In 1801, Eli Whitney went before the US Congress with 10 working muskets. He proceeded to disassemble each of them, mix and scramble all the parts, then reassemble 10 working muskets. Prior to that day, most things were custommade by craftsmen using hand tools. Then, in a flash of geological time, the idea of interchangeable parts was released to the world -- it would be impossible to put the idea back in its cage. Extraordinary innovation followed in the industrial revolution. In the murky world of crypto-currencies, the financial instruments of tomorrow may not necessarily be assembled like they are today. The new applications of  decentralized currency are modeled more like “energy” flows rather than individual  units of account. Energy exists in many forms, such as electrical, chemical, thermodynamic, kinetic and nuclear, but its objective is always the same: to move something in the physical world -- to create change. The value of crypto-currency is proportional to the magnitude of change it can induce. A generalized theory is emerging to define and specify decentralized applications (DApps). This makes them easier to identify, measure and replicate. If ignored, these innovations have the potential to be extremely disruptive to the insurance industry. If adapted, they can greatly increase the efficiency, variety, precision and granularity for insurance products of tomorrow. Not unlike at the dawn of the industrial revolution, there has been an extraordinary level of innovation in crypto-currencies since the inception of Bitcoin. The objective of these efforts is to move something in computational space such as flipping a switch, verifying a data set, securing identity, establishing order, establishing ownership or verifying capacity. This may seem somewhat obscure until you realize that these “energies” can convert and combine in immeasurable combinations to form autonomous logic circuits -- i.e. complex contracts. Because all businesses are based on contracts that act upon some physical space, it is only a matter of time before crypto-contracts jump to the physical space, as well. As David Johnson, CEO of DApps Fund (a venture capital firm for decentralized innovation), says; “Everything that can be decentralized will be decentralized.” Eli Whitney was said to have uttered similar sentiments. Early DApps are little computational engines that operate autonomously and whose output is determined by an algorithm. The resulting decisions are binary and final. There are three characteristics that an application must have to be classified as a DApp. As you read these conditions, note how different they are from a traditional corporate structure.

1. The application must be completely open-source. It must operate autonomously, with no entity controlling the majority of its tokens. And its data and records of operation must be cryptographically stored in a public, decentralized block chain.

2. The application must generate tokens according to a standard algorithm or set of criteria. These tokens must be necessary for the use of the application, and any contribution from users should be rewarded by payment in the application’s tokens.

3. The application may adapt its protocol in response to proposed improvements and market feedback, but all changes must be decided by a majority of its users.

Next, there are three classes of decentralized applications that align loosely to a familiar computer analogy:

• A Type I DApp is analogous to a computer operating system such as Windows or the Mac OS X.

• A Type II DApp is analogous to a general-purpose software program such as Word, Excel or iPhoto.

• A Type III DApp is analogous to a specialized software solution like a mail merge, an expense macro or a blogging platform.

As such, we can expect that there will be fewest Type I DApps, more Type II DApps and even more Type III DApps. The more direct definition of these three classes is:

• Type I decentralized applications has its own block chain. Bitcoin is the most famous example of a Type I decentralized application, but there are others.

• Type II decentralized applications use the block chain of a Type I decentralized application. Type II decentralized applications are protocols and have tokens that are necessary for their function.

• Type III decentralized applications use the protocol of a Type II decentralized application. For example: A hypothetical cloud protocol that uses a Type II DApp to issue "cloudcoins" that can be used to buy cloud computing services would be an example of a type III decentralized application.

Taken together, we have most, if not all, of the familiar components of governance and interdependencies without the layers of management that are associated with traditional corporations. As you absorb the analogy and definitions, consider how DApps can be nested, combined and integrated with other DApps to emulate complex contracts. One particularly interesting DApp that recently launched is called Counterparty. Counterparty is a Type II DApp that  performs one single task extremely well. Counterparty is a betting platform; or we can put it politely and call it an escrow platform. Two parties may enter into an agreement about the outcome of a future event such as a horse race or football game. Each player puts his or her money into an escrow account that is sealed prior to the race. After the results are registered, the DApp autonomously transfers the money from the combined account to the winner. Now imagine 500 bettors putting their money into the escrow account before the contract event. Upon completion of the event, the money is automatically assigned by algorithm to the winners in pre-assigned proportions. It does not take too much imagination to see this as an insurance product, except without agents, executives, managers, office towers or cute little geckos. Soon, marathon runners can pool health insurance more toward sprains and falls, and less toward heart disease. Mini-van moms can pool auto insurance for number of passengers rather than miles driven. Professionals can pool E&O insurance by  peer review. In fact, any affinity group can accurately price the perils that they are also most capable to manage. DApps are massively scalable; one application can serve infinite users. The market size of binary betting (sports, insurance, coin toss, etc.) combined with complex betting (contracts for difference, hedging, options, etc.) is in the trillions of dollars. So while Counterparty has only one use case, the use case is massive. Now imagine 100,000 DApps operating autonomously, combining and integrating into complex relationships -- not unlike building a jigsaw puzzle. There was once a time when craftsmen guilds were the most powerful organization in the republic. Many of us remember the days when labor was increasingly replaced by machinery. The time may be arriving where machinery can also replace management. The insurance industry must become familiar with this environment and have the wherewithal to reorganize itself, before someone else does it for them. *** Come Join us at The Future of Money and Technology Summit in San Francisco today, Dec. 2, 2014, for my panel discussion on Fueling the Decentralization Movement.  Speakers: Paige Peterson - Maidsafe Sam Onat Yilmaz - Dapps Fund Joel Dietz - Swarm.co Christian Peel - Ethereum Moderator: Dan Robles, The Ingenesist Project

Employers trying to continue offering affordable health and welfare benefits amid the expanding costs and regulations enacted under the Patient Protection & Affordable Care Act (ACA) often are encouraged by some consultants and brokers to consider offering  coverage options pursuant to a "private exchange." While these options sound attractive, not all work for all employers. The consumer-driven healthcare and other private exchange lingo used to describe these arrangements often means different things to different people. Some "private exchanges" are little more than high-tech online cafeteria enrollment arrangements. (See, e.g., A 'Cynical' Look at Private Exchanges.) Employers need to scrutinize proposals both for compliance and other legal risks, affordability and cost and other suitability. When considering a private exchange or other arrangement, it is important to understand clearly the proposal, its design, operation, participating vendors, the charges, what is excluded or costs extra and who is responsible for delivering what. Agencies have issued a long stream of guidance cautioning employers against paying for or reimbursing premiums for individual policies or the cost of enrolling in coverage under a public health insurance exchange. (See, e.g., DOL Technical Release 2013-03; IRS Notice 2013-54;Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangement; IRS May 13, 2014 FAQs available here. )Most recently, the new FAQS About Affordable Care Act Implementation (XXII) (FAQ XXII) published by the agencies on Nov. 6, 2014, reiterates agency guidance indicating that tax basis for purchasing individual coverage in lieu of group health plan coverage.  FAQ XXII, among other things, states:

• Health reimbursement accounts (HRAS), health flexible spending arrangements (health FSAs) and certain other employer and union healthcare arrangements where the employer promises to reimburse health care costs: are considered group health plans subject to the Public Health Service Act (PHS Act) § 2711 annual limits, PHS Act § 2713 preventive care with no cost-sharing and other group market reform provisions of PHS Act §§ 2711-2719 and incorporated by reference into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code) but
• HRA or other premium reimbursement arrangements do not violate these market reform provisions when integrated with a group health plan that complies with such provisions. However, an employer healthcare arrangement cannot be integrated with individual market policies to satisfy the market reforms. Consequently, such an arrangement may be subject to penalties, including excise taxes under section 4980D of the Internal Revenue Code (Code).

FAQ XXII reinforces this prior guidance, stating, “Such employer healthcare arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.” Another potential issue arises under the various tax and non-discrimination rules of the code and other federal laws.  For instance, Code sections 105, 125 and other Code provisions against discrimination in favor of highly compensated or key employees could arise based on the availability of options or enrollment participation.  Historically, many have assumed that these concerns could be managed by treating the premiums or value of discriminatory coverage as provided after-tax for highly compensated or key employees. However, IRS and Treasury leaders over the past year have made statements in various public meetings suggesting that the IRS does not view this as a solution. Of course, FAQ XXII also highlights the potential risks of underwriting or other practices of offering individual or other coverage in a manner that discriminates against disabled, elderly or other employees. In addition to confirming that the arrangement itself doesn't violate specific Code or other requirements, employers and others responsible for structuring these arrangements also should critically evaluate and document their analysis that the options offered are suitable. Like other employee benefit arrangements, ERISA generally requires that individual or group products offered by employers, unions or both be prudently selected and managed. Compensation arrangements for the brokers and consultants offering these arrangements also should be reviewed for prudence, as well as to ensure that the arrangements don't violate ERISA's prohibited transaction rules. Eligibility and other enrollment and related administrative systems and information sharing also should be critically evaluated under ERISA, as well as to manage exposures under the privacy and security rules of the Health Insurance & Portability Act (HIPAA) and other laws. As a part of this analysis, employers and others contemplating involvement in these arrangements also will want to review the vendor contracts and operating systems of the vendors that will participate in the program for legal compliance, prudence for inclusion, prohibited transactions and other legal compliance, as well as to ensure that the contract holds the vendor responsible for delivering on service and other expectations created in the sales pitch. In reviewing the contract, special attention should be given to fiduciary allocations, indemnification and standards of performance, business associate or other privacy and data security assurances required to comply with HIPAA and other confidentiality and data security requirements and the like. The contractual commitments from the vendor also should cover expected operational performance and reliability as well as legal compliance and risk management.

“Young and old are dropping themselves from Wall Street at a pace we have not seen before” (sudden spade of suicides in 2014). “High -flying executives end up crash-landing in jail.” or “Your competitive advantage lies in the hearts and minds of your employees.” Deciding on a title for this piece was more difficult than writing it, but in the end it all comes down to thinking differently. We have to change the way we think about risk management and get away from the view that systems, processes and committees are the keys to effective risk management. Business leaders are slowly waking up to the concept of risk culture building, but it might be too late for some, and throwing money at the problem will also not help; time is what you need to invest here. The time has come for you to hospitalize the whole business and cure the disease of greed (and some others). Business success is anyway no longer measured by profits only. Many consultants and executives tried to define risk culture, but it is almost impossible because of all the worldviews, cultures, sub-cultures and generations out there in your business world. It is a lot easier to define risk culture building: the process of growth and continuous improvement in the way each and every person in an organization will respond to a given situation to mitigate, control and optimize that risk to the benefit of the organization. The biggest business failures in recent times were also not related to money; most were as a result of operational risk failures and, in particular, failures of people risk. A quick analysis of the biggest business losses in history highlights the causes as being one of two key people risk elements: “lack of management oversight” or “because of a management override.” Business leaders either did not do their jobs or completely misused their power and authority, often to cover up their personal lack of ethics or misconduct. Business (and other) leaders must fundamentally change the way they think about risk management; you cannot suddenly “bolt on” an effective risk culture. Do not make the same mistake you made when you saw risk management as an implementation project and spent a fortune on systems and processes to get a risk report that is as useful as driving a car without looking through the windshield. You can have the best dashboard and rear-view mirror (last month’s risk report), but if you make business decisions based on those you do not get very far. Organizations spent vast amounts of money to hire consultants to implement risk management as a project, believing that it can be done that way. Risk management cannot be implemented; it is a process of building and continuous improvement in an environment that is constantly changing. Business is no longer life in the fast lane; it is life in the on-coming traffic, and, sadly, some organizations still try to drive while looking in the rear-view mirror. Risk management can also not be a project; building an effective risk culture has only one possible end- date: the day you go out of business. Many organizations are heading toward this day by doing very little about risk management. If you are not good at risk management or not doing anything about building an effective risk culture, you will be exploited by those who are better at it. Many organizations are speeding up the process by working toward getting all risks “green”;  if everything is “green,” you are not taking enough risk to get enough reward and stay in business. As the famous racecar driver Mario Andretti put it:” If everything seems under control, you are just not going fast enough.” The risk profile of any organization must steadily increase over time, move from green to amber and onward to red, for those who run their businesses according to traffic lights. As you get better at risk management, you must take more risk for more reward. If you are not getting better at risk management, don’t try to get more reward. It does not work that way!

The last few years have witnessed truly astounding developments in the area of information management. We've become masters at creating, storing, analyzing and uncovering the hidden value of massive volumes of information. It seems that, every day, we're hearing about how all this big data has been used for amazing purposes, such as to improve customer service, uncover fraud, develop pharmaceutical products, predict diseases, improve airline travel and so on. Unfortunately, it also seems that, every day, we're hearing about how big data is causing big headaches arising out of improper management and security breaches. Recent headlines about cyber incidents have forced companies to analyze their risk of incurring information-related liability and to take steps to mitigate those risks. Concern over these issues, however, shouldn't stop with the IT department or even the C-suite. As Target and other companies have recently experienced, legal claims related to data-related events are now being asserted against corporate boards in the form of shareholder derivative actions. Although the legal liability of board members for information-related mishaps is an emerging area of the law, longstanding principles make clear that board members have a fiduciary duty to act on an informed basis, in good faith, for the best interests of the company. The emerging area of information governance, including privacy and data security, is no exception to this rule. Checklist of Issues to Consider Every organization is different and presents its own unique information risk profile. Corporate boards should be informed of and take steps to address the potential sources of information risk applicable to their specific organization. Those areas may include the following:

• What types of information is the entity managing, and does it include sensitive data such as health information, credit card data or intellectual property?
• How is enterprise data being managed throughout its entire life cycle, from creation or collection through final disposition or destruction?
• Are policies and procedures in place to ensure that information with no business value or compliance/legal restrictions is destroyed in a legally defensible manner?
• Have policies been implemented relating to the company's use of information, including privacy concerns and social media usage?
• Are there policies in place to manage IT assets, including mixed-use devices (those used for both personal and business purposes), while at use and at the time of disposition?
• Have reasonable data and network security policies, protocols and procedures been created, and are they regularly updated?
• Are all information-related policies actually in effect, enforced and updated, or are they just sitting on a shelf?
• If the company engages in big data projects, is the collection, storage, use and resale of data consistent with customer consents, applicable laws and regulations?
• Is there effective vetting and management of third parties that handle the company's data or have access to the company's computer network?
• Does the enterprise have up-to-date plans to address information-related incidents, such as a data breach, and are those plans vetted and practiced, before a breach ever happens?

Take-Away Message Responsibility for the management of enterprise information and mitigation of information-related liability has now reached the board level of many corporations. Active oversight by engaged and informed board members can reduce those risks to the corporation as well as to the members of the corporate board themselves.

By now, readers of this and many other outlets know that conventional workplace wellness doesn’t work. Period. It’s not that there is no evidence for it. It’s that all the evidence is against it. The “evidence” in favor of conventional wellness is easily disproven as being the result of gross incompetence or dishonesty. Occasionally, as in the American Journal of Health Promotion, investigators even manage to disprove their own savings claims without intending to. As we say in Surviving Workplace Wellness: “In wellness, you don’t have to challenge the data to invalidate it. You merely have to read the data. It will invalidate itself.” Just before Thanksgiving, both Health Affairs (with our blog post) and Soeren Mattke, the often-misquoted author of multiple RAND studies (in a comment to that post), weighed in with the same conclusion, as described in the headline: “Workplace Wellness Produces No Savings.” No longer can anyone claim with a straight face that “pry, poke, prod and punish” wellness programs saved money, or were even beneficial for employee health. And yet… Within one business day of the posting, Reuters’ Sharon Begley reported that on Tuesday, Dec. 2, the Business Roundtable’s (BRT) CEO is having a sit-down meeting with President Obama to demand exactly the opposite of what all the evidence shows: He wants more flexibility on wellness. In particular, the BRT wants the administration to call off the EEOC watchdogs, who have recently attacked Honeywell  and others for forcing employees into medical exams that appear to violate the Americans with Disabilities Act. The BRT’s goal is to allow companies to punish unhealthy workers to the limits of the Affordable Care Act’s wellness provision. (Recall from our earlier postings that the ACA wellness provision was modeled after the Safeway wellness program, which Safeway later admitted did not even exist during the period for which the company claimed it saved money.) In essence, the BRT leadership wants to make their employees love wellness whether they like it or not. This complete disconnect between the data and the BRT demands can be explained only one of two ways. (1)    The CEOs who compose the Business Roundtable have been duped into thinking wellness saves money, because they aren’t bright enough to Google it for themselves and learn that it doesn’t. (2)    The CEOs who compose the Business Roundtable are very bright and have figured out that the only way they can seriously manage their healthcare costs is by fining or shaming employees with chronic disease or obesity into leaving their companies…or at the very least collecting large fines from them. Let’s examine each possibility in turn. As to the first, people don’t get to the C-Suite by simply accepting information that their vendors tell them, especially when the numbers obviously don’t add up. Events that can be prevented by wellness programs, like heart attacks, account for only about 8.4% of  hospital spending, or less than 4% of total medical spending in the commercially insured population. The C-suite also must know that, as with the tobacco industry years ago, when the only people defending an industry are people who make their living from it, then the industry is a wholly illegitimate enterprise. The first possible explanation would therefore need to be termed an impossibility. The second alternative seems like something only a conspiracy theorist could conjure, but as Sherlock Holmes said: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” These CEOs must know that these “let’s play doctor” programs and fines are expensive, intrusive, ineffective and embarrassing for the employees…and take a major toll on morale. One organization, Penn State University, faced an employee revolt and backed down. Vik is currently in a wellness program that is eerily Penn State-like, and he is documenting his experiences. And surely someone has informed the BRT that the heart attack rate is only about 1 in 800 annually in the commercially insured population, while using wellness programs to identify all the other diseases they hope to prevent or control will merely drive up employers’ drug spending; these nascent conditions wouldn’t become debilitating until years into retirement. Guidelines promulgated by the U.S. Preventive Services Task Force (USPSTF) call for judicious use of clinical screenings in various at-risk subpopulations, (with a few exceptions, such as blood pressure). By contrast, wellness screening is done to all employees usually at least once a year. That screening frequency multiplies the odds of false positives, especially in younger populations. So why go to the mat with the president over these programs? Perhaps CEOs believe that fatter employees have lower productivity, which is probably the case – if you happen to own a package delivery service or a ballclub. Otherwise, it’s hard to imagine that weight affects one’s ability to answer the phone, conduct a meeting or handle almost any other task commonly required in today’s workplace. And these CEOs' own actions contradict any claims about how weight loss leads to greater productivity: Most of the growth in line manufacturing jobs takes place in states with high obesity rates…but lower wages. Obviously, the tangible benefit of the latter overwhelms any offset by the former, or hiring practices would be different. Unless there is an alternate explanation (or the BRT simply doesn’t understand the data), this BRT demand of the president must be interpreted more cynically: It’s the opening salvo in an attack against aging and chronically ill employees whom employers simply aren’t allowed to fire any more. Employers want to get rid of these employees because – often due to circumstances beyond these employees’ control – their healthcare expenses are believed to be higher.

As insurers increasingly collect “big data” -- think petabytes and exabytes -- it's now possible to use new data tools and technologies to mine data across three dimensions:

• Large size/long duration -- Traditional data mining usually was limited to three to five years of data. Now you can mine data accumulated over decades.
• Real-time -- With the advent of social media and the different sources, data pours in at ever-increasing speeds.
• Variety of types -- There's more variety of data, both structured and unstructured, that are drastically different from each other.

The ability to master the complexities of capturing, processing and organizing big data has led to several data-centric opportunities for carriers. Personalized marketing Big data is playing an increasing role in sales and marketing, and personalization is the hot industry trend. Gathering more information about customers helps insurance companies provide more-personalized products and services. Innovative companies are coming up with new ways to gather more information about customers to personalize their buying experience. One example is Progressive's Snapshot device, which tracks how often insureds slam on the brakes and how many miles they drive. It lets insurers provide personalized products based on customers’ driving habits. A device like Snapshot captures information from the car every second, collecting data like how often drivers brake, how quickly they accelerate, driving time, average speed, etc. According to facethefactsusa.org, U.S. drivers log an average of 13,476 miles per year, or 37 miles a day. Big data systems have to process this constant stream of data, coming in every second for however long the user takes to travel 37 miles. Even if only 10% to 15% of customers use the device, it is still a huge amount of data to process. The systems have to process all this information and use predictive models to analyze risks and offer a personalized rate to the user. People are increasingly using social media to voice their interests, opinions and frustrations, so analyzing social feeds can also help insurance companies better target new customers and respond to existing customers. Using big data, insurers can pinpoint trends, especially of complaints or dissatisfaction with current products and services. Getting ahead of the curve is crucial because bad reviews can spread like wildfire on the web. Risk management  The wealth of data now available to insurance companies -- from both old and new data sources -- offers ways to better predict risks and trends. Big data can be used to analyze decades of information and identify trends and newer dimensions like demographic change and behavioral evolution. Process improvement and organizational efficiency Another popular use is for constant improvement of organizational productivity by recording usage patterns of an organization's internal tools and software. Better understanding of usage trends leads to:

• Creation of more useful software that better fits the organization's needs.
• Avoidance of tools that do not have a good return on investment.
• Identification of manual tasks that can be automated. For example, logs and usage patterns from tools at the agent’s office are important sources of information for understanding customer preferences and agency efficiency.

Automation of manual processes results in significant savings. But in huge, complex organizations, there are almost always overlapping or multiple instances of similar systems and processes that result in redundancy and increased cost of maintenance. Similarly, inadequate and inefficient systems require manual intervention, resulting in bottlenecks, inflated completion times and, most importantly, increased cost. Using data from internal systems, systems can study critical usage information of various tools and analyze productivity, throughput and turnaround times across a variety of parameters. This can help managers understand inadequacies of existing systems and identify redundancy. The same data sources are also used to predict higher and leaner load times, so the infrastructure teams can plan for providing appropriate computing resources during critical events. These measures add up quickly, resulting in significant cost savings and improved office efficiency. Automated learning While big data technologies now help perform regular data-mining on a much bigger scale, that’s only the beginning. Technology companies are venturing into the fuzzy world of decision-making via artificial intelligence, and a branch of AI called machine learning has greatly advanced. Machine learning deals with making computer systems learn constantly from data to progressively make more intelligent decisions. Once a machine-learning system has been trained to use specific pattern-analyzing models, it starts to learn from the data and works to identify trends and patterns that have led to specific decisions in the past. Naturally, when more data -- along all of the big data axes -- is provided, the system has a much better chance to learn more, make smarter decisions and avoid the need for manual intervention. The insurance and financial industries pioneered the commercial application of machine learning techniques by creating computational models for risk analysis and premium calculation.  They can predict risks and understand the creditworthiness of a customer by analyzing their past data. While traditional systems dealt with tens of thousands of data records and took days to crunch through a handful of parameters to analyze risks using, for example, a modified Gaussian copula, the same is now possible in a matter of hours, with two major improvements. First, all available data can be analyzed, and second, risk parameters are unlimited. Predictive analytics Machine language technology can use traditional and new data streams to analyze trends and help build models that predict patterns and events with increased accuracy and convert these predictions into opportunities. Traditional systems generally helped identify reasons for consistent patterns. For example, when analysis of decades of data exposes a consistent trend like an increase in accident reporting during specific periods of the year, results indicated climatic or social causes such as holidays. With big data and machine learning, predictive analytics now helps create predictions for claims reporting volumes and trends, medical diagnosis for the health insurance industry, new business opportunities and much more. Fraud Detection The insurance industry has always been working to devise new ways to detect fraud. With big data technology, it is now possible to look for fraud detection patterns across multiple aspects of the business, including claims, payments and provider-shopping and detect them fairly quickly. Machine learning systems can now identify new models and patterns of fraud that previously required manual detection. Fraud detection algorithms have improved tremendously with the power of machine learning. Consequently, near-real-time detection and alerting is now possible with big data. This trend promises to only keep getting better. These six opportunities are just the tip of the iceberg. The entire insurance industry can achieve precise and targeted marketing of products based on history, preferences and social data from customers and competitors. No piece of data, regardless of form, source or size, is insignificant. With big data technology and machine learning tools and algorithms, combined with the limitless power of the cloud computing platform, possibilities are endless.

During the last decade, workplace wellness programs have become commonplace in corporate America. The majority of US employers with 50 or more employees now offer the programs. A 2010 meta-analysis that was favorable to workplace wellness programs, published in Health Affairs, provided support for their uptake. This meta-analysis, plus a well-publicized “success” story from Safeway, coalesced into the so-called Safeway Amendment in the Affordable Care Act (ACA). That provision allows employers to tie a substantial and increasing share of employee insurance premiums to health status/behaviors and subsidizes implementation of such programs by smaller employers. The assumption was that improved employee health would reduce healthcare costs for employers. Subsequently, however, Safeway’s story has been discredited. And the lead author of the 2010 meta-analysis, Harvard School of Public Health Professor Katherine Baicker, has cautioned on several occasions that more research is needed to draw any definitive conclusions. Now, more than four years into the ACA, we conclude that these programs increase, rather than decrease, employer spending on healthcare, with no net health benefit. The programs also cause overutilization of screening and check-ups in generally healthy working-age adult populations, put undue stress on employees and provide incentives for unhealthy forms of weight-loss. Through a review of the research literature and primary sources, we have found that wellness programs produce a return-on-investment (ROI) of less than 1-to-1 savings to cost. This blog post will consider the results of two compelling study designs -- population-based wellness-sensitive medical event analysis and randomized controlled trials (RCTs). Then it will look at the popular, although weaker, participant vs. non-participant study design. (It is beyond the scope of this posting to question vendors' non-peer-reviewed claims of savings that do not rely on any recognized study design, though those claims are commonplace.)

Population Based Wellness-Sensitive Medical Event Analysis

A wellness-sensitive medical event analysis tallies the entire range of primary inpatient diagnoses that would likely be affected by a wellness program implemented across an employee population. The idea is that a successful wellness program would reduce the number of wellness-sensitive medical events in a population as compared with previous years. By observing the entire population and not just voluntary, presumably motivated, participants or a “high-risk” cohort (meaning the previous period’s high utilizers), both self-selection bias and regression to the mean are avoided. The field’s only outcomes validation program requires this specific analysis. One peer-reviewed study using this type of analysis -- of the wellness program at BJC HealthCare in St. Louis -- examined a population of hospital employees whose overall health status was poor enough that, without a wellness program, they would have averaged more than twice the Healthcare Cost and Utilization Project (HCUP) national inpatient sample (NIS) mean for wellness-sensitive medical events. Yet even this group’s cost savings generated by a dramatic reduction in wellness-sensitive medical events from an abnormally high baseline rate were offset by “similar increases in non-inpatient costs.”

Randomized Controlled Trials and Meta-Analyses

Authors of a 2014 American Journal of Health Promotion (AJHP) meta-analysis stated: “We found a negative ROI in randomized controlled trials.” This was the first AJHP-published study to state that wellness in general loses money when measured validly. This 2014 meta-analysis, by Baxter et al., was also the first meta-analysis attempt to replicate the findings of the aforementioned meta-analysis published in February 2010 in Health Affairs, which had found a $3.27-to-1 savings from wellness programs. Another wellness expert, Dr. Soeren Mattke, who has co-written multiple RAND reports on wellness that are generally unfavorable, such as a study of PepsiCo’s wellness program published in Health Affairs, dismissed the 2010 paper because of its reliance on outdated studies. Baicker et. al.’s report was also challenged by Lerner and colleagues, whose review of the economic literature on wellness concluded that there is too little credible data to draw any conclusions.

Other Study Designs

More often than not wellness studies simply compare participants to “matched” non-participants or compare a subset of participants (typically high-risk individuals) to themselves over time. These studies usually show savings; however, in the most carefully analyzed case, the savings from wellness activities were exclusively attributable to disease management activities for a small and very ill subset rather than from health promotion for the broader population, which reduced medical spending by only $1 for every $3 spent on the program. Whether participant vs. non-participant savings are because of the wellness programs themselves or because of fundamentally different and unmatchable attitudes is therefore the key question. For instance, smokers self-selecting into a smoking cessation program may be more predisposed to quit than smokers who decline such a program. Common sense says it is not possible to “match” motivated volunteers with non-motivated non-volunteers, because of the unobservable variable of willingness to engage, even if both groups’ claims history and demographics look the same on paper. A leading wellness vendor CEO, Henry Albrecht of Limeade, concedes this, saying: “Looking at how participants improve versus non-participants…ignores self-selection bias. Self-improvers are likely to be drawn to self-improvement programs, and self-improvers are more likely to improve.” Further, passive non-participants can be tracked all the way through the study because they cannot “drop out” from not participating, but dropouts from the participant group -- whose results would presumably be unfavorable -- are not counted and are considered lost to follow-up. So the study design is undermined by two major limitations, both of which would tend to overstate savings. As an example of overstated savings, consider one study conducted by Health Fitness Corp. (HFC) about the impact of the wellness program it ran for Eastman Chemical’s more than 8,000 eligible employees. In 2011, that program won a C. Everett Koop Award, an annual honor that aims to promote health programs “with demonstrated effectiveness in influencing personal health habits and the cost-effective use of health care services” (and for which both HFC and Eastman Chemical have been listed as sponsors). The study developed for Eastman’s application for the Koop awards tested the participants-vs-non-participants equivalency hypothesis. From that application, Figure 1 below shows that, despite the fact that no wellness program was offered until 2006, after separation of the population into participants and non-participants in 2004, would-be participants spent 8% less on medical care in 2005 than would-be non-participants, even before the program started in 2006. In subsequent presentations about the program, HFC included the 8% 2005 savings as part of 24% cumulative savings attributed to the program through 2008, even though the program did not yet exist.

Figure 1

Source: http://www.thehealthproject.com/documents/2011/EastmanEval.pdf The other common study design that shows a positive impact for wellness identifies a high-risk cohort, asks for volunteers from that cohort to participate and then tracks their results while ignoring dropouts. The only control is the cohort’s own previous high-risk scores. In studying health promotion program among employees of a Western U.S. school district, Brigham Young University researcher Ray Merrill concluded in 2014: “The worksite wellness program effectively lowered risk measures among those [participants] identified as high-risk at baseline.” However, using participants as their own control is not a well-accepted study design. Along with the participation bias, it ignores the possibility that some people decline in risk on their own, perhaps because (independent of any workplace program) they at least temporarily lose weight, quit smoking or ameliorate other risk factors absent the intervention. Research by Dr. Dee Edington, previously at the University of Michigan, documents a substantial “natural flow of risk” absent a program.

Key Mathematical and Clinical Factors

Data compiled by the Healthcare Cost and Utilization Project (HCUP) shows that only 8% of hospitalizations are primary-coded for the wellness-sensitive medical event diagnoses used in the BJC study. To determine whether it is possible to save money, an employer would have to tally its spending on wellness-sensitive events just like HCUP and BJC did. That represents the theoretical savings when multiplied by cost per admissions. The analysis would compare that figure to the incentive cost (now averaging $594) and the cost of the wellness program, screenings, doctor visits, follow-ups recommended by the doctor, benefits consultant fees and program management time. For example, if spending per covered person were $6,000 and hospitalizations were half of a company’s cost ($3,000), potential savings per person from eliminating 8% of hospitalizations would be $240, not enough to cover a typical incentive payment even if every relevant hospitalization were eliminated. There is no clinical evidence to support the conclusion that three pillars of workplace wellness -- annual workplace screenings or annual checkups for all employees (and sometimes spouses) and incentives for weight loss -- are cost-effective. The U.S. Preventive Services Task Force (USPSTF) recommends that only blood pressure be screened annually on everyone. For other biometric values, the benefits of annual screening (as all wellness programs require) may not exceed the harms of potential false positives or of over-diagnosis and overtreatment, and only a subset of high-risk people should be screened, as with glucose. Likewise, most literature finds that annual checkups confer no net health benefit for the asymptomatic non-diagnosed population. Note that in both cases, harms are compared with benefits, without considering the economics. Even if harms roughly equal benefits, adding screening costs to the equation creates a negative return. Much of wellness is now about providing incentivizes for weight loss. In addition to the lack of evidence that weight loss saves money (Lewis, A, Khanna V, Montrose S., "It’s time to disband corporate weight loss programs," Am J Manag Care, In press, February 2015), financial incentives tied to weight loss between two weigh-ins may encourage overeating before the first weigh-in and crash-dieting before the second, both of which are unhealthy. One large health plan offers a weight-loss program that is potentially unhealthier still, encouraging employees to use the specific weight-loss drugs that Dartmouth’s Steven Woloshin and Lisa Schwartz have argued in the Journal of the American Medical Association never should have been approved because of the drugs’ potential harms. In sum, with tens of millions of employees subjected to these unpopular and expensive programs, it is time to reconfigure workplace wellness. Because today’s conventional programs fail to pay for themselves and confer no proven net health benefit (and may on balance hurt health through over-diagnosis and promotion of unhealthy eating patterns), conventional wellness programs may fail the Americans with Disabilities Act’s “business necessity” standard if the financial forfeiture for non-participants is deemed coercive, as is alleged in employee lawsuits against three companies, including Honeywell. Especially in light of these lawsuits, a viable course of action -- which is also the economically preferable solution for most companies and won’t harm employee health -- is simply to pause, demand that vendors and consultants answer open questions about their programs and await more guidance from the administration. A standard that “wellness shall do no harm,” by being in compliance with the USPSTF (as well as the preponderance of the literature where the USPSTF is silent), would be a good starting point.

Long-range forecasts don’t all agree on the weather or how we label it, but another winter of extreme cold may be upon much of the nation. I’m personally convinced one is because even where I live, in Tennessee, my dog, Max, is vocally rejecting his outdoor house at night -- and that doesn’t usually happen until January. While Max and I, having lived in the South all our lives, may be wimps when it comes to the cold, conditions are clearly calling for an alternate plan. And that brings me to today’s topic: From a workers' comp and safety perspective, did last year’s polar vortex provide any important lessons? Slips and falls Slips, trips and falls, according to OSHA, contribute to 15% of all workplace fatalities -- second only to motor vehicle accidents. WorkCompWire recently reported that nearly one-third of all workers' comp claims in the Midwest last year were because of slips and falls on ice and snow, doubling the rate of the previous year. This data, from the Accident Fund and United Heartland, represents only five states, so I don’t want to say we have a national trend -- but I am eager to see 2013-2014 data from the Bureau of Labor Statistics or other major sources. Would it be surprising if percentages were even higher in areas where extreme winter weather is rare? While it will be another year before the first “polar vortex” slips and falls from late 2013 show up on experience mods, I thought it would be interesting to set up a few scenarios and with the help of ModMaster illustrate how an increase in these accidents might affect an employer’s experience mod and premium. The cost in terms of mod points – and increased premium For the following scenarios, I assumed an average slip and fall on the ice would cost $22,000, which is in range of varied statistics I found on the web. Of course, an actual slip-and-fall expense could vary from very little to tens of thousands of dollars, depending on complications and time away from work. As you see below, whether the loss is kept as a medical-only loss or involves indemnity makes quite a difference – although, in actuality, an indemnity claim is probably going to be quite a bit higher than $22,000. As a reminder, in most states, medical-only losses are reduced by 70% because of the experience rating adjustment (ERA) rule of the experience rating formula. For the first scenario, let’s imagine a relatively small machine shop with about $1.5 million in annual payroll. This company’s minimum mod is 0.79, and the manual premium is $75,000. As you can see below, a single average slip and fall would increase the mod by 8 points (on a scale of 100) and increase the premium by 10% – unless the claim is kept medical-only, in which case the impact would be only 3 mod points and about 3% of the premium. In a second scenario, let’s imagine another small company, one that consists of office workers. Because this company’s expected losses (not shown) are much less than in the first scenario, the company’s minimum mod isn’t as low as our first example. Furthermore, the impact of a single slip and fall is much more significant in terms of mod points. However, this company’s manual premium is only $5,000 -- so while the premium impact of the slip and fall may not seem too significant in dollars, the percentage increase of their premium is notable. Finally, I wanted to see what kind of impact  several slips and falls might have on a larger company. My mind is already on holiday baking, so let’s imagine a cookie factory of several hundred employees and about $20 million in annual payroll. Then let’s imagine that, during a particularly bad patch of weather, seven people slip and fall in the parking lot and three more slip and fall in an entryway that has become wet with melting ice. For this company, which has a minimum mod of 0.43 and a manual premium of $500,000, those 10 slips are still a hefty impact if they’re not held to type 6. For the examples above, I’ve depicted companies whose workers are not primarily assigned to environmentally challenging conditions. Imagine the spike in injuries and cost for companies whose employees are exposed to cold stress. 'The tip of the iceberg' Slips and falls certainly aren’t the only winter issue. Workers' comp and insurance news and blogs are populated with lists and stories of all types. Consider just a couple: 1.  A recent story in Business Insurance concerns an employee injured when her employer gave her a ride in the floor of a company van during a snowstorm. While the employer was clearly trying to help out its employees, this employee is due benefits, a NY court ruled, because she was still on the clock, and the employer “took responsibility for the inherent risks of transporting its employees from the worksite.” 2.  Although it’s not mentioned as a weather-related issue, it’s easy     to imagine that a situation like this wet floor case could have developed because of rain or snow. The moral of this particular story? A “wet floor” sign is a safety device that an employer must ensure is utilized, not just made available to custodians. Regardless of the cause of any injury, a popular analogy in risk management is that the cost of workers’ compensation insurance is just the “tip of the iceberg.” In addition to direct insurance, medical and indemnity costs, the full costs include administrative expenses, potentially significant impacts to a company’s productivity and the injured employee’s overall well-being. By the most conservative estimates, an average slip of $22,000 may actually cost twice that -- and by some estimates may approach $100,000 in total costs. Summary As the examples above show, the experience mod and cost impact of winter-related accidents are sure to vary considerably from one accident and one company to the next. Regardless of exact cost, the reported uptick in slips and falls on ice and snow should serve as a flare on a snowy roadside, reminding us that every company, regardless of its size or geographic location or the type of work it does, needs some level of preparation for extreme weather in terms of policy, operations and equipment. (Broker Briefcase is a good resource to help.) Even before I read the news about the increase in Midwestern slips and falls, a prevalence of winter-related slips and falls had stood out to me in loss runs that I occasionally see in the process of assisting clients. Have you seen evidence of this, as well? How are you helping your client or company understand the potential cost of just one winter weather loss, and to prepare as much as possible for avoiding or mitigating that loss? I’d love to hear your thoughts in the comments below.

Savvy chief information and technology officers have always known that IT capabilities could deliver more than efficient, repeatable business practices. Many CIOs and CTOs understand that a well-designed and fully leveraged technology strategy can usher in breakthroughs and competitively disruptive capabilities. With this in mind, CIOs can focus on an important question: How can technology become an enabler for innovation? This is a particularly sensitive point in today’s changing business world. Easy access to technology is toppling the barriers of entry to innovation and giving rise to a new class of players that pose a threat to established companies, according to our 6th Annual Digital IQ survey. In fact, 67% of nearly 1,500 business and IT executives surveyed said they were concerned that the speed of technological change is a threat to their growth prospects. Top performers, however, take a dedicated approach to innovation, and the CIO or CTO works closely with other C-level executives to deliver greater value from innovation that drives growth. For example, top-performing companies are much more likely to report that their CIOs and chief strategy officers enjoy strong working relationships, compared with other respondents in our survey. Bridging Technology and Innovation CIOs help bridge IT capabilities and innovation objectives in a few ways.

• They create spaces for innovation and allow experimentation to happen. IT systems in companies are notoriously complex, rigid and laden with firewalls and security. But innovation requires experimentation and tweaking the status quo. Savvy CIOs create IT sandboxes for the innovation team to work in without compromising the integrity of the company’s IT system. These sandboxes can be internal or external systems for experimentation and piloting.
• CIOs generate ideas and enable innovation. Sitting on top of the stacks, servers and systems, CIOs have a unique perspective on how value is delivered to clients and the way it is monetized. Leaders don’t sit back and let others innovate.They generate ideas for innovation and join in the process of exploring the best way to make them commercial realities.
• CIOs increase value beyond the next planned IT rollout. Enterprising CIOs look at how existing or new technology can be leveraged to drive growth through innovation and increase customer value. They work with other senior executives to define the innovation strategy and recommend ways technology can support those objectives. Also, by building stronger relationships with the marketing officer and chief strategy officer, for instance, CIOs can help identify customer trends, use technology as a lever in improving the delivery of products and services and better execute on the business plan.
• CIOs foster innovation from the outside-in. Many companies set up programs and incentives internally for innovative ideas. Resourceful CIOs look outside the walls of their organizations for ideas. They encourage use of crowdfunding, maker faires and open-source communities to help spawn and foster new ideas.

The CIO Balancing Act But even as CIO roles evolve toward having a stronger innovation focus, they also must manage the more routine IT tasks involved in keeping their companies agile, efficient and flexible. Here are some things CIOs might think about as they try bring these two worlds closer together:

• How can we rapidly prototype and use demos to show innovative ideas rather than just telling about possible concepts?
• How can our IT platform be better used to incubate breakthrough innovation?
• How can my team and I use data analytics to identify hidden opportunities?
• What IT best practices can we leverage to accelerate growth?
• How can we align IT metrics to business outcomes and integrate IT performance metrics into innovation scorecards? CIOs are already masters at using IT capabilities to deliver organizational improvements. Couldn’t they use that same know-how to drive innovation forward, too?

This post, co-written with Rob Shelton, also appeared on the PwC Growth Leaders Blog.

As we are all too familiar, the handling of workers' compensation is dictated by statutes in all states. Only Texas and Oklahoma offer the freedom to “opt out” of the statute, and their approaches are quite different. In Texas, “non-subscription” has been around for more than 100 years. Practitioners have achieved dramatic costs savings and better outcomes for many claims. Over time, non-subscribers also often experience significant reductions in frequency and length of disability. All of these outcomes are what we work hard to help our clients achieve, but we are often frustrated by the statutory requirements of many states that bring bureaucracy and controversy to many claims. In February 2013, the state of Oklahoma enacted workers’ compensation legislation, SB 1062, which allows any employer to exit, or opt-out of, the state’s statutory workers’ compensation system. While not exactly like  “non-subscription” in Texas, this new statute is a significant move forward in giving employers more options in how they respond to and finance employee injuries and related benefits. A key focus is on ensuring injured employees are treated respectfully and compensated fairly. Just as there are significant differences between what Oklahoma has done and what has been in place in Texas for more than 100 years, there are state-specific opportunities to improve in many other states. Enter the Association for Responsible Alternatives to Workers' Compensation, or ARAWC (pronounced “A-Rock”). This national coalition of employers and workers' compensation system providers has formed after many realized the benefits achieved in Texas and those anticipated in Oklahoma. Where SB 1062 offers Oklahoma employers that choose to opt-out of the state system the opportunity to substantially reduce work-injury costs and avoid both the statutory system’s extensive regulation and litigation risk, similar goals for other states are being established by the leaders of ARAWC for the benefit of both employers and employees. Two key statistics show why Oklahoma changed:

• Oklahoma employers said that workers' compensation costs were the #1 reason they were either leaving the state or adding jobs at facilities located in other states, such as Texas.
• National Council on Compensation Insurance (NCCI) statistics for 2012 showed Oklahoma loss costs to be 225% higher than those in neighboring states.

ARAWC is now developing strategies and plans that will identify the states where statutory change can bring the most benefit to both employers and employees through a more effective, efficient mechanism. The founders expect that their efforts will enable the delivery of better medical outcomes to injured workers and give employers more choice on how employee injuries will be managed. The organization will be announcing its first target state at the first of the year. Currently, all but Oklahoma and Texas effectively mandate workers’ compensation insurance as the sole option for employers to cover employee injuries. The Texas and Oklahoma options are not currently available elsewhere. ARAWC’s mission is to expand the delivery of better medical outcomes to injured workers by expanding employer choice in other states. Experience under these alternative employee injury benefit platforms has proven to dramatically reduce employee injury costs, while achieving higher employee satisfaction and substantial economic development. Over the past two decades, Texas non-subscribers have achieved better medical outcomes for hundreds of thousands of injured workers and saved billions of dollars on occupational injury costs. While ARAWC is not necessarily taking the Texas model forward into other states, it will leverage the learnings from more than 100 years of having options in Texas and from what emerges from the changes from Oklahoma’s new statute, to drive a strategy for process improvements and lower costs in selected states where change is overdue. It is important to remember that ARAWC views an option as a positive, competitive complement to workers' comp, not necessarily a replacement to the current system. Some of the core benefits that ARAWC will be seeking include:

• Delivering better medical outcomes and higher process satisfaction for injured workers without the cost and burden of traditional workers’ compensation.
• Driving state economic development through the attraction of employer savings.

This newly minted organization was established and is governed by a founding board that includes many Sedgwick clients that, in some cases, have tens of thousands of employees throughout the U.S. and have an intense interest in seeing those employees helped by a better-designed and -managed system. The member companies of ARAWC aspire to refocus state-based mandates in response to growing gaps in quality medical care, efficient risk financing, effective return to work and other gaps in many current systems. Some of the other expected benefits of ARAWC’s strategy for employees are expected to be:

• Improved workplace safety and training supporting injury prevention.
• Expanded access to quality medical providers providing exceptional care.
• Opportunity for expanded benefits through custom-designed plans.
• Opportunity for reduced waiting periods for wage replacement, with greater benefits.
• More expedient medical treatment and more immediate referral to specialized medical treatment to enhance recovery.
• Early identification of potentially complicating medical conditions and securing appropriate medical treatment to aid recovery.
• Improved communications with injured workers to address benefit questions and assist early return to work.

Nationwide, the experience under alternative employee injury platforms will provide employers the option of alternative mechanisms, which can result in:

• A more competitive insurance marketplace -- experience shows significant rate reductions when choice is introduced.
• Improved incentive for existing workers’ compensation providers to improve services and pricing, knowing the employer has an option to be more engaged in helping injured workers recover and return to work more quickly and efficiently.
• Incentives for medical providers to act in the best interests of the employee and improve levels of service
• Expanding employee access to medical providers who do not accept workers’ compensation patients because of low fee schedules and paperwork.
• An injury benefit plan that can more efficiently deliver care to and achieve better medical outcomes for injured workers.

ARAWC shows what an often inefficient system can motivate: change that can benefit all participants while reducing bureaucracy and many other negative elements. As the conversations that ITL is driving are focused on disrupting the status quo, what better place to start than with choice in workers' compensation?