Medicaid has several components, but at its core it is a health insurance program for the poor. States can differ, but most provide for those below the poverty level. Federal health reform requires expanding Medicaid to those earning up to 138% of the poverty level (about $25,000 for a family of 3). The U.S. Supreme Court has ruled that each state can accept or reject the expansion of Medicaid. Like other states, Georgia must make that choice. This analysis addresses the human impact — not state financing, our national debt, or deficit spending. The key question: Is Medicaid expansion beyond the poverty level a "hand up" or a "handcuff?"

Unlike other income levels in America, getting ahead is less likely if you are in the bottom 20%. The Economic Mobility Project of the Pew Charitable Trusts shows 65% of children born in the lowest 20% of incomes stay in the bottom two quintiles.

If the core philosophy of Conservatives is producing upward economic mobility and Progressives are for helping the poor, why have both ideologies failed the poorest among us? Scott Winship, a researcher at the Brookings Institute has said, "The bottom 20% in the U.S. looks very different from the bottom 20% in other countries." Americans are more likely than foreign peers to grow up with single mothers. In poor communities, drugs, alcohol, violence, and ineffective primary and secondary schools represent a huge barrier to economic mobility. The United States also has uniquely high incarceration rates, and a longer history of racial stratification.

With all those challenges, the Brookings study showed that regardless of race or ethnic background, if you stay in school at least through high school, don't have a child until you're married and over 21, and work full-time at any job, your chances of being poor are only 2 percent and your chances of joining the middle class are 74 percent.

More than other countries, poor Americans have to educate and work their way up from the lower levels. The United States provides many benefits for the poor, disabled, and unfortunate. No one of any rational political or ideological persuasion is opposed to helping those in need.

The key part of Medicaid is also called "Temporary Assistance for Needy Families" or TANF. Under health reform Medicaid would be expanded to 18-20 million new lives. Other health reform subsidies through exchanges are available up to 400% of the poverty level (about $92,000 for a family of 4). Programs affecting larger percentages of the population can create an attitude of entitlement and a culture of dependency that traps segments into intransigent generational poverty.

A study of entitlement programs in Colorado illuminates the concerns for Georgia and other states. Programs are available to low income families to provide housing, food, healthcare, educational, and other subsidies. A single mother with two children making $25,000 could be eligible to receive about $18,000 in government benefits.

Medicaid expansion and other health reforms add new subsidies for low and middle income families. Using the same example of a single mother with two children, Medicaid expansion to 138% of the poverty level can provide an additional $7,500 in benefits to those making $25,000.

What are the effects on real people as they try to advance economically? The marginal effective tax rate from federal income taxes, payroll taxes, and state income taxes, for a single mom with two children earning $25,000 is about 29.4 percent. If one includes other programs, SNAP (food stamps), state children's health insurance program, and the new health reform subsidies, the marginal tax rate rises to 54.5 percent.

If benefits like Temporary Assistance for Needy Families, federal housing subsidies, and WIC (nutritional program for Women, Infants, and Children) are considered, the marginal tax rate is as high as 81.9 percent because families lose even more benefits due to higher earnings.

Who would work harder, take that extra job, or seek a promotion when most of the added earnings would be taxed away or government benefits are reduced? The destruction of initiative can be the inevitable consequence of expanding Medicaid with an additional $7,500 (for a total of over $18,000) to someone making $25,000, but providing nothing to a similar family making $75,000.

Clearly, even the most compassionate among us can see that accumulated effects of entitlement programs can break the spirit of personal responsibility and the motivation for upward mobility. Medicaid expansion and the new health reform subsidies to over 50% of the population are likely to produce the same dependence and economic barriers to upward mobility already evident in the lower 20%.

The standard of living in Georgia is directly related to its citizens' ability to produce goods and services others want to purchase. Subsidizing able-bodied populations does not create economic growth for those individuals or for the state. In our compassion to help those in need, we tend to look away from the politically driven expansion of those programs and the debilitating dependency culture they enable. Georgia has apparently decided not to play that destructive game. Good for us.

As we look to the future and better ways to solve the problems of healthcare and health insurance, maybe Georgia can create an island of opportunity within a sea of growing dependency. Maybe we can remove the handcuffs of those chained to the programs and ideas of the past and offer a hand up rather than a handout.

Data-driven analysis is a critical decision-making tool for Construction Financial Managers and other industry leaders.

Decision-making is arguably the most important responsibility of company leadership.

Companies that make better decisions make fewer mistakes, and achieve a distinct competitive advantage in the marketplace.

The underlying purpose of benchmarking is to continually improve the quality of organizational decision-making.

Overview
As construction risk management consultants, we help contractors prevent accidents, mitigate claims, and reduce the total cost of risk through a continuous improvement process.

We believe companies must instill management accountability for continuous improvement by linking performance measurement to both prevention activities (leading indicators) and operational results (lagging indicators). As the adage goes:

"What gets measured is what gets done."

In our consulting roles, we frequently help companies establish realistic performance measures by conducting various types of claim and loss analysis.

This type of data analysis is usually the starting point in a performance improvement process — and a common practice among insurance agencies, brokerages, carriers, and risk management consulting firms.

In addition, we are often asked to conduct a benchmarking analysis that compares one company's claim and loss data against peer companies or to the construction industry as a whole.

Benchmarking
The term "benchmarking" refers to the comparison of a company's performance results against those of similar peer companies. Benchmarking evolved out of the quality improvement movement in the late 1980s and early 1990s.

Its initial intent was to identify leading companies regardless of industry sector, and apply their best practices to improve one's own company. Over time, benchmarking has become synonymous with process improvement.

The traditional view of benchmarking required two separate disciplines focused on performance improvement: measures and methods. Identifying and capturing performance indicators (the measures) is only the first step; developing and implementing performance improvement (the methods) is the second and most important step for the benchmarking process to be truly effective.

The Health Club Analogy
There is limited value in benchmarking without applying new methods to address continuous performance improvement. Performance improvement requires more than the measurement of performance indicators; it requires the implementation of changes in management disciplines to attain improved operational results.

Using only performance indicators without implementing new methods to improve operations is akin to joining a health club and expecting the benefits without actually using the equipment or committing to an exercise program.

Merely jumping on the scale and gauging your weight relative to others doesn't help you achieve your own weight loss goals anymore than comparing your pulse and respiration rate to others helps you attain your aerobic or cardiovascular fitness goals. What matters most is that a person embarking on a weight loss or fitness program stays committed to the process and monitors his or her own progress.

Similarly, we believe the ongoing monitoring of claim and loss data specific to an individual company is even more important than the initial measurement of insurance claim and loss data relative to other companies.

Baselining As Benchmarking
The term "baselining" refers to the internal benchmarking process that occurs when a company compares its performance against its own results year after year. Ongoing, internal monitoring allows a contractor to determine if the company's claim and loss trends are improving or deteriorating, and to make the critical performance improvement decisions necessary to facilitate a change in results.

Referring back to the health club analogy, baselining does not compare an individual's weight and aerobic fitness to that of the other health club members. Instead, individual fitness goals and measures are established, monitored, and tracked to verify continuous personal improvement.

Similarly, a construction company can develop a baseline analysis of its loss cost performance by reviewing loss and claim data for a minimum of 3-5 years. Company results are compared from year to year, and ideally are broken down by operating entity, division, project, manager, or even crew levels.

Exhibit 1 provides a sample of a baseline analysis that compares one company's relative claim and loss performance within all of its operating divisions.

This analysis reviews the historical loss cost data for the entire company and breaks it down into meaningful data relative to each operating division. The total workers' comp, Comprehensive General Liability, and auto liability incurred claim costs (sum of paid and reserves) for each company division over a five-year period were compared to the total man-hours for each division, producing a cost per man-hour figure.

The results illustrate dramatic differences in total claim costs per man-hour for each division. This baseline analysis was the first step in raising awareness of the predominant loss leaders within the company. This increased awareness led to a detailed analysis that established plans of action and realistic cost targets by company division for the upcoming year.

External Benchmarking
We acknowledge that there are numerous benefits to measuring the frequency, type, and cost of insurance claims compared to peer groups and/or the entire construction industry. Such analyses provide the ability to:

• Identify leading types and sources of claims
• Establish strategic objectives to prevent the occurrence of common industry claims
• Increase knowledge of industry best practices
• Determine operational performance improvement priorities
• Create awareness among managers and employees about the costs of claims and the impact on profitability
• Post positive results on company websites and for use in other marketing materials

The Bureau of Labor Statistics provides safety-related data so that companies can externally benchmark injury and illness data against specific industry groups. (Check out the Web Resources section at the end of this article for more information.)

In addition, Bureau of Labor Statistics data is used to calculate and compare OSHA Recordable Incident Rates and Lost Workday Incident Rates, both of which are common construction industry benchmarks. This data is useful when making high-level comparisons within construction industry segments relative to injury and illness rates.

We also use external benchmarking analyses to establish risk reduction, loss prevention, or cost containment goals. In "Risk Performance Metrics" by Calvin E. Beyer in the September/October 2007 issue of Building Profits, a sample benchmarking comparison shows a representative contractor's duration of lost workdays workers' comp cases in median number of days compared against the median duration for the industry. Results such as these can highlight the importance of an increased focus on injury management and return-to-work programs.

The benchmarking analysis in Exhibits 2A and 2B compares a contractor's workers' comp claim and loss performance to an established group of peer contractors in the same specialty trade. (These companies engaged in similar work, and performed in states with similar insurance laws and legal climates.)

The analysis was based on total incurred workers' comp costs and total number of workers' comp claims as compared to payroll for each entity. Overall, Company D had worse results than the other three companies.

This prompted an in-depth review of Company D's workers' comp losses by division and occupation. As shown in Exhibit 3, the company experienced significant claim frequency and severity issues within the first six months of employment.

These findings triggered the development and implementation of specific activities designed for Company D's new employees.

Below are some of the activities that were incorporated into the formal improvement plan:

• hiring processes
• new hire skills assessments
• orientations
• daily planning meetings
• formal training

Other Sources Of Benchmarking Data
Professional associations and industry trade/peer groups also provide comparative data for benchmarking purposes.

The Construction Financial Management Association's Construction Industry Annual Financial Survey is an excellent source for understanding the key drivers of contractor profitability. We use the survey data to determine comparative profit margins for different types and classes of contractors when we calculate a revenue replacement analysis to show the additional sales volume needed to offset the cost of insurance claims. (This technique was highlighted in the "Risk Performance Metrics" article previously mentioned.)

Similarly, the Risk and Insurance Management Society (RIMS) conducts an annual benchmarking survey that reviews insurance rates, program coverages, and measures of total cost of risk.

An example of a peer group data source for benchmarking is the Construction Industry Institute (CII). The Construction Industry Institute is a voluntary "consortium of more than 100 leading owner, engineering-contractor, and supplier firms from both the public and private arenas" (www.construction-institute.org). It develops industry best practices and maintains a benchmarking and metrics database for its participating members.

Another peer group example involves members of captive insurance companies sharing and comparing claim and loss data for the group as a whole. There is a major advantage when a true peer group shares benchmarking data: Such data sharing often leads to peer pressure in the form of increased ownership and accountability for improvement by the companies shown to be the poorest performing members.

We continue to search for more new sources of industry best practices and comparator data. A possible emerging source for the construction industry is the National Business Group on Health. This organization has developed standardized metrics known as Employer Measures of Productivity, Absence and Quality™ (EMPAQ®).

EMPAQ® helps member companies gauge the effectiveness of their injury and absence management and return-to-work programs. The founder and principal of HDM Solutions, Maria Henderson, served as a project sponsor for EMPAQ® from 2003-2007, and co-presented with Calvin E. Beyer on "Return to Work as a Workforce Development Strategy" at CFMA's 2008 Annual Conference & Exhibition in Orlando, Florida.

Limitations Of External Benchmarking
We fear that the increasing popularity of external benchmarking analyses may indicate that it has become a "quick fix" solution or a management fad. When asked to conduct an external benchmarking analysis, we always ask the following questions:

• What is your purpose in seeking these comparisons with other companies?
• Who are you trying to convince and what are you trying to convince them to do?
• What specific peer companies should be used for comparative purposes?
• Are these companies (and their operations and exposures) truly similar enough for a fair comparison?

Beware Of Pitfalls
There are many hurdles to surmount in locating suitable companies for external benchmarking comparisons. Generally, when benchmarking comparisons can be made, more often than not the greatest value lies in the workers' comp line of insurance coverage.

Here are some key factors to consider when choosing contractors for external benchmarking comparisons:

• Percent of self-performed work vs. subcontracted work
• Payroll class codes and hazard groupings of selfperformed work
• Differential geographic labor wage rates
• Payroll rate variances between union and merit shop operations
• Size of insurance deductibles
• Claim reporting practices

For example, claim reporting practices must be similar in order to minimize distorting the frequency or average cost of a claim. If one or more comparison companies self-administers minor claims or does not report all claims to their carrier, using carrier loss reports for the comparison is an invalid method.

We also find that comparing the frequency of claims and total loss dollars divided by thousands or millions of dollars of payroll (exposure basis) is a helpful workers' comp benchmark between companies of similar operations in similar states.

Likewise, a suitable benchmark for auto liability performance compares the frequency of claims and total loss dollars per one hundred vehicles.

When benchmarking fleet-related claims, ensure that the number and size of fleet vehicles — as well as the type of driving (urban vs. rural) and the total number of miles driven annually — are similar among the contractors whose claims are being compared.

Benchmarking comparisons of Comprehensive General Liability insurance results are especially challenging due to delays in reporting third-party bodily injury and property damage claims, in addition to the expected long tail of loss development for these claims.

All of these factors are compounded by vastly different litigation trends and liability settlements in various states and regions of the country.

Common Limitations Of Data Sources
Whether or not you intend to develop a baseline of your company's claim data or to benchmark your company's performance against a peer company, there are several issues that must be successfully resolved regarding the data's quality and integrity.

Based on our experience, we classify the key challenges associated with exposure and claim/loss data into the categories shown in Exhibit 4: availability, accuracy, accessibility, standardization, reliability, comparability, and date-related problems.

Value Of Multiple Measures
Evaluating data from various sources and different angles is also valuable. Why? Because it's possible to gain a better understanding of the whole by dissecting the parts. This practice illustrates the principle of multiple measures.

This approach is substantiated by 2006 research, which concluded that the "simultaneous consideration" of frequency and severity provides a more comprehensive result than performing analysis based solely on one factor.¹

This is similar to our approach when we conduct a "Claim to Exposure Analysis" and review historical frequency and severity vs. the relative bases of exposure for each line of casualty insurance coverage.

Returning to the health club analogy, when starting a formal exercise program, you often begin with such general baseline measurements as height and weight; this is usually followed by additional measurements, such as BMI, body fat content, and the girth of arms, legs, and chest (the baseline).

As we all know, weight alone is not always the best indicator of success in fitness efforts. In fact, since muscle weighs more than fat, an increase in total body weight may actually occur after beginning and maintaining a fitness program.

Although you might not experience a dramatic weight drop, you could see a reduction in waist size and BMI — positive changes that would not be evident unless multiple measures were being used and reviewed.

Benchmarking insurance claim and loss data performance is like comparing one person's height and weight against the ideal height and weight charts based on the entire population.

Wouldn't it be more effective to establish your baseline weight and other multiple measures initially so you can see the progress you are making?

This is similar to the baseline measurements that a company should take (as well as the multiple measures) that are necessary to meet your company's performance improvement goals for financial success, operational excellence, or risk reduction.

Web Resources:

1. U.S. Department of Labor BLS Incidence Rate Calculator and Comparison Tool
2. National Institute for Occupational Safety and Health Work-Related Injury Statistics Query System
3. Risk and Insurance Management Society, Inc. Benchmark Survey
4. Construction Industry Institute Benchmarking & Metrics
5. National Council on Compensation Insurance, Inc. (NCCI Holdings, Inc.) Benchmarking Tools
6. Employer Measures of Productivity, Absence and Quality EMPAQ
7. CFMA's Construction Industry Annual Financial Survey with Benchmarking Builder CD

Authors
Cal Beyer collaborated with Greg Stefan in writing this article. Greg is Assistant Vice President, Construction Risk Control Solutions, at Arch Insurance Group. As a member of the Southeast Regional team in Atlanta, GA, Greg supports underwriting and claims in risk selection, claim mitigation, and risk improvement activities. He is also responsible for high-risk liability risk reduction initiatives including contractual risk transfer, construction defect prevention, and work zone liability management.

¹ Baradan, Selim, and Usmen, Mumtaz A., "Comparative Injury and Fatality Risk Analysis of Building Trades," Journal of Construction Engineering and Management, May 2006, pp. 533-539.

This article was excerpted exclusively for Insurance Thought Leadership from a 43-page research report by the author and published by Aite Group on December 12, 2012 as further described here. This new report from Aite Group reviews the many different vendors, products, and services that help Property & Casualty insurance carriers achieve claims excellence. Based on a May through August 2012 Aite Group survey of North American Property & Casualty insurance company claims executives, the report assesses the executives' views of and reliance on various vendors, products, and services.

Introduction
The insurance industry has recently been transformed from operating in a product-centric model to operating in a customer-centric model across the entire enterprise, from sales and marketing to underwriting and from claims to billing. Today's new consumers are better informed than ever, have a heightened sense of service entitlement, and are quick to exchange information, experiences, and opinions with one another using smartphones and social media, where their influence exceeds that of insurance company marketing. And over the past several years, in a fiercely competitive marketplace, North American insurance carriers have spent billions of advertising dollars on promoting their companies based almost entirely on the responsiveness and quality of their claims services.

It has long been understood that the claim is the "moment of truth" for property & casualty insurers with their policyholders, and it is truer today than it has ever been. When a claim is filed — by an average 10% of all personal lines insurance policyholders every year or, put differently, by the average policyholder once every 10 years — the claim is more often than not triggered by a traumatic or at least unpleasant event. Consider as well that the typical claimant has been dutifully paying his or her insurance premiums for years with nothing tangible to show for it and now, at this time of high anxiety, needs and expects prompt and attentive assistance.

Vendors play a crucial role in enabling carriers to achieve the elusive goal of claims excellence. Supporting the entire insurance claims process (though mostly transparent to claimants) is a large, well-coordinated, mostly virtual team of claims professionals with diverse skills and responsibilities. These professionals are supported by tens of thousands of claims software, services, and solutions vendors. Further, these third-party service providers frequently interact in-person with claimants earlier in the process and more frequently than do insurance claims representatives and as such become the face of the insurance company.

The extent to which all of these many different resources work together on behalf of the claimant and provide excellent customer service can dictate the claimants' level of satisfaction and, in many cases, their intent to renew their insurance with that carrier as well as the opinions they will share and post about their claims experience. Because the challenges facing today's property & casualty claims executives, including ongoing resource constraints and the many other factors described above, are unprecedented in terms of their number and complexity, claims vendors that best help them solve these challenges are the most highly valued and rewarded.

Claims Software
Carriers rely heavily upon a large and diverse variety of proprietary and third-party claims software systems and databases to manage every aspect of claims operations, from first notice of loss (FNOL) through claims payment. There are several hundred discrete operational processes across property & casualty claims, including auto, property, and workers' compensation lines of business. These processes include the claims management system (CMS) — the "core" or main operating system supporting the entire claims operation — and many other vendor software solutions — of which our report looked at vendor management software, automobile repair and property loss estimating software, and casualty management software.

Example: Claims Management System Software
Underpinning and supporting the entire claims operation is the carrier's claims management system, defined as the "core system" and the system of record for all activities and interactions for all claims. The extent to which internal and external applications, including vendor products and services, are integrated with the claims management system determines the overall efficiency and effectiveness of the claims process and, in turn, the policyholder satisfaction with the process.

Claims Services
Property & casualty insurance claims departments rely more heavily upon third-party claim service providers than one might imagine. Using the services, software, and solutions of about 250,000 claim service providers, U.S. property & casualty insurers spend approximately US$300 billion in the course of resolving 100 million claims. As discussed in this report's introduction, third-party service providers frequently interact in-person with claimants and are often the face of an insurance company. Moreover, the extent to which all of these many different resources successfully work together on behalf of claimants can dictate claimants' satisfaction with their insurance company.

For all of these reasons, successful carriers value these relationships and spend a great deal of time and effort selecting, managing, and working closely with vendors to ensure claims are handled quickly, courteously, and professionally, no matter how complex the process may be "behind the curtain." While there are many others, the services and solutions included in our report include First Notice of Loss, claims analytics, insurance replacement rental cars, total loss vehicle valuation, salvage management, collision repair networks, national independent appraisal and adjusting services and litigation management solutions.

Example: Insurance Replacement Rental Cars
Insurance replacement rental cars are used extensively by insurance companies to provide temporary transportation to claimants whose automobiles are being repaired after an accident (most auto insurance companies include or offer temporary rental car coverage for a small additional premium). Of all the claims vendor services used by carriers, this category may be the most critical in terms of ability to influence the customer claims experience, policyholder satisfaction, and retention. In addition, it represents a significant overall claims cost for insurance companies and a major challenge for claims adjusters in terms of logistics, the many associated claims process touchpoints, and overall time consumed in managing the process.

Enterprise has come to dominate the insurance replacement rental car segment for a few simple but not-so-obvious reasons. Primarily, it focused on and perfected solving the unique needs of this very different segment of the rental car market. Its competitors treated insurance replacement rentals as just another small portion of their second-largest segment (the local market), choosing instead to focus on their larger and still-growing airport markets.

Enterprise quickly identified the many major pain points of insurance claims adjusters who were tasked with managing temporary rentals as part of the auto accident and repair claim process, and it ultimately simply assumed all of those responsibilities in exchange for the carriers' rental car business at competitive prices. Enterprise also understood the critical value of developing working relationships with local insurance agents and body shops, and it tasked their branch managers with doing both aggressively. Finally, Enterprise's family-owned and -run business philosophies have informed its business operations, including its college graduate-focused recruiting practices, its internal career-promotion policy, and its fierce focus on customer service.

Enterprise's impressive success may well be the insurance industry's best example of the rewards available to vendors who learn how to execute and manage insurance claims process outsourcing to the highest possible level of customer satisfaction.

The graph below illustrates respondent perception of the listed insurance replacement rental car vendor solutions' performance, regardless of whether respondents currently use them. As might be expected given the explanation above, perception of Enterprise performance is almost completely positive.

About This Report
This article is excerpted from a 43-page research report by the author and published by Aite Group on December 13, 2012 as further described here.

Companies with products and services named in the complete report are ABRA, Accenture, Acuity Management Systems, Aderant, Allegiant Systems, Allstate Insurance, Aon eSolutions, AQS Inc., Arbitration Forums Inc., Athenium, Audatex (a Solera company), Auto Claims Direct, Auto Injury Solutions, AutoNation, Avis Budget Group, BlueWave/Cover-All, Bottomline Technologies, Brightclaims, Caliber Collision, CARSTAR, CCC Information Services, CGI, ClaimForce, ClaimHub, Claim Toolkit, CodeBlue, Collision Revision, Copart, Corvel, Cox Enterprises, Craig/is, Crawford & Co., CSC, Cunningham Lindsey, CynCast, Detica NetReveal, Eagle Adjusting, Enterprise Rent-A-Car, Exigen, EXL Services, FairHealth, FairPay, FINEOS, Fiserv, FixAuto, Gerber/Boyd, Group 1, Guidewire, The Hartford, Hertz, HSG, HyperQuest, IA Net, IBM, Ingenix, Innovation Group, Insurance Auto Auctions, ISCS, ISO, Legal Services Group (LSG), LexisNexis, Lynx Services, Maaco, Manheim, Mitchell, Mitratech, MSB, NuGen IT, PDA Appraisal, Pega Claims, Penske, Performance Gateway, PowerClaim, Premier Prizm, Procura, QCSA, Quest, Ravello, Safelite Solutions, SAP, SAS, SCA Appraisal, Service King, Simsol, Sonic, Sterling, StoneRiver, SunGard, Symbility, Systema, Total Resource Auctions, Trillium, Tropics, Trover Solutions, Trumbull Services, Tymetrix, Van Tuyl, Verisk Analytics, Vista Equity Partners, Wipro, Wolters Kleuwer, and Zywave.

January 1 is going to be a day like none other in recent memory for the California workers' compensation system. Most of the provisions of Senate Bill 863 (De León) will be operative. A flurry of regulatory initiatives near the end of this year will allow implementation of many of these provisions. There will be considerable confusion and costs associated with these new laws and procedures as they come on line. The goal and hope of virtually all in the system will be that in time the objectives of this major legislation will be met, and we will have a system that is more efficient and better aligned than what resulted from the last major reforms in 2003 and 2004.

Those in charge of implementing this legislation — largely in the Department of Industrial Relations and Division of Workers' Compensation — have done an admirable job dealing with the intent and inherent conflicts in this new law. Their outreach through various forums — though maddening from a timing standpoint — has greatly assisted the community in its understanding of all the various nuances of SB 863 and its interaction with a voluminous body of regulations and court decisions already existing and in many cases left unaffected by this legislation. There are limits to what the Division can do, and those limits are largely set forth in the Labor Code as it will exist on January 1. Those who think that the regulatory process is a second bite at the apple to deal with issues inartfully drafted or largely ignored in the legislative process are going to be disappointed.

There is a debate as to whether SB 863 will reduce costs in 2013 and by how much. The benefit increases are hard dollar increases, while the various reforms intended to produce savings and offsets require both effective implementation and accurate analysis. They also take time. This dynamic is at the core of Commissioner Jones' November 30th pure premium order. The Commissioner's decision clearly showed, as did the actuarial analyses presented to him, that the reforms are mitigating the increased costs in the system from day one. It is equally clear that until there is experience under the reforms and the reforms are fully implemented, the full measure of savings cannot be completely or accurately estimated.

Prior reforms, specifically Assembly Bill 227 (Vargas) and Senate Bill 228 (Alarcon), combined system changes, such as mandatory utilization review, with well-defined elimination or reduction of benefits. These 2003 measures eliminated vocational rehabilitation and capped chiropractic treatments — changes that were easily quantifiable the moment the ink dried on then Governor Gray Davis' signature. The next year, Senate Bill 899 (Poochigian) added reforms to medical control and permanent disability rating that quickly manifested additional considerable savings in medical and indemnity losses, but also resulted in higher loss adjustment and medical cost containment expenses. And, as we saw with the Almaraz, Guzman, and Ogilvie decisions, reforms of the permanent disability system eroded significantly once reshaped by the Courts.

Medicare and Social Security are in deep trouble — deep trouble. The nominal national debt is puny compared to the unfunded liabilities in Medicare and Social Security. How does $16T — yes "T" as in trillion — compare to $86T? There is a good article in the Wall Street Journal written by Chris Cox and Bill Archer. Click here to read the full article.

Historically, the government has had success in transferring these types of liabilities to the private sector. One way was to deliberately underpay doctors and hospitals under Medicare with the full expectation that those shortfalls would be absorbed by private payers. In my career I had discussions with the Centers for Medicare and Medicaid Services about that very thing. One Centers for Medicare and Medicaid Services official admitted that was part of their strategy. He also said that would continue as long as private payers were willing to absorb the Medicare underpayments to providers. That has worked so far.

Another example was when the government declared that private group plans would be primary over Medicare for workers over age 65. For those of you too young to remember, that was not always the case.

One possible big transfer of Medicare costs to the private sector would be to declare that companies have to offer COBRA for five years or so for every employee age 65 and up who terminates employment. I guarantee you that type of transfer to private companies will be "on the table."

For those of you benefit managers who are in the first half of your career, you will be facing measures not unlike ones I've described here. Brace yourselves.

I was recently going through my notes, preparing to give one of my workshops on the subject of Personal Effectiveness. In preparation for the workshop each participant is requested to read some background material so all who attend have a passing understanding of (1) what the Best Practice looks like in action, (2) what it contributes to the business, and (3) if it's truly beneficial, how a business team would put it to work.

The material I pondered that caused me to start writing about it in this article is a Harvard Business Review article: Beware the Busy Manager by Heike Bruch and Sumantra Ghoshal.

The authors ask an intriguing question — Are the least effective executives the ones who look like they are doing the most? Hmmmmm.

Of course, being seasoned scholars, the authors backed up their observations in their article with some impressive research. For about a ten year period they studied the behavior of busy managers in companies in the US, UK, Germany and Switzerland, interviewing hundreds of managers. Their findings were not particularly encouraging. They report fully 90% of managers squander their time in all sorts of ineffective activities. In other words, a mere 10% of managers spend their time in a committed, purposeful, and reflective manner. Okay, what does that look like?

It seems the highly effective 10% had these common traits: (1) concentrated attention — focus, (2) vigor fueled by intense personal commitment, and (3) selecting a manageable number of projects for early contribution. From both my CEO days as well as consulting experiences, these patterns are absolutely what I have observed in highly productive executives. Of the three, I want to elaborate a bit more on the last one, the number of projects currently under management.

In our consulting practice I have facilitated a significant number of strategic planning sessions. As part of preparing an annual Strategic Plan, one of the very significant by-products is the Action Plan, which schedules accomplishment for all the projects that enable the achievement of the Strategic Plan. Most companies struggle with the above three traits — focus, commitment and scope in the Strategic Plan implementation process (the Action Plan). In fact, I would say just about 10% really do it well. Of the traits, the scope (number of initiatives) seems most troubling.

We urge clients approaching the Action Plan for the first time to limit the number of goals / projects / activities to a critical few, get them accomplished as soon as possible, then select some others and do the same.

The tendency is to select way too many initiatives and then get bogged down, get discouraged and abandon a potentially powerful process.

In support of simplifying the focus and reinforcing vigor and commitment, I developed the Law of Three. Applying this principle, you are encouraged to pick three high-impact projects and work like heck to get them accomplished in the next three months.

Variations on this theme are encouraged as long as it supports the accomplishment of the critical few projects that will have the greatest impact. This is where strategy and personal effectiveness team up for high performance. It is effective!

There are three major concerns and opportunities that must be considered. First, is the impact of SB 863, the major reform legislation bill passed late in this year's session of the legislature. Second is the continued increase in loss cost on prior years' claims. Lastly, will the weak economy improve enough to start bringing new workers into the workplace and what impact will that have on Workers' Compensation costs?

SB 863 holds the promise of lower claims costs, improved efficiency in claims processing procedures, and ultimately rate relief for California employers. At issue is the time frame for writing new regulations that will implement the new law. They are scheduled to take effect on January 1, 2013 which may lead to rushed procedures and unintended consequences. Also major parts of the law will be challenged in court. The Independent Medical Review procedures raise the issue of right to appeal. The injured employee attorneys have already indicated they will challenge this portion on constitutional grounds. Time will tell what the ultimate impact of the new legislation will be on the system, but immediate reduced costs are not expected.

Unfortunately, increasing premiums and rates will almost certainly continue into 2013. The Workers' Compensation carriers are spending 138 cents for every dollar of premium. The overly competitive marketplace coupled with medical cost inflation has led to large developments in claims settlements beyond case reserves. The collapse of the economy has also led to decreased premiums, while claims have increased.

It will take at least 24 months for this cost bubble to work its way through the system. The most recent actuarial review of past years' claims cost indicates that rates are over 9% lower than they should be. While the Workers' Compensation Insurance Rating Bureau governing board, in a purely political move, decided to recommend no increase in rates to the Department Of Insurance, underlying costs continue to increase.

Finally, as the economy slowly recovers and payrolls increase, we will see hiring pick up. While it seems like this would lead to lower loss ratios as premiums go up, just the opposite is true. As you add employees in general, they will be less skilled, need more training and will be less able to work safely immediately. Increasing workforces will lead to increased accident rates and increased loss ratios.

The carriers will always compete for very clean, well-managed and low loss ratio accounts, so now is the time to redouble efforts with safety programs, training and claims management.

Are you aware of the Independent Employee Act Defense? If you are, then you do not need to read on. However, I am willing to bet that most of you are not so that is why I am offering this for your reading enjoyment.

The question is "What do you do if you are fined by OSHA for a serious penalty?" Among the various defenses available, there is the Independent Employee Act Defense (IEAD). It is all based on the 1980 Mercury Service, Inc., case which by the way is still cited in Cal/OSHA legal circles.

In this defense, the employer must plead that the act of the employee that caused the injury was an independent act of the employee, and the employer should not be held liable. The argument by the employer is that "I did everything the law required me to do, but the employee violated company policies and procedures and that is what caused the injury."

Now this seems simple but it is not. In order to prevail with the affirmative defense, it must first be pled on the appeal following the citation and for the employer to prevail, he/she must prove all five of the following elements:

1. The employee was experienced and trained on the job. Using the case noted as our base, the employee was a diagnostic specialist on automobiles. The employer presented over 70 training certificates from the manufacturer out of which over 30 were on engine diagnostic and performance checks. Also, training certification from a nationally recognized body was provided by the employer. OSHA accepted the employer's claim on this issue. However, OSHA reviewed all of the safety training that had been completed by the tech.
2. The employer has a well-defined safety program in place. This one is so obvious. You must prove that you have a well-defined and active safety program in place. Here, the employer provided its Injury & Illness Prevention Program Manual along with copies of the various training sessions that had been given. These were taken directly from the manufacturer's service manual that were relevant to the tasks being performed at the time of the injury. OSHA again accepted this part of the defense as well.
3. You must have a policy of sanctions against employees who violate your safety program. Employers must have a policy of sanctions which is enforced equally against any employee who violates your safety rules or is involved in unsafe acts. Here the employer reported that he did not have such a policy as injuries were virtually non-existent and therefore not needed. The employer lost on this one at OSHA as no policy was in place and as any earlier violations that may have occurred had not been documented.
4. You must also have an effective enforcement program in place. The written policy noted above must be enforced equally and be well documented. Here, OSHA held that the enforcement part of the employer's overall safety program had "no teeth" and that the program which was well written was never followed nor enforced. Here, as you can see, the employer lost.
5. The employee caused the safety infraction which he/she knew was contrary to the employer's safety requirements. Here, the employer must prove that the employee had the requisite knowledge of the safety requirement which he knowingly violated, whether on purpose or by his/her own negligence. The employer provided a copy of the safety rules in place at the time of the injury which had been signed and acknowledged by the injured employee. They also provided a copy of the shop manual (specific directions on the servicing of vehicles) which all technicians refer to repeatedly. This document also outlined the safety procedures for each task as well as the relevant safety issues.

So what does this say to you? It says that if you have an effective Injury & Illness Prevention Program and training program in place which is well documented and enforced you may be able to effectively defend against an OSHA serious violation. However, the important thing to remember is that proper documentation wins the day. Without it, don't even try to defend as you will most likely lose. The watch word by most agencies is that lack of documentation means that there was no documentation and you lose.

A storm has been brewing since requirements for set asides were established in order to protect Medicare from future medical expenses from work comp and general liability claims. With the mandatory requirement that all work comp and general liability claims be reported in electronic format, CMS has the mechanism to look back and identify if they have ever made any work comp-related medical payments. Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 adds new mandatory reporting requirements for group health plan (GHP) arrangements and for Liability Insurance (including Self-Insurance), No-Fault Insurance, and Workers' Compensation. Failure to comply will subject any company to a fine of $1,000 per day and "double damages."

While this practice has been required for many years in workers' compensation, the new mandatory reporting application to civil matters has dramatic implications. It should be noted that Medicare's status as a secondary payer under 42 U.S.C. § 1395y (b) creates the right to reimbursement, which has the potential to simultaneously impede settlement and impose a possible risk of future liability against all parties.

In the 1980s, Congress amended the Social Security Act to include the Medicare Secondary Payer Act ("MSP"), which effectively enacted Medicare liens. In 2003, the Government clarified its position that self-insured entities were also included in the Medicare Secondary Payer Act in passing the Medicare Act of 2003. The 2003 revisions altered the Medicare Secondary Payer Act to expressly include self-insured entities as "responsible" parties obligated to reimburse Medicare.

Prior to the Act, Medicare did not have an efficient mechanism to identify or evaluate instances where Medicare's liability should have been secondary to the "responsible" party (or it's insurance carrier), and could only recoup payment from insurance plans to the extent that payment had been made or could "reasonably be expected to be made promptly."

The 2003 amendments to the MMA, found in Title III, were specifically enacted to overturn court decisions that limited the effectiveness of the Medicare Secondary Payer Act private cause of action. The amendments made it easier for injured Medicare recipients to bring these private actions on Medicare's behalf against an expanded class of entities and individuals with insurance, and they clarified when such entities and individuals must pay the Medicare beneficiary's medical expenses. The Amendments state:

All businesses, trades, and professions are deemed to have insurance, regardless of whether they carry their own risk. Any judgment or payment — including a settlement — conditioned on the recipient's compromise, waiver, or release of claims against the person or entity that commits the wrongful act (whether or not there is a determination or admission of liability) demonstrates a plan's responsibility to reimburse Medicare.

This legislation thereby expanded the possible defendants for the private cause of action to include any person or entity (including a business, trade, or profession without insurance), the entity's insurance company, and the plaintiff's self-insured employer or the third-party administrator. With these amendments it is now crystal clear that Medicare's right of reimbursement applies to almost all settlements in which Medicare payments have been made on a plaintiff's behalf. In addition, Congress applied the amendments retroactively to the original passage of the act in 1980. Court decisions since the 2003 amendments were enacted have consistently allowed the private cause of action to proceed against insurers and similar entities, including employers, who are deemed responsible for injuries. Therefore, responsible parties need to be made aware of the double exposure and how both the 2003 amendments to the Medicare Secondary Payer Act statute and the subsequent court cases expand the class of entities with direct exposure to damages.

The latest update took place very recently. On October 1, 2012, the Supreme Court declined review of a lower court's Medicare Secondary Payer decision. The important facts decided in this case (Hadden vs United States) is the fact the Supreme Court of the United States declined review of a 6th Circuit decision that upheld the government's authority under the Medicare Secondary Payer law to recover all expenses paid on behalf of a Medicare beneficiary when that beneficiary, in turn, recovers from a third party. The ruling helped define "Responsibility" under 42 U.S.C. 1395y (b)(2)(B)(ii), as that term was clarified under the 2003 amendment to the Medicare Secondary Payer Act. In this respect, the court essentially ruled that when there is a settlement, the primary plan demonstrates "responsibility" as defined under the Medicare Secondary Payer Act statute, thereby entitling Medicare to a full recovery of its claimed conditional payment amount — even if the settlement is for a compromised or reduced amount.

How will this affect employers?

One scenario is that when CMS/Medicare learns (and they will) it has been paying for work comp-related medical care, it will seek repayment from the claimant. The claimant, having spent the work comp settlement, will be unable to pay. Ultimately, it will be the employer and/or insurance carrier that will be held accountable. And should CMS have to pursue the employer in court, the amount is doubled. Unbelievably, the insured or employer could pay the future medical cost twice — once to the claimant at settlement and later when Medicare seeks reimbursement of the medical care they paid on behalf of the claimant. Legal attempts to put language in settlement agreements that the claimant agrees to be responsible for the cost of all future medical care has or will likely meet with failure because federal law will trump settlement agreements every time. Claimants, employers, and insurers are still bound by the requirements of the MSA statutes. Another scenario allows for a private cause of action to proceed against insurers and similar entities, in which there is still a potential for double costs.

Going forward, claims adjusters should have systems in place to verify compliance with the MSA requirements of CMS. However, problems may arise when you look backwards; there is no statute of limitations on compliance with the MSA requirements. CMS can review claims that were closed last year, five years ago or more for that matter to check for compliance. If CMS finds medical payments are owed, then you have 10 days to pay to avoid penalties and interest. One potential solution is baseline testing that can establish if there is an injury and if it is related to or aggravated by the date of loss.

Do you honestly believe that individuals deserve the right and responsibility to make their own choices about health care? Before you answer, remember, the party in charge of spending the money becomes the ultimate decision-maker. When it comes right down to it, most people say they support patient rights, but only in the context of someone else paying the bill.

Here's why those two issues cannot be separated:

When discussing health savings accounts with employers, I often hear concern that connecting financial factors to health decisions will lead to employees making bad choices (mostly by not getting the care they need). I hear a widespread belief that asking people to take financial accountability for healthcare produces negative outcomes, not positive ones.

Rarely do I hear policy-makers acknowledge that the opposite is also true. Actually, when we remove financial accountability we actually expose people to risk because we encourage people to stay uninformed.¹ Economists use the term "rational ignorance" to describe instances where the cost of becoming informed exceeds the perceived value and hence people remain rationally ignorant.

If you understand that all medical procedures — especially those done unnecessarily — contain inherent risk, then remaining uninformed increases the risk associated with healthcare decisions. (For a refresher on why more care is NOT better for patients, review the wonderful work of Fisher and colleagues.^{2 3})

Rational Ignorance
Because it takes time, effort, and sometimes money to be informed, we choose where to place our energy, attention, and resources. Like any other endeavor, why go to the trouble if the potential benefit isn't greater than the cost? Under normal circumstances, there is much to be gained by being informed:

• Money Saved (by comparing prices of different brands and stores);
• Value Gained (by comparing what we can GET for the price);
• Time Saved (by knowing an option is closer or easier to use);
• Best results (by knowing how to use the item you get — e.g., medicine — appropriately, you have a better chance of it working);
• Personal Control or Preferences (the satisfaction, peace of mind, or other personal preferences that are met when you decide what's best for you);
• BUT — it also takes work.

Two factors ultimately influence whether we decide to become informed about a topic: the value one perceives getting out of it (in the many forms described above), combined with one's ability to influence the eventual decision or situation. If we feel we have no influence, and it doesn't really bring us personal value anyway, why spend the time and energy to be informed? Rationally-we wouldn't. Rationally, we remain ignorant. For example, unless it is a rare topic that affects us in a significant way, few voters invest significant time and energy understanding the referenda on the ballot, because we don't feel like our vote will influence what happens anyway. Why bother?

Think about it: most of us know a lot more about the features on the cars we might purchase (which involve our choice and our financing) than we know about which doctors in our community deliver the best care for the best price.

Compare medical services to other activities and needs in our life:

When Choosing How To Spend Our Money:
When you bought your house, did you look at prices in that neighborhood to see if you were paying a fair price? Did you investigate whether the neighborhood was safe, and have an inspection to be sure the value was accurate?

When Choosing How To Spend Our Time:
Do you read reviews or ask friends about movies or books before you buy them?

On your last vacation, did you research different activities in the area, to best meet your expectations for the trip?

Remarkably, medical care is one of very few services we "select," while knowing almost nothing about the cost, the quality, and without guarantee from the person providing it.

We stay rationally ignorant about healthcare because we know someone else is in control.

While healthcare reform has evoked high emotion and political interest, most citizens are not particularly informed about the specifics. For the most part, under new rules someone else pays for the majority of the cost of care, and that someone else will decide what type of care will be allowed.

Regardless of whether the "someone else" is government or a private insurer, consumers will remain largely uninformed and disconnected from all related information — including price, safety, and quality. Not because agencies won't attempt to make information available, but because the cost of becoming informed exceeds its value. Unless we have great experience, influence or resources, we know we are not in control anyway.

The Ethics of Health Care Reform, published by the Non-partisan Institute for Policy, compared six different models for providing health care, and concluded that none was ideal.⁴ However, they came to the following conclusion:

"There is only one system that promotes patient choice, and yet still maintains the elements of a well-functioning health care system that ensures access to quality care while keeping costs under control: the consumer driven model" (p. 8). (It was a high-deductible plan with a funded HSA.)

While not using the term "rational ignorance," the report focused on the patient as the rightful decision-maker. "When a third party-government, insurer or employer controls most of the health care funds, that entity eventually becomes the decision maker, not the patient" (p. 4).

Payment Equals Control
The party with the purse strings decides who gets paid, for what, and how much. It's a simple equation. Thus, anyone who truly agrees that the consumer/patient should be the rightful decision-maker must also agree that they should have control over the money spent. Deciding and paying are one in the same.

When we insist that patients should decide about care — but only within the context of a third-party payment system — we create an illusion of patient influence. Patients understand that someone else — a doctor or an insurer — will be granting ultimate permission. This explains why most of us remain ignorant — rationally.

Some will insist that healthcare decisions are far too complex and/or dangerous for patients to make without a doctor acting on their behalf. But the opposite is true. While patients may need or want support in understanding options, that support should come from a person who first and foremost serves the patient. Doctors are humans, influenced by incentives and rules (inherent in the payment mechanism); their advice will reflect who is paying them, and for what. That alone should remind patients that control of payment is an important component of healthcare decisions.

This matters: Protecting people from financial responsibility for healthcare exposes them to risks by encouraging them to remain uninvolved in care decisions. Payment decisions cannot be separated from care decisions because true ownership requires control of both. It's critical that employers understand how plan design can encourage employees to be rationally informed.

References

¹ Downs A. An Economic Theory of Democracy. New York: Harper; 1957.

² Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 1: the content, quality, and accessibility of care. Ann Intern Med. 2003;138:273-87.

³ Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 2: health outcomes and satisfaction with care. Ann Intern Med. 2003;138:288-98.

⁴ Matthews M. The ethics of health care reform. Institute for Policy Innovation Issue Brief; 2009. Accessed October 22, 2009.