January 29, 2012
The CEO's Guide to Medical Inflation: The Case for Measurement, Part 3
by Michael Rowe
This issue of medical cost shift should become the rallying cry for bringing claims into the information age. This is one of those things that will happen on its own in time, even if no one were to take up the cause. But some companies will take up the cause and gain a huge competitive lift.
What Has Held Claims Back?
In every domain where statistical rigor has been brought to bear, old paradigms steeped in years of certainty have crumbled overnight. Claims is one of the few remaining significant institutions that have yet to undergo this transformation. In fact, it is the perpetuation of the myth that claims is different and that introducing statistical rigor is dangerous, that has kept claims from experiencing the benefits of significant investments in technology.
There certainly are dangers inherent in claim handling, especially bad faith actions because they can create painful financial and reputational damage. Even general litigation can be extremely expensive and outcomes are never certain. But the job of the astute claim leader is to find the sweet spot where legitimate claims are quickly honored and inflated claims identified and resisted. Litigation does not happen out of thin air — a claim adjuster and then several others in the chain of command have made conscious decisions not to accede to what is perceived to be an excessive settlement demand. The litigation process does not occur swiftly so there are many opportunities to settle cases in advance of an actual trial, and again, any decision not to should be well thought out. Plaintiff attorneys typically cite bad faith as a way of ratcheting up the pressure, but astute claim professionals understand what does
and does not constitute bad faith.
This current upcoding problem is an example of where many claim leaders will cite bad faith potential as a reason not to offer resistance. But when a qualified physician undertakes an unbiased evaluation of a peer and arrives at a different conclusion that is strongly supported by empirical evidence, it does not constitute bad faith. If a claim adjuster introduces such an evaluation in the course of settlement negotiations, allowing the claimant to provide evidence to rebut it, and giving it due consideration, that also does not constitute bad faith. The objective should be to get as close as to the truth as possible.
This really boils down to the question of whether an adjuster armed with empirical evidence of upcoding will generally achieve a more accurate settlement outcome than without one and whether the cost benefit of that evidence is justified by its impact on the settlement. Anyone who really thinks about this, and certainly anyone who tests and measures it, will find that the answer to both questions is, absolutely. But for those who rely on traditional high-level claim measures and see in them what they want, there is no impetus to engage in continuous improvement.
The problem is really one of perspective because claim leadership has far greater exposure to outlier cases than to those that flow seamlessly through the system. Having been immersed in outliers for many years and lacking measures that would reveal them as outliers, decisions are made on the basis of the 5% population of outliers rather than the 95% population of more typical claims. Claim leaders experience the world paradoxically as if outliers somehow represented the majority and hyper-caution is a logical consequence, but at the cost of operational stagnation and significant leakage.
CEOs and most other industry executives cannot hide from poor results very easily, but for years claims has been a black box only understood by claim people. Most CEOs have solid fundamental
understanding of underwriting, finance and marketing, but few emerge from claim backgrounds. When encountering persons with significant knowledge in fields less familiar to us, we tend to see them as experts.
But raw knowledge of any field absent empirical measures is pseudo-expertise. That does not mean the experience and expertise is not valuable, it just means that it has not undergone the transformative effect of the information age, hence it lacks empirical coherence. Significant decisions remain largely the domain of gut instincts or acquired preferences, reinforcing and perpetuating instead of testing long held assumptions about reality.
If one were to ask who the top ten carriers are from a loss or expense ratio standpoint, or with regard to premium growth or premium to surplus ratio, that information is easy to obtain. But if asked who the top ten claim departments are from a loss cost management standpoint, nobody knows. This is another example of where claims is increasingly becoming the exception to the rule as inter-industry and even intra-industry comparisons between similar functions have become increasingly relevant as the information age pulls back the curtain to reveal the key performance indicators that matter most and specify common measurement methodologies.
When standardized claim key performance indicators do ultimately arise, you can expect to see the emergence of a standard distribution of claim department performance with most lumped into the middle, a few on the high end, a few on the low end and the rest scattered in between the middle and extremes on both ends. How do you or any other CEO know what position your claim department occupies? If 100 CEOs were asked, 90 would likely answer “above average” or better, but that’s just not possible.
The types of measures discussed in this series are universal and could form the basis of an industry-wide system of potential benchmarks from which company claim department results could be
compared. In the meantime, as CEO, you own the responsibility for bringing your claim department into the information age. You may not be a claim expert but you surely have sufficient measurement acumen to demand empirical measurements that can be universally understood in support of abstract reasoning.
This issue of medical cost shift should become the rallying cry for bringing claims into the information age. This is one of those things that will happen on its own in time, even if no one were to take up the cause. But some company(ies) will take up the cause and gain a huge competitive lift.
Ten percent of total claim costs are a conservative estimate of leakage for the “average” claim department. Without certainty about where your claim department ranks among its peers, average is a good bet but the fact that you lack the means to be certain is the true cause for concern.