Misunderstanding the language contained in the self-insured retention ("SIR") in an insurance policy can cost policyholders millions of dollars.

SIRs, which appear in many liability policies, are similar to deductibles but require the insured to bear responsibility for a certain amount of the loss (including damages and defense costs) "before there is any coverage under the policy."¹  (A deductible is generally a sum the insured "'must pay before the insurer owes its duty to indemnify the insured for a covered loss'" and generally refers "only to the 'damage for which the insured is indemnified, not to defense costs'").²   The language of the SIR, which varies from policy to policy, ultimately controls when and how an insured's coverage is triggered.

Some policies contain language that preclude anyone other than the named insured from satisfying the SIR—which can catch companies by surprise.

In a 2010 case, Forecast Homes, Inc. v. Steadfast Insurance Company³  ("Forecast"), a housing developer faced a construction defect lawsuit filed by several homeowners.⁴   The developer argued that its subcontractors' insurer, Steadfast, should provide coverage for the lawsuits, pursuant to contracts that required the subcontractors to provide additional insured coverage for the developer.⁵   But the courts disagreed because the named insured subcontractors, who were not parties to the construction defect lawsuits, did not satisfy the SIR in the Steadfast policies, a prerequisite for coverage.⁶   And, the developer could not satisfy the SIR itself as an additional insured.⁷

There were several Steadfast policies invoked in this lawsuit, but these policies contained essentially two versions of the SIR.⁸   Version one provided that "you [the named insured] shall be responsible for payment of all damages and defense costs for each occurrence or defense, until you have paid [SIR] amounts and defense costs equal to the [p]er [o]ccurrence amount shown in the Schedule[.]"⁹   Version two contained this same language but added explicit language precluding anyone other than the named insured from satisfying the SIR.¹⁰   The court held the plain language of version two clearly barred the additional insured developer from satisfying the SIR.¹¹   But the court also found that the less explicit version one precluded anyone other than the named insured from satisfying the SIR, relying on the section providing that "you"—defined as the named insured—are responsible for payment of defense and damages until the SIR is satisfied.¹²   Developer Forecast Homes, to its surprise, could not satisfy the SIR to trigger coverage as an additional insured.

Under different language, though, courts have allowed insurers, additional insureds, or others to satisfy the SIR.  For example, in National Fire Insurance Company of Hartford v. Federal Insurance Company ("National"),¹³  National Fire Insurance Company of Hartford ("NFIC") paid its policy limits to settle a suit on behalf of its named insured (a restaurant) and its additional insured (a hotel).¹⁴   NFIC then sought reimbursement from the hotel's insurer, Federal Insurance Company ("Federal").¹⁵   Federal argued that it was not obligated to pay a portion of the hotel's defense or indemnity because the hotel had not satisfied the $250,000 SIR, and the SIR could not be satisfied through NFIC.¹⁶   The court disagreed.¹⁷

Similar to version one of the policy at issue in Forecast, the Federal policy provided "[w]e have no obligation or liability under such Coverages unless and until the applicable [SIRs] . . . . are exhausted by payments you make . . . .  You must pay all [SIR] expenses."¹⁸   But the Federal policy at issue in National contained language that "'bankruptcy, insolvency or the financial impairment of any insurer or any other person or organization does not relieve the hotel of its obligation to satisfy the SIR," unlike the language in Forecast that referred "only to the insured's own bankruptcy or solvency."¹⁹   The language in National, combined with the absence of explicit policy language prohibiting another insurer from satisfying the SIR, compelled National to find that there was no bar to NFIC satisfying the SIR in the Federal policy on behalf of the hotel, the named insured.²⁰

What does this mean if you are an insurer considering settlement?  And how can insureds use this information to facilitate settlement or avoid future disputes?

• Know your policy language ahead of time.  Make sure you look at your policy and other potentially relevant policies before entering settlement negotiations and understand exactly who can satisfy the SIR.  If the SIR must be satisfied by the named insured and you are an additional insured, make sure that topic is part of the negotiations.  If the named insured is not a party to the action, consider whether you have grounds to bring the named insured into the action.  If the SIR can be satisfied by other insurers or co-defendants, then you have more flexibility in negotiating.
• Consider sharing your knowledge.  Knowing how to satisfy the SIR not only protects you in settlements but may help facilitate settlements.  For example, if your insurer is reluctant to contribute because it is taking the position that other insurers should be at the settlement table, look at the relevant policies and determine whether the other parties can satisfy the SIR in these other policies.  If so, pointing this out to the insurers and increasing their comfort level with their chances for contribution may compel the insurers to tender additional policy funds that allow for settlement. 
• Spell it out.  Think about potential coverage disputes and explicitly state relevant terms that could help resolve any disputes that have arisen or may arise.  For example, if the named insured is required to satisfy the SIR and, in fact, does so, state that in the mediation or settlement briefs, or otherwise memorialize it, so that the issue is clear and does not lead to disputes.  Understanding the disputes that may arise can help insureds create records that will allow for quick resolution or avoid the disputes altogether.

These recommendations are particularly important to insureds in the construction industry, where contractors frequently require subcontractors to name them on their insurance policies as additional insureds and are frequently contractually required to name others on their own policies as additional insureds.  Similarly, these recommendations are also important to corporations that face large-exposure lawsuits that exceed the limits of their primary coverage and need to trigger coverage under their excess policies to resolve matters.  In these circumstances, knowing who can exhaust an SIR can be critical to securing potentially millions in coverage. 

For all insureds, arming yourself with knowledge ahead of time can help you to develop strategies and create records that maximize coverage, facilitate resolution of current disputes, and eliminate potential future disputes.

¹ Hon. H. Walter Croskey, Hon. Rex Heeseman and Christina J. Imre, California Practice Guide: Insurance Litigation (The Rutter Group 2013) ¶7:384.

² Id.; see also Forecast Homes v. Steadfast Insurance Co. (2010) 181 Cal.App.4th 1466, 1474 (internal citations omitted, original italics).

³ (2010)181 Cal.App.4th 1466.

⁴ Id. at 1470.

⁵ Id. at 1469-1470.

⁶ Id. at 1470.

⁷ Id.

⁸ Id. at 1470.

⁹ Id. at 1471.

¹⁰ Id. at p. 1472.

¹¹ Id. at 1476-1478.

¹² Id. at 1480-1481.

¹³ (2012) 843 F.Supp.23 1011.

¹⁴ Id. at 1012.

¹⁵ Id. at 1012-1013.

¹⁶ Id. at 1016.

¹⁷ Id. at 1017.

¹⁸ Id.

¹⁹ Id. at 1017, italics added; Forecast, supra, 181 Cal.App.4th at 1472.

²⁰ National, supra, 843 F.Supp.23 at 1017.

If there is a silver lining in the protracted downturn and delayed recovery in the construction economy, it is that “fatal construction injuries are down nearly 42% since 2006,” according to the BLS National Census of Fatal Occupational Injuries in 2011.

That same report observed that “fatal work injuries in the private construction sector declined to 721 in 2011 from 774 in 2010, a decline of 7% and the fifth consecutive year of lower fatality counts.”

However, as the general economy stabilizes and construction spending and project volumes increase, it will not be long before hiring pressures mount throughout the industry.

With an increase in hiring comes an opportunity to institute increased emphasis on safety through employee selection standards, substance abuse testing, new employee orientation and training processes, as well as job safety analyses and daily “huddles” to address project safety requirements.

There is no better time than now for construction company owners and construction financial managers to focus on systematic injury prevention by adopting a zero injury vision and strategy and begin a transformation into a zero injury culture.

Reality Check: Stop Rationalizing Construction Injuries & Fatalities As A Cost Of Doing Business

Stop for a moment and reflect on the hard fact that many construction workers are injured, disabled, and killed at work each year. It is widely recognized (or rationalized) that construction is a hazardous industry, accidents happen, and jobsite conditions are constantly changing and difficult to control.

The reality is that the overwhelming majority of injuries and fatalities are preventable. A common trait we’ve observed among companies that have adopted a zero injury culture is an underlying philosophy and belief that all injuries and fatalities can be eliminated.

What is required to make this philosophy a reality? Leadership resolve to change the prevailing attitude that rationalizes fatalities and injuries as an unfortunate aspect of the construction industry and a cost of doing business and a culture shift that changes the attitudes, beliefs, and behaviors of all industry stakeholders.

This shift to a zero injury culture instills a true belief that injuries and fatalities are not acceptable, should not be condoned, and cannot only be reduced, but actually prevented. This culture shift is necessary at the project, company, and industry levels, as well as in the thoughts and actions of each construction employee.

Zero Injury Culture Is For All Companies

Culture shapes the performance expectations of such key workplace attitudes as the importance of punctuality, wearing proper attire, and how hard to work (or not to work). It directly influences safety attitudes and behaviors, including whether employees wear protective equipment, ignore training instructions, and/or take safety shortcuts to finish work faster.

Therefore, culture determines if a company or work crew will act with a safety-conscious and risk-averse set of values or accept “at-risk” attitudes and behaviors as the prevailing norm.

With the emphasis on zero injury or zero incident culture by large contractors, many small- and medium-sized contractors are wondering if this is a suitable strategy for them as well. We believe all companies can benefit from adopting a zero injury vision and strategy.

The success of a company’s drive to attain a zero injury culture hinges on a company’s owners and senior leaders who must instill, reinforce, and sustain the core building blocks of a zero injury safety culture shown in Exhibit 1 below.

How To Institute A Zero Injury Culture

Companies that have adopted a zero injury culture generally have instituted the measurement of leading indicators in addition to traditional lagging indicators (which are discussed in Risk Performance Metrics). Leading indicators focus on the prevention-based activities that drive improved safety expectations and performance outcomes.

Exhibit 2 outlines a life cycle process for the development of a zero injury safety culture. We have high-lighted five distinct phases and delineated key steps and milestones for each phase. The five-phase model is presented to provide a useful framework for monitoring the progress of the evolving process.

For simplicity, Exhibit 2 summarizes key challenges, major milestones, and process outcomes in each of the five phases of the zero injury culture development life cycle. Similar to safety culture development, rarely is a one-size-fits-all approach appropriate for any organizational process or practice. Company culture is unique and will grow and change in its own way.

Building an organizational safety culture can be a slow and messy process, and it does not necessarily follow a linear progression. Sometimes the adage of “one step backward to go two steps forward” is necessary advice.

A model of organizational transformation that we found relevant and realistic to instituting zero injury culture is “Journey of Transformation: The CFO’s Perspective” (by Renee Beaulieu, Skip Perley, Dr. Perry Daneshgari, and Heather Moore in the May/June 2012 issue of CFMA Building Profits), which describes the Strategic Breakthrough Process Improvement.

Many of the companies adopting a zero incident or zero injury culture often describe their process of doing so as a journey.

Safety Culture Development Challenges

The 10-question Safety Culture Health Check in Exhibit 3 can provide your company’s leadership with an assessment of their personal and organizational readiness for instituting a zero injury culture.

It is crucial that the zero injury culture process be well conceived with thoughtful consideration of how to communicate the company’s commitment, secure employee engagement, and implement functional support structures to reinforce and sustain the process.

It is important to recognize that employees will intuitively know if the company leadership sincerely wants to adopt a zero injury culture. Employee skepticism will run high if the company has a history of initiating and quickly abandoning “fad of the month” safety programs.

A final “gut-check” question is necessary to determine your company’s readiness and resolve for adopting a zero injury culture: Is your company ready and willing to commit to adopting, instituting, and sustaining a zero injury culture? In honestly evaluating this question and its implications, it is natural to consider the challenges in doing so and identify the obstacles to overcome for your company to be successful.

Benefits & Outcomes

Once implemented, the benefits of a zero injury safety culture will be realized through reduced claim severity and frequency, increased productivity, and improved profitability. Once a zero injury safety culture is achieved, your company will:

• Become an employer of choice, reduce voluntary attrition, and improve morale among existing employees
• Increase productivity by decreasing time spent investigating employee injuries and reducing idle equipment, thereby increasing potential for improved margins
• Decrease direct and indirect costs associated with employee injuries, thereby reducing your company’s total cost of risk
• Demonstrate improvement in project owners’ prequalification metrics (e.g., total recordable cases (TRC); days away from work, job restriction, or transfer (DART); Workers’ Compensation Experience Modification Rate (EMR), etc.), thereby remaining on eligible bidder lists and increasing opportunities to bid desirable projects
• Align zero injury culture with other strategic zerobased risk management objectives: zero defects, zero crashes, zero equipment breakdowns, zero defaults, zero IT downtime, and zero disruptions (For more information, read “Zero Disruptions: Preparing for Unexpected Business Interruptions & Protecting Your Assets” by Calvin E. Beyer and Brian J. Cooney in the May/June 2011 issue.)
• Attain respect among peer competitors and establish a positive reputation in the industry

Management Safety Culture Assessment

Various survey instruments have been developed to measure perceptions of safety management culture. The Management of Safety Culture Assessment is based on the Determinants of Safety Culture Model, which assesses the measurable capacity and performance ability of companies to minimize accidents, injuries, and related costs.

According to Dr. Christopher Garrabrant, the Management Safety Culture Assessment and Determinants of Safety Culture model are founded on Charles Perrow’s 1994 discussion of Normal Accident Theory and High Reliability Theory, both of which correlate to reducing losses.

Garrabrant asserts this Management Safety Culture Assessment identifies and measures 15 factors within five broad categories that contribute to the success of a company’s safety culture, as shown in Exhibit 4.

A company demonstrates the necessary values within its culture to promote the health and well-being of its employees. The culture demonstrates behaviors that can be expected to result in fewer workplace accidents and achieve a more rapid return to work should an accident occur. The assessment is intended to validate a company’s ability to exceed industry expectations of safety performance.

Importance Of A Zero Injury Mind Shift In The Construction Industry

We recognize that for a true zero injury culture to occur, the mindset of zero injury needs to reach beyond the individual company culture and become the norm for the construction industry as a whole, since many contractors use the same subcontractors, vendors, and workforce. Therefore, until the industry – including all owners, contractors, and employees – takes a unified stance against unsafe behaviors and acts, each individual company will obtain limited success as a zero injury culture.

We envision a construction industry with the shared culture where workers have the same positive experience at every project where they are asked to put in an honest day’s work without taking any unnecessary risk and where they safely complete their work each day.

In order to do that, we are encouraged to see general contractors and subcontractors band together with insurers to start working as an industry to change the norm for all workers to complete each work day safely.

Please take a moment to think about whether you are willing to do what is necessary to help make zero incidents, injuries, and fatalities a reality in your company and the construction industry.

Challenge the conventional thinking about the construction industry being hazardous and help make the vision of a zero injury culture within this industry a reality.

We appeal to every stakeholder of the construction industry to join the cause of making zero injuries a reality. There really is no higher calling for the construction industry – the time is now for zero injuries to be the expectation, the norm, and reality.

Web Resources

1. BLS Economic News Release: Census of Fatal Occupational Injuries Summary, 2011.

2. Zero Injury Techniques, University of Texas at Austin, Construction Industry Institute.

3. Safety Plus: Making Zero Accidents a Reality. University of Texas at Austin, Construction Industry Institute.

Authors
Cal Beyer collaborated with Eric Lambert in the writing of this article. Eric Lambert, CRIS, ARM, CHST, is National Director of Construction Quality and Safety for Zurich North America Commercial in its Boston, MA office. Eric has worked in the construction industry for the past 20 years to save lives, reduce loss, and make companies better. For the past 11 years, Eric has worked to make a zero injury culture a reality. Eric has participated in many construction industry roundtables and committees to learn from and provide input to improve the industry’s safety culture and practices.

© 2013 by the Construction Financial Management Association. All right reserved. This article first appeared in CFMA Building Profits. Used with permission.

If you don’t have time to read this now, remember one thing:  do NOT fine women $1200 for refusing to disclose on an HRA whether they intend to become pregnant.   Perhaps you think that is obvious but it isn’t to Penn State, which is doing exactly that

Until recently, human resources (HR) departments couldn’t get enough wellness programs.  They have been a gold mine for brokers, too, because high volumes of business have driven commissions that are not even subject to disclosure requirements. Vendors of wellness programs competed with each other to see who could offer the highest payouts to brokers and were not shy about admitting how aggressively they were trying to find new customers, even though every metric shows that wellness programs don’t work. 

All that changed when Penn State got into the wellness business.  Advised by Highmark and Truven Health Analytics’ Ron Goetzel, who oversees the now-discredited C. Everett Koop  award, Penn State implemented perhaps the most unpopular wellness program in history. The program triggered a change.org  petition and coverage in the Wall Street Journal , every HR department’s worst nightmare-- except perhaps for unionization, which is now also on the table, partly because faculty were so upset about the onerous requirements imposed on them in the name of their health.

The program is laid out in Harvard Business Review, along with some sample reaction in the way of comments, so we won’t repeat that posting here.   Instead, the goal of this posting is the next step:  provide some lessons from Penn State for brokers and consultants, so that the problems at Penn State don’t happen to you.

Lesson One:   Employees matter in wellness.

Don’t assume that the HR department speaks for the employees.  In this case, the anti-HR outrage was overwhelming and could easily have been anticipated. Think twice before recommending a program that punishes employees if they don’t follow rules for improving their health—and that employees will hate. If your client is considering this type of program, ask which the company would rather have:   employees with high morale or employees with low cholesterol?

Lesson Two:   Forcing employees to “do wellness” will backfire.

Never recommend a program where completing forms avoids a forfeiture of a large sum of money.   People will just lie.  At Penn State, a memo went around encouraging people to lie.  So, instead of creating a culture of wellness, you’d be creating a culture of deceit.

In particular, as mentioned in the summary, Penn State decided it would be a good idea to fine women $1200 for declining to disclose to Highmark whether they intend to become pregnant.  This is the ultimate in “forced wellness.”  Indeed it is probably the worst idea in the history of wellness, and we mention it here only because if a large employer, well-known health plan, and prominent consultant can come up with this scheme, it ’s not beyond the realm of possibility that others might too.

Lesson Three:   Wellness numbers don’t add up.  Don’t pretend they do.

Wellness should be undertaken on its own merits.  If you, like Penn State and its advisors, cite the discredited bromide that 75% of cost is caused by chronic disease, you’re setting your client up to fail, as it is easy enough to find proofs that such a statement is meaningless.  Wellness actually increases costs, because biometric screens  and “preventive” physicals have very negative ROIs.

So what should you do instead?   Cracking Health Costs offers many solutions.  Chief among them would be narrow networks focused on a few safe, ethical national centers of excellence such as Mercy in Springfield (MO), where 80% of patients referred for back surgery are prescribed conservative treatment instead.  Also, coordinate care to manage employees who really do get sick, the so-called ”Quantum Health Model.”  Specifically, in lieu of conventional and ineffective wellness programs, pursue a well-being program of the type pioneered by Healthways.  

A combination of those initiatives should reduce your client’s spending while also keeping them out of the newspaper.

The vast majority of private employers in California desire an at-will employment relationship with employees.  The vast majority also believe they are at-will employers.  They may be, but for a great many, it will take three years of litigation and several hundred thousand dollars to prove it.

It is often said that there are two types of employment: at-will employment and employment by contract.  This is actually a misnomer.  All employment is by contract.  It is either a contract for at-will employment or a contract for something else.  The most common alternatives to at-will employment are collective bargaining agreements in the union environment and individual employment agreements that provide for “good cause” termination.  In the at-will employment relationship, the employer is not required to provide advance notice of a termination decision and is not required to justify the decision with “good cause.”

It is also often said that in the absence of a written employment contract, all employment in California is at-will.  This is also a misnomer.  It is true that the Labor Code specifies at-will employment as the default employment relationship, but a written agreement is not necessary to overcome the default.  Oral agreements and implied-in-fact agreements can be entered which limit the employer’s rights to end the employment relationship.  Implied-in-fact agreements are the most problematic because the employer will not even know that it has entered into the agreement until the question is litigated and the court renders a decision.  A properly structured at-will employment relationship permits the employer to avoid this litigation.  It also provides the employer with flexibility in making decisions for operational reasons, and ensures that no judge or jury will later be called upon to second-guess the wisdom or fairness of the employer’s business decisions.

It is likely at least one half of the employers in California who think they are at-will employers are not.  Or, at least they are not in the sense that they can avoid extensive litigation by using the legal process of summary judgment to have wrongful termination lawsuits dismissed.  The problem arises because many employers, even the big ones, use borrowed or template documents.  Unfortunately, many of the attorneys and human resource professionals who write the documents lack a complete understanding of the law on at-will employment and they utilize documents which fail to properly establish the at-will relationship.  Employers who create documents on their own are at even greater risk for errors.  This is an area where the words and their precise placement really matters.

The most common errors made that interfere with the proper establishment of an at-will employment relationship are summarized below.

• Relying exclusively upon at-will policy statements and agreements in employment application forms.  Courts have ruled that statements in employment applications are insufficient to prove at-will employment.
• Relying upon at-will policy statements.  Courts have ruled that because policy statements are generally non-binding they cannot conclusively prove an at-will relationship.
• Utilizing employee handbook language stating that the handbook is not intended to create a contract or contractual rights.  While that may be appropriate for most of the policies in the handbook, it can effectively wipe out any attempt in the handbook to create or confirm an at-will relationship.
• Failing to utilize documents which create an at-will employment agreement. A key court decision that can be used to obtain summary judgment requires that the at-will nature of the employment relationship be set forth in an “employment agreement.”
• Failing to control modification to the at-will employment agreement.  If a properly written at-will agreement can be modified without specific controls, the employer may be put to the burden and cost of litigation to prove that it was not modified.
• Failing to integrate the at-will agreement.  Agreements that are integrated are much less likely to be subject to lawyers’ arguments and extensive litigation.
• Failing to coordinate the numerous documents that may impact the at-will analysis. When the documents are not properly structured to work together in establishing the at-will relationship, there is an opportunity for lawyers’ arguments and litigation.
• Failing to get good documents signed and failing to securely maintain them once signed.  Even the best designed documents are of limited value if they cannot be produced when needed.

Avoiding these errors can literally save years of litigation and hundreds of thousands of dollars in a typical wrongful termination case.  Even where an at-will employment relationship is not desired, these same types of errors can result in unnecessary litigation. 

Fortunately, the errors and litigation can be avoided.  Employers should start by taking the time to really understand the various forms of employment.  This includes the pros and cons of each form, and the elements necessary to properly establish each.  Regardless of the form desired, employers should take a comprehensive approach.  All of the documents which refer to or which may relate to the employment relationship should be audited. 

Once the audit is complete and the documents have been revised properly, attention should be turned to employee training.  Employees involved in the on-boarding process should understand the type of employment relationship being created and should be trained to avoid communications in interviews and communications in initial emails that may conflict with the desired relationship.  By following these steps employers will have surety in the type of relationship created and will avoid unnecessary litigation.

The Need Is There

There were more than 26 million new strains of malware released into circulation in 2011, the last year with solid data on malware. Such a rate would produce nearly 3,000 new strains of malware an hour! Almost two-thirds of U.S. firms report that they have been the victim of cyber-security incidents or information breaches. The Privacy Rights Clearinghouse reported that since 2005, more than 534 million personal records have been compromised. In 2011, 273 breaches were reported, involving 22 million sensitive personal records.  The Ponemon Group whose Cost of Data Breach Study is widely followed every year indicated a total cost per record of $194 in 2011, an increase of over 40% ($138) compared to the cost in 2005 when the study began.

Other surveys are consistent.  NetDiligence, a company that provides network security services on behalf of insurers, reported in their “2012 Cyber Risk and Privacy Liability” forum the results of their analysis of 153 data or privacy breach claims paid by insurance between 2006 and 2011.  On average, the study said, payouts on claims made in the first five years total $3.7 million per breach.

And, attacks simply don’t target large companies. According to Symantec’s 2010  SMB Protection report (again the last report with good data on SME), small busineses:

• Sustained an average loss of $188,000 per breach
• Comprised 73% of total cyber-crime targets/victims
• Lost confidential data in 42% of all breaches
• Suffered direct financial losses in 40% of all breaches

Indeed, according to the 2011 Verizon Data Breach Report, in 2010, 57% of all data breaches were at companies with 11 to 100 employees. Interestingly, it was the Report’s opinion that 96% of such breaches could have been prevented with appropriate controls.

Seemingly, not a week goes by without a reference to cyber risk hitting the mainstream press. Recently, a cyber attack was successfully launched against ATMs in 27 countries withdrawing over $40 million in over 30,000 transactions in less than 10 hours.  The New York Times recently reported that universities are facing a rising barrage of cyberattacks, mostly from China.¹   And last year saw a number of denial of service attacks against financial institutions brought by sophisticated cyber “criminals” whose attacks were eventually sourced to the nation of Iran in what would truly be considered a Cyber War attack against the U.S. infrastructure.

All This Has Prompted Insurers To Enter The Market (And Make A Nice Profit To Boot)

Cyber-insurance began in earnest in 2000 when American International Group’s AIG eBusiness Risk Solutions unit launched AIG netAdvantage. Starting from scratch, premium jumped to over $100 million by the time the unit was merged into larger subsidiaries of AIG, just four years after its creation. AIG eBusiness was extremely profitable with estimates of loss ratio in the extremely low double digits.

Fast forwarding to today, the cyber-insurance market, according to the 2012 Betterley Report is “in the $1 billion range” in terms of premium (up from $800 million in the 2011 report) with close to 40 insurance carriers providing a standalone insurance policy.  Premium continues to increase with most carriers, accordingly to Betterley, reporting increases from 25% to 100% year over year.  Hard profit figures are difficult to come by; however, strong anecdotal evidence suggests that this line of insurance continues to be highly profitable.  Third party litigation continues to be slow to develop outside the privacy arena and first party claim losses, outside of breach funds, is non-existent.

From an underwriting point of view, some attention should be paid to theft of personal identifiable information (PII), especially with respect to first party costs associated with forensics and customer notification costs.  However, there are established methods to manage this risk successfully for the underwriter.  Indeed, in a widely followed report, Verizon reports that 90% of all breaches can be prevented with proper risk management guidelines.   Of course, like any other portfolio of business, care must be taken with respect to avoidance of catastrophic exposure, adverse selection and moral hazard.  There are underwriting guidelines and processes that can be developed to manage these exposures.

Yet The Market Still Has Plenty Of Room To Grow

Despite the increased attention to cyber incidents, most reports indicate only a minority of companies currently purchase cyber-insurance.  According to the “Chubb 2012 Public Company Risk Survey: Cyber,” 65% of public companies surveyed do not purchase cyber insurance, yet 63% of decision-makers are concerned about cyber risk. In a recent Zurich survey of 152 organizations, only 19% of those surveyed have bought cyber insurance despite the fact that 76% of companies surveyed expressed concern about their information security and privacy. A risk area with a high level of concern but little purchase of insurance? That’s an insurance carrier’s dream

It is unclear why there aren’t more buyers, but most of the industry believes it’s a lack of education. For example, previous surveys indicated that over 33% of companies incorrectly believe that cyber is covered under their general corporate liability.

Regardless of the reason, with respect to foreign corporations whose securities are traded on U.S. exchanges, a recent “Guidance” report² published by the U.S. Securities and Exchange Commission on October 13, 2011 is likely to increase sales.  The report begins simply enough:

For a number of years, registrants (companies who register their securities with the SEC) have migrated toward increasing dependence on digital technologies to conduct their operations. As this dependence has increased, the risks to registrants associated with cybersecurity has also increased ... As a result, we determined that it would be beneficial to provide guidance that assists registrants in assessing what, if any, disclosures should be provided about cybersecurity matters in light of each registrant’s specific facts and circumstances.

The “guidance” report goes on to specify five “suggested” disclosures that may be “appropriate” to companies trading with securities registered with the SEC.  The fifth suggestion is the one that caught the eye of the insurance industry.  It reads simply:

Description of relevant insurance coverage.

This is the first time that I am aware that the SEC included insurance in one of their guidance reports.  The SEC tends to start investigations 18-24 months after issuing a guidance report. It is difficult to imagine how a general counsel would be able to meet this disclosure without an investigation, at least, of specific cyber insurance.  This is especially true given that over the course of the last few years, general liability underwriters have continued to tighten up any language in a general liability policy to a point where an insured would be foolish to even think the policy applies to cyber risks.³

Thus, it is then perhaps not surprising that the Betterley 2012 market report stated “we think this (cyber) market has nowhere to go but up.”  Although, they quickly qualified,  “as long as carriers can still write at a profit.”

And With A Private-Public Partnership There Is Even More Potential

Unlike many other countries, 80% or more of the critical infrastructure of the United States is in private hands.  As we have seen in the last year, cyber attacks are increasingly being brought by companies associated with hostile nation states.  Cyber-terrorism - even cyber-war - is close at hand and, in some minds, is already here.  The insurance industry can and should play a vital role in providing private sector incentives to foster increased network security in the critical infrastructure.  However, the insurance industry cannot do this alone.  The answer lies in a private-public partnership between the insurance industry and the federal government.  Productive discussions are already underway between the Department of Homeland Security and the insurance industry with specific proposals to safeguard and enhance our country’s security being reviewed.

For more details on the need for this public-private partnerships, and what is going on to bring it about, stayed turned for our next article.

¹ Universities Face a Rising Barrage of Cyberattacks

² Cybersecurity

³ While from time to time, this is tested by insureds (see Sony vs. Zurich), almost all commentators have admitted that the “die is cast.”

Photo courtesy of Wiertz S

The Commonwealth Court of Pennsylvania, in Hospital & Healthsystem Association of Pennsylvania v. Ins. Commissioner, 939 C.D. 2011 (Pa.Commw. 08/09/2013) was called upon to decide whether a governmental entity – acting like an excess insurer – overcharged health care providers and appropriated funds belonging to the providers. The health care providers and trade associations petitioned for review of an adjudication of the Insurance Commissioner that denied their challenge to the assessments imposed upon them by the Medical Care Availability and Reduction of Error (MCARE) Fund for the years 2009, 2010 and 2011. These assessments provide the monies used by the MCARE Fund to pay medical malpractice claims in excess of what the health care provider’s primary insurer pays. Petitioners assert that their assessments were excessive because they resulted in a collection of more monies than were needed by the MCARE Fund to pay claims for one year and provide a 10% reserve.

Background

Since 1975, the Commonwealth of Pennsylvania has been directly involved in providing medical malpractice insurance to health care providers. The General Assembly addressed the medical malpractice crisis by establishing a mandatory medical malpractice insurance system. A health care provider’s refusal to purchase malpractice insurance coverage in 1975 was, and continues to be, sanctioned by the provider’s loss of his professional license.

In 2002, the General Assembly enacted the Medical Care Availability and Reduction of Error (MCARE) Act. The MCARE Act addressed a newly perceived crisis, i.e., the cost of medical malpractice insurance. There was concern that the cost of medical malpractice insurance in Pennsylvania had increased to the point that physicians educated and trained in Pennsylvania were leaving to set up practice in other states where the costs of this insurance were lower.

Relevant to this case, the MCARE Act established the MCARE Fund. The MCARE Fund was set up to provide insurance coverage in excess of the mandatory levels of primary medical malpractice coverage. The MCARE Fund is scheduled for termination. To that end, the MCARE Act has established a schedule for continued increases in the amount of primary coverage that must be purchased by health care providers and continued decreases in the amount of excess coverage that will be available from the MCARE Fund.

The MCARE Fund is a “pay-as-you-go” program of what the general assembly called “insurance.” Unlike a private insurance company, it does not establish reserves to cover injuries that occur in the assessment year but do not become adjudicated awards for several years thereafter. Instead, the MCARE Fund is set up to raise only those funds necessary to “cover claims and expenses for the assessment year.”  The MCARE Fund projects its annual expected claim payments on the basis of the prior year’s payments. This means that the amount collected from health care providers in a given year may be more, or less, than what is actually needed to pay the MCARE Fund’s claims and expenses for that year.

In making its calculation for 2009, the MCARE Fund ignored its 2008 accrued unspent balance of approximately $104 million. Instead, in 2009, $100 million was transferred out of the MCARE Fund into the Commonwealth’s General Fund for the purpose of funding the operations of state government. The Court held that this transfer of funds was illegal. Petitioners appealed their 2009, 2010 and 2011 assessments on the theory that the MCARE Fund’s year-end balance should have been included in the aggregate assessment calculation for 2009 and the following years. Simply, the aggregate assessment must be “sufficient” to produce a balance sheet that replaces what was spent in the prior year and provides a reserve of 10%.

The MCARE Fund has the statute to mean that 110% of the prior year’s expenditures must be collected each year from health care providers, regardless of the starting balance. This exercise means that unspent balances will accumulate even as claims decline, consistent with the MCARE Fund’s scheduled termination, or as earnings on the 10% reserve increase.

Analysis

Construing statutes, courts must be mindful of what the legislature did not say as well as what it did say. Most importantly, the MCARE Act says nothing about the accumulation of unspent balances in excess of the 10% reserve. It does not authorize them. The MCARE Act provides no guidance on the income generated by an accumulation of unspent balances, which can be considerable given the present unspent balance of $104 million. The MCARE Act’s silence on these matters makes perfect sense only if the legislature never intended that such an accumulation would develop.

The legislature has addressed the possibility of an unspent balance in only one place in the statute. The MCARE Act provides that upon termination of the MCARE Fund, “[a]ny balance remaining in the fund” shall be returned to the healthcare providers who paid “assessments in the preceding calendar year.”  This presumes a small, if “any,” balance and suggests that there should not be an unspent balance in any other year.

The MCARE Act states that the MCARE Fund’s reserve “shall be” 10% of the prior year’s claims and expenses. Instead, after the 2009 assessment, the MCARE Fund had a reserve of 64%. Such a reserve cannot fit any reasonable interpretation of the stated purposes of the MCARE Act or the precise wording of the statute.

The aggregate assessment must raise funds “sufficient” to meet the specified purposes in the statute. This means that the MCARE Fund must begin its annual aggregate assessment calculation with its unspent balance and add to it the amounts “sufficient” to cover the prior year’s claims and expenses and to “provide a 10% reserve” not a 64% reserve.

The fact that the General Assembly chose to limit distribution of any balance in the MCARE Fund at termination to those that participated in the Fund in the preceding calendar year indicates that the legislature intended a direct correlation between the actual MCARE Fund balance at termination and the population of providers assessed in the prior year.

Requiring health care providers to fund a new 10% reserve every assessment year, without regard to the monies already held by the MCARE Fund, defeats the stated goal of the statute to provide affordable excess insurance. Such an approach repeatedly and needlessly charges participating providers an assessment in excess of what is necessary to fund the statutorily-required 10% reserve. Because the population of providers changes over time, the providers who enter such a system in the earlier years will end up subsidizing the participating providers in the later years. This is unfairly discriminatory.

For all of the foregoing reasons, the court reversed the order of the Insurance Commissioner and remanded this matter to the Commissioner to recalculate the MCARE assessments for 2009, 2010 and 2011.

Opinion

The MCARE law was designed to die over time. It, and its predecessor, is an example of why a governmental entity should never get involved in insurance because they do not understand what insurance is or how it works in the real world.

Medical Malpractice Insurance is a risk-sharing device where many health care providers pay into a fund so that there is sufficient money available to indemnify those who are sued for malpractice. The “crisis” laws like the MCARE law arose because doctors who erred were sued regularly and successfully until insurers found a need to raise premiums to a level necessary to cover the payments and make a profit. To solve the “crisis,” the government decided to provide a form of insurance rather than resolve the problem caused by its tort system.

Governments should not make profits and do not know what to do with a profit if it was made by accident or by a poorly-designed system that has no relationship to the long-term thinking of an insurer. The law here was made specifically to protect those who paid into the fund and to return excess, unspent monies to the providers who paid into the fund. It is not a premium but a tax where health care providers are compelled to buy both primary insurance in the market and excess from MCARE.

This case is instructive as government continues to place itself into the business of insurance where whatever the government calls insurance is, in fact, a method of government largess. For example, the National Flood Insurance Program, FAIR Plans, and the Affordable Care Act have nothing to do with insurance since they are not risk-sharing devises but are rather devices that take tax money from the country or state as a whole to provide insurance-like benefits to a special category of people like those who live near a river that regularly floods, people who live in high fire risk areas, or people who are ill but decided not to buy insurance. The Commonwealth of Pennsylvania, until slapped down by this court, took money intended to protect medical providers for its own use without legal authority.

Understandably, Part 1 of this article series has been met with some controversy and skepticism. The article is not designed to scare employers, as might have been suggested. Its intention is to educate employers about the many issues facing them when an employee becomes injured, that transcend the State Workers’ Compensation System and a workable solution to overcoming the challenges. Employers can no longer afford to bury their heads and rely on the exclusive remedy position. Yes, it may be here to stay, but it is becoming a bit frayed around the edges.

Coincidently, when Part 1 of this article was published, The National Football League (NFL) announced that it had reached a 765 million dollar settlement with players and their families for the settlement and consolidation of approximately 4,500 concussion claims. The players alleged that the NFL hid or ignored the facts that concussions caused brain injuries. Under the settlement, the NFL will pay 675 million dollars to retired players who demonstrate medical evidence of brain injury. Payouts of up to 5 million dollars each could go to players found to have Alzheimer's or Parkinson's diseases or other concussion-related conditions, or to their families. The settlement came just prior to the start of football season and will put an end to the mounting litigation that threatened the multi-billion dollar league.

United States District Presiding Judge Anita B. Brody appointed Judge Phillips to oversee the negotiations. Judge Philips said, “This is a historic agreement, one that will make sure that former NFL players who need and deserve compensation will receive it, and that will promote safety for players at all levels of football.”

 “This agreement lets us help those who need it most and continue our work to make the game safer for current and future players. Commissioner Goodell and every owner gave the legal team the same direction: do the right thing for the game and for the men who played it,” said NFL Executive Vice President Jeffrey Pash. “We thought it was critical to get more help to players and families who deserve it, rather than spend many years and millions of dollars on litigation. This is an important step that builds on the significant changes we’ve made in recent years to make the game safer, and we will continue our work to better the long-term health and well-being of NFL players.”

Once final documentation is completed, the settlement will be filed with Judge Brody, who will then schedule a hearing to consider whether or not to grant preliminary approval to the agreement. The retired players will then have the ability to file objections to the settlement.

One may ask what this has to do with Part 1 of this article.  An important component of this settlement is baseline testing. According to the settlement, baseline medical exams will be provided, the cost of which will be capped at $75 million. This will be a key element in ascertaining the conditions of current and retired players, gauging  the progression of any injuries they may have and having documentation of the medical status. This key component is the subject of Part 1 of this article. Baseline testing is not simply a self-promotion for the EFA-STM, but is a major part of helping injured workers, no matter what their occupations may be.

These cases are just the beginning, and it appears that the exclusive remedy provision for workers' compensation will no longer serve to prevent costly civil litigation as evidenced by the NFL settlement. An employer, insurance carrier/TPA and physician can take several steps to protect themselves. First, evidence-based medicine should always prevail. Objective medical evidence can help protect against claims for fraudulent denials of work-related injuries. Also, employers should accept only claims that arise out of the course and scope of employment (AOECOE). If an employer can objectively document AOECOE issues, fraudulent claims and fraudulent denials can be avoided and most importantly, correct treatment can be prevail.

A good approach to determining AOECOE claims is baseline testing, as it can identify injuries that arise out of the course and scope of employment. When a work-related claim is not AOECOE, as proved by objective medical evidence, such as pre and post assessments, then not only is there no workers’ compensation claim, there is no OSHA recordable claim, and no mandatory reporting issue. Conversely, if there is an injury, the injured worker can get the best site specific treatment and prevent inappropriate treatment and unnecessary progression of the underlying conditions.

The NFL recognized the importance of baseline testing with its recent settlement, and it is only the beginning. MSD for NFL players is also a significant problem. Why not baseline all football players, or, for that matter, all professional athletes, to address any injuries that may occur while playing and return them to the field sooner? This would promote better health and performance and might extend their careers. Professional athletes tend to play through their injuries, potentially causing more harm. An objective baseline test can assist all parties by providing objective medical evidence of an injury and outlining appropriate care. This truly is a win-win situation.

A proven example of a baseline test for musculoskeletal disorders (MSD) cases is the EFA-STM program. EFA-STM program begins by providing baseline injury testing for existing employees and new hires. The data is interpreted only when and if there is a soft tissue claim.  After a claim, the injured worker is required to undergo the post-loss testing. The subsequent comparison objectively demonstrates whether or not an acute injury exists. If there is a change from the baseline, site specific treatment recommendations are made for the AOECOE condition, giving the doctors more information and helping to ensure the injured worker receives the best care possible.

The case of the NFL settlement may not be a RICO claim, but, certainly, it tries the boundaries of the exclusive remedy provision of workers compensation. Baseline tests like the EFA-STM are a proven way to providing better work-related care. It is time for change and to think outside of the box to provide the answers so that we can become proactive, not reactive.

Workers' Compensation origins can be traced to the late Middle Ages and Renaissance times in the Unholy Trinity of Defenses, the doctrine that first outlined that work-related injuries were compensable.  This doctrine began in Europe and made its way to America with the Industrial Revolution.  There were so many restrictions with it that changes occurred and led to the doctrine of Contributory Negligence which outlines that employers are not at fault for work-related injuries. This principle was established in the United States with the case Martin vs. The U.S. Railroad. In this case, faulty equipment caused the injuries, but the employee did not receive compensation, as it was deemed that inspection of equipment was part of his job duties. Additionally, the case Farnwell vs. The Boston Worchester Railroad Company led to the "Fellow Servant Rule" where employees did not receive compensation if their injuries were in any way related to negligence from a co-worker.

For awhile, in the United States, we had the Assumption of Risk Doctrine that held employers were not liable for injuries because employees knew of job hazards when they signed their work contracts. By agreeing to work, they assumed all risks. These contracts were often nicknamed Death Contracts. The only recourse an employee had was civil litigation or tort claims. As the nineteenth century continued, employers were faced with increasing civil litigation and employee verdicts.

The basis of our exclusive remedy workers' compensation system had its roots in Prussia with Chancellor Otto Von Bismarck, who, in 1884, pushed through Workers' Accident Insurance which contained the exclusive remedy provisions for employers.  The first Federal Workers' Compensation law was signed in 1908 by President Taft, protecting workers involved in interstate commerce.

Work Reform was slower to progress to America. Early workers' compensation acts were attempted in New York (1898), Maryland (1902), Massachusetts (1908), and Montana (1909) without success.  Finally, in 1911, Wisconsin passed the first comprehensive workers' compensation law, followed by nine other states that same year. Before the end of the decade, thirty other states passed workers' compensation laws. The last state to pass workers' compensation laws was Mississippi in 1948.  The main issue in all the states workers' compensation acts is the no fault system, i.e. employers who participate in the states workers' compensation system are exempt from civil tort litigation, hence the exclusive remedy. In the United States this exclusive remedy for work related injuries has stood, for the most part, until recently.

Racketeer Influenced and Corrupt Organizations, more commonly known as RICO, is a federal law that provides for criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. This act focuses specifically on racketeering, and it allows the leaders of a syndicate to be tried for the crimes which they ordered others to do or with which they assisted. It was enacted October 15, 1970 and was in widespread use to prosecute the Mafia. It has become more widespread and now plays a significant role in work-related injuries.

RICO on the Radar

One of the most recent significant cases is Brown, et al v. Cassens Transport, et al No. 08a0385. In summary, The United States Court of Appeals, Sixth District (Michigan), acting on a remand from the United States Supreme Court, has held that employees may have an action based on the civil provisions of the RICO Act against not only employers but their agents (carriers and doctors).  This is an important decision which could affect employers in the 6th district, Michigan and Illinois, because it involves a Federal statute where the United States Supreme Court has held that the plaintiffs need not prove reliance that the defendants’ actions resulted in detrimental consequences to the plaintiff.

In the instant case, Brown v. Cassens, decided October 23, 2008, the Supreme Court had merely restated its opinion in Bridge v. Phoenix, decided June 9, 2008, where it originally held that the plaintiff need not prove that it relied on the alleged RICO violation. This case allows the Plaintiffs to sue the Employer (Cassens Transport Company), the TPA (Crawford and Company) and the doctor (Dr. Margules).

The Plaintiffs allege that the defendants engaged in a civil conspiracy and racketeering to deny them workers' compensation benefits. Specifically, the Plaintiffs allege that the employer and TPA hired unqualified doctors to issue fraudulent medical findings to deny them workers' compensation benefits.  The case alleges at least 13 predicate acts of fraud by mail and wire all relating to the fraudulent denial of the workers' compensation benefits under the Michigan Workers' Disability Compensation Act. For more specifics, please refer to the case citations. Suffice it to say here that the Court has allowed this case to proceed forward, taking away the employers exclusive remedy. Furthermore, RICO cases are not covered by insurance, making this very costly for the employer, carrier and physician.

Many say that the this case has a long way to go before employers have to be concerned about  the exclusive remedy position being taken away, but that may no longer be true. In November 2012, a landmark settlement was reached in Josephine et al v.Walmart Stores, Inc., Claims Management, Inc., American Home Assurance Co., Concentra Health Services, Inc.; Defendants. Civil Action No. 1:09-cv-00656-REB-BNB (USDCT Colorado). This RICO case was allowed to proceed against defendants under a state RICO statute in Colorado in March, 2011. In November, 2012, a settlement was reached between the parties for $8 million.

And most recently, June, 2013, the Sixth Circuit heard arguments in Jackson v. Sedgwick Claims Management Serv. This RICO case will determine if Michigan’s workers’ compensation laws provide the exclusive remedy for injured workers, or whether injured workers can sue under RICO for an alleged conspiracy to file false medical reports to cut off workers’ compensation benefits. 

These cases are just the beginning and it appears that the exclusive remedy provision for workers' compensation will no longer serve to prevent costly civil litigation. An employer, insurance carrier/TPA and physician can take several steps to protect themselves. First, evidence-based medicine should always prevail. Objective medical evidence can help protect against claims for fraudulent denials of work-related injuries. Also, employers should accept only claims that arise out of the course and scope of employment (AOECOE). If an employer can objectively document AOECOE issues, then no claim exists, hence no fraudulent denials.

A good approach to determining AOECOE claims is baseline testing, as it can identify injuries that arise out of the course and scope of employment. If a work-related claim is not AOECOE, as proven by objective medical evidence such as a pre- and post-assessment where there is no change from the baseline, then, not only is there no workers’ compensation claim, there is no OSHA-recordable claim, and no mandatory reporting issue. If the baseline testing is evidenced-based medicine and objective, this can further protect employers against RICO claims.

A proven example of a baseline test for musculoskeletal disorders (MSD) cases is the EFA-STM program. EFA-STM Program begins by providing baseline injury testing for existing employees and new hires. The data is interpreted only when and if there is a soft tissue claim.  After a claim, the injured worker is required to undergo the post-loss testing. The subsequent comparison objectively demonstrates whether or not an acute injury exists. If there is a change from the baseline, site-specific treatment recommendations are made for the AOECOE condition, ensuring that the injured worker receives the best care possible.

This is Part 3 of a multi-part series on building and monitoring networks with intelligence. Part 1 can be found here and Part 2 can be found here.

California has defined how medical networks in Workers’ Compensation should be structured and managed. Part 1 and Part 2 of this series described how California’s SB 863 LC 4616 (b) (2) and LC 4616 (b)(3) takes medical provider network directives to a new level. The key imperative is, “Every MPN must establish and follow procedures continuously to review the quality of care, performance of medical personnel, utilization of services, facilities, and costs. However, a few additional key points should be considered when selecting and monitoring medical providers for the California MPN or any network.

Beyond legislation
Escalating problems in the industry with Opioid overuse and abuse, as well as physicians who are dispensing medications from their offices are additional factors that must be considered. While the California SB 863 legislation does not address these issues, the data should be scrutinized to identify physicians who demonstrate unfavorable prescriptive practices. Analyzing the data to evaluate physician performance in that regard is essential to vetting physicians for membership in a network. It is also crucial to monitoring networks going forward.

Opioid Over-Prescribers
Workers’ Compensation literature is replete with information about Opioid overuse and abuse with its disastrous human and resource waste. Unfortunately, measures taken to curb inappropriate prescribing behavior are few and vary widely across the country.

Simply stated, the best way to reduce Opioid abuse is to avoid Opioid over-prescribers. Analysis of the data will identify the perpetrators. They should never be a part of a Workers’ Compensation medical network.

Back to California - CURES
California has a program that approaches the problem by monitoring patient utilization of prescribed Schedule II drugs and making that information available to authorized prescribers and distributors (pharmacies) of controlled drugs.

California’s program is called CURES (Controlled Substance Utilization Review and Evaluation System, and PDMP (California Prescription Drug Monitoring Program).¹ The California Department of Justice, has a Prescription Drug Monitoring Program (PDMP) system which “allows pre-registered users including licensed healthcare prescribers eligible to prescribe controlled substances, pharmacists authorized to dispense controlled substances, law enforcement, and regulatory boards to access timely patient controlled substance history.

The California Attorney General's Office said that if doctors and pharmacies have access to controlled substance history information at the point of care it will help them make better prescribing decisions and cut down on prescription drug abuse in California. The role of the CURES/PDMP ensures that well-informed prescribers and pharmacists can and will use their professional expertise to evaluate their patients’ care and assist those patients who may be abusing controlled substances.

The state’s database known as the Controlled Substance Utilization Review and Evaluation System (C.U.R.E.S) contains over 100 million entries of controlled substance drugs that were dispensed in California. Each year the CURES program responds to more than 60,000 requests from practitioners and pharmacists. The online CURES/PDMP system will make it much easier for authorized prescribers and pharmacists to quickly review controlled substance information via the automated Patient Activity Report (PAR) in an effort to identify and deter drug abuse and diversion through accurate and rapid tracking of Schedule II through IV controlled substances.”

Submission Of Controlled Substance Data
Pursuant to Health & Safety Code Section 11190, and Business & Professions Code Section 1170, all licensees who dispense Schedule II through IV controlled substances must provide the dispensing information to the Department of Justice on a weekly basis in a format approved and accepted by the Atlantic Associates Inc. (AAI) and the Department of Justice (DOJ). Similarly, pursuant to California Health and Safety Code Section 11165(d), dispensing pharmacies and clinics must provide weekly dispensing reports to the DOJ on Schedule II, III, and IV prescription drugs.

For purposes of creating an intelligent MPN, ensure any physician under consideration for an MPN in California is a member of CURES/PDMP. That notwithstanding, the data should be monitored continuously to determine actual performance.

Physician-Dispensed Medications
Another prescription abuse issue not addressed by the California legislation is physician-dispensed medications. While it is portrayed as a patient convenience, and probably is, the medications are prepackaged and extraordinarily costly. Once again, this practice can be monitored in the data. Bills reflecting drugs dispensed by the treating doctor are not monitored by Pharmacy Benefits Managers (PBM). Rather, they appear in normal provider billing.

Networks With Intelligence
All medical provider networks serving any jurisdiction should analyze integrated data, meaning all data associated with claims. Integrated data is sourced from claims level systems, bill review systems, PBM systems, and other sources such as utilization review to understand the broad spectrum of claims and all individuals, organizations, and events touching them. The goal is to select best-in-class doctors by objectively identifying excellent provider performance.

Authors
Karen Wolfe collaborated with Margaret Wagner to write this article. Ms. Wagner is President and CEO of  Signature Networks Plus. She is considered an expert in network selection, monitoring and management, thereby creating Networks with Intelligence™ for clients.

¹ http://oag.ca.gov/cures-pdmp