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The Total Cost Of Your Insurance Program, Part 1

Risk Control can be defined as a multidisciplinary approach in which human, engineering, and risk management practices are employed to reduce the frequency or severity of losses. From an insurance company perspective, this would apply to real or potential losses associated with coverage(s) or covered perils provided for in the insurance contract or insurance policy.|

Dirk Duchscherer

June 25, 2011

This is the first article in a five-part series on understanding the total cost of your insurance program. Subsequent articles in this series can be found here: Part 2, Part 3, Part 4, Part 5.Introduction Risk Control can be defined as a multidisciplinary approach in which human, engineering, and risk management practices are employed to reduce the frequency or severity of losses. From an insurance company perspective, this would apply to real or potential losses associated with coverage(s) or covered perils provided for in the insurance contract or insurance policy. The Carrier Risk Control Perspective As we take a look at this topic, let's start off by identifying “What Insurance Related Risk Control Services Are.” They can be summed up for the most part in the definition of a service team. The purpose of the Service Team is to evaluate risk quality and assess our ability to be successful in underwriting, servicing, and retaining an account. What may not be so obvious in this statement is the business stance of the insurance carrier. We need to do whatever it is that we do in a way that yields a profit for our company with an interest of servicing and retaining accounts that can help us achieve that. This speaks to efficiency, efficacy, and a focus on what types of services or activities drive profitability for carriers. Efficiency because we don’t have unlimited resources to throw at an account. Efficacy because we need to be able to produce a desired result, and we need to know how to do that in a focused manner that achieves the desired results while sanguinely endearing the client in a mutually beneficial business relationship. Now that the business perspective is clear, it is important that we understand the roles, goals and procedures in play when these types of insurance services are involved. Oftentimes, due to the varying player's actions (different carriers) and the individuals (risk control personnel) involved, these parameters can become blurry. What we will achieve from taking a look at these areas is clarity of roles, perspicuity of expectations, and as even a playing field as possible given an environment where some players are trying hard to differentiate themselves in the marketplace. Let's take a look at the function of the three major players on the insurance carrier side of the equation. Role clarity for the three major functions of an insurance carrier:

The Risk Control Role: Develop accurate account information (understand what we are insuring). Plan, organize, and lead LC service delivery to achieve significant account-level loss reduction and customer satisfaction.
The Underwriting Role: Solicit, select and manage profitable business.
The Claim Role: Provide professional claim handling within the spirit and the letter of the law, in a fashion that treats the policyholder and claimant fairly and does not create legal liability for the company, our insured’s and agencies while achieving increased profitability through effective cost containment strategies and programs as well as enhancing the image and value added capabilities of the company.

Taking this a bit further, let’s clarify the goals for Risk Control — what are we trying to accomplish:

Loss Management is a better term than the traditional Loss Control term, probably even better than Risk Control, but it doesn’t have the same level of correspondence to the function. Thus, while Risk Control is winning out regarding the name game, Loss Management is a better describer of the purpose at hand because our primary goal is to reduce; eliminate and or mitigate losses.
Providing meaningful services that our customers desire and which achieve good customer retention is also important, and can compete with the primary goal in many ways. In instances where we can seemingly have no real affect on a customer’s loss performance (they are having zero losses), risk control can be a significant ambassador to the insurance client. In this regard, let me point out some very interesting customer service statistics before we proceed further, to make this point clear (the point being, there is more to risk control servicing than loss management).Some customer service statistics:
1. A typical business hears from only 4% of its dissatisfied customers. The other 96% just go quietly away and 9% will never come back. That represents a serious financial loss for companies whose people don't know how to treat customers, and a tremendous gain to those that do.
2. A survey on "why customers quit" found the following: 3% move away 5% develop other business relationships 9% leave for competitive reasons 14% are dissatisfied with the product 68% quit because of the perceived attitude of indifference toward the customer by an owner, manager, or employee
3. A typical dissatisfied customer will tell 8 to 10 people about his problem. One in 5 will tell 20. It takes 12 positive service experiences to make up for one negative incident.
4. Seven out of 10 complaining customers will do business with you again if you resolve the complaint in their favor. If you resolve it on the spot, 95% will do business with you again. On average, a satisfied customer will tell 5 people about the problem and how it was satisfactorily resolved.
5. The average business spends 6 times more effort to attract new customers than it does to keep old ones. Yet customer loyalty is, in most cases, worth 10 times the price of a single purchase.
6. Businesses that have low service quality average only 1% return on sales and lose market share at the rate of 2% per year. Businesses with high service quality average a 15% return on sales, gain market share at the rate of 6% per year, and charge significantly higher prices.
Remember, when it comes to customer service, it's the customer's perception that really counts, regardless of how well you think you're doing your job.

Related Articles The Total Cost Of Your Insurance Program, Part 2 The Total Cost Of Your Insurance Program, Part 3 The Total Cost Of Your Insurance Program, Part 4 The Total Cost Of Your Insurance Program, Part 5 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

Resilience & Sustainability

Do Natural Disasters Matter To Me As An Insurance Buyer?

Chuck Coppage

June 23, 2011

Does the recent string of catastrophes from New Zealand to Mid America to Japan matter to me and my Insurance Program? Should I worry about the impact and record breaking cost of these events? Currently the cost estimate is over 60 Billion dollars and counting. As with so many things in a global environment, are all of these events related and will they have serious implications for insurance pricing in the future? The simple answer? Yes, they do. Insurance at its core is the ability to collect premiums from many businesses such as your local operation and many thousands of other small to medium size businesses and use those premiums to pay losses for the group. The insurance carrier has to charge a premium that not only is sufficient to pay smaller routine losses, but to also bank premiums for the large multi-billion dollar losses that can occur on an infrequent basis. Every carrier has to predict the potential loss that they could be exposed to from any source and make sure they have the financial strength to pay those claims. No one carrier, no matter how large, is able to take 100% of any loss or losses that might happen without facing financial insolvency. The solution to that problem is to purchase what is called reinsurance. In essence, each carrier pays a premium to another carrier for protection against a truly devastating event such as happened in Japan. A carrier might have multiple layers of reinsurance with each policy taking a defined portion of any loss such as 5 million of coverage after the paid loss totals 15 million, and these policies each have a defined portion of a loss for a defined premium. These reinsurance premiums are then included in the premium that each policy holder pays each year. Reinsurance premiums can average as much as 15 to 20% of the annual premium you pay as a business owner. If the reinsurance carriers have to participate in the cost of a catastrophe such as Japan or New Zealand for earthquakes or hurricanes or tornadoes, then the premium they charge will increase which will increase the premiums your carrier pays for the protection and thus your individual premiums can go up. It is this ability to spread high dollar losses to numerous carriers that makes insurance work in any situation. The reinsurance industry is absorbing losses at a record pace over the last six months, but through careful management of assets and surplus has been able to remain solvent and financially able to continue to provide protection. We are starting to see an indication that rates are going to adjust upward to replenish surplus for reinsurance carriers. Increases will be variable based on location, line of business and carrier concentration. The industry is keeping a wary eye on the upcoming hurricane season. If a large event takes place in the United States in a heavily populated area, it could be the final event that generates a rapid increase in pricing at the individual policy level. Stay tuned for further developments.

Chuck Coppage

Chuck Coppage manages the Alternative Markets Division for <a href="http://www.iwins.com">InterWest Insurance Services</a> where he assists in identifying clients who would benefit from insurance solutions involving risk transfer as part of their overall financial management strategy.

Commercial Lines

Self-Insured Retention vs. Collateral - What is the True Cost of Risk?

Knowing that virtually every high deductible or self-insured option you choose requires collateral, how do you decide which option is the most cost-effective? It’s important that you have a very savvy, experienced, and knowledgeable insurance broker or consultant assisting you in weighing these options. Furthermore, your broker must understand the implications of collateral demands when risk is retained.
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Jeff Pettegrew

June 17, 2011

Each year, the corporate risk manager scrutinizes workers' compensation excess insurance proposals from one or more insurers, trying to figure out the cost-benefit of the company’s self-insured retention (SIR), such as $250,000, $500,000, or even much higher. The “SIR” terminology applies whether the company is utilizing an insured high deductible, captive or legally self-insured workers compensation program. As we all know, claims below the chosen level of retention are “retained” (paid for) by the entity, not the excess insurer. And despite what level of self-funding is chosen, the risk manager gambles that the company’s injury/illness prevention program and competitively safe working environment is going to beat industry statistical odds. Why buy insurance on something that has little likelihood of occurring anyway? Your hope is that the premium money you save choosing a higher deductible will more than offset the claim costs associated between a lower and a higher deductible / self-insured retention. With that decision made, the risk manager then dutifully works on an annual operating budget to project the direct and allocated costs of the entity’s “expected” workers’ comp claims, including excess insurance. With that task done, the workers comp risk factors have pretty much been addressed, right? Not really. The unaddressed factor in this self-insured/high deductible scenario — which goes up most corporate ladders to the CFO or Treasurer — is the issue of collateralization. Collateral, by definition is that which serves as protection for a lender against a borrower's default (failure to pay an obligation). For example, when you take a mortgage out on your house, the amount you owe the lender is supposed to be adequately collateralized — at least since the ’08 housing bubble burst — by the sales value of your home. In fact, in today’s post-recession real estate market, banks are requiring excellent lender credit ratings as well as a real estate loan that is typically no greater than 80% of the appraised value of your home. After all, your home is the bank’s only secured collateral in the event you default on your mortgage. So, who is taking the risk if your company fails to make its workers compensation claim payments within the self-insured retention — which is often 90% or more of all corporate claims costs? The fact of the matter is simple. No insurer, captive, or state/governmental agency has any intention of bailing out your company if and when it goes bankrupt, or for whatever reason, fails to meet its workers compensation obligations under the law. In the event of default, therefore, the company’s excess insurance policy must drop down to pick up any unpaid claim costs on a “first dollar” basis. Does this mean the excess insurer is out of pocket for the losses paid within the self-insured retention/high deductible?Simply put, no insurer is willing to take the risk that its insured may be unable or unwilling to pay its high deductible. Similarly, no state government wants to assume to liability of a legally self-insured entity failing to pay its workers compensation obligations. The only sure way to avoid having the excess insurer, captive, or the State assuming the costs arising from a default is to require sufficient collateralization of the policy periods covered by high deductible or self-insurance. In the case of insurers, the terms, timing, and amount of collateral is negotiated and typically requires that the insured put up: a cash deposit; an irrevocable letter-of credit; securities (i.e. certificates of deposit); or a surety bond payable to the insurer in the event of default. For insurers, the collateral target is determined by actuarial estimates, including the estimated ultimate cost (including IBNR and ULAE) of all claims within the entity’s high deductible or SIR retention level. Obviously, the collateral requirement grows in the aggregate with each policy year of workers comp coverage. Now, you understand why the entity’s CFO is concerned. Tying up your company’s collateral or its credit revolver (the amount your bank(s) provides your company as a line-of-credit) is a huge issue. While the cost and amount of this may vary to some degree depending upon your company’s credit rating and banking relationships, the fact of the matter is that this collateral can build up to significant amounts over the years. In California alone, there are dozens of large companies with sizable self-insured retentions with aggregate workers compensation claim risks from $100 to $500 million. The amount of collateral required is almost always determined by an actuary — usually the insurer’s unless you are a true self-insured entity. Knowing that virtually every high deductible or self-insured option you choose requires collateral, how do you decide which option is the most cost-effective? It’s important that you have a very savvy, experienced, and knowledgeable insurance broker or consultant assisting you in weighing these options. Furthermore, your broker must understand the implications of collateral demands when risk is retained. This is a much more challenging process than simply selecting an SIR based upon excess insurance quotes. So the question arises ... How much collateral do we need to post? What will it cost our entity to tie-up this amount of money each year? To the CFO, this issue may be the driving factor in your workers compensation strategy. Essentially, there are two major factors that determine collateralization: (1) the expected amount of aggregate claim exposure; and (2) the entity’s credit risk rating or factor. In general, the only break you’ll get in posting the actuarially determined deposit is if you’re with an insurer that may consider your company a “good credit risk” and allow you to post your annual collateral (keep in mind that it’s in aggregate) on a delayed basis, such as 3 to 6 months into your new policy year. In my previous experience as a VP of Risk Management for an international company doing business in 38 states, we hired a leading actuarial firm to challenge the quarterly actuarial numbers asserted to us by our excess insurer’s in-house actuary. Usually, we were able to negotiate some minor concessions relating to the collateral posted with the carrier. The amount of collateral was revisited at a minimum of every quarter. Most states allow a self-insured the opportunity to choose its own self-insured retention (up to a certain limit); its excess carrier (if any); and in many states, self-insured’s are allowed to self–administer their workers comp claims — as opposed to using the excess insurer or a designated Third Party Administrator. In California, the Self-Insurers’ Security Fund (a non-profit entity that guarantees the take-over and payment of private and group self-insured entities in the event of default) pioneered an option in 2003 that no other state, except North Carolina, has been able to offer. Individual self-insured entities with equivalent credit ratings of AAA (A+) to B3 (B-) are eligible for the Alternative Security Program (ASP). Under this arrangement, qualified self-insured’s have their “deposit” (State-required collateral) covered by the Security Fund. In short, the self-insureds pay an assessment that mimics their cost of securing a Letter of Credit (LOC) from a bank. The Security Fund uses a sliding scale with 16 intervals, AAA to B3, to determine the factor (multiplier) used to determine its annual assessment. Included in the assessment calculations are the Security Fund’s operating expenses, hedging costs, as well as any funds targeted to build the Security Fund’s reserves. In 2010-11, this factor ranged from 16 basis points (AAA) to 355 basis points (B3). The distinct advantage to this unique ASP program option is that nearly 350 California individual self-insured entities are able to free-up large sums of monies or a Letter of Credit. The Security Fund annual assessment is a fee, and the company’s credit revolver is not impacted since there is no secured debt arrangement. This frees up nearly $5.9 billion of workers’ comp collateral each year, and it allows these self-insured companies — including non-profit and religious organizations — to use their creditworthiness to pursue business and organizational goals.

Jeff Pettegrew

As a renown workers’ compensation expert and industry thought leader for 40 years, Jeff Pettegrew seeks to promote and improve understanding of the advantages of the unique Texas alternative injury benefit plan through active engagement with industry and news media as well as social media.

Life & Health

The Big Mystery - Who's In and Who's Out of Obamacare?

The continued increase in health care costs encourages employers to rethink their health care strategy. Recently we were approached by a major international company asking us to take a look at their health care offering and help them estimate costs of continuing it under a reformed health care system. They are seriously considering terminating the program worldwide, and paying the benefit penalty to be assessed by the Federal Government. |

David Axene

June 13, 2011

There has been continuing discussion about Obamacare and what the reformed system will look like. The controversial June 2011 McKinsey article suggests that as many as 30% of employers will definitely or probably stop offering employer sponsored insurance after 2014. This somewhat surprising result is much different than initially suggested by the Administration or other forecasters. Price Waterhouse Coopers (i.e., PwC) released an article in June suggesting that healthcare will soon become 20% of the GDP. One thing very clear is that there continues to be significant uncertainty and controversy about today’s health care system and the anticipated cost of it.The continued increase in health care costs encourages employers to rethink their health care strategy. Recently we were approached by a major international company asking us to take a look at their health care offering and help them estimate costs of continuing it under a reformed health care system. They are seriously considering terminating the program worldwide, and paying the benefit penalty to be assessed by the Federal Government. Without transferring this risk to their employees they are questioning their ability to survive financially and compete in the marketplace. Although the analysis is not complete, they are prepared to end their health benefits to improve their financial outlook even if this results in financial penalties.This type of thinking is unheard of in the recent past, but is becoming more common in today’s marketplace. What had once become a recruiting tool to attract employees has now become a financial burden jeopardizing the company’s profits. Who is thinking this way? Is it the small employer or the large employer? Is it the regional or the multi-national? What was initially presented as a solution to solving the woes of our healthcare system (i.e., PPACA), is now becoming a turning point or a decision point where radical changes are being considered.

Who will remain? Who can afford to remain? Has this been a disguised attempt at creating a nationalized system? No one seems to know these answers, but clearly this has become time of significant decision making. The combination of a painful recession, deepening federal and state deficits, continuing increased health care costs, and a general dissatisfaction on several fronts have all led to serious and thoughtful discussion to re-look at how businesses spend their scarce and treasured monies. This is an interesting time facing all of us. Stay tuned for more discussion on this topic.

David Axene

David Axene started Axene Health Partners in 2003 after a successful career at Ernst & Young and Milliman & Robertson. He is an internationally recognized health consultant and is recognized as a strategist and thought leader in the insurance industry.

Life & Health

California AB52 – Is This A Good Bill Or A Bad Bill?

If and when California AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.|

David Axene

May 18, 2011

In the State of California, current law requires carriers and health care service contractors to notify when rate changes are about to happen. In the case of health insurance regulated by the Department of Insurance (i.e., DOI), there is a prohibition of any rate that results in a life-time loss ratio below 70%. New Federal law prohibits annual loss ratios below 80%. However, there is no current authority given to regulators to approve or reject rates. AB52 changes that by granting regulators the authority to reject and rate or rate change that is found to be excessive, inadequate, or unfairly discriminatory. The bill also requires specific information to be submitted for review by regulators. The bill would authorize the imposition of fees on health care service plans and health insurers for purposes of implementation, for deposit into newly created funds, subject to appropriation. The bill would impose civil penalties on a health care service plan or health insurer, and subject a health care service plan to discipline, for a violation of these provisions, as specified. The bill would establish proceedings for the review of any action taken under those provisions related to rate applications. AB52 clearly authorizes regulators to be more aggressive in their review of rates and rate increases. Current regulation seems to unnecessarily restrict what regulators can do. To the extent that health plans and carriers propose rates and rate increases that are unreasonable, this provides valuable enabling regulation. On the other hand if rates and rate increases are reasonable, AB52 provides a more aggressive and more visible forum for argument and discussion. The rate development process is complex and one that is not readily or thoroughly understood by the non-actuary. Although actuarial calculations are objective, many of the calculations are based upon actuarial assumptions which can be subjective. One person’s objective and reasonable assumption might be determined as unreasonable by someone else. Specifically the setting of underlying health care inflation, a key determinant of rate increases, is subject to major controversy. If the regulators inappropriately charge the carrier as being unreasonable in setting of their assumptions, AB52 introduces a new empowerment that could prove to be more damaging than helpful. Public opinion polls opposing large rate increases have nothing to do with the reality that large rate increases may be appropriate. No one will argue that they are higher than what might be wanted or hoped for. If the appropriately applied actuarial science shows that the rate levels and rate increases are reasonable, then the regulators need to accept the outcome. The underlying characteristics of the health care system may be to blame, not the carriers. If and when AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.

David Axene

Commercial Lines

Directors' & Officers' Liability

Directors' & Officers' (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today's difficult economic environment, D&O coverage should be an essential part of your insurance program.|

Cynthia Byers

May 17, 2011

Directors' & Officers' Liability Coverage — The Basics Directors' & Officers' (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today's difficult economic environment, D&O coverage should be an essential part of your insurance program. Typical D&O coverage provides for "any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties." In basic terms, D&O policies are designed to provide financial protection for your directors and officers while performing their duties as relates to their company. Directors' & Officers' Liability — The Risks Common activities and situations in which D&O coverage would come into play:

Conflicts of Interest — many executives serve on multiple boards and/or have investment portfolios that could potentially create conflict of interest situations. Non-profit board members, in particular, are more likely to be affiliated with a number of organizations within their communities, both professionally and personally, placing them at additional risk. Be certain your company adopts and enforces formal Conflict of Interest policies that all members must adhere to.
Information Disclosure — the SEC has specific requirements that all publicly traded firms must follow as to when and how information is released and broadcast to the public. In addition, your employees and other directors and officers have certain expectations regarding confidentiality. Breach of these regulations, rules or expectations may open your company up to both civil and criminal suits and judgments. Ensure your company has strict, written protocols regarding the dissemination of information, both privately and publicly.
Breach of Duty of Loyalty and Breach of Duty of Care — Your directors and officers can be held personally responsible for negligent investment decisions and/or alleged failure to operate in honesty and good faith, whether these actions be direct or indirect. Employees and shareholders alike expect a company's portfolio to perform well and a lackluster performance can oftentimes be traced back to the lack of corporate governance and poor management. Your firm's officers must create and adhere to strict written fiduciary care guidelines so as to avoid shareholder derivative actions.

Directors' & Officers' Liability — The Protection D&O policies vary greatly from insurer to insurer and are oftentimes designed for particular types of risks. The most common types of policies are those designed for non-profit and for-profit organizations and publicly traded and privately held companies. Some important components to consider when purchasing coverage are:

Entity Coverage — Provides direct protection for the firm itself. Many suits name individuals as well as the organization and Entity coverage ensures coverage for liability incurred by the organization.
Duty to Defend Provision — Requires the insurer to pay claim expenses even if the allegations are baseless, rather than providing reimbursement after such a claim is closed.
Defense Costs Insured Outside the Limit of Liability — An essential provision! Many plaintiffs seek to protect their own long-term interests and investments in a company by seeking to impose new corporate management practices rather than monetary damages. In addition, a class action suit can easily and quickly exhaust a policy's limit of liability with pure defense costs.
Outside Entity Coverage — Extends coverage to individuals serving on other boards as part of their job function.
Broadened Definition of An Insured — Expands coverage to include your employees, volunteers, trustees, committee members, family members and spouses.
Libel, Slander, Copyright and Trademark Infringements — Extends personal injury coverage for suits alleging damages related to publishing liability.
Severability Clause — Assures protection for innocent parties within the application process. The provision provides for knowledge of material or false statements given within the application as possessed by one insured will not be imputed to another insured.

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Cynthia Byers

Cynthia is an Account Executive with <a href="http://www.iwins.com">InterWest Insurance Services</a> and has over 13 years of formal insurance experience in managing hospitality and golf and country club risks.She is also a Certified Insurance Service Representative and is nearing the award of the coveted Certified Insurance Counselor designation.

Commercial Lines

Rethinking The Incentives Built Into The Workers’ Compensation System

Perhaps we can find a way to reward injured workers for doing the right thing. And perhaps we can use Utilization Review as a tool, and not as a crutch, to make smarter decisions about the treatments we approve. We can shortcut the unnecessary and costly Utilization Review and give injured workers the best possible chance to recover. Its the right thing to do. And its good business, as well.|

Judy Adlam

May 14, 2011

A few months ago, my husband began experiencing back pain. First it was nagging, then moderate, and within a couple of days it had reached an intolerable level. I was shocked to see this stoic man with a "mind over matter" approach to his health succumb to such pain. He was completely unable to function. And so the medical journey began. First came a prescription for opiates, and then came diagnostics (yes, in that order). Next came an epidural injection and then therapy and exercise. At this point, the story sounds much like what we experience in Workers’ Comp on a daily basis. The difference was ... this was not Workers’ Comp. My husband is a self-employed realtor. If he doesn’t work, there is no opportunity for pay. There would be no Temporary Disability, no Permanent Disability, no "add on" disabilities, no attorneys. The only motivation was to recover quickly enough to be able to work. We found the best specialists, in this case opting for a spine clinic that specializes in treating athletes. Diagnostic tests were completed within days, and the epidural was done within a week. No Utilization Review delays. No authorizations. No shopping for discounted diagnostics. No delays ... on anyone's part. It was truly the "sports medicine" approach — excellent up-front treatment, with everyone focused solely on achieving a positive outcome. He cooperated fully with his physician’s advice, doing all the exercises prescribed while at the same time steadfastly refusing to accept any limitations. And his only financial incentive was to be well enough to work. And therein lay my "light bulb" moment. It would be naïve, of course, to assume that motivations alone can make the difference. Granted, the underlying condition was amenable to quick results. But we all know that much of the time when we see protracted outcomes, it was not the underlying condition that caused the outcome. Many of the outcomes we see are the result of the "system" and those of us who make our living from the system. Do we do everything in our power to assist the injured worker in his recovery? Do we contribute to the problem unintentionally by incenting the wrong behaviors, or through our application of the very principles meant to protect the injured worker? In particular, do we use Utilization Review as a tool, or as a crutch? Utilization review allows us to curtail physical therapy at 24 visits. But is that the right thing to do? Likely some circumstances warrant the use of the "cap," while others do not. While we should use the tool to prevent abuse, shouldn't we also apply common sense? Research tells us that for people taking opiates, it is critical to keep moving and avoid retiring to the couch. It seems that until we are able to wean the worker off the opiates the therapy is likely actually therapeutic. What about the person who is improving? Should we curtail the therapy before the results are achieved? It is also fairly common practice to deny gym memberships through Utilization Review. But, for a motivated injured worker, isn’t the gym the most cost-effective way for an injured worker to build strength and restore function? In most cases, a month's gym dues are less costly than one or two physical therapy treatments. What about Functional Restoration? Wouldn't it make sense for us to consider functional restoration in cases that appear amenable? It can be the most effective tool in returning some motivated people to full function and to work! In addition to the lessons about utilization review, my husband's injury has heightened my awareness of the issue of cooperation and financial incentives. I believe it's appropriate to ask ourselves whether the system motivates cooperation or whether it actually motivates "claimant behavior." Does the person who cooperates fully with the medical rehabilitation plan often end up with a much smaller payday than the person who "works the system?" Is the system fraught with unintended financial consequences? What if we took a practical approach to Utilization Review, and also offered financial incentives to get well, rather than to sustain ongoing disability? What if we provided incentives to go to therapy, or go to the gym? What about Incentives to cooperate? What about incentives to participate in functional restoration of all different types? Without turning the system upside down, we can certainly turn our thinking 180 degrees. Perhaps we can find a way to reward injured workers for doing the right thing. And perhaps we can use Utilization Review as a tool, and not as a crutch, to make smarter decisions about the treatments we approve. We can shortcut the unnecessary and costly Utilization Review and give injured workers the best possible chance to recover. Its the right thing to do. And its good business, as well. Note: In case it occurs to anyone, I did get a HIPPA compliant release from my husband before sharing his story!

Judy Adlam

Judy Adlam is president and CEO of LWP Claims Solutions, an organization that leverages a culture of teamwork and excellence to consistently deliver results that are far superior to industry standards. She is a chartered property casualty underwriter (CPCU) and a senior claims law associate (AEI).

Commercial Lines

Pharmaceutical Liens Require Acquisition Disclosure

A recent denial of a Petition for Writ of Review by a pharmaceutical lien provider demonstrates the burden of disclosure of acquisition costs as a prerequisite for recovery in pharmaceutical lien proceedings.|

Rick Goldman

May 14, 2011

On January 4, 2011 the California Second Appellate District summarily denied a Petition for Writ of Review by a lien claimant, California Pharmacy Management, which challenged a determination by the Workers' Compensation Appeals Board that proof of acquisition costs of pharmaceuticals is a prerequisite to the recovery of their lien. The appropriate reimbursable amount of pharmaceutical lien claims, like other forms of medical treatment apart from physician services, is highly dependent on the date of service. The formulas for calculating appropriate reimbursable amounts are set forth in Labor Code §5307.1, but require reference to external sources such as the AWP, Medicare reimbursement schedules, and the Official Medical Fee Schedule (OMFS), and Medi-Cal reimbursement schedules. Beginning January 1, 2004 and continuing through the present time, the appropriate reimbursable amount for pharmaceuticals was set at 100% of the Medi-Cal payment system. Pharmaceuticals prescribed prior to 2004 are reimbursable at OMFS rates which are published in the OMFS. Repackaged Pharmaceuticals — an Exception to the Rule Under California Pharmacy Management v. WCAB (Mendoza), when evaluating repacked drugs only, the same valuation applies for all repacked drugs dispensed from 1/1/1996 through 2/28/07. In these repackaged drug cases, the lien claimant provider is entitled to reimbursement based on the lesser of the provider’s cost for the drugs or the 2003 OMFS formulary. The 2003 OMFS formulary is based on the following: For brand-name drugs, a provider is entitled to recover the average wholesale price of the drug +10% and a $4.00 dispensing fee. For generic drugs, the provider is entitled to the average wholesale price +40% and a $7.50 dispensing fee. However, when a generic pharmaceutical costs more than a brand-name pharmaceutical, the appropriate reimbursable amount is the brand-name equivalent. An appropriate and highly relevant revision of the Official Medical Fee Schedule adds the requirement that "documentation may be required" (emphasis added). Mendoza now stands for the proposition that the provider is entitled to reimbursement based upon the lesser of the actual cost of the drug paid by the provider or the 2003 OMFS formulary. This is based on the fact that the Board interpreted “usual charge” to equate to “the amount that he or she paid for the pharmaceuticals.” Providers of repackaged pharmaceuticals are highly resistant to disclosing their acquisition costs and this is the crux of the issue. Just as purchasing household goods in large quantities from discount warehouse retailers substantially reduces the cost of the individual per item retail value, pharmaceutical providers are being required to disclose as part of their evidence the actual acquisition cost of the pharmaceuticals purchased in bulk prior to repackaging. What this means for you When dealing with liens for pharmaceutical reimbursement for repackaged drugs, always demand documentation from the provider as to the actual cost to the provider for purchase of the prescribed drugs. The appropriate formula for reimbursement may then be calculated. For non-repackaged drugs that exist in the Medi-Cal database, pursuant to CCR 9789.40(a), the maximum reasonable fee “is 100% of the reimbursement prescribed in the relevant Medi-Cal payment system, including the Medi-Cal professional fee for dispensing.” Disclosure of the acquisition costs appear to be exempt from trade secret privacy claims by the requirement in the official medical fee schedule that appropriate documentation is required. Failure or refusal to disclose the acquisition costs should result in substantial reductions in the value of lien claims. In the recent case denied review by the Court of Appeal, the lien claimant was found to be entitled to reimbursement at their cost, with the issue of penalties and interest left unaddressed due to the failure of the provider to disclose their costs.

Rick Goldman

As a Certified Specialist in Workers’ Compensation Law, Rick Goldman has practiced exclusively in all aspects of defense of Workers’ Compensation claims with a vast experience in subrogation, retirement hearings and civil litigation involving the management side of employment and labor matters.

Commercial Lines

The Reasonable Accommodation Process Done Right

While an employer is not required to create a position for an injured worker who seeks accommodation, an employer must do an investigation of all available positions which the employee is qualified for and could fill.|

Rick Goldman

May 14, 2011

In the recent (unpublished) decision by the California Court of Appeal, Moore v. California Surety, the Court held that the employer’s handling of the interactive process and attempts to provide reasonable accommodation to an injured worker were wholly adequate, and that the employee’s case was properly dismissed as a matter of law. In Moore, the employee, who was working as a “bounty hunter”, suffered a back injury in the course and scope of his employment. He was declared TTD for some time. When he was released to return to work with significant restrictions the employer searched for an alternate, available position for the employee and offered the employee two “desk jobs.” The employee turned down both positions, stating that they were too far away from his home and that he was not interested in the jobs. The employer then stated they would try to find a position in their corporate office, but the employee stated he needed to make the same amount of money as he was making in the position he was employed when injured. The next time the employer tried to speak with the employee (via its counsel) it was referred to the employee’s newly hired attorney. Further conversation with that attorney revealed that plaintiff was interested in settlement of his purported claims, and no mention of continuing the interactive process was mentioned. Soon thereafter the employee filed suit against the employer claiming, among other things, that he was denied reasonable accommodation and terminated. The Court ruled that there was no evidence that the employer terminated the employee or that it failed to engage in the requisite interactive process. It heavily relied on the fact that several alternate positions were offered, but were turned down. The Court further asserted that it was the employee who discontinued the interactive process, choosing to sue the employer rather than request additional information about possible job openings. What This Means For You This is an example of the correct way to handle the interactive process. The employer timely respond to the employee’s initial need for reasonable accommodation, looked for alternate positions that the employee could fill and promptly offered them to the employee and continued with the interactive process until the employee cut it off. As difficult as the interactive process can be this shows that with adequate preparation and the assistance of counsel it can be done right. Practice Tip It is clear that the offer of alternate positions was a key element in this employer’s success. While an employer is not required to create a position for an injured worker who seeks accommodation, an employer must do an investigation of all available positions which the employee is qualified for and could fill. It is recommended that these investigations be well documented to show that an employer has made appropriate efforts to put the employee back to work. For more information regarding reasonable accommodation and employment law, please use the contact form below.

Rick Goldman

Life & Health

How To Make Healthcare Affordable

Dennis Kelly

May 10, 2011

Employers and employees need to be held accountable for not being realistic in their expectations of the healthcare system or in their obligation to participate in various responsibilities of it. Employers, employees and their families should cooperatively plan their finances to avoid heartbreaking disasters that can result from Life-Altering and Major Incidents. The monthly cost of a $2,000-deductible medical plan is sometimes 60% less than that of a comprehensive major medical plan, HMO or PPO. This reduced premium charge and higher deductible is well within the economic planning of most Americans or their employers. Hospitals and healthcare providers do not refuse medical care when the deductible is too high, only when there is no insurance coverage. To a hospital, $2,000 would be acceptable co-pay for a $50,000 treatment. For less than $500 per person, per year, most Americans can get adequate "Routine Care and Maintenance" services. Employer-sponsored plans are more than capable of picking up these costs. An individual may exceed $2,000 in annual medical bills just a couple of times in his or her entire life. Why pay premiums for this expense every 12 months? With a family deductible of $5,000, only Life-Altering and Major Incidents would reach this level consistently. The family could reserve funds for this one-time expense every several years with a line of credit against their retirement savings. Think of that! A family could allocate 60% of their current health insurance premiums toward retirement. This alone could add an additional $6,000 per year to each families' IRA and 401K contributions — money that is now by-passing the tax system as employer-paid insurance premiums. The result: no additional tax burden on the national budget. Part of this money could be earmarked to subsidize income-based clinics, or to provide doctors with interest-free loans to set up clinics in exchange for treating a certain percentage of indigent patients. Where to Get More Details I hope that the ideas and reforms outlined in this report are useful. If you would like more details on any of the points presented, or on our employee benefits program, I would honor the opportunity to share with you my vision for a healthcare system that is fair, affordable and reliable for all Americans. If you deem it appropriate, please contact me by completing the contact form below.

Dennis Kelly

Dennis Kelly is a businessman and pioneer in the development of health care finance strategies and health insurance programs. Transformation and transparency powered by a disciplined approach to the science of incentives, these relationship strategies motivate consumers to personally steward the cost and risk of health care.