Smart is cool, especially in electronics. Smart phones answer their users' most obscure questions instantly. Computers are smart, as are iPads, some TVs and even children's toys. So why can't workers' compensation medical provider networks be smart?

If they were, what would that look like?

Portrait of a Smart Medical Network

A smart medical network contains only the best doctors and other medical providers, those who drive the best results for injured workers and their employers. Moreover, a smart network does not rely on discounts on services as the requirement for participation. Instead, demonstrated positive outcomes are the qualifier for medical provider participation and continuing excellence.

Smart Networks Are Local

A network containing thousands of doctors is of no value to the injured worker. Workers need the closest provider who will treat them effectively and return them to work. The worker’s employer likewise needs the best local provider who will return the worker to pre-injury status in the shortest amount of time at the least cost. Smart networks are composed of this kind of medical doctors.

Network Participation Qualifiers

Smart networks are built by objectively measuring the performance of physicians who have actually treated injured workers. Objective evidence of performance is found in the data. Yet, indicators of performance are typically ignored in traditional networks. They do not measure or monitor the quality of provider performance. They simply contract with any providers and add them to the network directory.

Indicators of Quality

Many indicators of performance found in the data can be used to measure the level of provider performance. In the case of medical treatment of injured workers, the most telling indicators reveal doctors’ awareness and acknowledgement of the nuances of workers’ compensation that ultimately benefit both injured workers and their employers.

Revealing data elements influenced by the treating physician include return to work, medical costs, indemnity payments, legal involvement and disability status at the close of the claim. These outcome indicators in the data are important markers of quality and legitimate criteria for evaluation. Algorithms are executed using the indicators, and providers are scored based on their performance. Performance measurement must be objective and consistent. But performance measurement cannot end there.

Continuous Monitoring

To ensure continued quality, the data must be continuously monitored. Unlike traditional medical networks that contract for discounts with medical providers and go no further, smart medical networks for workers’ compensation continue to monitor for quality. Continuous monitoring is the very definition of medical management:

Good management is making sure what you did stays done!

California SB 863

In fact, California SB 863, effective Jan. 1, 2014 (now!), mandates continuous monitoring of medical provider costs and quality performance. This progressive legislation is an excellent model for selecting and monitoring smart medical networks, regardless of geographic location.

Establishing a smart medical network is essential, and the means are clear and available. However, the transition from traditional networks to smart medical networks can be tricky.

Converting to Smart Networks

Traditional networks are tethered to their established means of revenue generation. Shifting from the discount network model to the smart medical network model is challenging. The most practical approach is initially combining the two models, then weaning from the old model over time.

If the right physicians are a part of a smart medical network, claim outcomes will improve. Injured workers will receive good medical treatment and return to work early and successfully, and costs will be significantly reduced.

Moreover, physicians and other providers who qualify for smart networks should be rewarded. They should not have their fees reduced by discounts. Based on the excellence of their past performance, they should be included in the smart network on a very long leash. Continued performance for continued participation will be monitored scrupulously.

Win-Win

Nevertheless, it should be noted, payers have an obligation to participate in the transition to, and continuation of, smart networks by recognizing and paying for value received. Networks need support and cooperation from payers to integrate and analyze their data, score provider performance and realign medical provider preferences. The benefits will accrue to everyone: payers, networks, employers and injured workers.

Data Participation

Importantly, to achieve optimum results, data must be gathered from multiple sources and integrated for comprehensive claim analysis. Data from only one source, such as bill review, is sorely deficient for accurate analysis of medical provider performance. Claim system and pharmacy data must be added to bill review data at a minimum. Shortcuts in data gathering and analysis are not defensible.

Change Momentum

Network administrators are gradually stepping up to the challenge of shifting to smart networks. Momentum toward smart networks will be exponential with payer participation, resulting in quality improvement and cost control all around.

As many organizations look to add young talent, the opportunity to develop, inspire, engage and grow these new workplace entrants is great. So is the potential to kill their motivation and drive… with just four small words.

I met a young man in his mid-20s recently who shared with me his plans to change jobs. He’d been with his current employer for a couple of years, taking on increasing levels of responsibility. He didn’t mind the additional work without a title change or more compensation; he was delighted to be learning, expanding his skills and gaining valuable experience. A position in his current organization that represented the next logical step in his career progression had recently opened up. He summoned the courage to approach his management with his interest. The response he received started with those four small words:

“You’re too young to…”

Nothing that came after mattered to – or was even heard by – this young man. He promptly activated his network, started applying for jobs elsewhere and tendered his resignation.

He reminded me of a time earlier in my career. I was a consultant and had been working with my company’s sales team and a prospective client on a sizable and fairly complex training implementation. Things had gone well, and the client was very happy with the work. The contract was signed, and I got ready to head off to Arizona. Then I heard those four small words:

“You’re too young to…”

Planning the implementation was one thing; but rolling it out… that required someone with more experience and some grey hair. I’d done a fine job, my boss told me. But I was too young to take it from there.

These four small words go far beyond answering a request or redirecting someone’s effort. They’re killer words.  They extinguish motivation, inspiration, excitement and even connection with the organization. These four small words close doors and choke off possibilities. They discourage, demoralize and drive young people away.

Now, let’s be honest. Not all young people are prepared to take on every challenge they aspire to. But youth should never be used as an excuse or reason to hold someone back. Instead, what if organizations and managers communicated a different "you’re too" message to their young, ambitious workers? What about…

You’re too talented to not keep growing… so what skills will you need to develop to be prepared to take on greater responsibilities?

You’re too valuable to not know how much we appreciate you… so thank you for your contributions and performance.

You’re too creative and innovative to not continue to be challenged… so what‘s next on the list of things you’d like to take on?

The ambition and even impatience of young workers can be a vital competitive advantage to organizations that know how to harness it. We need young employees to remain passionately engaged so we can cultivate them into the tenured contributors who will become the bedrock of our organizations. The first step is to rid your vocabulary of those four small words.  And we’re never too young – or old – to do that.

If you’re targeting prime prospects who

• don’t reply to your emails
• don’t return your calls
• or screen you through gatekeepers

Try this little-known YouTube strategy.

Imagine getting a video where someone says YOUR name in it?

 “John, I recorded this short video for you because I think I can help you…”

It’s a powerful connection builder.

Because the one-to-many approach is so easy, very few advisors use a one-to-one approach to video marketing.

However, there is a stealth way you can do this for free and open up doors that used to be closed.

Step 1: Record a video using YouTube’s “Webcam record” feature.

This will allow you to record a quick video without all the equipment and lighting. You’ll get an instant link you can copy and paste into your email.

Done.

Step 2: Give away something that will help make prospects’ lives easier.

Don’t just ask for an appointment; give them something to prove you’re an expert.

Separate yourself from the herd by sharing a secret, strategy or technique that will help them with their current insurance situation.

Use a script like this:

“Hi, Lawrence, I’ve recorded this short video because I’m helping CEOs like you in Dallas lower their risk and protect their employees.

“I’m sure your insurance advisor is great. However, there’s a little-known strategy most don’t use to help software companies like yours because it’s just too complex.

“I’ve been using it for seven years and implemented it with 28 other software companies like yours with great results.

“It’s all in my special report [Hold up a copy for them to see] called “The Five Most Critical Trends Facing Software Companies, and How to Protect Yourself from Them.”

“Just reply to this email, and I’ll send it to you, or click on the link to get access to my calendar, and I’ll review it with you over a 15-minute conversation to see if you qualify.”

Simple.

Step 3: Add a link to your online calendar to take the next step.

Sign up for a tool like Timetrade, which allows you to publish an online calendar you control. Others can sign up to be on your calendar, and it automatically populates into Outlook or Gmail. Paste that link into your email.

Brilliant.

Step 4: Send a short email.

Remember, your ONLY goal is to get them to watch the video. Don’t waste time.

Use this format:

[subject line] Lawrence

Lawrence,

I’ve been trying to reach you without success. So I recorded this short video for you.

[video link]

My calendar: [link]

Enjoy,

[your name]

At first, you’ll take a bit longer to get it all set up, but once you do you’ll be able to get each email/video done in nine minutes or less.

Remember, be yourself in your video – everyone else is already taken

Ok, let’s recap:

Step 1 – Record a short video via YouTube.

Step 2 – Give away something of value that helps your prospects.

Step 3 – Set up your online calendar for easy scheduling.

Step 4 – Write and send the email.

At a cost of more than $1.4 billion annually, narcotics and opioids have rapidly become one of the highest-cost therapeutic categories for workers’ compensation injuries.* They are also among the most difficult to manage. No employer wants to have injured workers in undue pain or discomfort – and narcotics do alleviate pain. However, there are serious issues to consider with regard to prescription abuse and misuse, especially for opioids such as Oxycontin and Vicodin.

How can employers help injured workers while ensuring appropriate use of narcotics and reducing unnecessary costs? Comprehensive, clinically based narcotic management programs can help.

Over the past 10 years, opioids, a type of narcotic, have become more commonly used to treat chronic to severe pain associated with workers’ compensation injuries. Known by the generic names of morphine or codeine, and now more frequently by the brand names Oxycontin and Vicodin, opioids are powerful pain relievers.

However, many of these medications were initially intended for end-stage cancer, not for common workplace injuries. While there is likely some benefit in some cases for the use of such medications to treat workers’ compensation injuries, clinicians note that those benefits are typically seen by just a small percentage of patients. There is little evidence to support their long-term or widespread use in standard workers’ compensation injuries. In fact, a study reported by the American Insurance Association found that only a minority of workers with back injuries improved their level of pain (26%) and function (16%) with the use of opioids.** What’s more, there is a high risk for abuse, dependency, and overutilization with this classification of drugs. Indeed, the strongest predictor of long-term opioid use was when it was prescribed within the first 90 days post-injury; that means that every prescription – especially the first one – must be scrutinized to ensure appropriate utilization and optimal benefit. Employers are also concerned about the cost of narcotics. While narcotic use is concentrated among a small percentage of claimants, per-claim costs for narcotics have increased more than 50% over the past decade

Key statistics

• From 1997 to 2007, the milligram per person use of prescription opioids in the U.S. increased from 74 milligrams to 369 milligrams – that’s an increase of 400%.
• In 2000, retail pharmacies dispensed 174 million prescriptions for opioids; by 2009, 257 million prescriptions were dispensed – an increase of more than 40%.
• Opioid overdoses, once almost always because of heroin use, are now increasing because of abuse of prescription painkillers.

White House Office of National Drug Control Policy

Managing narcotics is not about removing viable medications for mitigating pain from the therapies available to providers – it is about ensuring the best possible medications for workers’ compensation injuries are used.

As a result, claims examiners should be trained to look for red flags, such as:

• Higher-than-normal physician dispensing.
• Lower-than-average generic dispensing.
• Higher-than-average prescribing of opioids such as Fentanyl Citrate.

But prescribing medications is a complex issue – reports and percentages alone don’t tell the whole story. So, it’s crucial to look beyond simple prescribing reports to uncover additional information that could indicate why prescribers’ patterns are outside the norm. For example, use of amphetamines could indicate that a patient has a traumatic brain injury, where such medications are a standard treatment protocol.

Drugs that are not suitable for the injury type and the age of the claim need to be identified at the point-of-sale, so claims examiners or nurses are alerted before a prescription that is outside the formulary is filled at the retail pharmacy and can intercede with drug management, if needed. This is particularly useful in the acute injury stage to eliminate early narcotic use where it is not appropriate. If a narcotic is prescribed, the injured worker’s entire medical history needs to be reviewed, using both in-network and out-of-network transactions and non-occupational associated medications to evaluate actual medication use and ensure appropriate utilization.

Follow-up appointments should be required, and only a few days of treatment should be authorized initially. This helps determine whether the medication has improved pain control and function.

Another critical step to managing narcotics is to thoroughly educate employees as to the benefits, dangers, and alternatives for narcotics. The education should include:

• Training the injured workers about their medication, adverse side effects, and alternative medication options.
• Required screenings for risk of addiction or abuse (history of drug or alcohol abuse, or regular use of sedatives).
• Opioid use agreement/contract with urine drug screenings and avoidance of other sources for medication, such as emergency rooms.

A number of factors should trigger a review:

• Narcotic-class medications for the treatment of pain (Oxycontin, Demerol, etc.).
• Use of multiple medications excessively or from multiple therapeutic classes.
• Using medications not typical for the treatment of workers’ compensation injuries.
• High-cost medications.
• Receiving high doses of morphine equivalents daily for treatment of chronic pain.
• Using three or more narcotic analgesics.
• Receiving duplicate therapy with NSAIDs, muscle relaxants or sedatives.
• Using both sedatives and stimulants concurrently.
• Using compounded medications instead of commercially available products.

* “Narcotics in Workers Compensation,” NCCI Research Brief, Dec. 2009

** http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=351901

I’m not talking Patsy Cline’s “Crazy” or even Gnarls Barkley’s “Crazy”—I’m talking Peter-Frampton-re-release-the-same-song-and-get-totally-different-results kind of crazy!  In 1975, Frampton released “Show Me the Way” on his album Frampton, and no one cared.  The song was re-released in 1976 on the album Frampton Comes Alive—and topped the charts in both the U.S. and U.K. In Wayne’s World, the song was described as “required listening for all suburbia.”  It’s all marketing, baby!

What does this have to do with private exchanges? Most are just a re-release of technology that has been part of benefits administration enrollment for years.

The following is a short list of “new” capabilities and requirements that are typical for a private exchange:

• Defined employer contribution, instead of defined benefit.
• The ability to connect electronically to insurance carriers.
• Decision support tools, to help determine employees’ best options.
• Support for core insurance products such as medical, dental and vision.
• Support for voluntary insurance products such as life, disability and accident.
• Support for multiple insurance carriers (although some exchanges are single-carrier).
• HRA and Section 125 pre-tax support.
• Premium processing and billing support.
• Support for insurance plan comparison and other employee shopping tools.

Nearly every function defined as “new” for a private exchange is not new—these functions have been part of group benefits administration systems for over a decade.  As I’ve said, the “new” private exchanges are 95% marketing hype and 5% enhanced decision support.

I have attended dozens of conference breakout sessions, read articles, talked to “private exchange” vendors and seen countless demos. The only word I can use to describe the whole group private exchange world is “crazy” — wonderful, “Show Me the Way” kind of crazy.

Given that we’ve been there and done that with the technology in the private exchanges, I can offer some informed observations about how they will play out as employees use them to select coverage under the rules established as part of Obamacare.

--It would be very difficult to move to an Expedia-type shopping model for employees’ insurance. Insurance carrier requirements for participation and underwriting through private exchanges make the disintermediation of the health insurance broker less likely than the disintermediation of the travel agent.  Few exchanges are even talking about vendor participation. It takes years to develop benefits administration systems simply because of the inherent complexity of insurance. A good technologically and customer service driven health insurance adviser is worth her weight in gold, and will continue to be.

--While Health Sherpa has been described as a somewhat functional equivalent to healthcare.gov, that claim is, well, crazy. Health Sherpa—although a great idea—has no ability to process eligibility, enrollment, carrier connectivity or anything required in a true benefits enrollment or exchange platform.  Health Sherpa is a clean front end for displaying plan options and rates but has no back end to support the followthrough required by the carriers or the federal or state governments.

--Recently, the president invited executives from a few of the nation’s top tech companies to the White House for a highly publicized meeting.  Why?  What do Yahoo and Amazon know about health insurance exchanges, enrollment, eligibility and carrier connectivity?  Exactly nothing!

If the president wanted more than a photo op, why didn’t he call Rich Gallun or Don Garlitz from bSwift or ask my company, benefitsCONNECT, to join the discussion? Between us, we accurately and electronically process many millions of enrollments—completely eliminating the need for paper. Either company could have saved this country hundreds of millions of dollars and produced a public exchange for Obamacare that actually works.

There’s actually one thing that’s new about private exchanges: While benefits administrations systems have become somewhat standardized, if you’ve seen one private exchange—you’ve seen exactly one private exchange. They are all different, from their front-end requirements to their back-end requirements.

As I said, it’s a craaaazy world we live in.

Clayton Christensen famously coined the term “disruptive innovation” to describe “simple business applications that relentlessly move up market, eventually displacing established competitors.” Disruption is not just change; it is change that gores somebody’s ox. There has never been a year like 2013 for disruptive writing about health care. Here are five “oxen” gored by the best of that writing.

Gored Ox One: The Idea That Someone Else Pays The Bills

The first salvo of the year was David Goldhill’s highly controversial book, Catastrophic Care: How American Health Care Killed My Father – and How We Can Fix It. Goldhill had the audacity to question an assumption accepted as a truism by both proponents and opponents of Obamacare: the notion that Americans can’t pay for their own health care without some kind of health coverage. Goldhill suggests that our nation’s reliance on third-party payors like health plans, Medicare and Medicaid has created – not alleviated – the burdensome problems of cost and bad quality that plague health care, and that we could run a better health care system without them. (Disclosure: Goldhill sits on the voluntary board of my nonprofit, The Leapfrog Group, though Leapfrog isn’t associated with his book).

Goldhill wasn’t the only one asking the impertinent question, “What if you paid your own medical bills directly?” Time published a powerful story by Steven Brill, Bitter Pill: Why Medical Bills are Killing Us, which points out the bizarre oddities of what goes on behind the scenes when the checks are written to pay for patient care. Bills for the same procedure vary tenfold, but few health plans actually pay the full bill. Elisabeth Rosenthal’s reporting in the New York Times pointed out the same bizarre pricing phenomena in her remarkable series on the varying charges hospitals record for their services.

The business community took note of these questions about who pays the bills, since they traditionally pay most of them. A study by S. Eappen and colleagues in the Journal of the American Medical Association found that commercially insured patients were charged an extra $39,000 every time they suffered a surgical site infection at one hospital system. Employers wondered how they missed this enormous surcharge they paid for an undesired outcome.

Where were their health plans and consultants to alert them to this waste? They were AWOL, say Tom Emerick and Al Lewis in their brilliant book, Cracking Health Costs, which all employers seem to have on their desks these days.

The book is getting attention for its strategies on how to bypass health plans and consultants and disrupt health benefits purchasing.

Gored Ox Two: Keepers Of Secrets

The health care industry has long been shielded from the candor other industries live by. Writers this year went beyond complaining about the lack of transparency in health care — now, they are successfully calling out those who want to maintain it. Respected nurse-leader Kathleen Bartholomew writes in a piece in the Seattle Times that the lack of transparency in health care is simply unethical, and she points some fingers. In a blog for the influential policy journal Health Affairs, business leader Francois de Brantes argues that our nation’s remarkable lack of progress on quality and costs is a consequence of having no feedback loops — candid information on performance that provides continuous pressure for improvement. He calls for upending the incentives that keep health care opaque and dysfunctional. A breakthrough piece reported by Charles R. Babcock in Bloomberg News exposed the political underpinnings of why we still don’t have national data on many of the most common errors, accidents and injuries happening every day in hospitals — and he discusses the ongoing movement to preserve what little data we have. Author Rosemary Gibson, one of the decade’s most influential health care writers, writes in a memorable Huffington Post blog, “The military counts its dead and wounded even though politicians would prefer to hide the truth.” When we count the dead from medical errors, she says, we could fill Arlington National Cemetery in nine months.

One writer did try to quantify the problem – John T. James, a father and NASA toxicologist who tragically lost his son to medical errors. In a widely discussed piece published by the peer-reviewed Journal of Patient Safety, he used a scientific method developed by the Institute for Healthcare Improvement to estimate how many people die each year from hospital errors. The dismaying answer: anywhere from 200,000 to 420,000 – in other words, as many people as the population of Miami.

Gored Ox Three: The Passive Patient

The Hollywood-inspired idea of the patient as quiet recipient of physician infallibility is officially over. Patients don’t just do what they are told; they expect to make choices. Beth Howard’s cover story in AARP The Magazine – the most widely read publication in the United States – launched a firestorm with its advice for patients on protecting yourself during a hospital stay, including which hospitals are safest and what to look for in a hospital room.

Crystallizing this era of the disruptive new patient is its leading sage, Dave deBronkart, coauthor of Let Patients Help! Survivor of Stage 4 kidney cancer, deBronkart has a popular TED talk and delivers speeches throughout the world arguing that patients should serve as active members of the team delivering care, a job that includes supplying the wisdom and knowledge physicians and nurses don’t have. The emergence of this new patient cannot come soon enough, as evidenced in a widely discussed report published by the nonprofit Childbirth Connection, Listening to Mothers III: Pregnancy and Birth. The report shows the results of a Gallup survey of women who had recently given birth and reveals a stunning number of maternity patients whose wishes were ignored or manipulated, to the detriment of the women and their babies.

Among the most disruptive writers of 2013 are physicians who found themselves – or their families – on the wrong side of the hospital bed. Dr. Bob Wachter told a fascinating story of his mother’s stay in his own hospital (The University of California San Francisco Medical Center), candidly weighing some of the positive aspects of the care she received with the negatives that caused his family distress. Dr. Ashish Jha talked movingly about his father’s hospital stay, recounting with alarm three errors averted only because Jha happened to be in the room.

Gored Oxen Four: Conventional Wisdom About Delivering Care

The role of the patient has changed and so has the practice of medicine and nursing. Hollywood took note of one passionate nurse writer, Sandy Summers, and her colleagues, whose blog on the fascinating website http://www.truthaboutnursing.org analyzes media portrayals of nursing practice. Summers points out how TV depicts physicians performing tasks nurses actually do in real practice and generally portrays nurses as incompetent, unprofessional and/or none-too-bright. This hurts patients, she says, since the vast majority of care patients receive comes from nurses, and we need the best people on the job. Her passion had a direct impact this year, influencing advertiser choices and prompting talks with producers of problematic programs.

Physicians, too, are raising eyebrows by asking impolite questions about their practice. Atul Gawande’s article in the New Yorker asked why providers don’t always do the right thing in their day-to-day practice. It’s not malice, he says; it’s human nature. The piece explores lessons from international public health on a specific peer-education strategy that works to change practice patterns.

Another piece of conventional wisdom stood on its head in 2013 came from the University of Michigan’s John Birkmeyer and his colleagues, concerning surgical skill and its implications for patients. The study in The New England Journal of Medicine prompted tumultuous debate in the surgical suite when it demonstrated widespread variation in the skill of surgeons performing the same surgery. The study also suggested that skill level correlated with complication rates, raising significant new questions about what surgeons and hospitals can do to improve outcomes in health care.

But it’s not enough to identify and test new innovations for delivering care better; if they work, they must be hard-wired into practice, says Paul Plsek in his book, Accelerating Health Care Transformation with Lean and Innovation: The Virginia Mason Experience. He describes how the Virginia Mason Medical Center applied principles of lean manufacturing to balance the seemingly contradictory objectives of expanding innovation and improving adherence to the routine.

Gored Ox Five: Sacred Cows Of Public Health

Almost everyone agrees that the best strategy for improving Americans’ health would be to prevent people from needing health care in the first place. But as these writers demonstrated in their powerful arguments, beware the easy answers.

Does more health coverage mean better health? Not necessarily. A study of the impact of Medicaid in Oregon found that coverage had no impact on emergency room visits or health status (though it did relieve financial stress, an important advantage).

Does employee wellness save money? Not really. That was the reluctant conclusion of Rand researchers in a shocking study: Employee wellness programs did not appear to save money nor measurably improve health status. For more thoughts on the topic, The Health Care Blog’s series by Al Lewis and Vik Khanna is also worth following. The blog posts have prompted employee backlash and even a call for revocation of the C. Everett Koop award for a wellness program with questionable outcomes.

Should we cut the fat to fight obesity? Maybe not. A summary in the British Medical Journal of the research on obesity is prodding the nutrition science community in new directions. The exhaustive research overview by science journalist Gary Taubes found that most of the assumptions and guidelines we rely on are not supported by research, and policymakers ought to rethink our approach to the problem from the bottom up. Among the surprising observations: There’s no evidence that saturated fat is the culprit, and attempts to eliminate it from the diet may have accelerated the obesity epidemic.

Optimism For The New Year

I am confident that health care is headed in the right direction as we welcome 2014, thanks in no small part to the courage and eloquence of these disruptive writers.

This post first appeared on Forbes.com.

If you are not a practicing member of the captive community, either as a professional service provider or a captive owner, and are interested in learning about captives, you will most likely turn to the Internet.  Unfortunately, the vast majority of Internet sources are designed to sell you something, or at the very least, tempt you to contact them with some sort of “teaser."

Additional sources of captive information are periodic industry-focused magazine articles and occasional pieces that appear in the likes of Forbes and Fortune magazines, along with the odd newspaper article. These are often interesting to read, but they are almost always written from a particular point of view, and because of time and space limitations, rarely present a truly balanced perspective.

You may recall a few years ago, when a financial reporter for the New York Times wrote what was intended to be an expose of captives’ presumed nefarious financial and tax doings.  The piece was ultimately discredited, its author clearly had an agenda. (For good measure, the Times, turned out to own a captive).

Given the general lack of information about captives, let’s begin with some basics.  Regardless of what you may have read, a captive is first and foremost, an insurance company.  The term “captive” denotes insurance company status.  Insurance company status means that the captive employs insurance accounting.  If the structure cannot qualify for insurance accounting, it must use deposit accounting, which renders it something other than a captive insurance company.

Insurance accounting allows the captive to deduct its loss reserves from its federal income taxes; taxes are paid on earnings, and earnings are recognized once losses for a particular period (usually a year) are no longer expected to occur or become reported.

Moreover, the captive’s contracts (insurance policies) must conform to Financial Accounting Standard (FAS) 113.  FAS 113 requires that the insurance contract provide coverage for a reasonable chance of a significant loss.

Contrary to what you may read, a captive is not a tax shelter, nor is it a bank.  It can be used, however, as an estate-planning tool (more on this later).  To qualify to use insurance accounting every captive must:

• Establish and document non-tax business objectives and purpose
• Experience insurance losses
• No parental guarantees to bail out the captive
• Have adequate capitalization
• Avoid substantial loan-backs
• Engage professional captive management
• Comply with local insurance regulations and formalities
• Follow conventional investment strategies
• Use risk-transferring insurance contracts per FAS 113
• Make sure risk sharing is sufficient based on IRS safe harbors
• Transact business at “arms length” using actuarial-based pricing
• Maintain the business, books, and records separate from the parent company and comparable to other insurers
• Not have premiums match the maximum limit of liability

The majority of the companies selling captives – not feasibility studies, just captives – sell what is known as the 831(b) captive.  Caompnies will also assist in the creation of standard captives, but their primary stock-in-trade is the 831(b).

This captive’s name is derived from the section of the Internal Revenue Code that enables their use.  Many of these 831(b) companies make little pretense of providing objective risk management advice; their advice centers on estate planning, which is the primary purpose of the 831(b) captive.  The primary benefits of the 831(B) captive are that (1) only investment income is subject to U.S. federal income taxation (income from premiums is tax-free)  and that (2) 831(b) captives are off-balance sheet.

Unfortunately, many firms have a less-than-comprehensive grasp on the rules to which all captives must adhere, to be considered bona fide insures.  Others conflate certain aspects of the 831(b) captive with captives in general, which of course causes confusion and adds to the amount of misinformation available to prospective captive owners.

Because there is so much blatant misinformation on the Internet, it was hard to pick out the best examples for this article, but I think you’ll find the following examples entertaining, if not disconcerting.

Example 1

An article appearing in a respected technical journal on taxation and accounting lists the following as three benefits of captives:

• "Asset protection from the claims of business and personal creditors” 
• “Opportunity to accumulate wealth in a tax-favored vehicle”
• “Distributions to captive owners at favorable income tax rates”

The problem is that none of the three so-called benefits apply to the vast majority of captive insurers.  They apply ONLY to the 831(b) captive, which, as noted above, is used as an estate-planning vehicle.

The vast majority of captives (non-831 (b) captives) are on-balance-sheet, risk-financing vehicles.  Their tax filings are consolidated with their parents’ filings, so they provide no asset protection from creditors.  Likewise, the vast majority of captives are not “tax-favored,” thanks to the 1986 tax law changes.

The fact that the article is actually devoted to only 831(b) captives is never revealed; the term 831(b) is not even mentioned until page three of the six-page article.

Example 2

A promoter advertises itself as offering a “new service” to help clients “take advantage of Captive structures and domiciles to meet their individual risk management needs.”

It is clear that this company has almost no institutional knowledge of captives.  Its litany of captive benefits is a recitation of the generic, non-specific “benefits” cited hundreds of times across the Internet and elsewhere.  It is obvious that this firm is, like many others, describing the 831(b) captive, but it doesn't even use the term.

This firm’s captive “sin” is tax-related.  This is ironic as according to the firm’s marketing literature, it is the leading tax services firm in North America!  Its sales material on captives states that annual insurance premiums (paid to a captive from its parent) are tax-deductible as ordinary and reasonable expenses pursuant to IRC Section 162(a).  This statement is untrue on its face.

IRC Section 162(a) does indeed provide guidance as to tax-deductible business expenses.  However, given the specialized rules (for captives) promulgated by the IRS over the last couple of decades, this firm’s lack of understanding of captives is not only annoying; it’s potentially dangerous.  The IRS has issued a raft of revenue rulings that address the tax status of captives and their parents, in a wide variety of circumstances.

The central theme of many is the notion of what constitutes risk distribution (risk sharing).  These rules are applicable to every captive, including the 831(b) variety.  Briefly, a single-parent captive (such as an 831(b) captive), must have at least 50% unrelated business to qualify as a bona fide insurer.  This means that only about half of the captive’s total annual premiums can come from the captive parent.

To add insult to injury, in the same marketing piece, this firm says that safe harbor revenue rulings provide the tax benefits.  They do indeed, but only if the prospective captive owner can qualify under them!  This firm’s message is that any company that pays taxes is automatically qualified to form a captive.  Bait and switch?

This firm’s marketing literature also says that a captive’s funds can be immediately invested in just about anything the owner wants – real estate, stocks, bonds, mutual funds, etc.  Nothing could be further from the truth.  Some captive domiciles, such as Bermuda, have specific investment guidelines designed to require the captive to hold primarily liquid investments.  In Bermuda, 75% of investments must be considered “relevant,” another way to say liquid.

Some onshore domiciles such as Vermont have no specific investment guidelines for single-parent captives, but I guarantee that the regulator (and your actuaries) will seriously discourage illiquid investments such as real estate and equities.  Bonds are the preferred captive investments.

Example 3

Another firm proclaiming captive expertise provides an exhibit that ostensibly shows captive tax benefits over ten years.  If you’ll recall, the first principle – Establish and document non-tax business objectives and purpose – doesn’t appear to be a priority with this firm.  The exhibit compares after-tax income with and without an 831(b) captive.

On its face, the exhibit shows that with a captive, if the parent company pays about $10 million into its little captive over 10 years, it earns about $5 million over the no-captive scenario.  Unfortunately, the exhibit fails to include a rather important element – captive losses.  Without losses, captives are nothing more than tax-advantaged pools of funds, upon which the IRS frowns.  This omission effectively renders the exhibit worthless.

Conclusion

Unfortunately the snake oil trade is alive and well on the Internet.  How does one guard against such shenanigans?  The only effective way to do so is to talk to qualified professionals (consultants, attorneys, etc.) who have nothing to sell but advice.  My next article will include a few more egregious examples of professional malpractice or prevarication, along with a detailed, unbiased, discussion of the 831(b) captive and its uses.  Stay tuned.

You’ve probably seen the recent headlines about the Target retail chain being hacked, resulting in approximately 40 million customer credit and debit card numbers being stolen by hackers. It would be easy to write another article about the importance of cyberliability insurance, but we’d like to go a step further. While it is true that a breach of this magnitude will be incredibly expensive and could strain the total limit capacity available in the cyber insurance marketplace, other insurance products that could possibly be triggered shouldn’t be ignored.

On October 13, 2011, the Securities and Exchange Commission’s (SEC) Division of Corporate Finance published the Cybersecurity Disclosure Guidance. Among other recommendations, the guide contained the SEC’s views on the type and extent of cyberliability risks and exposures that public companies should consider disclosing to investors. The guidance was issued to help investors understand the nature of a company’s cybersecurity risks. In quarterly and annual filings with the SEC, companies disclose risk factors that can have a material impact on their operations. When investors sue a corporation for actions that have harmed the company, and in turn their investments, that is a claim typically addressed by a Directors and Officers (D&O) Liability policy. In certain instances, they also might be covered by a dedicated cyber insurance policy or a Side-A excess policy (or both), to the extent the company has purchased such products, which are separate and distinct from a D&O form.

Like other public companies, Target has sought to abide by the SEC’s cybersecurity disclosure recommendations, most recently including cyber risk as one of 17 risk factors in the MD&A section of its February 2013 10-K:

If our efforts to protect the security of personal information about our guests and team members are unsuccessful, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer.

The nature of our business involves the receipt and storage of personal information about our guests and team members. We have a program in place to detect and respond to data security incidents. To date, all incidents we have experienced have been insignificant. If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our guests could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of REDcards, decline to use our pharmacy services, or stop shopping with us altogether. The loss of confidence from a significant data security breach involving team members could hurt our reputation, cause team member recruiting and retention challenges, increase our labor costs and affect how we operate our business.

State attorneys general have already initiated demands for information and protection for state residents. The Connecticut attorney general is asking for two years of credit monitoring and identity theft protection for state residents, along with more details on the breach and security protocols. Not surprisingly, there have been threats of consumer class actions against Target. It will also be interesting to see if shareholders, or more importantly the plaintiffs bar, think that the disclosure of the risk was adequate. Given the size of the breach, it would not be surprising to see any number of such suits filed against Target.

In the meantime, certain banks are advising consumers that the consumer will not be held responsible for fraudulent charges on their credit cards.

If we look back at the 2007 breach at TJ Maxx (TJX), which affected more than 90 million credit cards, we could gain insight into how MasterCard and Visa might respond to the Target breach. They sued TJX and collectively recovered over $60 million. Other banks, such as Fifth Third Bancorp, Amerifirst Bank, Eagle Bank and SaugusBank, also made claims against TJX. Media reports indicate that TJX paid in excess of $250 million to resolve the myriad claims against it as a result of the 2007 breach. We would expect that number includes crisis management expenses, such the costs of forensic analyses, public relations expenses, notification expenses and other remedial costs. It also likely accounts for regulatory fines and penalties from the government, PCI fines paid to credit card companies, damages paid to both credit card companies and banks, cash and merchandise vouchers for harmed customers, and probably even credit monitoring. It would be challenging to quantify the lost revenue from jilted customers who chose to shop elsewhere following the breach, but we suspect it was meaningful.

Impact on Investors

A key question is, can investors still sue if the stock doesn’t have a precipitous drop? The answer is probably yes. Typical allegations in a securities claim allege that: 1) the management misled investors; 2) the truth came out; 3) the stock dropped as a result; and 4) the investors suffered financial loss. The damage valuation might be determined by comparing the price of the stock prior to the date the “truth” came out and the price after it had been disclosed. That’s an oversimplification of a securities claim, but still reflects the typical pattern.  For something like the Target breach, shareholders could argue that Target failed to fully disclose the potential cyber-related problems, lost business opportunities which kept the stock from rising and therefore caused the loss of future gains, mismanaged and failed to properly oversee its cybersecurity protection program, and other assorted alleged improprieties.

Other Claims

Apart from securities-related disclosure lawsuits, a company like Target also will likely be subject to consumer class actions and regulatory actions. Such lawsuits could lead to sizeable settlements, which could have an impact on the stock price and raise investor concerns. Target’s earnings similarly could be impacted by the costs of breach remediation and associated expenses. It also stands to lose significant opportunity costs, to the extent its management and staff becomes distracted by the post-breach activities. Whatever surfaces will require a lot of money spent in legal and forensic bills.

It is well-known that litigation naming a company’s directors and officers can arise from a variety of alleged misdeeds. Like other entrepreneurs, the plaintiffs are always exploring new legal theories to establish liability and recover damages in order to collect higher fees. When that happens, you can bet those defendants will quickly be looking to their D&O policy for assistance. For every cyberliability underwriter expressing relief that they aren’t insuring Target for this breach, there are likely two D&O underwriters concerned about their policy limit – assuming, of course, that Target has a sizeable D&O insurance tower in place.

Companies like Target likely employ a robust cybersecurity program to protect consumers’ personal and financial information.  But breaches aren’t limited to large multinational operations. According to cyberlaw expert Richard J. Bortnick of Christie Pabarue and Young, and publisher of the blog Cyberinquirer.com, small- and medium-sized public companies are just as much at risk, perhaps even more at risk, than companies like Target. “Every company of every size is at risk,” Bortnick said. “And if you think of it logically, small- and medium-sized companies are likely more at risk, and subject to greater residual financial harm, than the bigger firms. And in the cyber realm, that means small- and medium-sized companies that almost certainly have not invested the resources necessary for proper cybersecurity.” According to Bortnick, “regrettably, oftentimes clients call me in after a breach, not before. And on each occasion, I tell them that the cost to remediate a breach can be multiples of what it would have cost if I had been brought in before the breach and been able to work with the company to plan and implement a cost-effective, best practices cybersecurity regime. Not only does this approach discourage or even prevent hackers, it provides a company with a ‘best practices’ defense to a privacy suit and, potentially, to a shareholder lawsuit.”

As mentioned in the introduction of this advisory, the risks facing your clients following a data breach go beyond the obvious cyberliability insurance policy. How a company has prepared for a breach, what steps have been taken to prevent a breach and what plans are in place to deal with a breach are all executive-level decisions. Regardless of the size of the company, a data breach can be a significant threat to the survival of a company. Companies should buy a cyberliability policy to help respond to a data breach and a D&O policy to protect the management and board for their plans and decisions.

The past several years provide ample perspective on what it means to grow a business via social media, teaching us what works and, perhaps more importantly, what doesn’t. Early adopters are getting their social strategies down to a science; insurance companies commonly generate significant business value by enhancing existing customer relationships and expanding business  through social channels.

Research shows that the initial rush to get customers to simply “like” corporate pages on Facebook was misguided––“likes” for a brand have little value when compared with interactions between agents or reps and customers on an individual level through social media. Personal interactions can lead directly to sales, whereas a “like” rarely translates to dollars. Our own data at Hearsay Social supports this. One major insurance client shared that its agents who used social media to personally connect with customers and prospects had an average of greater than 20% more sales than those who don’t. Customer retention also improves drastically.

Based on our experiences working with numerous large, multi-line companies, I want to share four simple reasons why insurers need to become “social” businesses.

You will notice that these four principles have always applied to successful agencies and businesses; the communication channels are simply evolving.

1. To get found

Being “findable” used to require significant up-front marketing effort and spending. Agencies often invested heavily in ads, sponsorships, and prime real estate to be discovered and considered by prospects. But the way people research has fundamentally changed. Today’s buyers go online to research products or services before purchasing. Whether people are buying a book or a complex financial product, it’s safe to assume that digital research factors into the purchase process. Today, social media is one of the most powerful ways to help an agent or business get found. If a customer searches on Google, social media pages and profiles are typically at the top of their results.

In this example, 3 of the top 4 results in a Google search for the name of a Thrivent Financial Advisor are for his social media pages, demonstrating how a social media presence greatly improves “findability.”

Additionally, with complex products like insurance or financial services, where the decision-maker relies on expert advice, they look for people whom their friends or colleagues recommend. Where one might have previously called friends and colleagues about where to take their business, people increasingly turn to social networks as the easiest way to find the right expert.

2. To grow networks

An extensive network has always been a key indicator of a good businessperson. Historically, new agents were trained to continually build and maintain strong personal networks. The same is true today, and the rise of social networks has made this entire process more efficient and powerful. Social networks online act just like shared connections in the physical world-- online social networks provide the context, familiarity, and trust that allow good sales people to effectively establish a credible rapport to represent themselves and their brand.

Building and maintaining long-term personal relationships is also essential to gaining referrals and repeat sales. On social media, this means connecting with all your friends, colleagues, and business contacts from the offline world. Successful social sales representatives then use social media to connect with customers and continually engage before, during, and after a sales cycle.

3. To “hear” customers and start meetings warm

Listening to and understanding clients is a key characteristic that separates successful relationship managers from the pack. People share valuable information and buying signals on social networks, and gathering insights from posts makes it easy to identify and understand customer needs so that sales reps can truly go into meetings “warm.”

Agents and reps can “hear” what is going on in their networks with Social Signals alerts that highlight key life events, such as weddings or new babies, that could be opportunities to reach out.

Companies that embrace social business provide their teams with powerful ways to pay attention to what’s going on with customers, which increases productivity. Information shared by consumers via social networks also helps relationship managers understand the appropriate time to reach out, with exactly the right information.

4. To build credibility

In the insurance industry, customers must rely on their agent, advisor, or wholesaler as an expert. Buyers don’t have the time to do their own research and stay up-to-date. Social media makes an enormously powerful and effective tool for sales reps to demonstrate expertise and consequently build trust. Industry-leading relationship managers share content via social channels to build credibility and educate customers. In addition, sharing content on social networks helps relationship managers stay top of mind with prospects with whom they haven’t yet engaged. When the prospect is ready to move forward, they know exactly who to contact to initiate sales conversations.

With close to $40 billion in net written premium, the workers’ compensation line of business is an important driver of financial success for many property/casualty insurers. It has come a long way since its inception roughly 100 years ago. 

As we move forward into the second century of workers’ compensation, it’s possible to anticipate many of the challenges (and opportunities) that are coming. What follows is a checklist of areas to watch.

CLAIMS FREQUENCY—Many aspects of the U.S. economy should help keep claims frequency flat or negative in the near future, including:

An increasing underground economy

In April, Mark Koba, a senior editor at CNBC, chronicled the growth of a large shadow economy of workers who, because they are unable to find regular employment, are taking jobs under the table with no reportable income or taxes. Since these workers have no workers’ compensation insurance protection, medical costs may shift from the workers’ compensation system to the health care system. With some estimates showing construction employment at just 75 percent of 2007 levels, it’s possible that a portion of these jobs are being filled by under-the-table workers. If that’s the case, these traditional higher-frequency classes may not show up as heavily in the industry’s calculations as they have in the past—moderating frequency trends going forward.

Growth in Social Security disability payments

Also in April, CNN Money reported a 29% increase in the number of Americans with little or no employment income who receive disability payments. For those who were formerly employed, the increase was a staggering 44%. In 2011, according to the CNN report, the federal government spent almost $250 billion on disability payments to some 23 million Americans. Although this is a ballooning liability for the federal government, the impact on workers’ compensation insurers is largely in the opposite direction. As workers who are less than healthy exit the workforce, the remaining pool of healthier workers will lead to claims frequency decreases in the future.

Expansion of other state and federal backstops

Since the recession began, there’s been a dramatic increase in federal and state assistance. A March article that appeared on the MoneyNews website reported that the number of food stamp recipients reached a record high in 2012, with an average of 46.6 million people receiving food stamp benefits each month. According to Supplemental Nutrition Assistance Program (SNAP) data, total food stamp benefits increased from $30.4 billion in 2007 to $74.6 billion in 2012, a 145% increase. As state unemployment benefits and other backstop programs cover more people for longer periods, the pool of future workers’ compensation claimants likely to file claims shrinks. When individuals leverage government backstop programs and choose not to work, workers’ compensation insurers benefit.

Older workers not retiring

People are working longer. For the manufacturing industries, this most likely means a dramatic reduction in the number of new employees entering the workforce. Although older workers have higher claims severity, new workers have significantly higher claims frequency.

Workplace health and safety efforts

The risk management and environmental, health, and safety departments of companies continue to focus on enhancing return-to-work programs, promoting workplace wellness, and improving workplace safety. These efforts continue to bear fruit, especially as the workforce ages and the adverse impacts of obesity receive more attention.

Part-time to full-time bias on frequency

Workers’ compensation frequency is often calculated as a ratio of the number of lost-time claims per an adjusted payroll amount. To the extent that recent payroll increases have been driven by more part-time workers converting to full-time work, the doubling of exposure for current workers isn’t the same as doubling the number of workers. In the short term, a heavier reliance on existing employees working longer hours very likely will help make frequency statistics look better. This trend could reverse if smaller employers keep their head count under 50 employees or reduce employee hours to part time (under 30 hours) to mitigate the impact of the employer mandate in the Affordable Care Act (ACA). Newly added part-time workers are likely to bring higher claim frequency, while workers taken below the 30-hour threshold to avoid employer-mandated health care might have an increased incentive to shift claims to workers’ compensation.

SEVERITY—A number of coalescing factors could drive medical and indemnity severity higher in the years ahead, including:

Rising interest rates

With the Federal Reserve finally winding down its quantitative easing programs, interest rates will be heading higher. To the degree that this coincides with an improving economy, indemnity severity is likely to tick up with rising wage pressure. Medical severity, which historically has run at roughly double the medical consumer price index, is likely to rise from the 3% levels we are experiencing today. Severity trends in the 6% to 7% range may be manageable in light of today’s rate increases, but it will be difficult to expand profit margins over the long term if medical inflation returns to double-digit levels.

Claims predictive modeling

Companies increasingly are using advanced analytics to identify claims for triage as early as the first notice of loss. By identifying the highest severity claims, assigning the appropriate resources for triage, and doing a better job on referrals from special investigative units, companies are favorably affecting the duration and severity of claims.

Obesity

The obesity statistics are staggering. The Centers for Disease Control and Prevention (CDC) estimates that in 2010, 36% of Americans age 20 or older were obese. The Robert Wood Johnson Foundation in a 2012 report predicted that obesity rates for adults over the next 20 years would reach or exceed 44% in every state in the United States, and exceed 60% in 13 of those states. Recent NCCI studies show that the ratio in the medical costs per claim of obese to nonobese claimants at the end of five years is 5.3, and the duration of obese claimants is five times that of nonobese claimants. Given the fact that workers of all ages are struggling with maintaining a healthy weight, workers’ compensation costs will only increase as other comorbidities associated with obesity increase costs.

An aging workforce

As workers age, gradual changes in hearing, vision, strength, and balance may lead to increased probabilities and durations of workplace injuries, including sprains, strains, slips and falls, carpal tunnel syndrome, knee and shoulder problems, hip replacements, and back issues. A 2012 NCCI study, however, concluded that an aging workforce appears to have far less of a negative impact on workers’ compensation claims costs than was previously thought. Although there’s evidence that injured workers older than 35 years have higher costs than those younger than 35, costs associated with injured worker cohorts older than 35 tend to be quite similar. And while older workers have more costly injuries, the NCCI observed that such injuries are becoming more prominent in younger workers.

While the NCCI has presented conflicting data on the claim costs of older workers, we know that the number of older workers in the workforce will nearly double in the next 15 to 20 years. The U.S. Department of Health and Human Services estimates that the 39.6 million persons age 65 years or older today will increase to roughly 72.1 million by 2030. That equates to roughly one in every five Americans being 65 or older. While the jury is out on the precise impact of an aging workforce on claim frequency and severity, an aging workforce increases the likelihood of more severe injuries and longer claim durations.

LONG-TERM TRENDS—On the plus side, several trends are emerging that could benefit workers’ compensation insurers in the long run, including:

Price transparency

When the Surgery Center of Oklahoma in Oklahoma City started posting its prices online four years ago, it forced competing area hospitals to follow suit. Although it will take time to catch hold across the country, greater price transparency in the delivery of health care could benefit workers’ compensation insurers. Running counter to this trend is the pace of consolidation in health care. The ACA, with its focus on accountable care organizations (ACOs), electronic medical records, and other coordination-of-care rewards, is fueling consolidation in health care at an unprecedented rate. With increased consolidation comes increased local pricing power, and workers’ compensation insurers could find themselves on the wrong end of that pricing pendulum.

Opioid use

The epidemic of opioid abuse that had swept the nation is finally starting to abate. State governors, attorneys general, and legislatures are passing laws to toughen criminal and administrative penalties for doctors and clinics, establishing standards of care for doctors who prescribe narcotics, increasing the reporting and tracking of prescriptions, and limiting reimbursements to physicians who dispense prescription drugs to no more than a certain percentage above cost. State agencies, local agencies, and the U.S. Drug Enforcement Administration also are aggressively prosecuting individuals involved in illegal prescribing activity and “pill mills,” causing physicians, nurse practitioners, and pharmacies to surrender their federal licenses to dispense controlled substances. In the most serious cases, the offenders have had to surrender their medical licenses to state medical/pharmacy boards. Physicians and medical boards also have developed resources to guide physicians on responsible opioid prescribing, and there’s been a rise in the number of physicians who have had their licenses suspended by state medical boards for the unlawful distribution of controlled substances and for prescription drug fraud. Organizations like the Federation of State Medical Boards and Physicians for Responsible Opioid Prescribing also have joined the fight.

Given the high-profile nature of these efforts to define the proper use of opioids in treating injured workers, it’s likely the workers’ compensation line will see an effect. With medical expenses exceeding 60% of workers’ compensation costs, 20% of that going toward prescription drugs, this would be a welcome development.

Medical tourism

Medical tourism continues to grow as an option for patients all across America. An airline magazine recently had advertisements from hospitals outside the United States showing savings of 50% to 80% on procedures such as knee and hip replacements that are common in workers’ compensation. The general cost in the United States for a knee replacement was shown at $34,000, versus the overseas cost of just $10,000. A hip replacement was listed as $35,000 versus the overseas cost of just $11,000. Even with the cost of airfare, transportation, and hotel accommodations, the potential savings are significant (acknowledging that we aren’t attempting to control for quality or safety differences). With several companies and health insurers investigating offering medical tourism options to their employees and insureds, there could come a day when workers’ compensation insurers could leverage these tremendous savings to help drive down severity for certain procedures. While businesses may welcome the cost savings, we recognize that persuading state legislatures and injured workers to agree to these practices could be difficult.

The ACA

Several economist and workers’ compensation industry stakeholders have predicted that the ACA will create shifts in the workers’ compensation industry. But exactly how isn’t clear. Many refer to the Massachusetts Health Care Reform Act to bolster the argument that the ACA will lower overall health care costs and workers’ compensation costs. Under Massachusetts health care reform, costs within the workers’ compensation system decreased. Although ACA is more complex, similar provisions in the two laws allow a comparison of the impact on the workers’ compensation system. Analysis by RAND in 2012 found that expanding coverage to previously uninsured individuals resulted in a drop in workers’ compensation costs in Massachusetts. Finding an association between being insured and the frequency of workers’ compensation claims, RAND concluded that expanding the population holding group health insurance could reduce cost shifting to workers’ compensation.

In a May blog posting, Joe Paduda, a principal at Health Strategy Associates, affirmed his belief that the overall effect of the ACA on workers’ compensation would be positive, citing among other things, that it would lessen the motivation for cost shifting and fraudulent claims. Others have argued that increasing access to care and expanding preventive services, coupled with employer-sponsored wellness initiatives, should make the working population healthier overall, leading to a reduction in claim frequency and faster recoveries when injuries do occur.

On the other hand, some speculate that the ACA will increase workers’ compensation costs over time by straining already scarce primary care resources and causing longer wait times for treatment. The projected shortage of primary care physicians could make it more difficult for injured workers to find a physician. This, in turn, could lead to increased costs because of extended disability durations while waiting to see a physician. Others have pointed out that a decreasing supply of physicians and increasing patient demand could drive costs higher. Other factors that could affect cost shifting are significant increases in copayments and high-deductible health plans—costs that employees must bear. This could motivate some employees to file workers’ compensation claims for nonoccupational injuries.

According to findings from a recent study by Assured Research, a connection between increased health insurance coverage and decreased workers’ compensation costs isn’t supported by the data. The study evaluated health insurance penetration rates by state from 1999 to 2011 and corresponding statewide workers’ compensation loss ratios. After adjusting for national workers’ compensation trends, the results showed 31 states with rising health care penetration that resulted in decreased loss ratios. On the other hand, 20 states with rising health care penetration experienced increased loss ratios.

Immigration reform

There are approximately 11 million undocumented people living in the United States. Many don’t file workers’ compensation claims for fear of being deported. The general consensus is that legalizing undocumented immigrants will increase workers’ compensation claims. At the same time, immigrant workers are more prevalent in high-risk sectors such as agriculture, construction, and landscaping. With an influx of workers into a high-risk injury class, the potential impact on frequency and severity in the workers’ compensation system can’t be overlooked.

Anticipate and Plan

British Prime Minister Benjamin Disraeli once quipped, “What we anticipate seldom occurs, what we least expect generally happens.” Still, it’s important to anticipate and plan for the future risk. There’s little doubt that change is looming for workers’ compensation insurers and that actuaries have a key role to play in identifying and managing the transformation.

Authors

Denise Gillen-Algire and Kevin Bingham collaborated with Bill Van Dyke and William Wilt in writing this article.

Bill Van Dyke, an associate of the Casualty Actuarial Society and a member of the Academy, is a specialist leader at Deloitte Consulting LLP in Hartford, Conn. He has extensive actuarial experience in managing and performing workers’ compensation unpaid claim reserve and pricing analyses for state funds, insurers, reinsurers, state agencies, municipalities, self-insured corporations, and captives.

William Wilt, a fellow of the Casualty Actuarial Society, is president of Assured Research, a research and advisory firm focused on property/casualty insurance. Prior to forming Assured, he held diverse roles as an actuary, as a credit and equity analyst, and in corporate development.

This article first appeared in the November | December 2013 issue of Contingencies Magazine and is © 2013 American Academy of Actuaries. Reprinted with the permission of the American Academy of Actuaries.  All Rights Reserved.