Tag Archives: claims administrator

The ‘CURES’ for Work Comp Claims

When an injured worker submits a claim, it initiates processes aimed at returning the injured worker to gainful and sustainable work at the earliest possible time. In this journey, checkpoints and milestones are the best means to monitor progress. Checkpoints generally relate to visits with a medical practitioner where medical conditions are checked against expectations and, if necessary, treatments are adjusted. Milestones are associated with reaching a goal.

At the first medical appointment, the physician is required to prepare a report for the claims administrator based on a comprehensive medical examination of the injured person, including a review of the medical history. At the same time, the physician can access CURES (Controlled Substance Utilization Review and Evaluation System) to check whether the patient has received any scheduled controlled substances in the prior 12 months. Through this access, the physician can identify an at-risk patient and accordingly establish a treatment plan that considers both medications and adjunctive treatments. Also, if a patient is identified as an addict, he can be referred for rehabilitation and social re-integration. With subsequent medical appointments, the physician can again use CURES to check for any changes to the patient’s scheduled controlled substances usage since his last visit.

The importance of a physician using CURES to check a patient’s use of scheduled controlled substances cannot be overemphasized, especially in workers’ compensation, where a patient may not be forthcoming in sharing comorbidity information because of a lack of trust. Not knowing if a patient is currently taking scheduled controlled substances, the physician could jeopardize the patient by prescribing inappropriate medications.

In addition to the medical profession, CURES is available to Department of Justice investigators and law enforcement agencies to identify persons who visit a number of physicians to obtain supplies of scheduled controlled substances for abuse and diversion (i.e. physician shopping). Pharmacists and numerous regulatory boards from the medical board to the veterinary board also have access to CURES, providing them with the opportunity to monitor the medical profession for aberrant prescribing of scheduled controlled substances.

While states like Florida implemented a PDMP (prescription drug monitoring program) as late as 2011, California has monitored Schedule II controlled substances since 1940 and with the introduction of CURES in 1996 extended its monitoring to include Schedule III and IV controlled substances. Online access to CURES has also been available to the medical profession since 2009. Consequently, California has not experienced the abuse and diversion that Florida has with its “pill mills.”

Access to CURES by claims administrators or their representatives (i.e. third party payers) will not deliver improved quality of care or reduce prescription drug fraud and abuse and will add unnecessary costs through duplication of efforts already being performed by others using CURES. Close monitoring of checkpoints, however, by the claims administrator will provide benefits. Monitoring is accomplished through what is commonly referred to as “encounter data” and includes diagnoses, services performed and medications dispensed along with amounts charged and paid. Diagnoses, medical procedures and pharmaceuticals translated into coding systems such as ICD-10 (International Classification of Disease, 10th revision), HCPCS (HeathCare Common Procedure Coding System) and NDC (National Drug Code) provide excellent opportunities to automate the monitoring of encounter data.

Have claims administrators been able to implement technology solutions to automate the monitoring of encounter data and achieve outstanding results? Over the past two decades, many claims administrators have opted to outsource the management and control of critically important functions such as utilization review, medical bill review and pharmacy monitoring. Many of the outsource organizations only focus on that part of the encounter data that directly applies to their function — for example, pharmacy benefit managers only monitor the pharmacy. But using all the encounter data can promote a vibrant synergy very capable of achieving outstanding outcomes and results for the injured worker.

Losing control of encounter data eliminates the claims administrator’s ability to establish and monitor adherence to best evidence-based practices. When physicians have not adhered to their proposed treatment plans, opportunities to trigger yellow and red flags for investigation are lost.

Claims administrators who have automated the monitoring of their encounter data can assist states in reducing abuse and diversion by monitoring the quantities of medications being dispensed in a progressive or step therapy pain management plan, for example, and encouraging unused supplies to be returned to the physician at the next appointment. This can be achieved at no additional cost to the claims administrator and reduces the quantities of unused or unneeded prescription medications in circulation, which has been the focus of the DEA’s (U.S. Drug Enforcement Agency) “take back” initiatives. To date, the DEA has collected in excess of 1,400 tons of unused medications, which could otherwise have found their way into the illicit drug market.

For as long as the U.S. remains the biggest licit and illicit drug market in the world, claims administrators will remain challenged to deliver on their workers’ compensation claims handling obligations.

With a changing workforce, claims administrators will need to move more and more toward a biopsychosocial approach to managing medical conditions. They must provide quality care at the lowest possible cost, which can only be achieved through the fine analytics of consolidated encounter data.

Capturing encounter data through the claims administrator’s processes and fine analytics will consistently yield the best claims outcomes, from earlier return-to-work to lower costs associated with medical treatment through to automated overseeing of a claim, including provider performance monitoring and evaluation. All of these are the essence of superior workers’ compensation claims management.

Stop Being Clueless About Workers’ Comp

Despite the brouhaha over the ProPublica articles that say companies are unfairly denying treatment to injured workers to save on costs, I still regard the high cost of workers’ compensation (for those companies that do have high costs) mostly as a management problem.

The companies I see — which are the ones that have huge problems — are clueless about workers’ comp. They turn their claims and injury process over to their claims administrator or carrier, hardly participating in the process, then they blame the TPA or carrier when costs go up even though they have done nothing internally to manage safety or injuries.

These companies never budget for workers’ comp management, don’t staff the risk department (if there even is a department) properly. THAT would cost money, and our headcount would increase, they say. Often, if they do have staff, they do not allow the staff to attend conferences or seminars, join organizations or purchase resources. THAT would cost money, they say.

Sometimes, their brokers offer to help by providing consulting resources, but the companies with high workers’ comp costs do not see the merit in such an approach. I worked with a major entertainment facility, speaking with them once per week, on behalf of their broker, hoping to gain insight. I offered to consult with the staff because I am a consultant: Getting to the root of the problem, finding the cost drivers and fixing them is what I do. They did not need a consultant. Then, one day I said I could “help them develop their training program,” and they accepted instantly! I had used the wrong word — they needed “training help” not “consulting help.” Within months, the high cost of their workers compensation program went down to almost zero. Problem solved.

Several things employers can do, but usually don’t, are:

1. Contact employees within a week or two after the injury to do a survey of their medical and claims adjuster experience. Speak to them via phone, just as you would ask a good customer about her experience. Jennifer Christian, chief medical officer at Webility, contacts employees to find out if each injured worker felt that care was poor, fair, good or excellent. Often, poor treatment by medical providers and callous indifference by adjusters causes employees to become angry, seek counsel or even delay recovery because of lack of expertise during the initial treatment experience.

2. Have claims reviewed periodically by an independent auditor with a medical provider on the team. Only an MD is qualified to read the medical reports to determine whether treatment was appropriate and sufficient, whether alternate causation has been considered and whether aggressive and excellent (yes, perhaps more expensive) treatment has been provided. Make sure adjusters are not using utilization review (UR) to deny care. Audit, audit, audit. Care, care, care.

Do weekly roundtables with your third-party administrator (TPA) — for instance, every Friday discuss 10 claims, etc. Don’t wait until claims reach $25,000. Discuss them when they are small, BEFORE they get astronomical.

3. Retain an MD to be part of your claims team. This can be an on-site MD part-time or full-time who also speaks with treating physicians and injured employees. Adjusters and nurses do not know “medicalese.” Applause to those insurers who have MDs on staff BUT employers still need to have their own medical advisers on the team. Employers often forget we are talking about medical injuries, not simply “claims.”

4. Assess the key cost drivers of your workers’ compensation costs. Nine out of 10 times, employers misdiagnose the cause of their high workers’ compensation costs. In one case, the employer was ready to fire the insurance company because “they thought” there was too much nurse case management. Upon more detailed analysis, including an independent review by claims experts and an MD, we found the claims were handled well 98% of the time. The cause of the problem was misidentified.

The REAL problem was a lack of a post-injury response — employees and supervisors did not have steps to follow within the first 24 hours after the injury. We then held 19 training sessions over three weeks to improve best practices related to rapid medical care and RTW/SAW (return to work/stay at work) in this mega-entertainment theme park. The workers’ compensation costs dropped 20% in a year-over-year comparison of total incurred losses with the previous 12-month period.

5. There are no tools to guide employees and supervisors. In the above case, we provided: employee brochure, physician brochure, wallet cards in English/Spanish for supervisors and employees, and other tools.

6. And, most importantly, provide the best quality medical care available. Yes, even if it’s more expensive. Pennywise is pound foolish. Get the best, not the cheapest. Pay the doctor more to spend more time with your injured employees, not less time.

7. Establish bundled pre-approval of care in account instructions so UR is not necessary — e.g., “All PTP (primary treating physician) treatments and as many as five visits to specialists are pre-authorized by insured. All testing requisitioned by PTP and specialists including physical therapy (PT) and MRIs is to be approved; do NOT submit to UR. If you strongly believe treatment or testing is unwarranted, contact the insured’s medical director before denying request.”

If you don’t manage and monitor it, the process (any process, not only workers’ compensation) will not work well.

It’s time for employers to become involved in their own business! The first step is assessing the problem at your company, not the industry in general or another company. Get that mirror out and have a look. You are most likely looking at the problem.

A Key Ruling on Workers’ Comp in California—and What It Means

The workers' compensation community watched anxiously for months as the U.S. District Court for the Central District of California considered a constitutional challenge to the lien activation fee — an important component of the 2012 reforms in Senate Bill 863. In the case (Angelotti Chiropractic, et al. v. Christine Baker, et al.), Judge George Wu ruled on Nov. 12 that the fee is indeed unconstitutional based on the Equal Protection provisions of the U.S. Constitution. His reasoning was that there was no rational basis for exempting large institutional lien holders (health care plans, union trusts, etc.) from the activation fee and that all lien claimants should either be in or out when it comes to filing fees.

The injunction against enforcing the lien activation fee took effect on Nov. 19. In anticipation, the Division of Workers’ Compensation notified the community Nov. 15 that it would no longer be requiring the fee be paid for liens filed prior to Jan. 1, 2013.

It is important to note that there are two filing fees enacted in SB 863. The one that applies to liens filed prior to Jan. 1, 2013, is the lien activation fee and is the subject of the federal lawsuit. The other is the lien filing fee, which is not affected by this litigation. In addition, statutory and regulatory changes made in SB 863 and the regulations adopted by the Division of Workers’ Compensation eliminate liens for most service providers that are subject to a fee schedule for dates of service on and after Jan. 1, 2013.

That is not to say that the injunction against enforcement of the activation fee is inconsequential, for it most certainly is not. In the last two calendar quarters of 2012 alone, more than 800,000 liens were filed. Of those, almost two-thirds are in Los Angeles County. Most of these have not moved through the system, undoubtedly because some lien claimants were waiting to see whether the activation fee was going to be upheld. It is assumed that many of these liens were never going to be filed because of the activation fee. As such, many liens would have expired by operation of law on Jan. 1, 2014. That, too, is now part of the unknown that comes from the Court’s decision.

Obviously, the Department of Industrial Relations and claims administrators are not happy with this ruling. To a certain extent, neither are the plaintiffs in the case, who saw two of their three claims summarily dismissed by the court. Whether these issue now go up to the Ninth Circuit U.S. Court of Appeals remains to be seen. Plaintiffs, and indeed all lien claimants regardless of whether they were parties, have secured the relief they sought – enjoining the activation fee—but that could be put at risk if there is an appeal. Conversely, while the Department of Industrial Relations disagrees with the finding that the activation fee is unconstitutional, the fact that Judge Wu dismissed the claim that the activation fee constituting a “taking” of private property is a big win for proponents of SB 863 – for the taking argument has much broader implications than does the Equal Protection argument that Judge Wu found persuasive.

Because the Jan. 1, 2014, dismissal by operation of law date on old liens has been enjoined, it is not automatic that there will be a flood of activity on liens filed before Jan. 1, 2013, at the Appeals Board before year end. It is a fair observation, however, that liens many in the community thought would be extinguished by operation law won’t be. Whether those liens are going to be the subject of Appeals Board hearings and ultimately paid, however, remains uncertain. And uncertainty is a chronic symptom of our oft-ill but rarely cured workers’ compensation system.

And in case no one noticed, on Nov. 14 a new federal lawsuit was filed challenging both the lien activation fee and the lien filing fee. The plaintiff, who is seeking class action certification, is also demanding disgorgement of fees paid and reinstatement of any lien dismissed for failure to pay the appropriate fee. That case is Kancilia v. Brown, et al. and was filed in a different federal district court than Angelotti.

The transition from one set of rules to another on the heels of major legislative changes is never easy, regardless of the subject matter. In time, because of the other changes wrought by SB 863, the disruption caused by these suits will work its way through the system. Relief from the costs associated with the lien process will be delayed, and the income the fees provide to the Division of Workers’ Compensation will be less than anticipated, but ultimately the lien problem will be solved – just later than most had hoped.

The Real Challenge for Reforming Workers’ Comp

Sifting through the claims and complaints of those involved in California’s complex workers’ compensation system could leave both the casual observer and the seasoned veteran wondering when, if ever, this multibillion-dollar program will ever get properly aligned. It would be fairly easy to say, “Not during our lifetime.” But that would be too cynical even when discussing a system that for the past several decades could easily invoke cynicism.

Every participant in workers’ compensation has two faces. Some employers provide benefits, have a compliant return to work program and enforce a culture of safety at the workplace, while other employers view employees as a necessary evil. These latter employers view adherence with the legion of local, state, and federal laws and regulations regarding the workplace as burdens that need only be acknowledged if employers are required to do so, generally in the form of a legal proceeding against them.

We have seen the abuses in the medical system from unnecessary surgeries, overuse of Schedule II medications, and downright fraud in billing insurers and other payers, and yet if there is one indispensable party in the workers’ compensation system beyond labor and management it is medical providers. As recent events have demonstrated, we have yet to figure out how to empower the noble practitioners of the healing arts while keeping the venal away from injured workers.

Claims administrators vary in expertise, motivation, and professionalism, as do the various service providers and the tactics they employ to provide services and collect fees. “Insurers” have borne an unfair brunt of criticism largely because it is an easier talking point to cast such a broad brush than to single out any one bad actor or group of them. Without the ability to transfer risk, however, the workers’ compensation system could never be sustainable.

Each system participant has a particular grudge against the others. We allow policyholders to sue insurers for claims handling practices, and, in far narrower circumstances, an injured worker may pierce exclusive remedy and sue a claims administrator when conduct is so egregious that it goes beyond the grand bargain that is at the core of workers’ compensation.  Periodically, claims administrators and service providers resort to the civil courts with a variety of complaints over unfair business practices.  And, of course, the Workers’ Compensation Appeals Board is the forum where all participants flock with even the slightest provocation.

The appellate courts weigh in on a wide range of benefit delivery challenges, as well. Their decisions in Guzman and Ogilvie were two of the main incidents inciting changes in permanent disability benefit determinations codified in Senate Bill 863 (De León). Even today, we are litigating issues over the apportionment changes brought about in Senate Bill 899 (Poochigian) enacted almost a decade ago. Litigation in federal court is rare, although not unprecedented, as the current challenge to the lien activation fee in SB 863 demonstrates.   State-imposed fee schedules have periodically worked their way into federal court on the theory that reimbursement rates are so low that they are confiscatory – a challenge unlikely in California while the fee schedule is not mandatory, but still possible given the breadth of authority that the Division of Workers’ Compensation has been given to develop fee schedules for virtually all service providers.

“Well, that’s just California workers’ comp.”  That may be the case, but such resignation does tend to take the focus away from core problems that magnify the multiple personality disorder that plagues this system. As we work our way through the implementation of SB 863, we must also recognize that not every solution to the high cost of comp, both in dollar and human terms, can be put down on paper in Sacramento or Oakland.

While compliance is part of best practices, it does not define them exclusively. To be sure, the new costs associated with complying with SB 863 are consequential. As is inevitably the case when new comprehensive workers’ compensation laws are enacted, there will be considerable friction moving from one set of rules to another. The threat of litigation will hang over the changes made in this legislation just as it has in prior iterations of reform. It will take years to sort this all out.

In the meantime, there is much work to be done to improve the system even if it is not in  reaction to a new law or regulation or judicial decision. As has been the case all too often over the past two decades, laws are driven by anecdote. The adage “bad facts make bad law” applies equally to the legislative, regulatory, and judicial processes. Navigating California’s complex system is never easy. If claims administrators expect the process by which laws are made and interpreted to provide the necessary clarity and simplicity we crave to do our jobs, then we are all sadly mistaken.

Yet, when we commit to best practices both as employers and claims professionals, we can create better outcomes than Sacramento could ever hope to achieve. The challenge, therefore, is not what legislators or regulators or justices will do for us, but rather what will we do for ourselves?

Controlling Workers' Compensation Claim Costs: 3 Things Every Self-Insured Should Know

The observed increase in workers' compensation claim liabilities and ultimate losses is partially attributable to external factors — those outside the control of risk management, such as medical inflation. Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? explores such external factors.

This article also explores the topic of increasing workers' compensation claim costs, with a focus on how claims practices can influence claims costs and contribute to the increasing liabilities, and discusses what self-insureds can do to better manage practices in an effort to control costs.

The management of a workers' compensation claim incorporates several key areas, all of which interact and combine to influence the claim's outcome (e.g., initial handling, investigation, reserving, medical management, etc.). It can be challenging to understand whether a workers' compensation claim is well-managed and whether optimal outcomes are being achieved. This is particularly true for self-insured entities, which often delegate claims management responsibilities to an outside third-party claims administrator (TPA).

The result of using TPAs for claims administration is that the self-insured entity itself maintains little if any expertise in the area of sound claims management practices. Moreover, the TPA will often delegate certain functions to other vendors such as case management and medical and legal bill review, further removing the oversight of these services from the self-insured's reach. Finally, many self-insured/TPA contracts focus on the quick resolution of a large volume of smaller dollar claims, with little consideration for the efforts and resources needed to resolve large claims. Therefore, the management of larger claims may not be well understood or outlined in these arrangements.

Improving three often misunderstood or underestimated claims handling areas could result in a significant improvement in claims outcomes and have a material impact on liabilities:

  • Initial activities
  • Information and data collection
  • Change in case reserving practices

Basic knowledge of these essential claims handling activities will enable the self-insured to effectively work with its TPA to avoid common pitfalls and to proactively manage the TPA. This, in turn, will mitigate or avoid unnecessary cost increases.

Initial Activities
Activities undertaken by the claims handler immediately after a claim is reported are often thought of as administrative tasks — no more than an intake exercise whereby the handler runs through a checklist of scripted questions. These activities include assessing immediate medical management needs, making three-point contact (i.e., contact with the employer, the injured worker, and the medical provider), assigning to the appropriate adjuster, taking statements, and gathering documents (e.g., medical authorizations, photos, police reports, and wage statements).

And in truth, activities that occur in the early stages of a claim may not be terribly significant for the large number of reported workers' compensation claims that resolve quickly. However, for that small percentage of claims upon which the majority of the costs are ultimately expended, proper claims management from the outset is crucial to achieving optimal claims outcomes.

For example, a claimant who has had previous injuries or prior surgeries, or who otherwise presents with certain characteristics such as chronic pain, is more likely to require medical management from the outset to ensure optimal medical outcomes, which in turn reduces costs. For a small number of high-severity claims, if the medical aspects are not understood and well controlled at the outset, the claimant often does not improve and the claim can adversely develop into a larger-than-anticipated and larger-than-necessary claim — a lifetime pain management claim perhaps involving multiple surgeries, and costing hundreds of thousands or even millions of dollars without optimal medical outcome or endpoint for the claimant.

Thus, it is important upon receipt of a claim to investigate all prior injuries, surgeries, prescriptions, and comorbidities (i.e., health issues that are not work-related but nonetheless could impact the treatment of the injury). In many cases, the best practice of making three-point contact has devolved in practice into two-point contact (the employer and the injured worker) and in some cases even one-point contact (the employer). This can leave basic medical questions unanswered for weeks or months. For a small percentage of claims that have the potential for developing into the highest-severity losses, these delays could be critical.

Another key initial activity is adjuster assignment. Assignment to the appropriate adjuster can be particularly important for some claims — for example, those where the claimant reports injuries to nonspecific or multiple body parts, such as “neck, shoulder, arm.” These claims present an element of subjectivity, uncertainty, and potential complexity. It is important that the adjuster thoroughly investigate precisely how the injury occurred and communicate with the medical providers about the types of injuries that can result from that activity.

This means that the adjuster needs to have the proper background and expertise to ask the right questions. If injuries or body parts are reported that are not medically connected to the work-related injury, the adjuster may only have a short period of time within which to deny those unrelated claims. An inexperienced adjuster may not identify or attempt the valid denial, in which case that injury and all subsequent treatment may be deemed accepted for the duration (perhaps for the life of the claimant), with no further opportunity to deny. In a large number of cases, this missed opportunity will not have a significant impact on the outcome, but for that small population of high-severity claims, such an error will be costly.

As a final example, the initial investigation is important to assess the claimant's ability or motivation to return to work based on one or more subtle aspects of the claim, such as educational level, child support status, disability status of the claimant's spouse, ability of the employer to accommodate the claimant's limitations, proximity of claimant's home to job opportunities, or other factors.

It is important for the handler at the outset of the claim to immediately contact the employer, the injured claimant, witnesses, and medical providers to ask pertinent questions. Equally important is the need for the handler to listen carefully to the answers and follow up on unusual or inconsistent information. Inexperienced claim handlers often appear to be following a list of predetermined questions and may hesitate to go “off script.” Many times, the claims that adversely develop are those that, in retrospect, could have been controlled had certain information been collected and had the investigation been thoroughly completed and thoughtfully assessed early in the life of the claim.

Information And Data Collection
Increasing claim costs are also associated with the inability to easily locate and evaluate the information gathered on the file. A claim may be assigned to an adjuster with the appropriate level of expertise, and that adjuster may undertake a prompt and thorough investigation. However, the pertinent information emanating from that investigation is not captured in discrete data fields in one location in the file system. Rather, that information is buried throughout the “notes” section of the claim system — along with numerous immaterial or administrative entries. This impedes the ability of the self-insured to easily identify claims that have the potential to be large and work with the TPA to effectively control costs.

For example, a large volume of the “notes” section of a claim file may include entries such as the date of a reserve review, an adjuster's failed attempt to contact a party, the payment of a bill, the date a processing decision was made, the scanning of a document into the file, or the receipt of a police report with no substantive commentary. Even entries related to the status of a claim — one that on its face would appear to be highly relevant and current — are often simply “copy/pasted” from prior status entries.

Thus, including in the claim notes pertinent information vital to making prompt and reasonable strategic decisions can lead to inefficiencies and suboptimal outcomes. The amount of stale, outdated, repetitive, and sometimes misleading information makes it exceedingly difficult to identify and assess the pertinent facts, issues, and activities in the file, and impedes the adjuster's (and supervisor's) ability to make informed decisions. In many claim operations, reviewing the file is so time-consuming and difficult that the supervisor is only able to randomly select a small sample to audit at regular intervals. If that supervisor does not by chance select the “right” files, important issues might not be identified and key strategic opportunities might be missed.

The problem is compounded when information is entered incorrectly. Common errors can lead to costly repercussions. For example, assume that the medical records all clearly identify a right shoulder injury. If the handler inadvertently references the “left shoulder” injury in the claim notes, all subsequent actions might be based upon that. A supervisor or newly assigned adjuster may not have the time, or may believe it is unnecessary, to confirm that information by checking the original medical records. Body parts and treatments could be implicitly accepted and additional costs expended for injuries that are not work-related.

Similar types of errors can be made with wage information or rate calculations, and can go unnoticed for long periods of time, resulting in costlier claims. Finally, as more and more claims departments are outsourcing medical bill review functions to third-party vendors, some of that key medical information is not captured in the claim system at all, which can also distort the true picture of the potential exposure.

Thus, it is important that the self-insured verify that the TPA, or other claims-handling entity, develops a system of meaningful data capture, whereby key pieces of information are systematically downloaded or manually entered into consistent discrete fields in as few screens as possible. Many claims systems already have these capabilities, but handlers are not required to enter the data and the fields remain blank. Such a data capture would allow representatives at the self-insured entity the ability to obtain a current and comprehensive snapshot of the development on the claim. Discrete data fields also ensure consistency, facilitate fact-checking, and support the creation of meaningful metrics and management information reports. Self-insureds should ensure that they have full access to the claims system and that they understand all the features of that system.

Change In Case Reserving Practices
The onset of conservative case reserving practices can lead to unnecessary increases in ultimate losses. This may not be intuitive. Many people may think that inadequate case reserves lead to increasing ultimate losses, because over time the case reserve (which was initially set “too low”) needs to increase to cover actual payments. While this is true, the ultimate losses may not be affected by the development of inadequate case reserves, because the actuary may have taken the case reserve practices into account in estimating the actuarial reserve.

Thus, even if the case reserves were “too low,” the actuarially estimated additional reserves would have compensated, resulting in a total reserve (case plus actuarial), or “ultimate,” of “just right.” As case reserves increase, actuarial reserves may decrease (all else being equal), and the ultimate will not change. In that way, inadequate case reserves do not necessarily result in increasing ultimate losses.

An important aside: We must remember that inadequate case reserves are not necessarily the result of poor claims handling or intentionally suppressing case reserves. When we say that case reserves are inadequate, we mean that, despite best efforts to set a case reserve that reflects the ultimate value of the claim at any given point in time, there are a few claims that will develop adversely in unanticipated ways (i.e., in ways that could not be foreseen by the claims handler when the prior case reserve was established). That is in part what the actuarial reserve is intended to estimate — the unanticipated development — and is outside the purview of the claims handler.

Changing case reserving practices by making them “higher” or “more conservative,” however, can result in increasing ultimate losses. Consider, hypothetically, a TPA that decides to institute a new practice of establishing a case reserve reflecting the worst case scenario, or adding an arbitrary amount (e.g., 25%) on top of the best estimate of case reserves. That change could result in higher ultimate losses, for two reasons:

  • First, if the actuary is unaware of this change, it will not be incorporated into the actuarial estimates. This could result in higher actuarial estimates. When added to the already increased case reserves, the ultimate losses increase substantially.
  • Second, raising case reserves on a claim can lead to overpayments by the adjuster, a phenomenon commonly referred to as “leakage.” In this case, the additional case reserves are believed, either explicitly or subconsciously, to be available to make payments. Efforts to reduce costs and manage the claim to its optimal result may be tempered by the knowledge that there is “extra” money with which to negotiate. This change in case reserving practices can lead to overpayments and rising claims costs.

In this article, we explored a concept mentioned but not developed in Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? Specifically, we discussed three basic claims practices that could result in increasing workers' compensation costs. Understanding and recognizing the importance of these practices will enable the self-insured to effectively manage the TPA to control increasing costs.