implore!"

Quoth the Raven "Nevermore."

Of course, no one is saying "nevermore" about the Ravens or the coach, whose team did well in a competitive game and won a Super Bowl but two years ago.

But immersive reading in Emerson and Longfellow charts the Colts' best shot prepping for the AFC championship game against the Patriots. Colts coaches and players would find few other drills as efficient or effective as they get ready to challenge New England champs.

Comprehension of Emerson's and Longfellow's insights shows how to innovate in a highly competitive game.

Police officers and firefighters in California and Arizona in separate cases are alleging violations of the Racketeers and Influenced Corruption Act against third-party administrators York and Corvel and the municipalities those companies serviced. In California, the defendant cities are Rialto and Stockton. In Arizona, it's Phoenix.The California complaint says the companies "routinely and improperly chose to hurl frivolous and legally unsound roadblock after roadblock to wrongfully deny care" to injured first responders.The plaintiffs believe that a "pattern of practice" at the defendant companies together with the involvement of certain personnel for the defendant municipalities created an enterprise to fraudulently deny benefits in violation of RICO statutes. Michael P. Doyle, a founding partner of the Doyle Raizner law firm, which filed both complaints, told WorkCompCentral the Arizona case already survived a motion to dismiss, and he anticipates going to trial by the middle of summer. The California case is just getting started, he said. The defendant cities paid the administrators based on a flat fee per claim and a percentage of savings from utilization-review and bill-review services that were provided, creating an incentive for improper conduct, the plaintiffs claim. The alleged pattern of denying legitimate claims allowed the defendants to "lower the liability of the city, while at the same time maximizing the TPA's revenues (and allowing the TPA to maintain and obtain contracts with other public entities based on their 'outstanding' financial performance at the expense of public servants)." The defendant employers conspired with the defendant administrators and "denied claims in hopes that some plaintiffs will simply not continue to seek benefits under workers' compensation entirely," the complaint says. The complaint also alleges the defendants ignored California law regarding pre-existing injuries that are aggravated by a new incident, as well as statutes creating a presumption of compensability for certain conditions suffered by first responders.

Representatives for the various defendants would not comment on the cases to WorkCompCentral reporter Greg Jones because of the pending litigation or were not available prior to deadline.

Credit rating is a highly concentrated industry, with the two largest CRAs, Moody's Investors Service and Standard & Poor's (S&P) controlling 80% of the global market share, and the "Big Three" credit rating agencies, which also include Fitch Ratings, controlling approximately 95% of the business. While the value of the rating agencies has been highly questioned, they remain critically important to many organizations. Risk managers can play a key role in preserving and improving their organizations' credit rating. Having had the opportunity to participate in rating agency presentations for a publicly traded company and a non-profit, I learned that the process was similar for both and that the stakes were high, requiring a tremendous amount of preparation. In the case of the publicly traded company, my presentation materials were focused on traditional risk management and audit practice (it was the ‘90s), and with the non-profit my focus was on enterprise risk management (progress). The following, though not a comprehensive description of the rating process, describes key areas where risk managers should focus:

• Engage with the lead on the rating team (typically within the CFO division)
  • Prepare a high level report for the lead's review. Provide information regarding how the organization is addressing risks, both insurable and non-insurable.
• Inquire about the rating agency criteria
  • Agencies do not use the same criteria, but they are required to be transparent about the criteria and will share them beforehand. Through inquiry, you can identify the areas of risk that will be their focus. Read other institutions' credit reports for clues.
• Know your financial statements
  • Carefully review your financial statements for what the rating agency analyst will be looking for: debt, finances, significant litigation, mergers and acquisitions, etc. and be prepared to address questions around risk in all these areas.
• Understand the metrics that are used
  • In addition to financial metrics, the focus will also be on legal review, risk management and governance.
    • Strategies and polices
    • Board composition and capabilities
    • Bank covenants
    • Management turnover
    • Ability to anticipate, predict and respond to potential challenges
• Rehearse your presentation
  • It is common to rehearse individually and as a group for the presentation. Your presentation time will likely be less than 30 minutes. There may also be tours provided to the rating agency analysts, so assist in preparing the people involved and the physical location.

What can lead to a downgrade? Failure to meet targets, two or more years of declining revenue, debt burden that exceeds 10% of operating revenue, significant turnover in leadership and litigation. What can lead to an upgrade?  Consistent financial performance, lower debt burden, modest future capital plans (not overextending) and a strong enterprise risk management program. At the University of California (UC), we presented our enterprise risk management program during the rating agency review. Universities access the capital markets to finance their working capital need, so a strong credit rating is critical. The result was that UC was the first non-financial institution to receive credit agency acknowledgement of an enterprise risk management program. S&P's RatingsDirect on the Global Credit Portal wrote on Sept. 9, 2010: "The UC has implemented a system-wide enterprise risk management information system, which in our opinion, is a credit strength." As a result of the presentation, Standard & Poor’s requested that we conduct a webinar on Enterprise Risk Management in Higher Education for its analyst in New York and has continued to focus on the importance of ERM. The company has written: "Standard & Poor’s Ratings Services has expanded its review of the financial service industry’s enterprise risk management (ERM) practices. This enterprise risk management initiative is an effort to provide more in-depth analysis and incisive commentary on the many critical dimensions of risk that determine overall creditworthiness. This enhancement is part of Standard & Poor’s holistic assessment of enterprise risk management of corporations and financial institutions. Standard & Poor's is continually enhancing its ratings process to respond to the emergence of new risks and marketplace needs and conditions." The presentation centered on demonstrating that risk management programs and tools were in place and effective, fulfilling the following criteria: ERM aims to measure an institution's achievement of four primary objectives:

1. Strategic - High-level goals that are aligned with and support the institution's mission
2. Operational - Continuing management process and daily activities of the organization
3. Financial reporting - Protection of the institution's assets and quality of financial reporting
4. Compliance - The institution's adherence to applicable laws and regulations

Within each of these four objectives, there are eight related components:

1. Internal environment - The general culture, values and environment in which an institution operates. (e.g., tone at the top)
2. Objective-setting - The process management uses to set its strategic goals and objectives, establishing the organization's risk appetite and risk tolerance
3. Event identification - Identifying events that influence strategy and objectives, or could affect them
4. Risk assessment - Assessment of the impact and likelihood of events, and a prioritization of related risks
5. Risk response - Determining how management will respond to the risks an institution faces. Will they avoid the risk, share the risk or mitigate the risk through updated practices and policies?
6. Control activities - Represent policies and procedures that an institution implements to address these risks
7. Information and communication - Practices that ensure that the right information is communicated at the right time to the right people
8. Monitoring - Consists of continuing evaluations to ensure controls are functioning as designed, and taking corrective action to enhance control activities if needed

Your criteria (framework) could be different; the key is to demonstrate that you have an effective means of identifying, managing and monitoring a wide variety of risks across the enterprise. Of primary importance is the identification of risks. The analysts are very concerned that organizations are going to be hit by surprises and thus be ill-prepared to respond and recover from them. Examples of programs and tools that evidence your ability to detect risks:

• Policies that are supported by awareness and education (people know the right thing to do), backed up with reward and accountability for doing the right thing – built into employee selection process, job description, development plans and reviews and compensation plans (people want to do the right thing)
• Multiple reporting channels – anonymous hotlines for employees, customers and the public and ease of access to human resources, compliance, risk management and legal and the inclusion of continual communication that retaliation is not tolerated
• Incident reporting and tracking systems (claims, safety, human resources information systems, etc.)
• Risk assessments at both an enterprise level and at the functional level
• Business intelligence system – the ability to aggregate and analyze data across the organization to enhance detection and advance predictive modeling

Key takeaway: As a risk manager or enterprise risk practitioner, your engagement in the credit rating process is an ideal way for you to add value. Leverage your ERM program to highlight your organization's ability to detect, manage and respond to risk events.

Usage-based insurance, a.k.a. pay-as-you-drive, is an intriguing proposition to drivers. For most drivers, usage-based insurance offers plenty of allure: cost savings, extra motivation to drive safely and added incentive for the ecologically minded to drive less often. But some customers note privacy concerns. Here are three ways to address privacy to make customers feel more comfortable. 1.  Show them the benefit. Younger consumers have grown up in the digital age, and, as such, they’ve gotten used to sacrificing a bit of privacy to gain something of value. According to Pew, 81% of Millennials are on Facebook, and a full 55% have posted a “selfie” on a social media site. If they understand that giving up some driving privacy may allow them to earn better rates, and that they may even become better drivers from the feedback they receive, privacy concerns may fall by the wayside. 2.  Be transparent. Track only the data you need, and be straightforward about it. Inform your customers of what you track, where you store it, why you need it and how you protect it. Honesty garners respect, and transparency puts you one step ahead. In the area of transparency, smartphone UBI delivers a clear advantage over the use of onboard diagnostic devices. With a black box plugged into the dash, consumers have no idea what you’re looking at. With smartphone UBI, they can see every factor measured and how they score. When marketing and onboarding new customers, be clear about how data will and will not be used. Some consumers may want to know if their information will be given to police or other third parties. Answer these questions clearly, and abide by the policies established. 3.  Continue to offer choices. Some drivers love the concept of UBI and are willing to reveal their habits to participate. Others are not -- and that’s okay. By providing your customers the information they need to understand their options, and reminding them they’re free to choose whatever is best for them, you relieve concerns and build trust -- not to mention brand loyalty. For more on how UBI works for drivers, click here.

Less than 10% of people keep their New Year's resolutions for at least six months, according to research from Cancer Research UK, with half breaking their resolutions within a fortnight, blaming a lack of will power. 20% planned to cut back on alcohol, others to spend less money (34%), cut down on chocolate (21% and go to the gym (22%). New Year’s resolutions aren’t just for individuals, though. They can also be found in the annual reports of most companies, including insurers, when they set out their strategic objectives for the coming year. Sadly, most insurers say the same thing, even if different language is used: reduce costs, improve efficiency, grow, focus improve service. There’s a more than reasonable chance that they will be saying the same things next year, as well. Delivering against strategy objectives is as much a matter of leadership as it is of planning. I wonder how many business leaders are also abject failures in keeping their New Year's resolutions? After all, a leopard doesn’t change its spots. Maybe the answer is to set up a project team and delegate some responsibilities. I imagine an interesting conversation in the office: "Jim, I’ve decided that your role this year is to give up chocolate for me...." Maybe it’s about having an incentive? Insurers might say to a policyholder that they will give a 20% discount on premiums if the policyholder gives up booze. Such a discount, coupled with the money saved, could be a compelling argument. And, after all, isn’t that what user-based insurance is fundamentally about? I wonder: Will future insurance models need to have greater alignment between risk mitigation plans of insurers and personal behavior of the individual? I suspect we are already close to having that capability, as insurers increasingly use analytics to understand their customers and create more compelling offers at renewal. Can’t we extend that thinking? So here’s a challenge for insurers – not to promise the same old stuff but rather to make a single big resolution for their organization which will be differentiating, ambitious, maybe even bold! Perhaps insurers need to look into the crystal ball and imagine not only themselves, but also the industry in 2030, and start to realize how different the insurance business will be by then. And then, in 2015, do "just one thing" of significance to take them along that journey. As for me and my resolution? I asked a friend what she thought I needed most, and she suggested a visit to the opera, on the basis that it’s apparently good for the soul. How I see myself, and how she saw me, are apparently different. Isn’t that the same for all of us, and for the insurance industry as a whole? I’ll tell you when I’ve been to the opera!