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A risk manager's guide to workers' comp providers.

by David A. Tweedy and Barbara Y. Anderson

David A. Tweedy is senior consultant with Betterley Risk Consultants Inc. in Worcester, MA. Barbara Y. Anderson is director of risk management for the Southern California Rapid Transit District in Los Angeles.

Risk managers are well aware of the crisis workers' compensation has brought to corporate America. It also comes as no surprise to them that a considerable amount of money has been spent by companies and their insurers to minimize costs associated with these exposures.

Yet for most risk managers, the real crisis in workers' compensation is the proliferation of companies offering workers' compensation-related services. From bill review to case management firms and experience modification factor analysts, an industry has suddenly exploded with "problem-solving" providers, all clamoring for a piece of the multibillion dollar workers' compensation pie.

Certainly, opportunities abound. Workers' compensation is a $53 billion industry, according to a recent article in The New York Times. For most companies, reducing expenses that directly impact the bottom line is a recession survival tactic. Senior management depends on risk managers to come up with practical ideas for reducing short-term costs as well as increasing longrange savings.

While it is true that some workers' compensation providers can help companies achieve those short- and long-term goals, others can lead firms to financial ruin. For instance, if a provider is hired for the wrong reason or its services fall short of expectations, the responsibilities fall back on the risk manager. Thus, when it comes to navigating the service-provider marketplace, remember, let the buyer beware ! When confronted with the dizzying array of options, the risk manager should develop a guide of service providers in the workers' compensation field. Once providers are identified and categorized, the services can be evaluated for overall effectiveness. However, establishing a meaningful outline of providers is a challenge in a boom industry.

In an increasingly competitive environment, lines of service blur as providers try to carve out profitable niches by offering a variety of products or services. Some workers' compensation service providers claim to be experts in one area. Others try to be all things to all people. Indeed, it is not unusual to find a joint venture formed from many different fields, including medical, claims, systems and rehabilitation.

The recent proliferation of providers is evidenced by exhibits at industry conferences. At the Risk and Insurance Management Society's annual conference in May in New Orleans, the amount of booths in the exhibition hall and seminars highlighting a particular type of service demonstrated the diversity and intense interest in workers' compensation. This year's conference featured 289 exhibitors, the majority of which offered workers' compensation-related services. How can one possibly differentiate among the hundreds of possibilities in the marketplace? The Providers Profile chart on page 25, which categorizes the major services and specialty areas, is designed to help.

Yet as risk managers search for solutions, it is important to remember that workers' compensation itself is still evolving as state legislators consider amending the 80-year-old system. Many believe that workers' compensation is headed toward becoming another social program similar to Medicare and Social Security. There is also a movement, led by The Travelers and CIGNA, that hopes to merge group health and disability benefits with workers' compensation. If these trends continue, the system will need to be redefined even further.

Evaluating Provider Services

Given the large pool of providers, how does the risk manager determine which one to select or retain? Would a multitalented organization or a specialist firm best fill the company's needs? Should the provider bill on an hourly, per claim or contingency basis? These and other questions are important ones to ask when hundreds or even thousands of dollars per patient are at stake.

Before grabbing for the hottest service on the market, assess the company's current program, including its assets and liabilities. Differentiate between the risk control and risk financing aspects of the program and consider whether the company is getting true value from its providers.

Then identify weaknesses and pinpoint problems that require immediate attention. However, do not abruptly dismiss a provider, because some important strengths could be lost in the process. For example, although a third party administrator may not offer case management, it may provide excellent claims investigation, reserving and resolution services.

Once an evaluation has been made, set reasonable standards and require minimum credentials for each service provider. For instance, when establishing standards for third party administrators, include maximum caseload, minimum education and years of experience per adjuster. Standards should be attainable, concise and consistent with those set by the market.

Risk managers must also be knowledgeable about the different types of service providers. Admittedly, keeping track of the various providers is a Herculean task. However, workers' compensation problems will likely get worse in the coming decade. Therefore, prudent risk managers should start educating themselves now as to possible solutions.

When looking into service providers, consider several options and companies in each area by conducting interviews, checking references and speaking to colleagues who have used a particular provider. Also, contractual agreements should be clarified. Once a decision has been reached on the services to be provided, get the specifics in writing. This is where guidelines and standards come in handy.

Monitoring the provider's effectiveness is an ongoing task. One of the best ways is to invest in a risk management information system (RMIS). Since it is virtually impossible to stay abreast of all the elements of a multistate, multimillion-dollar workers' compensation program, an information system, in concert with a network of service providers, will provide a truly managed program.

As the Providers Profile chart shows, service providers fall into two categories: risk control and risk financing. In the past most of the attention in risk management centered on risk financing. Today, risk control services-safety and loss prevention, loss control claims management and information systems-receive far greater attention. Other, more specialized, risk control services include medical cost management, expense management, claims services and risk management information systems.

Risk Control Services

While safety and loss prevention have been around a long time, they have recently been undergoing changes. Firms that typically focused on strategies to eliminate or reduce the probability of a loss today offer specialty services, such as sick building syndrome investigation, pre-employment testing and drug screening. Even the more traditional safety firms have diversified. Some offer post-loss loss control services as an integral part of overall service, while others concentrate on industrial hygiene, ergonomics, job analysis and Occupational Safety and Health Administration regulations.

Many large organizations offer a wide spectrum of services, but the greatest growth in recent years has been in the area of specialty firms. Today, many small firms offer ergonomic worksite analyses designed to decrease instances of lower back injuries and carpal tunnel syndrome. In addition to these specialty firms, TPAs, brokers, insurers and consultants also provide these services.

Claims management organizations are also basic to the workers' compensation process. Claims organizations can provide full or TPA service, including adjusting, check writing, bank account reconciliation and placement of excess coverage. They can also provide specialized services such as field adjusting and surveillance.

However, this area is changing as claims organizations come increasingly under fire. Once perceived as too reactive, overworked and mere processors, claims organizations are becoming more proactive and innovative and are seeking partnership arrangements with their clients. Caseloads per adjuster are decreasing, and field adjusters are back in vogue. Today, performance standards on caseloads, investigations techniques, contact time and settlement authority are negotiated regularly. Some claims organizations, such as Crawford and Co. in Atlanta and Axia Services Inc. of Glastonbury, CT, even offer a range of services, including loss control, medical case management, information systems and utilization review.

TPAs are not the only firms looking to be promoted as proactive, customer service-oriented organizations. Likewise, insurers are positioning themselves as TPAs by offering unbundled claims management services. CIGNA has been doing this for several years. Other insurers, such as Liberty Mutual and The Hartford, perhaps sensing another exodus of clients during the next hard market, are marketing TPA services. Charges for these services are on a percentage of standard premium or per case basis.

In too many instances, subrogation analysis is the forgotten part of the claims process. Historically, insurers have given the most inexperienced or least effective member of their claims staff the job of following up with responsible third parties. Today, with the renewed focus on the bottom line, no stone is being left unturned in the quest to reduce expenses associated with workers' compensation.

As a result, the degree of experience and professionalism assigned to the subrogation process has increased. U.S. West Inc., for example, has several professionals in the medical subrogation area who search for collateral sources of claimant reimbursement. These collateral sources include benefits or workers' compensation payments already being received which reduce the third party award. Other related services include claim and medical history searches, surveillance when fraudulent activity is suspected and structured settlements to cost effectively resolve expensive claims.

Another new risk control area is expense management in which firms audit the accuracy and efficiency of other service providers involved in the workers' compensation process. Some are also involved in risk financing, evaluating the accuracy of payroll classification, experience modification factors and premium.

Risk managers regularly use claim auditors to quantify the efficiency of a claims program. Claim audits can be comprehensive, encompassing administrative and managerial aspects of the claims process, or specific, focusing on reserving, subrogation and litigation efficiency. Some auditors focus solely on the medical provider bill in terms of appropriateness of treatment and fee schedules. Others also review the accuracy and propriety of attorney defense firm billings. While most auditors charge on an hourly basis, some, such as provider bill review firms, charge on a percentage of savings realized.

However, although audit services seem to be similar, their results and fees are not. A major TPA recently evaluated five bill provider reviews in three states, comparing a certain quantity of bills with the same total amount, and found that all yielded different savings results. In one case the provider saved three times as much money as another provider. Competency, system effectiveness and other variables accounted for the disparity.

Closely related to firms offering loss prevention are those offering post-loss or loss control services, including post-injury response strategies, return-to-work programs, job evaluations and traditional training and education. Post-injury response services are a recent phenomenon that concentrate on the 24-hour period following a loss. The pioneer firm in that field, Lynch-Ryan of Westboro, MA, develops practical methodologies used by everyone from the job site foreman to key medical providers when the accident occurs. Fees are usually on a per diem or contingency basis.

Secondary Services

Medical cost management is the most important secondary service to evolve from the primary services. In the last two years there has been tremendous growth in the number of medical management providers, ranging from insurers, such as CIGNA with Intracorp, to TPAs, private firms, hospitals and health maintenance organizations. These firms often offer both pre-and post-loss medical management services.

Pre-loss medical management services include drug screening, employee assistance programs and injury prevention. AIIA/Comp Care of Daytona Beach, FL, for example, offers a national chiropractic managed health care network that focuses on prevention. Post-loss medical cost management services include utilization review, concurrent review, discharge planning, hospital precertification and case management. These service providers often offer variations on these services, including medical bill audits, which encompass hospital bills, fee scheduling, compliance audits and treatment pattern analysis. Computer Sciences Corp. of Lanham, MD, and Beech Street Inc. of Irvine, CA, are among the service providers offering treatment pattern analysis. Post-loss medical rehabilitation services are also offered by many firms. Some states, such as California and Maine, mandate separate tracking of rehabilitation expenses and treatment.

How One Entity Deals With its Providers

As a large public entity transit system serving the Los Angeles metropolitan region, the Southern California Rapid Transit District (SCRTD) annually incurs about 2,400 workers' compensation claims, paying $20 million to $25 million. It also pays a third party administrator an estimated $5 million to process approximately 2,400 new claims a year and the outstanding 5,000 open claims. Considering that it is set in an urban area and in California-a difficult state for workers' compensation-SCRTD has great interest in mitigating costs and controlling the exposure.

As a large employer, SCRTD is regularly solicited by many workers' compensation service providers. However, as a public entity receiving federal and state funds, it is subject to rules on selecting providers. In addition, because of its urban setting, there is a high degree of litigation and suspected fraudulent claim activity.

Under these circumstances, how does the risk management department utilize its provider network and assure the best possible management? In the case of SCRTD, risk management took the following steps:

* Instituted provider standards and qualifications. The department set specific caseloads for TPA adjusters and mandated that supervisory level and above be certified in California. It also required that supervisors carry no caseloads; their only job would be to supervise their adjuster and examiners. In addition, it required active participation by the TPA and vocational and medical management activities. For its medical clinics, the risk management department required that physicians and physical therapists be state registered.

* Required test audits prior to contracting with a provider. For medical bill providers, the department required a pre-test of each provider's claims. It issues an equivalent amount of medical bills to each of several bill review auditors and asks them to come back with recommendations on the reasonableness of the charge and estimated savings.

* Conducted specialty audits. For example, SCRTD hired a specialty law firm from the Midwest to review the accounting and billing practices of its defense and general liability counsels. (SCRTD plans to do the same for workers' compensation in the near future.) The law firm promised to provide a payback from its review. For the liability review, it charged $85,000 and returned $300,000 in savings by discovering mistakes and other inappropriate billing practices.

Another audit of increasing importance is the fraud audit. SCRTD has assembled a special unit comprised of attorneys, claims people and internal risk management personnel. It is their responsibility to perform reviews of employees, doctors, attorneys, rehabilitation specialists and third party administrators.

* Assembled internal expert task forces. SCRTD enhances its internal resources by melding them with outside specialists, such as attorneys, private investigators and human resource experts. One outcome of this is its Pilot Investigation Program, which investigates the accuracy of employee accidents through a detailed review of attendance patterns. Another offshoot is the Crisis Injury Roundtable, which convenes after a major injury has occurred to an SCRTD employee. Within 24 hours, a representative from the employee assistance program is called in to provide counseling. The TPA and internal claims risk management set up the necessary mechanisms to process the claims as quickly as possible.

SCRTD's risk management department believes in forming partnerships with outside workers' compensation providers. It also believes that relying on outside expertise alone is not enough. Indeed, direction must be provided by the employer's risk management department to control this difficult exposure in the '90s.

Another secondary service found under the claims management umbrella is litigation management. Companies offering such services specialize in reviewing the adequacy, appropriateness and cost efficiency of defense counsel. Many times a review of litigated claim files reveals that the claims organization has delegated most of the investigation, as well as the defense, to defense attorneys.

Even though some states, such as Texas, California, Maine and Rhode Island, have workers' compensation laws that increase litigation, careful analysis regarding the appropriateness of litigation is nevertheless necessary. Many consulting firms, law firms and litigation management system vendors are becoming involved in this service, including Legalgard of Philadelphia and Lititech Inc. of Denver.

RMIS providers have been active in the workers' compensation industry for the last decade. For companies based in several states with varying risk financing arrangements and multiple TPAs, an information system is an important tool to help quantify and manage workers' compensation risks. Indeed, it is no coincidence that many well-known vendors-Corporate Systems Ltd. of Amarillo, TX, Risk Sciences Group of Atlanta and DAVID Corp. of San Francisco-got their start creating systems for workers' compensation exposures.

Although it is the one service that transcends all functional areas in workers' compensation, not all RMIS providers emphasize or even provide capabilities in each area. Therefore, when shopping for such a service, assess the situation carefully. A RMIS provider should give information on almost all aspects of workers' compensation, including claims management, legal tracking, case management, disability management, provider bill audit analysis, subrogation analysis, funding and safety. The resulting information system report forms the foundation for the consulting analysis in claim audits, provider bill reviews and litigation management reviews. RMIS are available in time share and stand alone capabilities in all platforms from mainframes to personal computers.

Risk Financing Services

Although enough services exist to cause confusion among risk managers, there are not many new risk financing services available today as entering this arena requires a great deal of financial resources and involves strict compliance with state laws and regulations. In addition, it is becoming more difficult to assume workers' compensation risks, especially in states where rates are under pressure and state-assigned risk pools are burgeoning. Voluntary markets have disappeared in some states, including Maine, and are close to disappearing in Rhode Island, Massachusetts and Texas. The overhaul of several state workers' compensation systems have provided little relief, and once ever-present insurers have become increasingly selective in the accounts they will underwrite. Indeed, monoline voluntary workers' compensation with an insurer is almost extinct in certain states.

Therefore, it is no surprise that insurers are seeking mechanisms to limit their exposure, either through self-insured retentions, high deductibles or blatant refusal to provide any assumption of risk. Instead, many insurers are offering only TPA services or stop-loss protection above hefty self-insured retentions. Many old-line workers' compensation insurers are clamoring to become TPAs because they see them as a way to maintain clients without retaining risk. Insurers are attempting to differentiate their services and utilize their existing resources, such as multiple offices in several states, to maintain some of these services.

With the erosion and, in some states, disappearance of the voluntary market, alternative risk financing methods are widely being employed. Employers, generally within the same type of industry, are forming self-insurance groups to purchase stop-loss insurance and legal, claims management, actuarial and other necessary services to finance risk and avoid assigned risk pool charges. Captives and rent-a-captives as well as non-subscription to workers' compensation are also options. In addition, consultants and brokers, seeking their share of the pie, are advising and managing employers on the most suitable risk financing mechanisms.

The punitive measures being exacted on employers with poor loss experience in a state with a high percentage of assigned risk has caused specialty firms to offer potential relief. In Massachusetts, for example, if a firm reaches an experience modification factor greater than 1.00, it pays a surcharge for this "poor loss experience." Because insurer audits are wrong from time to time, due to payroll misclassification or using the wrong rates, firms such as Premium Review Associates in Swampscott, MA, have built a practice out of identifying the accuracy of the experience modification factor and supplying the calculations that lead to a surcharge. PC-based software programs that combine the classification rates per states, experience modification factor and surcharge formulas have been developed to evaluate the accuracy of the National Council on Compensation Insurance and other rate-making organizations.

To complicate matters even further, workers' compensation is evolving beyond its traditional borders. Today, for instance, the medical component of a workers' compensation case is similar to a group health case: The medical incident must be managed with claims providers, information services and medical cost management. The trend toward comprehensive coverage, known as 24-hour coverage, has inspired programs such as The Travelers' pilot program in Florida for Grumman Corp. While there are plenty of obstacles still facing a viable 24-hour coverage program, it represents a possibility for the future. It may even extend someday into the group disability and workers' compensation disability areas as well.

Workers' Comp Trends

What does the future hold for this dynamic, evolving exposure? Several trends are already emerging. As costs continue to escalate, so will the number of new firms offering workers' compensation-related services. In addition, a return of the hard market will only accelerate this growth. It should also be noted that while the Providers Profile chart accompanying this article displays clear distinctions of service, the real world is not that simple. Services are likely to continue being offered by generalists and specialists. However, with increased competition brought on by multiple service providers and the recognition that old methods are not working, the emphasis will shift to service quality.

A case in point is ManagedComp, a Tufts Associate Health Plans Inc. subsidiary. This managed care system is composed of five distinct risk reduction services: injury prevention, management systems, medical delivery system, case management and management information. While many TPAs and insurers offer similar services, ManagedComp has fused these services into one system.

In this system the claims examiner works in tandem with the case manager who, in turn, works with the employer and the employee to return that person to the job as soon as possible. Similar to the HPR property insurance approach combining loss prevention and safety with underwriting and claims, the initial cost for the services is higher than for the average TPA. However, the lower costs each year are designed to provide a good return on that investment.

Although the growth of service providers is a sign of a distressed system in need of reform, it is also an opportunity for risk managers to take charge of a runaway exposure. Selecting the right provider is only part of the problem; it is up to the risk manager to know his or her program inside out and to match it with the appropriate service providers.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article on how Southern California Rapid Transit District deals with providers; employment liability insurance providers
Author:Tweedy, David A.; Anderson, Barbara Y.
Publication:Risk Management
Date:Jul 1, 1991
Previous Article:GAO questions NAIC's effectiveness.
Next Article:Using a TPA to control losses.

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