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Wise up to workers' comp.

As employee health care assistance goes down, claims for workers' compensation go up at many firms. Now you and your human resources executive have to put out a different fire.

Today's workers' compensation problem is more like arthritis than pneumonia. It's a chronic problem you have to manage because you can't cure it. The new approaches on the market are, for the most part, reapplications of older approaches. While using techniques you've found effective in managing general medical care can be useful and makes sense biologically, you have to modify these techniques for the workers' compensation environment. So first you should review in detail the structure, management and results of your workers' comp program before deciding if you want to improve your internal workers' comp management or seek the help of one or more vendors. If you do choose to outsource, clarify your requirements before randomly selecting vendors to layer on top of your present system.

Here are some pitfalls to avoid in managing your program:

Pitfall 1: Not having enough data. Get the facts. Most companies know their total workers' comp costs, but a surprising number don't know the cost per person. Some companies know what the costs are by the "part of the body injured" (at least according to the initial report of injury) or by the mechanism of injury. But almost none know the final medical diagnosis for a given case, whether the diagnosis was valid, the treatments applied, and whether the patterns of treatment and the length of absence were reasonable.

You may be able to locate many sources of information on your work-related illnesses and injuries. Unfortunately, none of these sources typically include basic statistics on such necessary information as the length of absence by diagnosis; the appropriateness, price and volume of medical care provided; or evaluations of the quality and adequacy of claims management. And many companies or their claims payers use workers' comp automated systems that collect insufficient data, or, worse, have no automated systems at all.

Because of this lack of information, companies frequently make errors in the amount of funds they reserve for compensation claims compared to the final costs of those claims. And they're in no position to get costs under control.

Pitfall 2: Using a narrow perspective to evaluate workers' comp management. CFOs look at the upward trend in claims costs. Risk managers look at risk financing or cost statistics. Safety managers are concerned with which parts of the body are injured and the source of energy causing the injury (chemicals, falling or moving objects, etc.). Medical practitioners look at diagnosis and treatment patterns. Personnel executives look at absence patterns. Organizational effectiveness experts look at employee perceptions about the workplace, the value the company places on safety and how workers' comp is organized and managed. Each perspective is only part of an effective, integrated evaluation.

Pitfall 3: Not knowing what risk you're managing. If you use the risk management approach to managing the dollar volume of workers' comp, you probably assume the risk is that of injury and illness. But there are other costly risks--of bad claims management, bad information management or inappropriate medical management, for instance. Another major risk is improper personnel management, which ranges from ignoring safety problems to communicating poorly with workers to outright exploiting employees. Exploited employees in turn try to get out of work via your workers' comp program, either consciously or unconsciously, to show they're dissatisfied with the workplace.

Pitfall 4: Relying solely on vendors' claims. While the problems of workers' comp costs and lost time may sometimes seem so daunting you should outsource them, there's no substitute for good internal groundwork. Also, vendors of workers' comp cost management packages (mostly narrow, single solutions) can manipulate their promotional data fairly easily to demonstrate savings, usually by showing the amount of hospital time and treatment that providers "recommend" instead of the amount they "certify." This difference is supposed to be the savings. Indeed, a certain amount of "gaming" goes on between providers and reviewers. Providers request longer than necessary lengths of stay or treatment to end up with the amount they consider adequate.

To counter this sales tactic, you should instead be looking for figures that show a declining trend per person corrected for inflation. Also, note that hospital treatment is typically only 5 percent of total workers' comp costs. Most cases are treated on an outpatient basis.

In short, beware of magic solutions. Vendors who claim a 25- to 75-percent reduction in your workers' comp costs in the first year are probably exaggerating.


To figure out which workers' comp area you want to attack first and how to carry out that attack, both internally and externally, you need to use strategic management and quality improvement tools.

First, assemble and analyze any data you can find on workers' compensation, work-related illness and injury, and illness- and injury-related absences from work. You can get quantitative information from workers' comp claims tapes, OSHA 200 logs, medical claims management tapes, first reports of injury, accident investigations, and personnel tapes, although each source contains only part of the puzzle. You usually have to merge all of the sources, some of which may be in paper form, to come up with a data base ready to analyze.

Now, rank the types of injuries, sources of energy, supervisors, departments, and processes by dollar value or lost time, so you can find the "big targets." Commonly 20 percent of the injuries or illnesses account for 80 percent of the lost time and costs, although the two dividing points aren't necessarily the same. (That is, the 20 percent accounting for 80 percent of the costs may be a smaller group than the cases accounting for 80 percent of the lost time.) One particular type of injury may be predominant, and that injury varies by employer. You can also correlate the initial "diagnosis" on the accident report or OSHA 200 log with the interim or final medical diagnosis. If you have enough data, you can analyze how reasonable both the diagnosis and the treatment patterns devolving from that diagnosis are.

Compare the prices you paid to the general market and to fee schedules.

For example, you may be paying scheduled fees for physician services, but "workers' comp market," or full charges, for hospital bills, while managed care organizations are paying 60 percent of that amount. As usual, the question is, "compared to what?"

And compare lengths of absence to a variety of benchmarks, ranging from national averages for specific diagnoses for work-related injuries (typically longer) to the best disability management (closer to medical reality).

Qualitative information is important as well. Look at your policies for managing occupational illness and injury, absence from work, limited duty, return to work and such related topics as disability and production incentives. They provide the framework for the management process. Surprisingly, many organizations don't even have policies in these areas. And when policies are in place, they're often not well thought out, well executed, or well integrated into the corporation. For example, one very common finding is that productivity incentives interfere with returning employees to work rapidly. Managers incented with productivity bonuses would rather not have employees return to work quickly on modified duty but that's precisely how to avoid creating "20 percent" cases.

Surveys and focus groups of employees and supervisors can be very informative. You can ask, for instance, how employees perceive the company's attitude about safety, about the care given to injured workers and about the adequacy of benefits and compensation. Ask subgroups of employees who've been injured about the timeliness and quality of the medical care the company provided or about their experiences with the claims management system. Also, ask employees about their general and specific knowledge about their rights and responsibilities if they're injured on the job. Try to find out if employees feel disempowered or mismanage--and therefore are prone to seek legal assistance.

An on-site audit of your claims management process is typically revealing, too, serving as a "window" on the process and any management of medical care that might be going on. You can find anything from disorganized files or files that are consistently opened late to misunderstandings of medical terminology to complete mismanagement. It's important, however, to score previously agreed upon metrics for system performance in the audits.

You can trace most of the problems you uncover to defects in the process and organization of workers' comp management. Because workers' comp responsibility is often scattered among many departments and the process is unnecessarily complex, disconnected, and diffused, quality improvement tools and the QI team approach can help you better understand and address problems in managing workers' comp management. We've successfully used flow maps of the management process, identification of key quality characteristics (KQCs) and key process variables (KPVs), Pareto charts, fish bone (cause and effect) diagrams, and statistical analysis to look at the stability of the injury management process in a "task team" approach. Or you and employee groups can adapt other relatively simple techniques from standard quality improvement texts.

Mapping the flow of the information, treatment and management associated with work-related illnesses and injuries is key to understanding why workers' comp is so cumbersome and expensive. This mapping frequently points out some disconnects, both in information and in handling the injured worker, between the many functions that get involved in workers' comp management both inside and outside the organization. For instance, often no one is in contact with the injured worker because there's a breakdown in communication between the claims manager and the on-site manager of the injured worker. No player has complete information, and the injured worker goes to an attorney to get it.

Your system analysis will help you define the roles of people who handle various aspects of workers' comp within your company and then define how they interrelate. Ultimately, you can convert the KQCs, KPVs, metrics, process map, role definitions and policy analysis into a relatively explicit standard operating manual that will specify how to carry out each step of the process. The manual could describe how the process works now; even better, it should form the basis for improvements. The manual should also include samples of the forms you use to collect information, which you can then use to design an information system.

Now, identify and rank workers' comp issues in terms of the magnitude of each problem. This sets the stage for making short- and long-term changes. The bottom line is you can't redesign your internal process or even begin to select a vendor until you understand how the process does and should look. Your analyses should lead to some realistic targets for reducing absolute dollars, reducing incidence rates or deflecting the trend line.


If you decide to use a vendor to help with workers' comp management, before you approach a firm, be sure your processes, expectations and objectives are clear and measurable. Then divide the flow of your workers' comp management process into what you can do in-house and what you should contract out. Once you specify the different roles of all the players in the process, write "job descriptions" for your vendors similar to the contract specifications you use for any other good or service you purchase. Make the descriptions clear, focusing on the type of performance you expect. And specify your requirements for collecting and transferring data, managing the process with internal resources, and interfacing with other vendors, such as claims, medical and legal management.

These vendor specifications will then help you assess any proposals that vendors submit. It's crucial to understand exactly what each vendor does. Few, if any, have a comprehensive solution. You will want to make on-site visits to vendor candidates to inspect their processes and see if there are gaps between their marketing claims and their actual performance. Ask for actual results, not just on a case-by-case basis but across the vendors' books of business. And assess their financial stability, as well as the size and stability of their organizations. Because vendors currently address different facets of the comp puzzle and because some aspects such as modified job placement can't be delegated, vendor integration is a key issue.

Once you select the vendor or vendors that best match your specifications, start the implementation process by communicating with your employees, establishing the detailed interfaces you want between the different players and setting up your information systems. Then periodically reanalyze the integrated process to make sure it's functioning at its best, because it probably won't be and you'll need to make adjustments.

The process will run the most smoothly if you know how to organize and integrate your medical, legal and rehabilitation vendors. Here are some suggestions:

Medical Management Vendors--A key problem with workers' comp medical treatment is it's fragmented and highly variable. So a number of companies have sprung up to manage that care. Unfortunately, many of them approach the problem intuitively as well. So you may have to manage the managers. To do that, or to evaluate the vendors before selecting one, check the following issues.

Have your medical management vendor or your own medical team ask your treating physicians whether an occupational illness or injury is, in fact, work related. The traditional claims adjustment definition of work related is the injury or illness is "arising out of and in the course of employment." But this definition doesn't consider, for instance, the degree of force applied that resulted in an injury or a claimant's past history. It's not uncommon, for example, following a relatively minor incident at work, for an employee to claim his or her back pain is a result of that incident, when in fact that person had been treated for back pain before making the compensation claim. This is particularly a problem if the company's medical benefits are inadequate. Without a good medical history on each employee, you can't refute any claim.

You may also want to examine actual measured exposures in specific jobs and the documented effects of potential toxins, since some workers make clearly implausible claims of illness or injury as a result of working around certain chemicals or other agents or due to stressful working conditions.

Unfortunately, you can't count on diagnostic accuracy, given the pool of physicians who often treat workers' comp injuries. So you need to ask medical management vendors how they validate diagnoses. They should have specifications in place to validate a diagnosis at the beginning of each episode, or a halt should be called to treatment until the diagnosis is clarified. One other way to assure that a diagnosis is correct is through an independent medical examination, or IME. IMEs can also determine if someone has reached maximum medical improvement. That's important because many workers' comp cases are left open for a long time without reexamination. Often, the natural healing process has solved the problem.

Also, you or the medical management vendor should put in place algorithms for the most efficient treatment of each injury or illness and link these electronically into the medical management system--then insist that treating health professionals follow them. And integrate into the system some guidelines on using certain tests for certain types of claims and how long claimants should be absent from work. These guidelines should conform to the best nonoccupational practices, not averages currently used by providers who treat mostly workers' comp patients. For instance, length-of-absence guidelines based on current occupational practice are generally 2 to 10 times longer than what the injuries physiologically require to heal.

Finally, find out what data the medical management or medical care vendors are collecting and what format it's in for analysis and reporting. You should be able to merge that data with data collected by adjusters, claims reviewers, your company and any other available sources.

Legal Management Vendors--Today, many vendors advertise "legal management" of workers' comp cases. They presume a large number of the cases involve fraud or at least a deliberate miscasting of the situation. While this is possible--you hear plenty of anecdotes about people holding second jobs while they collect workers' compensation--you have to frame your legal management programs very carefully to avoid a prosecutorial stance, which could damage your employee relations.

Nevertheless, you certainly should be managing all your cases that involve litigation. Many large companies take an approach similar to that for managing malpractice or other liability issues. If you don't have a centralized function that keeps a close tab on all litigation, it can easily get out of control.

Rehabilitation Vendors--Rehabilitation vendors are hot issues on Wall Street these days. The theory is they'll return employees to work quickly and at a low cost. However, simply providing more physical or occupational therapy without an integrated management system probably won't reduce your overall cost. While you have to allow for adequate rehabilitation, you also have to be careful when you select rehabilitation vendors.

There are conflicts between incentives in workers' comp and rehabilitation. Workers' comp management focuses on proving disability and an entitlement mentality; rehabilitation focuses on building self-esteem and returning employees to work. These conflicts aren't easy to resolve and must be managed.

The distinction also demonstrates the social-work underpinnings of rehabilitation. Wittingly or unwittingly, some rehabilitation providers want to return the patient to his or her original functional state. However, the typical trajectory of rehabilitation is a relatively rapid gain in the employee's functioning over days to weeks and then a flattening of the curve. The curve can then proceed from 80- to 100-percent rehabilitation over a period of months to years.

At the point where the slope flattens, your benefit-to-cost ratio declines markedly. That's when you need to carefully monitor rehabilitation against the goals you set initially. When the employee reaches the flat part of the curve, you should terminate rehabilitation. And, close to the top of the curve, you should push for a transition for the employee back to the worksite so he or she can make minor additional gains on the job.


In summary, much of what ails workers' comp is the result of poor employee relations, comp management fragmentation, ill-defined management processes, and poor execution. It's not all the fault of the regulatory framework or the legal establishment, although they contribute their share. As a financial executive, you have a choice if workers' comp payouts are a problem: Understand and improve the internal system, or understand and improve the system and outsource some or most of it, although it's not yet clear that farming out your entire workers' comp management function is effective.

Dr. Harris is the western regional practice leader for Alexander & Alexander Consulting Group's Health Strategies Group.
COPYRIGHT 1992 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Risk Management; workers' compensation
Author:Harris, Jeffrey S.
Publication:Financial Executive
Date:Nov 1, 1992
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