More news from the technology front: Aetna acquires bswift. , shortly after Hodges-Mace announced the purchase of SmartBen. Last year, it was Towers Watson buying Liazon. Next year, it will be someone else. Is this just beginning of the dance where everyone in employee benefits needs to choose a partner? What does this mean for the benefits market and the benefits broker?

For some, the Aetna acquisition of bswfit may be strange. Aetna buys a company that provides technology that is used by its competitors and that handles enrollment for many employers that don’t have Aetna insurance. Similarly, Towers Watson bought a company whose products and services are distributed by its competitors, other brokers. What most people aren’t realizing is that the world has changed. If you view this acquisition in the old world, where competitors don’t work together, you may see it one way, but in a new world it may look a little different -- in many industries, companies that compete in one segment may be partners in another. My message to brokers on this is to start thinking differently. Those who don’t will get left behind. The rules of the game are changing, and you don’t get to make all the rules. I have been fortunate to have worked in some capacity with Mark Bertolini, CEO of Aetna, and Rich Gallun, CEO of bswift. Both are outside-the-box thinkers. Aetna has invested billions in technology preparing for what it views as a consumer-centric healthcare model. Aetna wants to reinvent the patient experience. To quote Bertolini, "We're going to begin to change the healthcare industry by giving people tools they can put in the palm of their hand.” Here is another quote from Bertolini that would make brokers pause. When asked about the future of healthcare, Bertolini responded: “There wouldn't be plan designs. You wouldn't need them. What you would do is invest in all those things that are necessary to keep people healthy.” You can see a full overview of the Aetna model by viewing this presentation from its 2013 investor conference. Some may see the bswift acquisition as a benefits enrollment platform for Aetna. But I see this as another step by Aetna to execute on a plan to compete effectively in a new healthcare world. A world where consumers are in more control. Where provider systems are engaged in a patient's wellness and not just proving treatment after the fact. Where health information and communication is moved via Web and mobile. Bswift made a strategic move into the consumer-centric world through private exchange technology, with individual rating and decision support tools. Now it has paid off. This made bswift attractive to Aetna. Congratulations to bswift for a job well done. So what does this mean for benefits brokers? A few weeks ago, I wrote an article titled “Does Apple’s HealthKit signal the end of employer-based insurance?” Some may not relate Apple’s investment to the Aetna acquisition of bswift; however, I think they are related. Apple is clearly one of the top consumer technology vendors in the market. Aetna is driving consumer-centric healthcare. They are pieces of the same puzzle. It is a puzzle benefits brokers need to pay attention to because the market is changing around them. A carrier buying an enrollment vendor says one thing, Aetna’s and Apple’s investments mean something different. The healthcare world is changing in a way that most brokers are not recognizing. Consumer-centric; mobile; doctors as wellness facilitators; employers out of the risk business? Maybe. So get ready.

With today’s fast pace of change, innovation is no longer a nice-to-have initiative, but rather a must-have, strategic mandate that is defining a new era for insurance – and separating future winners and losers. Today, it is not any one thing that is creating change, but the convergence of many things that are creating a seismic shift. Strategy Meets Action (SMA) has actively tracked and promoted innovation in the marketplace for several years and has been publishing formal innovation research since 2012. In our latest report, Innovation in Insurance: Expanding Focus and Growing Momentum, we see continued progress, but with a refocus. SMA believes this reflects the realization that modernization of core systems is a foundational requirement for innovation. At the same time, insurers’ innovation approaches and efforts are broadening. Insurers are getting outside-in views, engaging in open innovation and developing an ecosystem of outside resources to fuel the innovation journey. This move reflects a best practice from outside the industry: acknowledging that no business can expect to harness the future and all its conceivable possibilities on its own. Within their ecosystems, insurers are primarily engaging with agents, business partners, software partners, customers, other insurers and a supply chain as catalysts for innovation. However, more outside-in relationships with high tech, other industries, futurists, venture capital firms and academia are beginning to take shape, as well. The ecosystem is gaining importance because leading insurers recognize that day-to-day operational demands mean there is a lack of time and resources for tracking, assessing and putting the implications for insurance into context. Also, the whole network benefits from the integration of new thinking as the input of the outside organizations helps to break down legacy assumptions. The expanding focus and growing momentum for innovation is reflected in some key survey results, including:

• More than a fourth of insurers (26%) have focused on innovation for five years or more, and 33% have focused on it for two to five years. That puts 59% of insurers focused on innovation for the last two years, highlighting the growing momentum. A majority of further 32% have made innovation a focus for two years or less.
• Innovation leadership and organizational approach takes many different forms. Only 7% of insurers have a dedicated innovation area. More than half of insurers (51%) have no single area of the organization leading innovation. Nearly 28% of insurers have their strategy or R&D leadership/areas lead innovation. SMA believes this reflects the resurgence of strategy and R&D to provide an enterprisewide approach for innovation, maximizing the strategic impact and value of innovation initiatives to the organization’s Next-Gen Insurer vision and strategy.
• Encouragingly, more insurers believe their investments are positioning them well ahead on the innovation journey as market leaders (9%) and movers (33%) as contrasted with those that are at the early stages of the journey as mainstreamers (22%) and those at the very beginning stages or not focused on innovation as laggards (9%). SMA believes this reflects the broadening focus of continued implementation of modern core insurance systems and innovation.
• The top four industries influencing insurance in the next year are: healthcare (46%), with the potential influence of the healthcare insurance exchanges; high tech (45%), with the potential of Google, Amazon and Apple entering or disrupting insurance; telecom (32%), with the race for the customer’s connectivity, data and services; and government (32%), with some states aggressively piloting new technologies such as driverless vehicles.
• The focus and business drivers for innovation are changing, reflecting the shifting landscape of influencers, threats and competitors for insurance. Enabling growth (42%) and profitability (30%) moved into the top spots, up from second and fourth in 2013. But a bigger shift has also emerged, reflecting the demands of the digital revolution and outside industry influencers. In 2013, improving existing products and providing great service were in the top six. In 2014, there is a shift in focus to developing new products and engaging and strengthening customer relationships, which is directly related to meeting the new expectations of customers.

A new future is rapidly unfolding, and the pressure is on. Innovation can never cease. It must advance with urgency. Each and every day, insurers must recommit to their innovation journey and the culture they have created for it – and avoid falling into an operational trap. As Charles Darwin said: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Innovation will be a journey of great disruption, great opportunity and great change. Have you started your innovation journey?

In our last article, When Nature Calls, we looked back at an insurance industry reeling from several consecutive natural catastrophes that generated combined insured losses exceeding $30 billion. Those massive losses were a direct result of an industry overconfident in its ability to gauge the frequency and severity of catastrophic events. Insurers were using only history and their limited experience as their guide, resulting in a tragic loss of years’ worth of policyholder surplus. The turmoil of this period cannot be overstated. Many insurers went insolvent, and those that survived needed substantial capital infusions to continue functioning. Property owners in many states were left with no affordable options for adequate coverage and, in many cases, were forced to go without any coverage at all. The property markets seized up. Without the ability to properly estimate how catastrophic events would affect insured properties, it looked as though the market would remain broken indefinitely. Luckily, in the mid 1980s, two people on different sides of the country were already working on solutions to this daunting problem. Both had asked themselves: If the problem is lack of data because of the rarity of recorded historical catastrophic events, then could we plug the historical data available now, along with mechanisms for how catastrophic events behave, into a computer and then extrapolate the full picture of the historical data needed? Could we then take that data and create a catalog of millions of simulated events occurring over thousands of years and use it to tell us where and how often we can expect events to occur, as well as how severe they could be? The answer was unequivocally yes, but with caveats. In 1987, Karen Clark, a former insurance executive out of Boston, formed Applied Insurance Research (now AIR Worldwide). She spent much of the 1980s with a team of researchers and programmers designing a system that could estimate where hurricanes would strike the coastal U.S., how often they would strike and ultimately, based on input insurance policy terms and conditions, how much loss an insurer could expect from those events. Simultaneously, on the West Coast at Stanford University, Hemant Shah was completing his graduate degree in engineering and attempting to answer those same questions, only he was focusing on the effects of earthquakes occurring around Los Angeles and San Francisco. In 1988, Clark released the first commercially available catastrophe model for U.S. hurricanes. Shah released his earthquake model a year later through his company, Risk Management Solutions (RMS). Their models were incredibly slow, limited and, according to many insurers, unnecessary. However, for the first time, loss estimates were being calculated based on actual scientific data of the day along with extrapolated probability and statistics in place of the extremely limited historical data previously used. These new “modeled” loss estimates were not in line with what insurers were used to seeing and certainly could not be justified based on historical record. Clark’s model generated hurricane storm losses in the tens of billions of dollars while, up until that point, the largest insured loss ever recorded did not even reach $1 billion! Insurers scoffed at the comparison. But all of that quickly changed in August 1992, when Hurricane Andrew struck southern Florida. Using her hurricane model, Clark estimated that insured losses from Andrew might exceed $13 billion. Even in the face of heavy industry doubt, Clark published her prediction. She was immediately derided and questioned by her peers, the press and virtually everyone around. They said her estimates were unprecedented and far too high. In the end, though, when it turned out that actual losses, as recorded by Property Claims Services, exceeded $15 billion, a virtual catastrophe model feeding frenzy began. Insurers quickly changed their tune and began asking AIR and RMS for model demonstrations. The property insurance market would never be the same. So what exactly are these revolutionary models, which are now affectionately referred to as “cat models?” Regardless of the model vendor, every cat model uses the same three components:

1. Event Catalog – A catalog of hypothetical stochastic (randomized) events, which informs the modeler about the frequency and severity of catastrophic events. The events contained in the catalog are based on millions of years of computerized simulations using recorded historical data, scientific estimation and the physics of how these types of events are formed and behave. Additionally, for each of these events, associated hazard and local intensity data is available, which answers the questions: Where? How big? And how often?
2. Damage Estimation – The models employ damage functions, which describe the mathematical interaction between building structure and event intensity, including both their structural and nonstructural components, as well as their contents and the local intensity to which they are exposed. The damage functions have been developed by experts in wind and structural engineering and are based on published engineering research and engineering analyses. They have also been validated based on results of extensive damage surveys undertaken in the aftermath of catastrophic events and on billions of dollars of actual industry claims data.
3. Financial Loss – The financial module calculates the final losses after applying all limits and deductibles on a damaged structure. These losses can be linked back to events with specific probabilities of occurrence. Now an insurer not only knows what it is exposed to, but also what its worst-case scenarios are and how frequently those may occur.

When cat models first became commercially available, industry adoption was slow. It took Hurricane Andrew in 1992 followed by the Northridge earthquake in 1994 to literally and figuratively shake the industry out of its overconfidence. Reinsurers and large insurers were the first to use the models, mostly due to their vast exposure to loss and their ability to afford the high license fees. Over time, however, much of the industry followed suit. Insurers that were unable to afford the models (or who were skeptical of them) could get access to all the available major models via reinsurance brokers that, at that time, also began rolling out suites of analytic solutions around catastrophe model results. Today, the models are ubiquitous in the industry. Rating agencies require model output based on prescribed model parameters in their supplementary rating questionnaires to understand whether or not insurers can economically withstand certain levels of catastrophic loss. Reinsurers expect insurers to provide modeled loss output on their submissions when applying for reinsurance. The state of Florida has even set up a commission, the Florida Commission on Loss Prevention Methodology, which consists of “an independent body of experts created by the Florida Legislature in 1995 for the purpose of developing standards and reviewing hurricane loss models used in the development of residential property insurance rates and the calculation of probable maximum loss levels.” Models are available for tropical cyclones, extra tropical cyclones, earthquakes, tornados, hail, coastal and inland flooding, tsunamis and even for pandemics and certain types of terrorist attacks. The first set of models started out as simulated catastrophes for U.S.-based perils, but now models exist globally for countries in Europe, Australia, Japan, China and South America. In an effort to get ahead of the potential impact of climate change, all leading model vendors even provide U.S. hurricane event catalogs, which simulate potential catastrophic scenarios under the assumption that the Atlantic Ocean sea-surface temperatures will be warmer on average. And with advancing technologies, open-source platforms are being developed, which will help scores of researchers working globally on catastrophes to become entrepreneurs by allowing “plug and play” use of their models. This is the virtual equivalent of a cat modeling app store. Catastrophe models have provided the insurance industry with an innovative solution to a major problem. Ironically, the solution itself is now an industry in its own right, as estimated revenues from model licenses now annually exceed $500 million (based on conversations with industry experts). But how have the models performed over time? Have they made a difference in the industry’s ability to help manage catastrophic loss? Those are not easy questions to answer, but we believe they have. All the chaos from Hurricane Andrew and the Northridge earthquake taught the industry some invaluable lessons. After the horrific 2004 and 2005 hurricane seasons, which ravaged Florida with four major hurricanes in a single year, followed by a year that saw two major hurricanes striking the Gulf Coast – one of them being Hurricane Katrina, the single most costly natural disaster in history – there were no ensuing major insurance company insolvencies. This was a profound success. The industry withstood a two-year period of major catastrophic losses. Clearly, something had changed. Cat models played a significant role in this transformation. The hurricane losses from 2004 and 2005 were large and painful, but did not come as a surprise. Using model results, the industry now had a framework to place those losses in proper context. In fact, each model vendor has many simulated hurricane events in their catalogs, which resemble Hurricane Katrina. Insurers knew, from the models, that Katrina could happen and were therefore prepared for that possible, albeit unlikely, outcome. However, with the universal use of cat models in property insurance comes other issues. Are we misusing these tools? Are we becoming overly dependent on them? Are models being treated as a panacea to vexing business and scientific questions instead of as the simple framework for understanding potential loss? Next in this series, we will illustrate how modeling results are being used in the industry and how overconfidence in the models could, once again, lead to crisis.

ERM can bring great benefits. By managing risk, it helps to minimize loss as well as maximize strategic profitability, optimize opportunities and enhance culture and reputation. Thus, when a loss occurs in a company that has been practicing ERM, the reaction is to be disappointed in ERM as a practice or to blame the ERM leader for faulty execution. It would be unwise, however, to react without further analysis and greater understanding. No process or person is perfect; there will be times when ERM may fail to live up to expectations. Even with excellent execution, there will be times when a risk is too opaque or too complicated to be identified or managed effectively. All ERM practitioners must determine how much they can rely on what their colleagues in other functions or business units say about a business situation and how much risk it holds, because there are, at least, three circumstances that might cause a business leader or “expert” to overlook or underestimate a risk. They are:

1. Reluctance to expose or report a risk, for whatever reason,
2. Lack of sufficient expertise or experience to recognize a risk or determine its size.
3. Reliance on imprecise or inadequate standards and models that fail to signal a risk.

Reluctance  It is really not such a mystery why a business leader or staff member might be reluctant to identify a risk. Among the reasons are:

• Fear of being labeled a naysayer,
• Fear of derailing an initiative that has favor in the C-Suite, thus becoming persona non grata,
• Concern that identifying a risk might hurt personal compensation, at least in the short term.

An environment that is rife with these cultural stimuli will never produce transparency in risk identification and mitigation. Factors that can give rise to such an environment include:

• Senior management who cannot distinguish between a naysayer and someone who is risk-aware and committed,
• Senior management who have shown themselves to be closed-minded or have “shot the messenger” when presented with an issue,
• Staff at any level who are not able or willing to consider the long-term health of the organization.

An environment where risk is openly discussed is a prerequisite to being able to manage risk well, but producing such an atmosphere takes time and effort. Much has been written about ERM and culture, and this literature holds great advice about how to build a risk-aware culture.  Among the collected wisdom is:

• The board and CEO must continuously champion ERM,
• Risk must be represented in strategy discussions, organizational performance management, various employee communications and individual performance plans,
• ERM must be given effective resources,
• The ERM process should be robust and repeatable,
• Mitigation plans should be closely monitored,
• Rewards or lack thereof should be determined on the basis of how well risk is managed per plans. 

Lack of Expertise Less sinister but no less dangerous a situation exists when the presumed experts do not have the knowledge or skill to identify risks within their spheres of responsibility.The person involved could be a business unit leader, a plant manager, a department/function head or a member of the C-Suite. Consider the testimony given by Jamie Dimon, chairman and CEO of JPMorgan Chase, about the bank’s chief investment office (CIO). His bank lost billions of dollars from a large accumulation of synthetic derivatives tied to credit default swaps that crashed in value. These investments were handled by staff based in London, in a debacle nicknamed “The London Whale.” The following is an excerpt of that testimony before the Committee on Banking, Housing, and Urban Affairs in the U.S. Senate on June 13, 2012: • "CIO’s strategy for reducing the synthetic credit portfolio was poorly conceived and vetted. The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO. • "In hindsight, CIO’s traders did not have the requisite understanding of the risks they took. When the positions began to experience losses in March and early April, they incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves. • "The risk limits for the synthetic credit portfolio should have been specific to the portfolio and much more granular, i.e., only allowing lower limits on each specific risk being taken. • "Personnel in key control roles in CIO were in transition, and risk control functions were generally ineffective in challenging the judgment of CIO’s trading personnel. Risk committee structures and processes in CIO were not as formal or robust as they should have been. • "CIO, particularly the synthetic credit portfolio, should have gotten more scrutiny from both senior management and the firmwide risk control function. “ This is truly a wake-up call to all organizations. It is an example of consciously adopted risk that produced billions of dollars of loss. The reason for its having reached the proportions that it did is described by the CEO as a lack of expertise, whether it be in terms of market knowledge, management controls and processes or something else. To help ensure appropriate levels of expertise, an organization should ask these questions and act when the answer is negative:

• Do the leaders of significant areas of the organization have deep knowledge of their operations?
• Do the leaders of significant areas of the organization understand the importance of managing risk?
• Do the leaders of significant areas of the organization have critical thinking capabilities and the communication skills to articulate what the risk profile of their operation looks like?
• Do the leaders of significant areas of the organization ask for input from others who may be expert about risk?
• Are those who facilitate the risk management process adequately knowledgeable and given sufficient resources?
• Are there specialized risk management professionals in place in key areas, e.g. a chief information security officer (CISO) for information technology, as needed? Alternatively, is this role competently outsourced? 

Inadequate Standards or Models Organizations of all sizes rely on standards or models, either self-designed or designed by an expert group (governmental or professional), which indicate when some aspect of the business is exceeding a safe level of operation. Insurers use loss-modeling tools; banks use “value at risk” models; manufacturers use all sorts of gauges, such as air safety levels and equipment safe usage levels.  There are also standards of safety applied to all manner of things both public and private, from buildings to transportation to infrastructure such as bridges, power grids and so on. These are routinely inspected to ascertain performance against pre-established standards of acceptability. As can be readily appreciated, if the standard or model is faulty, then the business leader, staff or  risk professional is placed at a disadvantage in identifying or evaluating the likelihood or the size of a risk. Consider that the models used by many banks and investment houses before the financial crisis of 2008 did not help them avoid major losses. The testimony quoted above shows issues with the model used to monitor the synthetic credit portfolio at JPMorgan Chase. Consider that, according to the Associated Press in 2013, “Of 607,380 bridges, the most recent Federal Bridge Inventory showed that 65.605 were classified as structurally deficient and 20, 808 were as fracture critical. . . . Officials say the bridges are safe.” How can a state or city risk manager know how to handle risk associated with the bridges when the standard of safety is so confusing? Not surprisingly, there have been some major bridge failures in the recent past. Organizations need to vet their standards and models. For example, they could:

• Get second opinions on the model of choice,
• Use multiple models, not just one,
• Stress test the model at regular intervals,
• Establish contingency plans in case the model fails.

No organization will eliminate all uncertainty. However, with the right risk culture, knowledgeable leaders and robust models, an organization can minimize exposure to unanticipated and unmitigated risk.

I doubt any readers of this post work with a CFO who is measuring Return on Empathy. Empathy? How can something as soft, as emotional, as seemingly non-quantifiable as identifying with people’s feelings, thoughts and emotions translate not only into hard-core financial benefit but also value to customers, patients, agents, employees or other participants in your digital experience? The fact is, the more you demonstrate empathy for your digital-experience participants, and connect that experience to your key performance indicators (KPIs), the more value you will uncover. I’ll share an example of how the credit card industry established a transformational industry practice by showing empathy via an innovative digital experience. It started with the simple insight that, by relieving customer stress, debt repayment rates could be improved. Here’s the story: We all have an image of how credit card companies collect past due balances. Late payers get a “friendly” phone call from the Collections Department, followed eventually by more persistent calling from collections agents to whom severely past due accounts are outsourced. These guys make pennies on the dollar extracting and following through on what the industry calls “promises to pay.” From the customer’s perspective, this is a confrontational and embarrassing situation. It’s full of stress that is probably only adding to what got the customer into a financial pickle to begin with. The reality is that most people don’t plan to find themselves at the other end of a phone call from a debt collector. But life happens. Medical emergencies, job loss, other surprises simply overwhelm cash flow and savings. In an industry where the interests of the institution and the customer may not necessarily be particularly well-aligned, the standard was historically an adversarial approach. Using digital technology, innovators within the industry were able to prevail against the belief that collections could only happen through outbound calling. Innovators advanced the notion that collections rates could be improved by providing late payers with the means to set repayment terms online. Good for the customer. Good for the company. Avoiding the confrontation of the phone call, and providing a private way to work through the issue, actually gave the customer a new opportunity to strike a deal. This led to meaningful increases in recovery of past due balances. So meaningful that the capability to set repayment terms online went from being an outlier, crazy idea to an industry standard that is spreading globally. Online collections didn’t arise from spreadsheet analysis or financial engineering. It started from the simple insight that relieving stress – showing empathy by giving the customer a private way to settle up – would tap into people’s real needs. This simple insight, based totally on emotion and flying in the face of industry practices and beliefs, opened a big opportunity that leveraged digital technology to improve the customer experience and by so doing created a whole new source of value for credit card issuers. Where is the learning transferable within the insurance and wealth management sectors? The way I see it, we are operating in categories where emotion plays a big role. And where there is emotion, there is potential for Return on Empathy. There are numerous opportunities to translate empathy into experience design using digital capabilities that will translate into results. Here are three starting points:

1. Look for broken “moments of truth.” Across the opportunities for improved revenue cycle management, examine the “moments of truth.” Which ones are working and not working for your constituents? What are your constituents worrying about in the larger context of their lives, not just within the insurance transaction? Tiny adjustments can have a large impact. Testing and learning is required to tease out the benefits. Consider that application submission and processing, billing, payments, account management, servicing, inbound inquiries and outbound communications are all areas to explore. Within the healthcare category, these same principles may apply more specifically to population health management efforts.
2. Focus on the bottom three dissatisfiers with your experience. Some very successful brands build their value story around addressing areas of dissatisfaction. Capital One is one example. What are the three worst areas of dissatisfaction with your experience based on your customer satisfaction tracking studies? What is the emotional basis for the dissatisfaction? How can you fix the experience by leveraging digital, mobile and social capabilities to close gaps? Can your team develop some quick mockups and share them in a usability lab?
3. It isn’t always about pricing. I know some readers are thinking, “well, my customers just care about price; none of this emotional stuff really matters.” My rule of thumb is that one-third of the market for insurance and financial products may be truly, truly price-driven. But for most people there is a “value for the money” calculation that will readily trade off price for perceived additional value. That value is often in intangible, emotional connection to the brand and offering. Just ask all the people who willingly pay more for Apple products: “Better feature functionality at lower price” will not come up as an answer. And even where price is a heavier factor (say, in P&C, where pricing is more transparent and where the industry emphasize low-cost offers) emotion rules more heavily inside the experience than may appear at first look. That means the potential for Return on Empathy is high.

Managing the medical portion of workers’ compensation claims can be daunting. The variables are endless -- vendors of all types, extraneous and overlapping events and even participants' attitudes. Moreover, injured employees' recoveries lie in the balance, making the effort essential. Tried-and-true methodologies have been in place for 25 years, including bill review, utilization review, discounted medical provider networks, medical case management, fee schedules, guidelines and peer review. That should do the job, but apparently not. The medical portion of claims continues to rise. Basically, the industry is continuing to follow the same pathways while hoping for different outcomes. Enough said. This is not to say we should scuttle the strategies in place. Instead, the focus should be on updating and intensifying the existing processes to achieve their intended results. Workers’ compensation is an industry replete with transactions that are recorded digitally. First reports of injury, bill review, pharmacy benefit programs and claims system paying bills and documenting events: All continually contribute to the data mass for each claim. Effectively analyzing that data on a concurrent basis and making the business knowledge available to claims adjusters and other decision makers is a powerful approach to strengthening current systems. Analyzing data and converting it to useful information is the key to enhancing current medical management techniques. Writing reports and analyzing trends cannot affect outcomes. Such measures focus on the past, but that cannot be changed. Data must be utilized in new ways. The first prerequisite is getting data-derived information to the front lines quickly. The business units should have access to analyzed information as concurrently as possible. Early information sets the scene for early intervention and resolving problematic situations in claims before they spin out of control. Distributing information continuously requires that the data be electronically monitored and analyzed continually, not at the end of the month or quarter. When conditions that portend risk occur, the appropriate person is automatically notified. That might be the claims adjustor, medical case manager, medical director, supervisor or manager. Importantly, the notified person will follow the organization’s approved procedures, thereby lending structure to the process. Monitoring data and notifying the right people when indicators in claims point to risk mobilizes medical management, as I explained in this article. Other data initiatives can be even more compelling. Research in the industry irrefutably shows poorly performing medical providers lead to high cost and poor results. Poorly performing doctors in the workers’ compensation context are those who have little understanding of the system or deliberately abuse the system through overutilization. Indicators of such poor performance are readily found in the data. The data will reveal the poor performers, those who ignore basic workers’ compensation needs such as early return to work, as well as those who bleed the system with excessive treatment practices. Treating doctors essentially cause, influence or control a significant portion of medical costs. Once the injured worker is in the doctor’s care, opportunities to steer the course with medical management methods nearly disappear. Consequently, choosing the right physician at the start is essential. Using data analysis to select the best practice doctors is the way to prevent problems and smoothly lead to the most optimal outcome. In many states, this is possible and encouraged. In other states, directing care is not allowed. Nevertheless, non-traditional applications of analytics can optimize results. When directing care to the best doctors is not possible, the next best option is to change the perpetrating doctors themselves. The fact is, people, and maybe especially doctors, do not like to look bad. Presenting them with analytic representations of their performance compared with others of the same specialty in the state is a powerful behavior-change methodology. Those who are outliers will begin to move toward the mean. Changing medical provider performance is not impossible! Of course, doctors will first attempt to push back. One way they argue is to say they treat only the more serious cases. That could be true. However, the pièce de résistance is to correct for medical severity in performance analytics, leveling the playing field. Those who treat more serious injuries are compared only with others who treat similarly difficult cases. Adjusting for case risk or severity by diagnosis is how to diminish resistance for poorly performing treating physicians. Graphic presentations of comparative performance cannot be disputed. The fairness is built in. As the treating provider outliers move toward the performance mean, they may never achieve best-in-class, but their outcomes will gradually improve. They will also be aware of continued surveillance, so the impact persists. Positioning data in this way is your weapon of choice for a powerful, yet bloodless medical management solution.

The International Association of Industrial Accident Boards and Commissions (IAIABC) publishes an annual Peer Review Journal, and the editor, Robert Aurbach, asked me to participate in a series to be included in this year's edition. This was no ordinary project, either, at least as far as I was concerned. I was asked to pen an article presenting my view on changes the workers' compensation industry should undertake to remain viable and effective for its "second 100 years." That article would be published alongside an article from another author outlining his views. Then both of us would have the opportunity to review the other's work and respond to his suggestions. And the author with whom I would be sparring? Why that would be John Burton, professor emeritus at Rutgers and Cornell, and presidentially appointed chairman of the 1972 Federal Commission on Workmen's Compensation. Yowza. Although the Journal will not be released until later this year, the four-article Point-Counterpoint series has been published in advance. Burton is an intellectual heavyweight in our industry, and I must admit the potential of this exchange left me feeling a bit like the industry's Adm. Stockdale, Ross Perot's hapless vice presidential running mate in 1992, who famously asked in a debate, "Who am I? Why am I here?" Burton is an economist, and his primary article, titled "Should There Be a 21^stCentury National Commission on Workers’ Compensation Laws?", goes into detail regarding the changes he proposes. The article contains the plethora of supporting charts and graphs that one would expect from a professor emeritus at Rutgers and Cornell who was the presidentially appointed chairman of the 1972 Federal Commission on Workmen's Compensation. My article by comparison, "The Case for Workers' Recovery," is a simpler, high-level view of a suggested philosophical change for our industry, to get away from our creeping "disability mindset." My intellectually challenged contribution can best be summed up as "injury bad, recovery good." We engaged in this process several months ago, and while I had seen and responded to Burton’s original article, I had absolutely no idea what his response to my submission was. I have spent months dreading the possibility that he would title his review of my article, “Bob Wilson Is a Blithering Idiot.” Fortunately, that was not the case. Ultimately, while we support the concept of workers’ compensation and its continuation, as well as agree on numerous points and identified problems, Burton and I do have distinct differences of opinion on what solutions would be best employed in the future. We have managed to present both a philosophically based and process-specific viewpoint in the writing of these articles. I was honored to participate in this, and I hope that you will take the opportunity to read these articles. I think they provide an interesting contrast in philosophies and, I hope, will spark further discussion. I certainly thank Dr. Burton, Mr. Aurbach and the IAIABC for allowing me to be a part of the conversation.

Earlier this year, the European Court of Justice ruled that Google is a "data controller" under the 19-year-old European data protection law, which gives individuals rights over data about them that others control. This ruling could effectively limit certain information on the Internet in Europe, and also which information would be allowed in the U.S. For example, in Spain, nearly 100 citizens would like to have information about themselves deleted from the Web. Some are embarrassed about misdemeanor arrests years ago when they were in college. Others have been victims of identity thieves or violent crimes and, understandably, don’t want their home addresses to be easily determined. The issue comes up because the official Spanish government gazette, published for 350 years every weekday, contains data required to be published publicly about bankruptcy, crime and other potentially sensitive subjects. It has been difficult to access this publication in years past and was typically unread, gathering dust at a library. But two years ago the government gazette information went online, making old and potentially embarrassing data easy to find. The Spanish government has ordered Google to stop indexing information concerning the 100 citizens who filed complaints with the Spanish Data Protection Agency. These cases are now in Spanish courts. American law is based on the concepts of free speech, the public’s right to know and unfettered debate. U.S. courts have determined that the right to publish true statements by one about the past of another person outweighs the other person’s right to privacy. In Europe, there is no general right to say anything about anyone, even when the statement in question is true. International law experts have declared that the American and European cultures are headed in different directions as to legal notions of privacy. Europeans seek to balance freedom of speech and the public’s right to know against the personal rights of privacy of others. The European perspective has been shaped by the experience of individuals as victims in data collection and use by dictators like Franco, Mussolini and Hitler, and by Soviet authorities. In Germany, two persons who murdered someone 20 years ago have recently sued to suppress their identity as criminals on the basis of their own rights of privacy and their so-called “rights to be forgotten” after their criminal sentences have been served. Google has faced suits in Germany, Switzerland and the Czech Republic over its “Street View” feature, collecting photographs of streets and private homes and businesses. In Germany, citizens are allowed an option to not have their home or business photographed, and more than one quarter million have chosen this option. By contrast, this issue has resulted in little debate in the U.S. where persons may take pictures of anything in plain sight from a public street. European Union surveys have found that three in four persons worry about how Internet companies use their information and want the right to delete personal data at any time. Ninety percent believe the European Union should formalize in law the “right to be forgotten.” These individuals want to retain some limited rights to their own data, even if it is in cyberspace – they want, in effect, a right to withdraw from others permission to store their personal data. The U.S. recognizes no such rights to be forgotten or deleted. But the Federal Trade Commission has recommended that companies collect only the data about persons they need and to delete information that is no longer necessary. Congress has introduced a “Do Not Trace Kids Act of 2011,” which would require companies to allow parent and child users to delete publicly available information about minors from a web site. The bill remains pending. Some parents have been shocked to learn that their minor children have accumulated large amounts of debt because of the unlawful use of their Social Security numbers by others. There were more than 4,000 cases of child identity theft found in 2010 from a random pool of 40,000 American children age 18 and younger, a higher rate than for adults. Criminals like to use children’s Social Security numbers because adults have their own existing credit records under their own names. Google and other search engine companies have argued that the Spanish consumers and others should not seek to hold search engines responsible for information they extract from the Web, but should instead seek redress against those parties that posted the allegedly private information in the first place. But many European legal experts expect the search engines to nonetheless become more regulated because they are the ones effectively spreading the information that otherwise would likely not be found.

This is the third in a series of four articles that offer a “road less traveled” to Agency 2020. The first article focused on your agency in the marketplace’s current reality. The second article considered the world as it might be in 2020. Today, we address the processes necessary to ensure you have the “seed corn” to grow the culture and structure necessary to produce Agency 2020 and win in the marketplace of tomorrow. Mohan Nair, in his book, Strategic Business Transformation, diagrams a world of yesterday where 80% of change was incremental/cyclical and 20% was structural/transformational. Today, he says, “When the unknown are threatening every variable we have counted on, 80% of the variables that shift are structural while 20% are predictable. We cannot use the strategic data used in the past to find our ‘true north.'” Your successful organization today is driven by its culture: “the house rules,” “what’s tolerated.” This organization and culture were created for the world of yesterday (“Daddy, may I?”) and today ("What do our carriers say?"). If you believe the world of 2020 will be different, you must create a culture appropriate for that new world. The Gospel of Mark (3:25) and then Abraham Lincoln stated that “a house divided cannot stand.” This was true in their world of incremental change. Theirs was a world that moved at the pace of a tortoise. Tomorrow’s world will move at the pace of the hare (but never stop for a coffee break).  As has been said: “It’s not the big that eat the small. It’s the fast that eat the slow!” Most people are reluctant to change. As Maxine puts it, “Change is good as long as I don’t have to do anything different!” In your organization, most folks are comfortable in their jobs, see the world as it is and are terrified that things will change. A minority of folks who are enthusiastic about the new, virtual world and global economy see the world as it will be and are terrified that your organization won’t change. Your house is already divided.  What you need to do is merely focus each segment on the role right for them. Both groups are necessary for success, but you must answer one question for each group and each individual. WIIFM? – What’s in it for me? Do this, and they’ll embrace your plan; ignore WIIFM, and they’ll sabotage your future. Be respectful of all. Understand that there are different “tolerances” for risk and that people discover, learn and adapt at different speeds. Gather your team. Put them at ease. Make the environment safe for them. Explain that you want to structure change to give every contributor an opportunity to continue their success today and find the right fit in the world of tomorrow. Celebrate your past and thank them for their participation. Clearly articulate your embrace of the inevitable change necessary for tomorrow and your commitment to your team's success in the future. Announce your plans to begin an Agency 2020 initiative. Explain that to build a foundation for success you need two teams. This process will not be instead of their existing roles but as an extracurricular activity. This initiative is about assuring a future with opportunities for each other. This is about each voice being heard. The first group will immediately focus on the existing organization – making it more efficient and effective to create the “seed corn” (profits) necessary to finance tomorrow. The group’s task will be to create an operational “to do list” defining and acting on what is necessary for enhanced success today and to quit doing those things carried forward from yesterday but no longer needed today – “we’ve always done it this way.” The “tomorrow team” will be the young at thought and the young at heart. They will be your pioneers. They will be charged with discovering tomorrow as it will be and creating a blueprint to build your organization as it must be to fit in 2020. This process is not intended to exclude the traditionalists. Both teams will be encouraged to share their discoveries and enthusiasms - to create excitement about today’s improvements and refinements and tomorrow’s innovations. Don’t create competition between the teams – encourage collaboration so that respect and trust will build. This will work because each group is focusing where “they live” – their comfort zone -- and you are not forcing them, at this time, to go to where they don’t want to be. Assure all team members that, as the blueprint for 2020 is designed and new roles are defined, each person on staff will have the right to be considered for jobs right for them and your organization. Promise them the training necessary for success. If they can’t or won’t fit into the world of 2020, facilitate their exit. Make it as painless as possible. For the Today Team, some ideas to consider and questions to ask (there are more):

1. Focus – take out the microscope and study every function you perform.
2. If “we’ve always done it this way” – it can be changed for the better.
3. What are five things we do today that no longer need to be done?
4. What are five things we do today that remain important and can be improved?
5. What are the jobs skills that remain important today? How do we improve these?
6. What are skills no longer needed in the world of today? How do we let them go?
7. Do we have the technology (systems and social media) needed for today?
8. What and how can we maximize our results from this technology?
9. Does our “client experience” differentiate us, or are we “the same old same old?”
10. Are we capturing the data available and converting this to actionable knowledge?
11. Where must we invest our time and energy?
12. What must we leave behind?

Please remember – the Today Team is about updating (remodeling) the organization you have. Its role is small steps – process improvement. Think outside of the box. Remember the words of Einstein – insanity is “continuing to do what you’ve always done and expecting a different result.” The world has changed more in the past 10 years than the previous 50, yet most agencies continue to do what they’ve always done. Don’t be crazy. Discover and do what needs to be done today to prepare for tomorrow. The Tomorrow Team is about designing a blueprint and facilitating the building of the organization and culture you’ll need for the future. The team's role is “giant leaps” – innovation. You are moving from the mechanical processes of yesterday to a new “living” system for tomorrow. Be bold. Don’t be afraid to fall – just do it, and learn from the experience. For the Tomorrow Team, some directions and innovations to consider (there are more):

1. Scan the horizon of the world and technology. Look outside your comfort zone.
2. Determine if “place” will matter -- where you, your employees and clients are.
3. Determine if “time” will matter? Is “Working 9 – 5” only right for Dolly Parton?
4. Determine the role of cultures and generations for buyers and those who influence decisions.
5. What are the talents needed? Prioritize communication, technology, insurance, etc.
6. What will be client needs? How can you deliver solutions profitably?
7. Shift your focus from products sold in the past – to client needs in the future.
8. What will be the demographics and psychographics of the populations served?
9. What will be the industries/market niches in collapse/decline? Avoid them.
10. What will be the industries/market niches in ascendancy? Focus on these.
11. How do you manage in a “virtual” (no time, place and more non-verbal) world?
12. What will be the role of big data? What will be your ability to use it effectively

The questions are offered as a starting point for discovery. You have many more questions to ask and answer. Yours is a world yet to be – not a world that is. Nonetheless, the better you ponder and plan, the better your head start on the future – the New World of 2020 - will be. Learn from the great change architect Peter Drucker, who said, “The best way to predict the future is to create it.”

The new FAQS About Affordable Care Act Implementation, published Nov. 6, 2014, confirm that employers can’t reimburse employees for purchasing individual coverage, even though various vendors are promoting that approach in lieu of group health plan coverage. FAQ XXII makes clear that the departments of Labor, Health and Human Services and Treasury object to this practice. FAQ XXII makes clear that the departments consider ACA’s market reforms to outlaw any arrangement pursuant to which an employer provides cash reimbursement to employees for the purchase of an individual market policy, regardless of whether the reimbursement is paid on a pre- or after-tax basis. This position is consistent with previous guidance that the departments have published, that health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer and union health care arrangements where the employer promises to reimburse health care costs are: considered group health plans subject to the Public Health Service Act (PHS Act) § 2711 annual limits, PHS Act § 2713 preventive care with no cost-sharing and other group market reform provisions of PHS Act §§ 2711-2719 and incorporated by reference into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). HRA or other premium reimbursement arrangements do not violate these market reform provisions when integrated with a group health plan that complies with such provisions. However, an employer health care arrangement cannot be integrated with individual market policies to satisfy the market reforms. Consequently, such an arrangement may be subject to penalties, including excise taxes under section 4980D of the Internal Revenue Code (Code). (See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangement; IRS May 13, 2014 FAQs.) FAQ XXII reinforces this prior guidance, stating, “Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.” (See, DOL Technical Release 2013-03; IRS Notice 2013-54; Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangements, Sept. 16, 2013.) FAQ XXII also confirms the departments’ view that arrangements where a vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits or other HRA dollars to pay for Marketplace coverage are illegal. According to FAQ XXII, these arrangements are problematic for several reasons, including: The arrangements themselves are group health plans. Therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. Department of Labor guidance indicates that the existence of a group health plan is based on many circumstances, including the employer’s involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash. Under DOL Technical Release 2013-03, IRS Notice 2013-54 and the two IRS FAQs addressing employer health care arrangements, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act § 2711 prohibition on annual limits and the PHS Act § 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act §§ 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under Code § 4980D. FAQ XXII also confirms the department’s position that an employer violates the ACA provisions of PHS Act § 2705, ERISA § 715 and Code § 9815, as well as the Health Insurance Portability & Accountability Act (HIPAA) nondiscrimination provisions of ERISA section 702 and Code § 9802 prohibiting discrimination based on one or more health factors if it offers selectively only to employees with high claims risk a choice between enrollment in its standard group health plan or cash. FAQ XXII clarifies that while the departments’ regulations allow more favorable rules for eligibility or reduced premiums or contributions based on an adverse health factor (sometimes referred to as benign discrimination), in the departments’ view this position does not extend to cash-or-coverage arrangements offered only to employees with a high claims risk. Accordingly, FAQ XXII states such arrangements will violate the nondiscrimination provisions, regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual market product or (3) the employee obtains any individual health insurance. Beyond these concerns stated in FAQ XXII, employers and others contemplating offering such a choice also should discuss potential exposures under the Americans With Disabilities Act (ADA) and, depending on the nature of the condition, Medicare law. In light of this new guidance and previous guidance published by the departments, employers and others sponsoring or contemplating engaging in these arrangements are encouraged to contact competent counsel for assistance in understanding the potential concerns raised by involvement in these practices and their resolution.