Tag Archives: stakeholders

Returning Insurance to Its 19th Century Roots

As we celebrate the Wharton Risk Center’s 30th anniversary, we are at the same time envisioning the future of risk management. In this spirit, I would like to make the case that the insurance industry return to its 19th century roots by requiring those at risk to undertake cost-effective loss-reduction measures as a condition for insurance coverage. Back to the future!

This is the way that factory mutuals operated when they were founded in the mid-1800s, and some insurers still do today when marketing commercial policies. Firms were given an insurance policy only after they were inspected and shown to be safe. Insurance premiums reflected the best estimates of the risk; improvements were rewarded with lower premiums, reflecting the expected reduction in future claims. Firms that did not continue to keep their factories operating safely were warned that their insurance policy would be canceled unless they took corrective action.

Insurance could play a similar role with respect to providing coverage to the residential sector where, today, limited attention is given to encouraging homeowners to invest in loss-reduction measures. Premiums should reflect risk, and risk information should be communicated in a transparent manner so decision makers have accurate signals. Those at risk should also be made aware of the reduction in premiums they could receive.

Public-private partnerships are necessary for dealing with insurance against some extreme events. Low-income individuals residing in hazard-prone areas are likely to demand financial assistance if their premiums are subsidized and the increase in the cost of their insurance raises issues of affordability. Even in situations where insurers are allowed to charge risk-based premiums, they may still feel that some hazards are uninsurable without public-sector involvement if catastrophic losses would cause their surplus to be reduced to an unacceptable level and perhaps lead to insolvency.

The National Flood Insurance Program (NFIP) offers an opportunity to creatively address these issues with regard to flood hazards. The Federal Emergency Management Agency (FEMA)’s technical mapping advisory council has already begun focusing on ways to design flood maps that reflect risk, and several reports by the National Research Council are addressing ways the flood insurance program can be modified in advance of its renewal in 2017. More specifically:

  • Updated flood maps will allow insurers to more accurately assess the hazard. If private insurers can charge risk-based rates, they would have an economic incentive to market flood coverage.
  • The public sector could provide financial assistance to low-income homeowners to address issues of affordability and encourage them to undertake cost-effective measures to reduce their risk. One way to do this is through a means-tested voucher program tied to low-interest loans. Well-enforced building codes and seals of approval would provide an additional rationale for undertaking loss-reduction measures.
  • A multi-year insurance policy tied to the property would prevent policyholders from canceling, as many do today when they have not made a claim for several years. Property owners would be provided with stable annual premiums and would know that they were protected against water damage from floods and hurricanes.
  • Reinsurance and risk-transfer instruments marketed by the private sector could cover a significant portion of the catastrophic losses from future floods. Some type of federal reinsurance would provide insurers with protection against extreme losses.

The broader challenge we face is developing long-term strategies that provide short-term rewards so that change is politically viable. There is a growing interest by policy makers and other stakeholders in ways that insurance can encourage individuals, firms, communities and countries to undertake protective measures.

Insurance has an opportunity to play this role in the residential sector by going back to its basic principles that were adopted almost 200 years ago from the commercial side of the house: encourage or require investments in loss-reduction measures today while providing claims payments should one suffer a severe loss.

The full Wharton risk newsletter is here.

What Physicians Say on Workers’ Comp

At the 2015 Harbor Health MPN Medical Directors Meeting, a panel discussed current issues affecting workers’ compensation. The panel consisted of:

  • Dr. Tedd Blatt (moderator)
  • Dr. Craig Uejo
  • Dr. Don Dinwoodie
  • Dr. Minh Nguyen
  • Dr. Kayvon Yadidi

Question: What are the things physicians can do or should do to improve workers comp?

  • Physicians need to assist in training their peers. There is inadequate training of occupational medicine physicians on the nuances of the workers’ compensation system. This is something other stakeholders in the system could also assist with.
  • Physicians need to be considering psycho-social issues in the treatment of patients. These can have a significant impact on claim outcomes.
  • There is not enough training for physicians on how to properly write medical reports, especially in the workers’ compensation arena.
  • It is imperative that physicians are responsive to questions from the payers. Failure to respond in a timely way to questions causes delays in reimbursement and creates animosity.

Question: How should physicians be approaching the issues of opioids, and are payers willing to consider alternatives?

  • This is something that needs to be considered from the initial visit forward. These drugs can lead to long-term issues, and prescribing them cannot be taken lightly. Too many physicians just prescribe these to make the patient happy.
  • There are inadequate detox programs to wean people off these drugs. Patients tend to bounce from one pain clinic to the next, which just continues the cycle of using these drugs.
  • Payers are often hesitant to authorize detox programs or non-pharmaceutical pain management alternatives because they view these things as experimental.
  • Physicians will soon be required to utilize CURES, the California prescription drug monitoring program, prior to prescribing opioids. This is intended to identify people who are doctor-shopping to abuse the opioids.
  • If you don’t prescribe the opioids, the patient will find someone else who does. Until there is a consistent approach to how these drugs are prescribed, this will continue to be a problem.
  • This is the greatest physician-created public health crisis in the history of the U.S. These drugs are massively overprescribed and should only be used for a very short term for post-operative care. They should never be used for long-term treatment.

Question: What do you think about utilization review? Are there things that you feel should always be subject to utilization review?

  • All surgeries should be subject to mandatory utilization review. Too many physicians are conducting unnecessary surgeries, which cause harm to their patients.
  • Compound medications and medications not usually prescribed in workers’ comp should be subject to utilization review.
  • There needs to be a level of common sense in UR. It should not be used if the recommended treatment is part of the normal course of care for an injury. Payers also are sometimes paying more for the UR review than the actual service requested costs.
  • If you have quantified that a physician is producing better outcomes for injured workers, these physicians should be subject to less utilization review.
  • The UR process needs to be more selective and focus on the outliers, not routine care. The perception from providers is that UR is being grossly overused. Physicians view this as punitive.

Question: More physicians are becoming part of larger health systems. Is this a positive change?

  • This is a positive change because the physicians have a better support structure to assist in writing reports and navigating the nuances of the workers’ compensation system.

Question: Is the Affordable Care Act going to affect workers’ compensation?

  • We will see an increased focus on outcomes, and, if a physician does not deliver superior outcomes, then payers will not refer patients to them for treatment.
  • Many of the policies under the exchanges have high deductibles and, because of this, it is likely we will continue to see pressure to push treatment into the workers’ compensation space.

Question: What changes would you recommend on the claims administrator side?

  • There needs to be more focus on better internal communication within claims organizations. Physicians end up sending reports and responding to requests multiple times because the claims organization does not have good internal communication.
  • The fee structure is affecting the number of physicians willing to treat workers’ compensation patients. Many specialists have stopped treating workers’ compensation patients because they do not feel adequately compensated for the amount of work required.

Is Controlling Workers' Comp Costs Really the Answer?

The agendas of all the big workers' compensation seminars agree. Controlling costs is the biggest and most pressing issue. Some might say it's the only issue. But I wonder if this emphasis isn't counterproductive….

The regulatory side

From a regulator's point of view, cost control is accomplished by imposing restrictions, by establishing fee and treatment schedules and, occasionally, by providing incentives that encourage the desired behavior. At bottom, the basis of regulation is distrust.

Controls are generally set to make everyone play by a single set of rules that allow the illusion of predictability and fairness.

I say “the illusion” because a clear understanding of the most common style of regulation shows a dysfunctional relationship. The regulator issues a regulation controlling, say, billing by physical therapists. The physical therapists will always collectively understand their business better than the regulator and will soon find a way to “work around” any portion of the regulations that they find objectionable. The regulator will eventually become aware of the “hole” in the regulations. The regulator will then move to reassert control by tightening the regulations, only to start the cycle all over again. 

In the meantime, the regulator comes to believe that the stakeholders (physical therapists in this example) cannot be trusted. The stakeholders have to be ever more closely controlled. When that fails, it “must be” because those pesky PTs are trying to make excess profits; the belief that they are self-serving becomes entrenched. Multiply this phenomenon by all of the various groups of stakeholders and service providers, and you see the atmosphere of “us against them” that is all too common in regulatory circles.

The trouble with this pattern for controlling costs is that it really is a cost driver. Every time the regulations change, two things happen. 

First, the change itself is costly. Computer programs have to be changed. People have to be retrained. Time that used to be spent doing the work of the industry is spent doing the work of the regulator. At the end of the day, the passive-aggressive resistance of the industry will win, and the cost of cost controls will outweigh the savings.

Second, the services to the injured get constrained by the cost controls, and the ability to provide individualized services suffers. One size does not fit all in injury management, and attempts to make it so usually end up fitting virtually no one.

The claims side

When the claims payer tries to impose control costs, the result is a different kind of cost driver. Once again, the whole system is based upon distrust. The claim must be investigated before it is accepted –even though only about one in 20 of the claims reported for suspected worker fraud justifies a finding of illegal behavior.[i1] Rehabilitative services that the research clearly shows are most effective if provided within the first days of the claim are delayed because this claim just might be the one in 20 (or worse, in a cynical attempt to save money by getting the injured worker with a legitimate claim to “just go away.”) Unfortunately, the delay of necessary services makes the claim more likely to become complex, more likely to attract the ungentle ministrations of the lawyers[ii], and less likely to resolve uneventfully.

Not only does the delay hurt, but the process of investigating the claim creates its own opportunities for adverse outcomes. Investigation is a statement of distrust. Tell the worker that you question whether she is really as hurt as she claims, and the natural reaction is to push back and try to prove that the injury really is severe. Sometimes, in that process, workers become attached to the belief in the seriousness of their injury, with unfortunate results.

Medicalization of the claim often occurs in the process of seeking a diagnosis. The diagnosis is not necessary for treatment of the injury in many cases – conservative care for, say, lower back pain is the same for the first few weeks whether it has a diagnosis or is just unspecified pain. Yet, because of the payer's distrust of the claim, we routinely get a diagnosis even though that risks losing control of the claim. 

Once the claim has been accepted, the scrutiny and distrust continue, again in the name of cost control. Adjusters and third-party payers have to justify their work, so claims are scrutinized. Frustration, delay and anger may be created in another self-perpetuating cycle of distrust.  

The outcomes of this dysfunction are often visited on the injured worker, in the form of reduced or curtailed injury management and lack of time for patient education that has proven value in durable recovery. 

We fail to realize that many cases of failure to recover as anticipated are caused by distrust, expressed in the system as cost-control measures. Moreover, the evidence is overwhelming that claims with unexplained failure to recover make up a large percentage of the 20% of claims that result in 80% of our loss costs. We might save a few dollars on some claims with our cost-control scrutiny, but at the risk of creating unnecessary complex, long-tail claims. We also risk pushing some of the cases into becoming one of those relatively rare cases of genuine misconduct, as people try to make the system work for them, in any way they can.

So, where are the savings?

A way forward

There are many other ways that cost controls actually become inadvertent cost drivers in the system. I'm not going to belabor the point further, because the important take-away is that an alternative exists. If 20% of claims create 80% of costs, then any efforts to prevent claims from falling into that 20% are heavily leveraged in their cost-savings impact.

If we want durable and sustainable cost control, the first step is to understand the dynamics that allow some people to recover and thrive while others with similar injuries spiral down to despair and dependency. While there isn't the space to discuss that topic here[iii], a better understanding about what helps injured people to avoid becoming “disabled” almost certainly leads to real and sustainable cost savings. And the distrust that currently permeates our systems isn't any part of it.

We created our situation, so we ought to be able to control it. Einstein said: “Any intelligent fool can make things bigger, more complex and more violent. It takes a touch of genius – and a lot of courage – to move in the opposite direction.” Our current fixation on cost controls certainly makes the system more complex and full of new players eagerly selling us the latest magic bullet. The understanding to move us in the opposite direction also exists, if we can find the internal fortitude to use it.


[i1] The 5% average comes from presentations at the National Workers' Compensation College, International Association of Industrial Accident Boards and Commissions, 2004-2006, and from the author's own personal observation while supervising the New Mexico Workers' Compensation Administration fraud investigation unit over the course of five years.

[ii] See Aurbach, R.  “Suppose Hippocrates had been a Lawyer,” Psychological Injury and Law, Volume 6, pages 215-237, 2013.

[iii] See Aurbach, R. “Breaking the Web of Needless Disability” Work: A Journal of Prevention, Assessment and Rehabilitation, http://iospress.metapress.com/content/y50n1479vj054364/?p=7d6ab3539cd840bea6e14dbe8f2874dd&pi=0