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Navigating the Future of Risk Management

The pandemic and the economy are presenting various challenges for risk management teams across the nation, including difficulties within the insurance marketplace, emerging risks and the challenges associated with changing business operations. 

The recent virtual conference, Elevate, presented by Out Front Ideas with Kimberly and Mark, hosted a panel of risk management professionals discussing the array of issues they face. Guests were:

  • Melora Copeland – director of insurance, Compass Group USA
  • Kelly Oyler – senior director, insurance risk, Walgreens Boot Alliance
  • Jane Sandler – vice president, global Risk management, McKesson
  • Dawn Watkins – director, integrated disability management, LAUSD

Risk Transfer Programs and Renewals

The Los Angeles Unified School District is largely self-insured and represents the second-largest school district in the nation. LAUSD faced challenges before the pandemic began, with most of its students below the poverty line. For some students, the lunch they received during their school day might be their only meal of the day, creating a crisis when schools were shut down over the pandemic. LAUSD launched a feeding program, offering a meal to anyone in need, providing over 100 million meals in the process. Other parts of their program have provided school supplies, diapers and COVID-19 testing and vaccinations.

Mirroring most employers, LAUSD has been inundated with requests for reasonable accommodations for a disability, extended remote work opportunities and vaccine policies. However, the reduction of silos and encouragement of departmental integration helped address these requests, providing more timely resolutions. Their workers’ compensation program has also adapted quickly through telehealth, outreach to injured workers and increased efforts to resolve claims through settlements. 

Compass Group, a leading food and hospitality company, has felt the effects of the hard market on its insurance program while paying particular attention to cyber during this renewal season. Its strong relationships with technology partners and carriers have proved vital. Articulating to its brokers how it has specifically invested in technology has also been important during renewals.

Everyone is affected during a cyber event, and handling a breach correctly and communicating across your enterprise can make all the difference. You also want to get ahead of your renewal and make sure that you are not overbuying, as hard market trends will likely continue across 2022.

As a leading provider and distributor of products and services to the healthcare industry, McKesson has seen much of the same with a challenging market after 14 consecutive quarters of pricing increases. Successful management of various implications has come down to strengthening relationships and avoiding silos. It has partnered with brokers and carriers and invested in tools to manage the total cost of risks. Not expecting the return of a soft market anytime soon, it has focused on better positioning its risk management program, including:

  1. Network use – Work with your risk managers, rely on your market relationships and have various options to maximize your coverage.
  2. Analytics use – Using a risk finance optimization study can help visualize a risk profile and draw insight into the pricing for your particular risk. It can also help frame internal dialogue around limits, deductibles and self-insured layers. McKesson employs captives and has grown them through building out a portfolio of products that strengthen its ability to support the business, including funding high deductibles, quarter share layers with insurers and taking in its own layers where pricing was not right.
  3. Loss-control, risk-mitigation investments – These should be included in the overall strategy; risk managers must understand in detail how they can support the company’s critical mission.

Walgreens credits its successful program in part to its relationships with underwriters within its carriers. While price is certainly important during renewal season, trust in partnerships can provide an incredible impact. Analytics also play an important role in driving conversations with senior executives to uncover their views on risk appetite and ensure strategies are aligned when developing a program. 

See also: The Woes of Absence Management

Impacts of Social Inflation

Non-economic factors affecting premiums, like increased litigation and higher jury verdicts, can be associated with anti-corporate sentiments and racial inequity movements. This phenomenon is often referred to as social inflation. While insurance premiums continue to rise, there are a few ways to offset some of the losses due to social inflation:

  1. Safety and loss prevention – Technology can help determine the cause of accidents, thus handling claims accordingly and ultimately avoiding litigation. Training to prevent accidents can also help.
  2. Claims handling – Some general liability claims can be resolved through early settlements. Typically, leaving these claims to a jury results in a worse outcome. 
  3. Diversity, equity and inclusion initiatives – Embracing the community can help you understand the mindset of individuals, including clients and employees, and builds a better foundation. Hiring minority-owned law firms can also provide a different perspective that your organization may not have seen before.

Workers’ Compensation Programs

First and foremost, your workers’ compensation program should be worker-centric. It is a major tenet of managing risk within your program. Connect with injured workers early and often and advocate for your employees so they have a contact in the event of a claim. Successful programs also include a strong focus on medical management and holistic care for the individual and on ensuring individual business locations are not paying to bring an injured worker back to work. 

Using specialists, physical therapists and rehabilitation facilities can help get an injured worker back to work and potentially settle a claim. Settling those lifetime claims can prevent a high-dollar event from occurring. Presumptions are also changing what occupations have compensable claims, particularly involving COVID-19. The best way to manage claims cost, though, is to understand the data behind your program. Understand what departments are driving the losses and why.

View the archived recording of this session here.

An Argument for Physician Dispensing

A January 2015 Workers’ Compensation Research Institute (WCRI) study that focused on three new medication strengths has again questioned the practice of physicians dispensing medications.  Some analysts argue that the new strengths are designed to skirt price controls and generate exorbitant profits for doctors and drug manufacturers and repackagers. But another explanation is possible: that doctors and drug companies have identified new strengths that patients want. In any case, competition will, over time, drive down prices on the new medications just as it did on ones that have been in the market for a long time.

The study titled, “”Are Physician Dispensing Reforms Sustainable?” prompted Michael Gavin, president of PRIUM, a subsidiary of Ameritox, to write an article titled “Physician Dispensing: I’ve Changed My Mind” on this website. He said: (1) ”that drug repackagers in California created novel dosages of certain medication to evade the constraints of the physician dispensing regulations”; (2) “allowing repackagers to create new NDC codes and charging exorbitant amounts of money for drugs that would have been substantially cheaper had they been secured through a retail pharmacy”; and (3) “Worse, utilization of these medications skyrocketed as a result of the revenue incentives for physicians (my conclusion, not WCRI’s)”.

This article analyzes the Cyclobenzaprine HCL medication, with emphasis on the new generic 7.5mg strength that was reviewed in the WCRI study and cited in the article, “Loophole for Doctors on Drug Dispensing,” that Ramona Tanabe from WCRI wrote for this website.

The 7.5mg Cyclobenzaprine HCL was first made available as a generic by the pharmaceutical company “KLE 2 Pharmaceuticals” ((www.kle2.com). The company’s mission statement reads: “It is our goal to provide new therapies via unique strengths, delivery methods and/or new formulations.” KLE 2 identified a marketing opportunity to meet the needs of those who found that the 5mg strength was not effective enough and that the 10mg was too strong. There is evidence on the Internet of people attempting to split a Cyclobenzaprine HCL tablet to reduce its strength, with limited success.

From late 2011 through early 2013, KLE 2 was the only manufacturer of the generic Cyclobenzaprine HCL 7.5mg strength, which was included in the Medi-Cal formulary and used for California workers’ compensation claims. In April 2013, the manufacturer Mylan released a generic 7.5mg strength, and it was also included in the Medi-Cal formulary. KLE 2 has a Medi-Cal price of $3.2153 per tablet; Mylan, $3.99. The brand name “Fexmid,” by Sciele Pharma, owned by Shionogi, has a Medi-Cal price of $4.4383 per tablet.

Pharmaceutical pricing in the U.S. is unregulated; the more manufacturers there are, the lower the price to the consumer. In the case of the 7.5mg strength Cyclobenzaprine HCL, there are currently only two manufacturers, so the price will remain high until more manufacturers produce this strength or there is less demand for it. The 10mg strength, in comparison, has currently around 17 manufacturers. The average Medi-Cal price for 10mg is $0.1035. The lowest Medi-Cal price is $0.0468, from the manufacturer KVK Tech. (Refer to page 7 of “Understanding Pricing of Pharmaceuticals,” available here under the Dialogue tab, for a Medi-Cal price comparison of 10mg Cyclobenzaprine HCL).

The 5mg strength is manufactured by about 11 pharmaceutical companies. The average Medi-Cal price is $0.1586 — that is down from Mylan’s price of $1.3616 in 2006. The current lowest Medi-Cal price for a 5mg strength tablet is $0.0468, again from KVK Tech.

I mentioned earlier that attempts to split either a 5mg or 10mg tablet in half have not been successful. It has been well documented that the coating applied to the 5mg and 10 mg Cyclobenzaprine HCL tablets does not allow them to be easily cut, regardless of the device used. The opportunity therefore for cutting a 5mg in half to take 1½ tablets of 5mg of Cyclobenzaprine HCL and accurately administer a strength of 7.5mg is not possible. The release of the 7.5mg strength addresses this need.

Although the 5mg, 10mg and now 7.5mg strengths are the most commonly dispensed Cyclobenzaprine HCL medications, there are also other strengths, such as the 15mg and 30mg extended-release capsules manufactured by Mylan, which have a Medi-Cal price of $8.7899 per capsule. There are also the brand name “Amrix” extended-release 15mg and 30mg capsules manufactured by Cephalon, a subsidiary of Teva Pharmaceuticals, which have a Medi-Cal price of $25.0163 per capsule for both strengths. These 15mg and 30mg strengths further illustrate how a lack of competition for a specific medication leads to higher prices.

Medi-Cal prices apply to all dispensers of California workers’ compensation medications, including pharmacies and physicians, and the same Medi-Cal maximum price has applied since 2007, as explained in my article, “The Paradox on Drugs in Worker’s Comp.” But the average prices paid, according to the WCRI study, are significantly higher than the Medi-Cal prices. The WCRI said prices paid for the 5mg and 10mg strengths were 35 to 70 cents a tablet, yet we find that the average Medi-Cal price was 10 cents for 10mg and 16 cents for 5mg. This discrepancy requires further clarification, because it appears that claims administrators have been paying significantly more than Medi-Cal’s maximum price.

The WCRI reported a range of between $2.90 and $3.45 for the 7.5mg strength. The $2.90 price is lower than Medi-Cal’s prices and indicates that a competitive price was paid by claims administrators.

If, as some have suggested, new strengths such as the 7.5mg are medically inappropriate, have claims administrators moved to remove the doctors who prescribe those strengths from their medical provider networks (MPNs)? Have claims administrators reported those doctors to the California Fraud Assessment Commission?

Gavin said in the second point I pulled from his article that medications dispensed by physicians cost more than those in retail pharmacies, but obtaining prices of Cyclobenzaprine HCL from a number of retail pharmacies on the website goodrx.com are higher than the average Medi-Cal price paid for the same medications to dispensing physicians. (Prices on the website can change at any time and cited here for illustration purposes only. The Medi-Cal formulary can also change at any time in both its suppliers of medications and prices paid.)

This analysis of the Cyclobenzaprine HCL medication further reinforces the need for claims administrators to be vigilant when dealing with pharmaceuticals. Let the buyer beware, too, when interpreting studies produced by organizations such as the WCRI.

Little-Known Loophole Inflates Health Costs

The rising cost of insurance is putting a squeeze on American families. And this problem could get even worse if lawmakers don’t fix a little-known federal drug program called “340B.”

Created by Congress in 1992, 340B was originally intended to provide low-income people access to needed medications. This program allows hospitals, clinics and other healthcare providers
serving large numbers of poor and uninsured patients to buy drugs at a deep discount. The idea was that these facilities would pass along those savings to their patients.

But 340B is not working as intended. Instead, it’s being manipulated by hospital systems to increase profits. It isn’t helping the poor. And this exploitation is driving up health insurance costs for all Americans.

Price Disparity

The program’s major flaw is it doesn’t actually require healthcare providers to pass along those drug discounts to low-income patients. Participating facilities are free to buy huge volumes of cheap medicines and then sell them at full price to insured patients — and pocket the difference.

That’s exactly what many participants are doing. Duke University Hospital has accumulated $280 million in profits from 340B over the last five years. The drug chain Walgreens is projected to make a quarter of a billion dollars off the program over the next half decade.

Established hospital systems have increased their revenue from 340B by buying up specialty clinics. These smaller practices often use a high volume of expensive drugs. By acquiring these clinics, hospitals can purchase even more discounted medicines through 340B and further boost profits.

In 2012, hospitals enrolled more clinics in 340B than in the previous 20 years combined. A new University of Chicago study shows that most of these clinics are located in relatively affluent areas. In other words, they aren’t even pretending to serve the low-income and uninsured populations 340B was intended to help.

Unfortunately, lawmakers have not responded to these abuses by fixing 340B’s structural flaw. Instead, they’ve blindly expanded the program. Back in the early ’90s, just 90 health care facilities participated in 340B. Today, that figure is more than 2,000.

The acquisition of smaller clinics, precipitated by 340B, will seriously drive up insurance costs for average Americans. Large, established health providers tend to charge more than smaller, independent clinics. And insurance companies respond to these higher treatment expenses by raising premiums.

Indeed, a study from three Duke University researchers published in the October issue of the journal Health Affairs looked into the price disparity between key cancer drugs provided at both corporate hospitals and clinics. Researchers noted that, between 2005 and 2011, the proportion of cancer services administered at independent clinics dropped by 90%. They found that the price gap between the two settings can be as much as 50%.

Pharmaceutical manufacturers are now incurring heavy losses from 340B abuse. In 2010, this program cost the industry $6 billion. By 2016, that’s expected to more than double, to $13 billion. Simple economics forces firms to compensate for losses by raising their prices, leading to higher medical expenses for average patients.

Noble Purpose

340B has a noble purpose. But it’s not fulfilling its mission to provide vulnerable patients with discounted drugs. Instead, 340B is being exploited by rich hospitals to boost their bottom lines. And these abuses are leading to higher insurance costs for everyone else.

Can Amazon Dominate in Insurance, Too?

In January 2013, LIMRA reported that 90% of industry executives it had surveyed believe that insurance companies will continue to form strategic alliances with “non-traditional organizations” to expand distribution. The example cited was MetLife’s trial alliance with 200 Wal-Mart stores. Then Accenture’s “Customer-Driven Innovation Survey” found that more than two-thirds of customers would consider purchasing home, auto and life insurance from businesses other than insurers—23% were open to purchasing from online service providers like Amazon or Google (which acquired auto insurance aggregator BeatThatQuote.com way back in 2011 in the UK).Amazon has proven leadership as an e-commerce distributor, while Google is seen primarily as an information organization, so I would like to elaborate exclusively on the compelling reasons for insurers and Amazon to create a distribution model to match ever-evolving customer demands.

Customer demands

Every information source and every analyst report on insurance in the recent past points to changes in customer’s preferences. Generation X, Generation Y and Millennials prefer doing business with companies that provide:

  • Convenience of on-demand buying and self-service, predominantly through digital channels such as web and mobile.
  • Personalization of product and service delivery, including helping the customer choose the right product.
  • Building trust through transparency in pricing, simplified products and clear articulation of benefits.

So, insurers must innovate in personalizing products, providing transparency in the value of products and services and demonstrating excellence in on-demand distribution. Innovation must also touch “moments of truth” such as claims and policy changes. It is also critical that the distribution lifecycle should be an iterative process to consistently review the value of benefits and help customers fine tune the products and services they purchase.

Insurers are lagging

Insurers have been consistently lagging in product innovation and trying to catch up through distribution. In P&C, all the personal product lines are commoditized. In life insurance, term-based products are commoditized. It is true some product personalization has been in the market for some time, such as pay-as-you-driving with telematics in auto insurance (led by Progressive, which saw a boost in profitability). Yet personalization has not reached its potential because of multiple inhibiting factors both internal (lack of aggregated information on risk, etc.) and external (privacy concern, etc.). The lack of product innovation shifts the responsibility of differentiation to distribution.

Manufacturing and retail have been pioneers in showing how boring commodity products can be differentiated through aspects of distribution such as packaging and channel selection.  A recent example is Coca Cola, which has been managing differentiation based on targeted customer segment and channel (Wal-Mart vs. Walgreens vs. Costco, etc.) and has moved one step closer to the customer by signing a 10-year agreement with Green Mountain Coffee Roasters to bring vending machines into kitchens.

In the past, insurance has learned from retail about channels. GEICO, which was known for selling online, has set up brick-and-mortar agency centers by responding to the fact that customers want to shop online but buy from agents. Allstate, where agents lead distribution, not only built online sales support but went one step further, acquiring Esurance to become a multi-channel insurer.

Now, with retail defining and moving toward omni-channel selling, through what is known as “device-independent e-commerce,” it is time for insurers to piggyback on Amazon, which is on the leading-edge of the emerging distribution model.

Amazon ready to sell insurance

Currently, Amazon merely sells books on insurance, has a limited selection of extended warranties for electronics and provides sponsored links for insurers. But to start selling insurance much more seriously would be easy for Amazon. It could expand its extended warranties and offer valuable personal property (VPP) insurance, as it sells the products that are insurable under VPP. It would also be logical for Amazon to extend and be an aggregator for auto, renters, homeowners and life insurance.

The critical question is: “Will customers want to buy from Amazon when there are other aggregators available?” For customers, having reusable information reduces effort, so VPP insurance would be a natural for Amazon. It gets more complex (and interesting) when analyzing the success factors involved in selling complex products such as auto, renters, homeowners and life insurance.

Few insurers can share data and process across products. Still fewer can share across channels. Aggregators are set up as silos. But Amazon’s shopping cart can provide ease of buying, plus reusability of data across channels (web and mobile) and products. The shopping cart actually can resolve the commodity dilemma of insurers through bundling. It can take the customers’ experience to the next level.

Amazon’s analytics-driven capabilities, such as detailed product features and comparisons (price to value of benefits), product reviews, questions and answers, “customers who bought this also bought,” “customers who viewed this also viewed” and offers for the week can be customized for insurance to offer suitable product advice to customers. Insurers do not have such an integrated view because of internal challenges in the effective use of data.

Amazon’s comparisons on features and pricing could improve transparency for customers. The reviews, Q&A and “similar customers” features would provide advice. “Weekly offers” would help customers continually review and tweak their insurance coverage. Hence, Amazon could become the channel of choice for all consumer insurance needs.

Sacred relationship, and not the competition, is the way to go

While Amazon could become consumers’ “trusted advisor,” Amazon also provides a jump start to insurance companies that want to build on the ready availability of its technology infrastructure, reducing their investment and time to market. Amazon might cooperate with innovative insurers to be an aggregator because that would provide immediate and direct profits from its platform.

Amazon would also generate synergies among its various product lines—for instance, when someone starts buying baby products, Amazon might offer life insurance. For existing homeowners policyholders, it could offer products, such as power generators, to help them get prepared and avoid loss during natural disasters such as hurricanes and ice storms. The customer’s engagement with Amazon would increase, leading to greater share of wallet through cross-selling and up-selling opportunities.

So, an insurer that provides coverage through Amazon would be creating a win-win-win—for Amazon, for customers and, of course, for itself.