Tag Archives: indemnity

The Question That Insurtech Is Avoiding

There’s a lot of it about. Insurtech and technology, that is. New ways of doing stuff. Breaking traditional distribution models and deconstructing established supply chains. Who could not be excited?

But there’s another side to this coin, and that’s the issue of established practice. Insurance isn’t a new gig, like telematics, but something that’s been around for three centuries. Some might argue even longer, as there are records of even the ancient Egyptians sharing and aggregating risk. Protecting the few by collaborating with the many.

Over the centuries, insurance hasn’t been an easy ride. What do we mean by appropriate compensation, or, in insurance parlance, by the principle of indemnity? How to deal with those at fault, or, in insurance language, the matter of subrogation.

See also: Where Will Unicorn of Insurtech Appear?

But in the old way of doing things, we all knew where we stood. Insurance contracts had evolved over decades, and where there had been differences in interpretation the legal system had sorted things out for us. There was a sort of certainty and framework to our business and a more certain relationship, even if the topic of trust remains contentious — the level of trust between policyholders and carriers has always been low, despite a degree of contractual certainty.

Now, here we are in a Brave New World of insurance. Things will never be the same because of technology, the experts say. Some say insurtech is mainly just about new distribution channels, customer management and operational efficiency, but that leaves the rest of the insurance proposition.

It feels like we’re throwing a ball onto a sports field and asking the two competing teams to sort out the rules for themselves.

Will there be winners and losers? Of course. The winners will be the legal profession, which will spend years, perhaps, discussing where the liability for death rests as a result of a driverless vehicle incident. Was it the manufacturer – as a product liability issue? Was it the occupant of the vehicle – extending the concept of occupiers liability? Was it the system administrator, which ran the system and which surely must be involved somehow? Maybe even the victims themselves: “Don’t you know you need to be more careful, with all these unmanned gadgets all around us?’”

We can’t all just contract out of responsibility. The proverbial buck must rest somewhere.

Think forward a few decades. Let’s accept that the insurance industry will have been re-engineered and reimagined, with robots, chatbots and wobots. Let’s assume that physical risk is calculated in a more granular way and that underwriting risk management is absolutely aligned to the risk appetite of a carrier. And we have somehow managed to be proactive, to have better responsiveness to climatic change and everything else. And ubiquitous devices provide us with bottomless barrels of information, from which our systems draw insight through advanced analytics.

See also: 3-Step Approach to Big Data Analytics

Someone, somewhere, will need to address the question — what does all this mean contractually to the insurance industry? After, all isn’t insurance just no more than a contract, between two parties? Or was that concept somehow lost, somewhere inside the Innovation Hub, or among the bits and bytes of technology?

Isn’t it time that someone slowed the momentum of change and had a real hard think about the legal implications for insurance?

Insurtech Is Ignoring 2/3 of Opportunity

Fifty-six cents of every premium dollar is indemnity (loss costs). A further 12 cents is needed to assess, value and pay those losses. Given that two-thirds of the insurance industry economics are tied up in losses, it would be logical that much of the innovation we are now witnessing should focus on driving down loss costs and loss adjustment expense — as opposed to the apparent insurtech focus on distribution (and, to a lesser extent, underwriting).

This is beginning to happen.

What do you have to believe for loss costs and adjustment expenses to be a prime area of innovation and disruption? You have to believe that the process (and, thus, the costs) to assess, value and pay losses is inefficient. You have to believe that you can eliminate the portion of loss costs associated with fraud (by some estimates, as much as 20%). You have to believe that there is a correct amount for a loss or injury that is lower than the outcomes achieved today, particularly once a legal process is started. You have to believe that economic improvements can happen even as customer experience improves. And you have to believe that loss costs and adjustment expenses can decline in a world in which sensor technology starts to dramatically reduce frequency of losses and manufacturers embed insurance and maintenance into their “smart” products.

See also: ‘Digital’ Needs a Personal Touch  

Having spent years as an operating executive in the industry, I happen to believe all of the above, and I am excited by the claims innovation that is just now becoming visible and pulling all of the potential levers.

We are seeing an impact on nearly all aspect of the claims resolution value chain. Take a low-complexity property loss. Technology such as webchat, video calls, online claims reporting and customer picture upload are all changing the customer experience. While the technologies aren’t having a huge impact on loss adjustment or loss costs, they are having profound impact on how claims are subsequently processed and handled.

One such example, as many have heard, is how Lemonade uses its claims bot for intake, triage and then claims handling for renters insurance. Lemonade’s average claim is a self-reported roughly $1,200 (low value), and only 27% are handled in the moment via a bot as opposed to being passed to a human for subsequent assessment. Still, Lemonade certainly provides a window to the future. Lemonade is clearly attacking the loss-adjustment expense for those claims where it believes an actual loss has occurred and for which it can quickly determine the replacement value.

More broadly, Lemonade is a window into how many are starting to use AI, machine learning and advanced analytics in claims in the First Notice of Loss (FNOL)/triage process — determining complexity, assessing fraud, determining potential for subrogation and guiding the customer to the most efficient and effective treatment.

While Lemonade is the example many talk about, AI companies such as infinilytics and Carpe Data are delivering solutions focused specifically on identifying valid claims that can be expedited and on identifying those claims that are more questionable and require a different type of treatment. These types of solutions are beginning to deliver improvement in both property and casualty. New data service providers — such as Understory, which provides single-location precision weather reports — can be used to identify a potential claim before even being notified, which can reduce loss costs through early intervention or provide reference data for potentially fraudulent claims.

Equally interesting is the amount of innovation and development appearing in the core loss-adjusting process. Historically, a property claim — regardless of complexity — would be assessed via a field adjuster who evaluates and estimates the loss. Deploying technical people in the field can be very effective, but it is obviously costly, and there is some variability in quality.

In a very short time, there are very interesting new models emerging that reimagine the way insurers handle claims.

Snapsheet is providing an outsourced solution that enables a claimant of its insurance company customers to use a service that is white-labeled for clients. The service enables the claimant to take pictures of physical damage, which is then “desk adjusted” to make a final determination of the value of the claim, followed by a rapid and efficient payment.

WeGoLook, majority-owned by claims services company Crawford & Co, is using a sophisticated crowd-sourced and mobile technology solution to rapidly respond to loss events with a “Looker” (agent) who can perform a guided process of field investigation and enable downstream desk adjusting process, as well.

Tractable provides artificial intelligence that takes images of damaged autos and estimates value (effectively a step toward automatic adjudicating). Tractable — like, Snapsheet and WeGoLook — has made great strides. Aegis, a European motor insurer, is rolling out Tractable following a successful pilot. In each of these instances, the process is much improved for customers — whether it be self-serving because they choose to do so (Snapsheet), rapidly responding to the event (WeGoLook) or dramatically reducing the cycle time (Tractable). All provide material improvements in customer experience.

See also: Waves of Change in Digital Expectations  

Obviously, each of these models is attacking the loss adjustment expense — whether through a more consistently controlled process of adjusting at a desk, using AI to better assess parts replacement vs. repair or improving subrogation, among other potential levers.

Today, all of these solutions are rather independent of each other and generally address a low-complexity property loss (mostly in the auto segment), but the possible combination of these and other solutions (and how they are used depending on type and complexity of claims) could begin to amplify the impact of technology innovation in claims.

Protecting Institutions From Cyber Risks

Recently, an email glitch at Florida State University resulted in the accidental emailing of alleged misconduct and housing violations to more than 13,000 current and former students.

The emails may have revealed the personal information of multiple students and may have disclosed confidentially reported information relating to harassment and alleged sexual assaults. The emails were not sent by anyone on campus but were the result of a technical glitch in the university’s database. The glitch left students confused and, in some cases, frightened and concerned for personal safety. University personnel, including FSU’s Title IX Coordinator, moved quickly to address student concerns, but the proverbial cat was already out of the bag. It will likely be some time before the full consequences of the breach will be known or what the final outcomes will be.

In the wake of FSU’s inadvertent disclosure crisis, a review of the privacy procedures in place at an institutional level may be in order to prevent these types of unintended disclosures in the future. It is also important to review the indemnity agreements between the university and third-party service providers such as the database administrator or software provider. Finally, it is important to review how cyber liability insurance may respond in the event of a data breach.

Data Privacy Protocols

When discussing data privacy protocols, there are three primary areas of concerns. They are how to protect:

  1. Information (e.g., personally identifiable data stored on a server)
  2. Mechanisms/systems that make up the physical housing for the information (e.g., the server itself)
  3. Users accessing the information

A breach of confidential information or data loss can occur at any of the three levels in any number of ways. It is impossible to quantify or evaluate every single manner in which a breach may occur—or how data may be lost.

What is important is establishing a protocol that takes into consideration all three areas where a breach may occur. In most cases, it is easy to focus on external threats and user misconduct but overlook the potential for data breach arising from internal system failures or glitches.

See Also: How Colleges Can Work With Insurers

In developing data security protocols, it is important to engage in a comprehensive threat assessment that includes evaluation of user-based or external potential breach areas as well as the possibility of an equipment failure/glitch.

A few areas to consider when reviewing internal data breach/data loss response protocols:

  1. Who is the architect of the protocols? (Are the foxes guarding the hen house?)
  2. Does your protocol comply with statutory requirements and contractual requirements such as PCI compliance, Title IX, HIPAA or other state and federal laws?
  3. Does the protocol specifically address each element of concern identified above? (protection of information, protection of systems, protection of users)
  4. Is there a progressive (tree) notification process? (Do the participants understand where they are in the tree? Does the process include notification to external stakeholders such as legal authorities, insurers, external legal counsel, and crisis management or PR firm?)
  5. Is there strong leadership/executive level buy-in of the protocol?
  6. Is there a training element? (Does it include tabletop or scenario-based practice?)
  7. Is there periodic review of systems and processes to identify and change obsolete protocols and replace key stakeholders in the event of turnover?

Indemnity/Hold Harmless/Limitation of Liability Agreements

Vendor service agreements, user license agreements and even software agreements typically include indemnity terms. In most cases, these terms are one-sided, in favor of the seller or service provider.

Essentially, the purpose of an indemnity agreement is to contractually shift responsibility for loss/damage from one party (seller) to another party (buyer). These types of agreements vary in scope, strength and enforceability but, in most cases, involve a release or limitation of buyer’s claims or potential claims against the seller. In some cases, the buyer may assume full responsibility for any loss, including an affirmative responsibility to protect and defend the seller in the event of third-party claims.

There may also be a limitation on the type and extent of damages a buyer may seek against the seller or service provider—in some cases, the recovery may be limited to the value of contract or agreement. Your institution’s risk management and legal teams should carefully review indemnity terms to fully understand the extent of risk assumed by the institution in executing an agreement with a third party.

As part of a comprehensive risk management process, consider limiting acceptance of comprehensive indemnification terms in a contract. This is especially important where the institution is being asked to waive its legal rights or outright indemnify a vendor for the vendor’s own negligence, misconduct or product/service failure. A few areas to consider in reviewing contract terms:

Indemnity/Hold-Harmless Terms

  1. Who is the indemnitee (recipient of the indemnity) and who is the indemnitor (provider of the indemnity)?
  2. Does the indemnity agreement require one party to indemnify for the other party’s own negligence or misconduct?
  3. Does the indemnity agreement include an obligation to affirmatively defend the indemnitee? Is there is a time limit to accept or reject the defense?
  4. Who is responsible for counsel selection?
  5. Is approval needed to settle claims?

Limitation of Liability

  1. Is there a limitation of liability?
  2. Does the limitation favor the institution or vendor?
  3. Is the limitation reasonable in light of the potential for loss or damage or the nature of the service provided? (Limiting liability to the contract value may not be reasonable if the contract value is low and the risk of loss is high.)
  4. Are there carveouts for negligence or misconduct, or is the limitation of liability intended as the sole remedy?
  5. Does the limitation of liability conflict with the indemnity terms? 

Cyber Liability Insurance

In the past few years, cyber liability insurance has gained significant attention among insurance brokers and clients. Cyber insurance refers to a suite of related insurance products that provide various types and levels of protection to insureds that may suffer from data loss or data breach.

There are three major components of cyber liability insurance:

  1. First-party coverage for loss or damage to or interruption of the institution’s electronic equipment and electronic services
  2. Third-party coverage for the liability imposed upon the institution for loss or exposure of third-party data; coverage for third parties may include costs for notification, credit monitoring and credit restoration services
  3. Coverage for regulatory requirements as well as for fines and penalties assessed against the institution as part of a covered loss

Unlike some property and casualty insurance products such as general liability or auto insurance, cyber liability insurance is not standardized. Instead, each insurance company issues a customized policy. These policies may vary greatly from insurer to insurer and can often include a la carte coverages that may significantly affect the breadth and scope of coverage.

A careful review of institutional and vendor policies is strongly recommended to ensure that the coverage purchased addresses the actual risks of the institution. Some questions to consider when reviewing your cyber liability policy: 

See Also: A Better Way to Assess Cyber Risks?

First-Party Coverage

  1. How does the policy respond to loss or damage to the institution’s own computer equipment, servers or other hardware components?
  2. How does the policy define a physical loss? (does it include loss of Internet-based platforms such as web portals or only loss to physical components)
  3. Is there a waiting period for business or data interruption? 

Third-Party Coverage

  1. How does the policy respond to breach of confidential or personally identifiable information?
  2. Is coverage provided based on a total number of affected persons or provided on a blanket limit basis?
  3. Is there a minimum/maximum affected person limit?
  4. How is a third-party loss defined? Does it include accidental loss, computer glitches or loss of non-electronic information? (e.g., is there coverage if a laptop containing personally identifiable information is lost? Or if physical records are removed or destroyed?)
  5. Is the coverage triggered only when there is a statutory or governmental notification requirement, or does it cover voluntary notification?


  1. Does the policy include coverage for fines/penalties including payment card industry (PCI) data security standards noncompliance?
  2. Is there a sublimit for the coverage?
  3. Are punitive or exemplary damages included? 


It is important to take a thoughtful approach to securing data in all its various forms. An individual protocol alone is not enough to fully secure your institution in the event of a data breach. It is also important to review vendor service agreements, user agreements and software licenses to ensure an understanding of the indemnity/hold-harmless and limitation of liability provisions, which may be present in a current agreement—and which may open up the institution to unintended liability due to the negligence or misconduct of a third party.

Finally, it is important to review and understand the types and scope of the institution’s cyber liability coverage—or to consider purchasing this coverage if the institution does not currently maintain coverage.

How Should Workers’ Compensation Evolve?

Workers’ compensation has been around for more than 100 years. It was developed as a grand bargain between labor and employers to ensure that injured workers received appropriate medical care and wage-loss benefits while employers received protections against tort lawsuits arising from workplace injuries.

The workplace is vastly different than it was when workers’ compensation was conceived. Workers’ compensation has also evolved in some ways, but in other ways it has not kept pace with changing workplace demographics and injury exposures. There are discussions in our industry around whether workers’ compensation is still meeting the needs of both employers and injured workers. Even the U.S. Department of Labor and OSHA have recently questioned the adequacy of workers’ compensation benefits. Some employers are actively pushing for an alternative option to workers’ compensation because they feel workers’ compensation no longer provides suitable protection for employers and injured workers.

As a person who has been very actively engaged in the workers’ compensation industry, I see a variety of issues within the current system and I hear complaints from a variety of stakeholders about it. Industry groups are starting to engage in discussion about the future of workers’ compensation. With that as a backdrop, here are my thoughts around how workers’ compensation needs to evolve.

Change Medical Delivery Model

The single biggest flaw in workers’ compensation is the current medical delivery model. Medical costs keep rising, and outcomes are often poor. This is because, historically, the medical delivery model in workers’ compensation has been focused on two things: discounts and conflict.

See Also: Workers’ Comp Market Trends

Too often, medical treatment in workers’ compensation claims is used as a weapon for secondary gain. Certain attorneys consistently refer injured workers to certain physicians who extend disability, perform unnecessary treatment and ultimately produce poor medical outcomes for the injured workers. These physicians producing the poor outcomes are well-known by the payers, yet they are allowed to continue to ruin the lives of injured workers so that the settlement will be larger and the attorney fee higher. This is just wrong.

The reimbursement model has prominently focused on who will deliver the cheapest care, not necessarily the best care. In fact, sometimes the best physicians refuse to treat workers’ compensation patients because of the low reimbursement rates. In addition, unnecessary utilization review delays workers from receiving care. Bills are not submitted at fee schedule rates, which necessitates spending money on bill review services to ensure that the appropriate amount is paid. There is a lot of money wasted on the bill churn that would be better spent on medical care.

We need to start over completely on the medical delivery model and look at what is happening in group health and Medicare for guidance. Under those models, insureds are not free to treat with any provider they choose; they must treat with someone “in network.” Certain treatments must be pre-authorized, and prescription drugs must be on an approved formulary to be covered. Both group health and Medicare are now scoring medical providers to see which of them produce the best outcomes. Those that consistently produce poor outcomes are excluded from coverage. Everyone with medical insurance, including Medicare, has operated under these rules for years. Yet, when the same rules are proposed under workers’ compensation, there is outrage that the injured worker would be denied the right to treat as he wishes.

The industry and regulator needs to focus on identifying which medical providers produce the best outcomes for injured workers and also which providers follow established treatment guidelines. These physicians, and only these physicians, need to be treating workers’ compensation patients. Let’s eliminate the “plaintiff and defense” doctor mentality and just have good doctors treating our injured workers. Once we have identified those physicians, we need to get out of their way and let them treat the patient. There is no need for utilization review when an approved physician is following treatment guidelines and dispensing off the pharmacy formulary.

Let’s change the focus from conflict and discounts to better outcomes and expedited treatment. These won’t be easy changes to make, but the result will be better outcomes for injured workers and lower costs for employers. Win-Win!

Reduce Bureaucracy

The administrative bureaucracy around workers’ compensation is complex, time-consuming and extremely costly. It also does little to enhance the underlying purpose of the workers’ compensation system, which is to deliver benefits to injured workers and return them to the workplace in a timely manner. States create a never-ending mountain of forms that must be filed and data that must be reported. These requirements vary by state, forcing carriers and TPAs to comply with more than 50 different sets of rules and regulations.

Also, why are penalties for compliance errors not based on a pattern of conduct instead of being issued with every violation? If a payer is 99%-compliant across thousands of claims, it is making every effort to comply. But mistakes happen when humans are involved, so perfection is not obtainable. The focus of compliance efforts should be ensuring that every effort is being made to comply, not simply generating revenue from every error.

State regulators need to take a critical look at their administrative requirements with a focus on increasing efficiency, reducing redundancy and lowering the costs to both payers and the states themselves.

Tighten Thresholds of Compensability and Eliminate Presumptions

The threshold for something to be a compensable workers’ compensation claim varies from 1% (aggravating condition) to more than 50% (major cause). Workers’ compensation benefits should be reserved for injuries and diseases caused by the workplace environment, not a simple aggravation. In addition, the normal human aging process should not produce a compensable workers’ compensation claim under the theory of “repetitive trauma.” There should not be workers’ compensation benefits for simply standing, walking, bending and other basic activities related to daily living.

States should adopt a consistent threshold that the work injury is the major cause of the disabling condition. If work is not more than 50% responsible for the condition, then it belongs under group health.

While we are at it, presumptions for certain conditions and occupations should be eliminated. These laws are based more on politics than science, and they add significant unnecessary costs to public entity employers, which, in turn, increases the tax burden on every person in this country. They also fly in the face of equal protection under the law by creating a preferred class of injured workers. If the facts of the case and the science support a compensable claim, then it should be compensable. However, a firefighter who has smoked two packs of cigarettes a day for 20 years should not automatically receive workers’ compensation benefits for lung cancer because of a presumption law.

Eliminate Permanent Partial Disability and Focus on Return to Work

The human body is a remarkable machine because it has the ability to heal itself. In addition, medical treatment is specifically meant to restore function. Most injuries do not result in some type of permanent impairment, yet most states have a permanent partial disability benefit. Why? This is how workers’ compensation attorneys get paid. Permanent partial disability benefits represent a tort element injected into this no-fault benefit delivery system, and this is the leading cause of litigation in workers’ compensation.

The goal of workers’ compensation is to return injured workers to employment. If they can go back to their regular earnings, then the goal is accomplished. If they cannot, then there should be a wage-loss benefit. This gives incentive to employers to return injured workers’ to employment, and it would significantly reduce litigation and conflict in the system.

Eliminate Waiting Periods

The suggestions I have provided thus far would all reduce workers’ compensation costs. The savings should allow us to increase certain benefits without increasing employer costs. Let’s start eliminating the waiting period. Why should someone have to go without pay for three to seven days because they suffered a workplace injury? This creates an unnecessary financial hardship on injured workers. You don’t have a waiting period when taking sick days from work, so why is there a waiting period for workers’ compensation benefits? Yes, a change would result in more indemnity claims, but we are talking small dollars in additional benefits when compared with the benefit this would provide to injured workers by reducing the financial strain caused by a workplace injury.

Eliminate Caps on Indemnity Benefits

All states cap the weekly indemnity benefits that injured workers can receive. These caps range from a high of $1,628 (Iowa) to a low of $469 (Mississippi). In 34 states, the benefit cap is less than $1,000/week.

Think about that for a moment. In most states, if you are earning more than $78,000 per year, you will be subject to the benefit cap. This is not something that only affects the top 1% of the workforce. This cap affects skilled trade workers, factory workers, teachers, healthcare workers, municipal employees, police, firefighters and a variety of others. It is truly a penalty on the middle class. For workers subject to the cap, their workers’ compensation benefits will be significantly less than their normal wages. How many of us could avoid financial ruin if our income was suddenly reduced by a significant percentage?

See Also: Why Mental Health Matters in Work Comp

Workers’ compensation benefits are designed to be a backstop for those unfortunate enough to suffer a workplace injury. Having a workers’ compensation claim should not mean someone suffers a significant financial hardship simply because they earn a decent living. Eliminating the benefit cap would solve this problem.

Define and Cover Known Occupational Diseases

One area where workers’ compensation really needs to evolve is the coverage of occupational diseases. This concept was not contemplated when workers’ compensation statutes were drafted because the focus was on sudden traumatic injuries, but we know that occupational diseases are a reality. Science tells us that there are certain conditions that may be caused by workplace exposures. These conditions can take years to manifest.

The industry and regulators need to work together to identify those diseases that are caused by the work environment and ensure that benefits are available to address them. This means eliminating statutes of limitations that are shorter than the latency period for the condition to develop.

I refer back to my comments on thresholds of compensability. If the workplace exposure is more than 50% responsible for the condition, then it should be covered. If not, then it should be paid under group health.

Reduce Inconsistency Between States

Workers’ compensation is a state-based system, so there will always be variations between the states. However, there are some areas where the inconsistency increases costs and does not treat all workers equally.

If states could agree on a common data template for carrier reporting, it would significantly reduce the administrative costs associated with gathering and reporting data. All the states don’t need to use the same data elements, but they could accept the feed and simply ignore what they did not need. There have been efforts in this area for years with no resolution. In addition, a common workplace poster for coverage and common forms would also significantly reduce the costs associated with compliance in these areas. As mentioned previously, the bureaucracy of workers’ compensation adds unnecessary cost to the system. We should be able to make some small changes to common templates to reduce costs and increase efficiency.

Another area of inconsistency is the simple definition of who is an employee subject to workers’ compensation coverage. If two people work for the same company performing the same job in different states, one should not be subject to workers’ compensation while the other is not, yet this occurs. States vary on their definitions of employees vs. independent contractors. Some states exclude farm workers and domestic servants from workers’ compensation, while others mandate coverage for those workers. Whether or not you are eligible for workers’ compensation should not vary based on your state of employment.

Ensure That Permanent Total and Death Benefits Are Adequate

Having a family’s breadwinner die or become permanently totally disabled (PTD) is both emotionally and financially devastating. Workers’ compensation benefits are supposed to help reduce the financial impact. Yet there are four states that have hard caps on all indemnity benefits (DC, MS, IN, SC). If you are permanently totally disabled in those states, benefits only pay for 450-500 weeks. That means, by design, those states shift PTD claims to the social welfare system.

Things are even worse with death benefits. There are 19 states that cap death benefits, including the four listed above. In Georgia and Florida, death benefits are capped at only $150,000. Some would argue that there may be life insurance to provide additional funds, but there is certainly no guarantee of that.

The most devastating injuries should not result in even more devastating financial consequences for the injured worker and the family.

Adopt an Advocacy-Based Claims Model

In many ways, workers’ compensation is a system based on conflict. We have “adjusters” who “investigate” your claim. A very small percentage of claims are ultimately denied as not being compensable, yet the claims review process is based on those claims rather than the vast majority, which resolve without any issues. Businesses stress the importance of customer service, and most employers agree that the workforce is the most valuable asset of any business. However, many businesses often fail to treat their own injured employees with the same consideration they give to their customers. That customer service focus needs to be extended not just to customers but to employees.

In discussions around creating an “Advocacy-Based Claims Model,” employers adopting this approach are seeing less litigation, lower costs and greater employee satisfaction. Rather than just denying a claim and inviting litigation, workers are told about benefit options that are available when workers’ compensation is not appropriate. Changing this model is about changing attitudes, the language we use to communicate and even the workflow. It can be done.

Workers’ compensation is still a valuable protection for both injured workers and employers. However, the time has come for it to evolve to better reflect the realities of the current workforce, risks present in the workplace, and advances in science and medicine. If workers’ compensation is to remain relevant for another 100 years, it needs to keep up with changes in society.

How to Manage MPNs in Workers’ Comp

A recent study of the use of medical provider networks ( MPNs) in California by the California Workers’ Compensation Institute (CWCI) found that, “While the use of the networks to medically manage treatment of work-related injuries has fulfilled the legislative intent to encourage network use, over time the MPNs have not lowered the cost of medical care.”

David DePaolo, CEO of WorkCompCentral, says medical cost savings is only part of the picture. MPNs need to be managed because the medical impact on other aspects of claims such as disability, indemnity, return to work and other factors is significant.

So how should networks be managed?

Networks can be managed only by evaluating and monitoring individual performance.

A network is the sum of its parts, the parts being the physicians and other medical providers. A network cannot be managed as a whole. Each individual medical provider acts independently and with differing results. Moreover, each provider, even within groups or facilities, acts independently. Consequently, each must be evaluated and managed individually.

Since networks began in workers’ comp back in the 1980s, their rationale has been that they offer discounts off stated rates for services, which they portray to payers as savings. The assumption is that all medical providers are equal. But no one checked.

No one checked because it was easier to claim savings through discounts than to evaluate the performance of individual medical providers in the network. Evaluating medical performance is especially tricky in workers’ compensation because, in addition to cost and medical treatment factors, there are elements unique to the industry that must be considered. Indicators of quality performance are many and varied.

But indicators can be found in the data. They include medical treatment indicators such as direct medical costs, prescriptions, surgery, hospitalization and medical procedures analyzed by injury type. Non-medical performance indicators that are influenced by medical providers include return to work, indemnity costs and legal involvement, along with ultimate outcome indicators such as claim closure and disability ratings at the close of the claim.

The way to manage networks is to use the data to identify the best providers and monitor their performance.

The data necessary to evaluate medical provider performance, particularly physician performance, can be found in bill review data, claims system data, pharmacy data and the utilization review system. Unfortunately, the data resides in different silos, but, by combining the data from these sources at the claim level, individual provider performance can be measured.

Because the data reflects actual treatment and events, it is objective and quantifiable. Select quality indicators in the data, adjust for case mix and keep them constant over time.

Medical costs have increased to 60% of claim costs, calling into question the benefit of network discounts. The truth is that medical providers long ago learned how to overcome the cost of discounts by increasing treatment frequency and claim duration, as well as prescribing expensive procedures, among other tactics.

Going forward, the major hurdle in managing networks effectively is to de-emphasize discounts, while underscoring and rewarding quality performance. To make that financially feasible for the networks, a different approach to discounting should be entertained. For instance, those providers who rate highest in quality performance would be excused from discounts. Likewise, those performing the worst would be discounted the most.

To manage a network, the performance of individuals within it must be evaluated and monitored continually. No longer does it suffice to sign up providers for the network and walk away. When individual provider ratings slip, action should be taken.

Let providers know they are being monitored. It has been proven that observed performance leads to behavior change.