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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.

Claims

Reducing Claim Costs By Implementing a First Aid Program

Employers can reduce their insurance costs by instituting strong safety measures and preventing losses from occurring. However, in the event of a small claim, employers can minimize their costs implementing a first aid program and reducing their experience modification factors.|

Jennifer Weathersbee

May 5, 2011

The Worker’s Compensation market in California is hardening. Rates have been increasing on an incremental basis and are expected to continue to rise as the cost of medical care increases. Employers can reduce their insurance costs by instituting strong safety measures and preventing losses from occurring. However, in the event of a small claim, employers can minimize their costs by implementing a first aid program and reducing their experience modification factors. Under the new experience rating formula instituted by the Workers' Compensation Insurance Rating Bureau (WCIRB) as of January 1, 2010, all claims under $7001 now go into the modification on a dollar-for-dollar basis, which means that these claims now impact employers more heavily than they have in the past. Claims under $2001 have always gone into the formula at full value and when we talk about instituting a first aid program, we are focusing on these small claims. The medical costs for any claim that meets the legal criteria for 'first aid' can be paid by the employer, rather than by the insurance company. Section 5401 of the California Labor Code defines first aid as:

"any one-time treatment, and any follow up visit for the purpose of observation of minor scratches, cuts, burns and splinters, or other minor industrial injuries, which do not ordinarily require medical care. This one-time treatment, and follow-up for the purpose of observation, is considered first aid even though provided by a physician or registered professional personnel."

The distinction between first aid and a "medical claim" that MUST be paid by the carrier is based on the type of treatment that an employee receives, not whether or not a physician was seen. It is generally accepted in California that the OSHA guides for recordable injuries can help define what claims can be considered "first aid." This information can be found on the Cal/OSHA website at: http://www.dir.ca.gov/dosh/dosh1.html. If a claim meets the definition of "first aid" and there is no prescription medication and no lost time or work restrictions beyond the date of the injury, the employer may pay the claim costs directly; however, it is still recommended that these claims be reported to the insurance company even if the employer pays the medical costs. When a physician is involved in treatment of a first aid claim, the California Department of Insurance, in conjunction with the Department of Industrial Relations and the Division of Workers' Compensation reminds employers and physicians that they must comply with Labor Code Section 6409(a) which states that a physician who treats a first aid injury must complete and submit a Doctor's First Report of Injury or Illness (Form 5021) with the insurance carrier within five (5) calendar days. With this requirement a claim will be reported by the physician or the employer via the Doctor's First Report of Injury or Illness so it is good practice for employers to be proactive in reporting all claims to their carrier, especially since claims can escalate at a later date. Many employers are concerned about the impact of frequency on their insurance rates if they report all of their claims, even first aid claims, but a good broker will present a strong case to the carrier at renewal that there were no costs to the carrier associated with those claims (because the employer has a good first aid program) and further that the employer is an even better underwriting risk because they report all losses to the carrier so there are no surprises down the road. Remember that all claims under $2001 are grouped together and submitted to the WCIRB by the carrier at the unit statistical filing date. The claims go into the experience modification calculation on a dollar-for-dollar basis and are factored into the experience modification for the next three years. If there are no costs paid by the insurance company for some or all of these claims, an employer can dramatically reduce the modification points associated with these small losses. As one mod point can equate to one percent of premium, there is a strong incentive for employers to reduce their experience modification by paying first aid claims whenever legally permissible. In an ideal situation, the carrier will review the claim to ensure that it meets the first aid criteria and can forward any bills to the employer for payment upon request. Unfortunately, many carriers do not have the time and resources to do this on a consistent basis so it becomes incumbent on employers to take a proactive approach to working with their medical clinic and carrier to implement a successful first aid program. Although it takes some time and coordination, the financial reward for implementing a First Aid Program is worth the effort. You can start by discussing the issue with your insurance carrier and your designated medical clinic. Your broker can also be a resource to facilitate communication, provide education and help to ensure the success of your first aid program.

Jennifer Weathersbee

With a strong belief that claims can be successfully managed using a proactive and comprehensive problem-solving approach, Jennifer Weathersbee oversees the Claim Services Department at InterWest Insurance Services, which provides claims consultation services for key clients, including those in alternative risk programs.

Life & Health

Life Insurance 101: America’s Most Underused Risk Management Tool

Scott Hinkle

May 3, 2011

Almost four out of five U.S. households own some form of life insurance, meaning that to some degree, there is national consensus regarding the importance and usefulness of life insurance. However, the average household only owns enough coverage to replace 3.6 years of income, creating a significant gap between the amount of coverage families have versus the amount of coverage they actually need. Forty-four percent of U.S. households would agree that they do not have sufficient coverage to meet their potential needs. The question then arises of why so many Americans are underinsured.One of the primary reasons why we suspect that many Americans are not sufficiently covered is that they are not sure about what type of coverage they need or how much. They have concerns about affordability as well, especially in light of the nation’s current economic struggles. Most families are tightening their budgets in an effort to weather the storm, and unfortunately, life insurance is often one of the first expenses to go. With these issues in mind, we have come up with some basic answers to some of the most common questions that develop as families consider the purchase of life insurance. Why do I need life insurance? Traditionally, life insurance has been viewed as a way to cover burial costs and replace income. However, there are many additional ways that life insurance can serve as a valuable investment and risk management tool. For example, it can be used to pay estate taxes, pay off a mortgage, equalize an estate among multiple heirs, diversify investment and retirement plans, donate a substantial gift to charity, or purchase a partner’s share of a business if he or she passes away. If you do your homework, you will likely be surprised at the variety of life insurance plans that exist as well as their creative uses and how they can benefit you and your family when you pass away and while you are still alive. What type of coverage should I purchase? There are two main types of life insurance. Term life is temporary insurance that is offered for a specified term only; usually 10 years, 15 years, 20 years, or 30 years. Policies expire at the end of the term, much like health insurance, car insurance, or property insurance. In most cases, term policies can be converted to permanent coverage for a period specified in the life insurance contract. Permanent life is just that — it’s permanent! Such policies can last for life if designed and monitored properly. Universal Life, Indexed Universal Life, Whole Life, and Variable Life products would all fall into the category of permanent life. They accumulate a cash value or internal cash reserve that can be used for a variety purposes. The cash value grows based on an interest rate determined by the insurance carrier. Permanent insurance can be flexible and transferable via a transaction called a 1035 Exchange, which is much like a 1031 Exchange in real estate. Typically, permanent life has a variety of uses beyond providing a tax-free death benefit, such as supplying a retirement income, serving as a cash reserve while you’re alive, offering long term care components, and giving you the opportunity to tap into the death benefit while you are alive to pay medical expenses if you become terminally ill. Can I afford life insurance and how much do I need? The cost of life insurance depends on your age, your health, the type of policy you’re applying for and how the policy is designed. Typically, permanent insurance, with its flexibility and multitude of uses, is much more expensive than term insurance. As you get older and/or your health diminishes, insurance carriers identify you as being a higher risk and therefore charge you higher premiums. It is best to lock in coverage while you are young and in good health. How much coverage you need can be calculated based on your income, your projected future income, your net worth, and your age. In the case of key-person business insurance, the potential loss of profitability that would result from you passing would be a key component in the calculation. Insurance carriers consider each of these factors when determining how much coverage you can qualify for. I’ve had some health issues. Will I even qualify for life insurance? Underwriting is the process during which a life insurance company reviews the prospective insured’s medical records and life insurance physical exam to determine which underwriting class should be assigned to the insured. For example, ratings span from Preferred Plus, which means that the insured is as healthy as possible for someone that age, to Substandard, which means that the insured has below average health for someone in that age category. The more health issues you have, the more expensive your coverage will be. One very important fact to consider, however, is that underwriting is subjective. One carrier’s assessment of your health can be completely different from another carrier’s assessment. If you have health issues, there is value in shopping around because you never know which carrier might give you just the offer you were looking for. What if I already have life insurance? Active life insurance policies should be reviewed at a minimum of every two to three years. Changes in interest rates, the market, mortality tables, and product efficiency make it critical for policy owners to have their contracts evaluated periodically to ensure that their policies are still competitive. If you have a life insurance policy currently, it should be your goal to determine the following as part of your periodic reviews: Am I paying the lowest possible premium for the amount of coverage I have? How strong and stable is my insurance carrier? Is my current death benefit amount still sufficient to meet my needs? Is my policy guaranteed? Am I taking advantage of all of the living benefits my policy has to offer? Should my policy be owned by a trust? As your life changes, your policy should change to meet your evolving needs.

Scott Hinkle

Scott Hinkle is a Shareholder of Grant, Hinkle & Jacobs, Inc., located in Solana Beach, California. Mr. Hinkle has over fifteen years of experience in the financial services arena. He specializes in the development and implementation of advanced business succession and estate planning strategies for business owners and high net worth individuals.