January 10, 2012

The Double Cost Shift


As the battle rages between medical providers and the government over Medicare and Medicaid reimbursement rates and private health insurance continues to decline, Property & Casualty claim departments have become the path of least resistance and are absorbing an increasing percentage of national healthcare costs.

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Insurance Research Council Findings
A 2008 study by the Insurance Research Council (IRC) identified that auto accident frequency has fallen significantly since gasoline prices began rising in 2000 and at the same time, increasing vehicle safety lowered the incidence rate of serious injuries.

In spite of such trends, loss costs were unyielding, sparking curiosity until further investigation identified that the cost of treating routine injuries had risen fast enough to eclipse what should have been substantial loss cost reductions. What is particularly vexing is that the Insurance Research Council also demonstrated that the nature of routine injuries has not changed, just the cost.

Medical Cost Shift
As the battle rages between medical providers and the government over Medicare and Medicaid reimbursement rates and private health insurance continues to decline, Property & Casualty claim departments have become the path of least resistance and are absorbing an increasing percentage of national healthcare costs. The Insurance Research Council estimates that the annual shift had reached 1.2 billion per year conservatively as of 2006. Inpatient emergency room billing practices reflect empirical evidence of a substantial upward rise in evaluation and management (E/M) billing levels occurring between 2002 and 2008.

The government and private health insurers have been far more effective at combatting these trends through negotiated fee arrangements than Property & Casualty claim departments who are over-reliant on automated systems that cannot detect upcoding. The billions in medical cost shift being absorbed by the Property & Casualty industry is akin to collateral damage to a bystander caught in the crossfire.

Diagnostic Upcoding
Property & Casualty claim departments rely on medical bill repricing software to keep medical costs in check through a combination of fee schedules, negotiated agreements, and where lacking, usual and customary charges. But there is one glitch — the software uses the providers; reported diagnostic code(s) as a baseline for vetting billing levels. Providers have learned to push back against government fee reductions by inflating diagnostic codes, and evidence of such activity is ubiquitous. Not only does diagnostic code inflation drive up medical bill repricing allowances, but the knowledge that it does so without any repercussion has many hospitals acutely aware of the opportunity presented by auto accident patients. A whole series of exploiting machinations have evolved to fully leverage the opportunity. This type of thing was once the domain of a few dishonest chiropractors, but the financial pressures heaped onto legitimate providers has caused it to go viral.

The following is an excerpt from a McKinsey and Company health care study:

Of the $2.1 trillion the United States spends on health care, nearly $650 billion is above expected, even when adjusting for the relative wealth of the U.S. economy

Outpatient care, which includes same-day hospital visits and is by far the largest and fastest-growing part of the U.S. health system, accounts for $436 billion, or two-thirds of spending above expected. Fueling this growth are a number of supply- and demand-related factors, including (1) provider capacity growth in response to high outpatient margins; (2) the judgment-based nature of physician care; (3) technological innovation that drives prices higher rather than lower; (4) demand growth that appears to be due to greater availability of supply; and (5) relatively price-insensitive patients with limited out-of-pocket costs.1

Can Anything Be Done?
As the saying goes, “necessity is the mother of invention” and a number of new services are evolving that are aimed at preventing diagnostic upcoding, but claim leaders are reticent to try them. Recent history reveals several instances where efforts to curb medical abuse in claims have resulted in class action lawsuits and disruptive collection processes. In many states, claim leaders have decided that the cures are worse than the disease, but medical cost inflation is now so far out of control that a reassessment may be forced.

What seems to have been lost in the rush to drive down claim expenses over the past several years is the art of negotiation. Most providers are amenable to reasonable resolution when offered the opportunity versus simply having the terms of resolution dictated in a form letter. Claims don’t go to trial unless a carrier makes a conscious decision that it has no reasonable alternative, so pointing to legal outcomes to justify inaction is dubious. In states with Personal Injury Protection and relatively low limits, claim leaders feel even more compelled to just process the bills as quickly and inexpensively as possible but they totally miss the impact of diagnostic upcoding on bodily injury claims, multiplied by non-economic (pain and suffering) damages.

Who Gets Stuck With The Tab?
Generally speaking, the market remains highly competitive for automobile insurance so it could be argued that no one is adversely affected. But there are actually two cost shifts underway, one from the health care industry to Property & Casualty carriers and the other from Property & Casualty carriers to their customers. While auto insurance consumers don’t feel the cost pinch yet due to competitive factors, if gasoline prices continue to moderate and driving picks up, frequency will rise, but neither diagnostic codes nor the cost shift they have wrought will recede. In fact, they will both continue to gain momentum until either prices rise to the point of consumer rebellion or claim departments return to their fundamental roots of investigation, evaluation, and negotiation.

Great claim departments were once recognized as a tremendous competitive advantage, but the age of expense reduction and automation has lowered claim deterrents and even the desire to deter to historically low levels.

An iceberg has been struck, the ship is taking on water, but it’s still warm and dry up on the deck.

1 McKinsey & Company, “Accounting for the cost of US health care: A new look at why Americans spend more.” Dec. 2008, 9 Jan. 2012,

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