Are Your Seat Belts Fastened for Workers’ Comp in 2016?
Issue: October 2015 | Workers' Compensation | Download PDF | English By Michael Shor, MPH, Managing Director, Best Doctors Occupational Health Institute
Make no mistake, the future has a nasty way of becoming the present, and always much sooner than we prefer. In the Workers' Compensation industry, that may mean unpleasantly blossoming reserves and an unrelenting rise in medical costs. The factors responsible are many, but the key question is, how can we as an industry remain viable in what may very well be an insidious shift in work-related injury costs?
In his recent publication "Seismic Shifts," Peter Rousmaniere describes in detail the myriad of changes affecting Workers' Compensation. Yes, the actual number of injuries is decreasing. For the social scientist, that would be considered very good news indeed. To the industry analyst, however, it looks much more like a "shrinking market." Much more concerning is the clear rise in injury severity. Market forecasts suggest that the industry will broaden its appetite for the "best" risks and avoid those that are more uncertain. Growth of the assigned risk pool is the harbinger. While not a major change in underwriting behavior, it will bring new meaning to the "sharpened pencil." For anyone who has looked at Workers' Compensation as a necessary loss leader to obtain the more profitable lines, the C-Suite question may well become "And why are we writing Comp?"
But one does not need to blindly follow past practice or thinking. Like all markets, the future will belong to leaders who are nimble enough to see around the corner and evolve their management and processes to meet new realities. The discussion that follows has two fundamental purposes. The first is to take a hard look at the forces that will be changing financial incentives for both patients and providers of care. The second purpose is to focus on the areas of expertise that will be necessary to meet these new challenges.
What Is Changing?
Many forces are reshaping Workers' Compensation, and most are more related to changes occurring in the group health market and the U.S. workforce. The textbook case for this is the dynamic change occurring in healthcare delivery as result of the Patient Protection and Affordable Care Act (PPACA), known by those of us from Massachusetts as Romneycare but by the rest of the nation as Obamacare or the ACA. After six years of Romneycare, the sky has not yet fallen on the Commonwealth of Massachusetts; most cost increases have been trending downward, and 98% of the state's population has health insurance coverage.
While overall Workers' Compensation medical costs have not dramatically escalated, the trends and warning signs are on the horizon. The cost of many brand name and generic pharmaceuticals common to Workers' Comp has increased measurably. It appears that some pharmaceutical executives ignored the memo about trying to keep healthcare affordable! And the physician-hospital organization owned by one of the largest healthcare providers in the Commonwealth has been much more aggressive in its Workers' Comp medical charges.1
Arguments for or against the PPACA are well beyond the scope of this article, but this game changer is already having profound effects on Workers' Compensation and, depending on which "smart guy" has the podium, will dictate the effects - whether positive or disastrous. Think of it as a slowly boiling pot that no one notices until it actually boils over. However, there is a specific rule of thumb that I have found to be an exceptionally accurate way of predicting behaviors and the future: call it the "follow the money" rule. If one understands how financial incentives are structured, the behavior of any organization or individual becomes glaringly obvious.
With the lofty objective of universal and affordable healthcare for all, the ACA has forced significant changes in the way group health medical services are organized and paid, essentially attempting to finally drive a stake in to the heart of the unintended perverse incentives that can exist within traditional fee-for-service medicine. The group health move to capitation is designed to pay providers of care a fixed fee for providing all necessary medical services to their patient population. This shift dramatically removes the old financial incentives of providing "more" under the fee-for-service model, to theoretically providing "just the right" or clinically efficient amount of services to achieve an optimal clinical outcome. What this really means is a change in how the organizer and providers of care will be rewarded. It may sound as though that could be good for Workers' Compensation, but one should never ignore the "law of unintended consequences."
One of the first responses is a new "Clinical Mergers and Acquisitions" arms race. Hospitals are acquiring smaller hospitals and as many primary and specialty medical practices as possible, essentially purchasing market share to improve their negotiating position with the group health insurer community. Health insurers are also buying up each other under the mantra that bigger must be better, or that at a minimum, bigger will provide much more negotiating clout with care providers.
Group health typically represents about 98% of all healthcare spending; Workers' Compensation represents about 2% of the market. How much negotiating leverage can 2% of the market purchase with a consolidating delivery system? Or consider a hospital or MRI center where the group health customer is asking for improved pricing. There are few other markets to make up that revenue loss, and Workers' Comp is likely the predominant choice.
Or to make the scenario just a bit more interesting, imagine that specialist referrals on the group health side shrink by 10%. That shrinkage could occur as primary care providers reduce questionable specialty referrals as a way of preserving their capitation dollars. Where can specialists look to make up that lost volume? Before answering, let's go a bit farther. As primary care providers shrink their use of specialty care, they will also begin to limit their referrals to those specialists with clinically and financially efficient outcomes.
That means those who are left on the outside, will be looking to make up that lost volume. Many suspect that all Casualty lines will be affected by this cost shifting, but it is likely that Workers' Comp and Auto Liability will suffer the greatest impact.
Now put yourself in the shoes of a CEO responsible for commercial or state, or federally funded, group health coverage programs that represent 98% of all medical spending. It is inevitable that the first place one would look for potential savings is "low hanging fruit." Those obvious opportunities could well mean a redoubled effort to move the financial responsibility for potentially degenerative musculoskeletal conditions - from those with physically demanding occupations - into the Workers' Compensation arena. Such a development would move those clinical services right out of the capitation expense and make them revenue-generating and fee-for-service for the life of the claim from the Workers' Compensation insurer. Could this actually happen? To test within your own organization, simply track the number of knee replacements or shoulder procedures that are now being reimbursed under Workers' Compensation. Very few work-related knee or shoulder injuries are dramatic enough on their own to require this level of intervention.
Now, this may sound as though I am piling on the problems, but now put yourself in the place of a patient with a job that involves lots of repetitive physical activity; the construction, healthcare and food industries are pretty good examples. None have disappeared in the U.S. the same way manufacturing has. Not that long ago, co-payments for your health insurance plan may have been $10 and your annual out of pocket maximum perhaps $1,000 or $2,000. Today, it is not at all unusual for co-pays to be $30 or $50, and that's with an annual deductible of $5,000 before coverage begins. To make it interesting, imagine that you're 55 years old with a BMI of 35 and with a bothersome knee or back that needs attention. Are you thinking about making a claim on a group health plan that has an annual deductible of $5,000 or a Workers' Comp claim, which is first dollar for the "life" of the claim?
What we know is that people are working longer because they must and that with aging comes degenerative conditions. We know about the decrease in the number of traditional manufacturing jobs that paid reasonably well and offered a degree of security, and that are now often replaced by robots. We also know that while the market may be shrinking, Workers' Compensation, as a mandated coverage, is simply not going to go away.
The population is getting older, and with age comes co-morbidities.
When one looks at loss experience, 30%-40% of losses are generated by those we refer to as "creeping catastrophic" injuries; essentially, they are injured workers with soft tissue injuries and pre-injury behavioral health risks that severely compromise their recovery.
Best Doctors case studies of medical practices have shown misdiagnosis rates of over 30% in certain medical specialties. That is much higher than a manufacturer or a customer would tolerate. A misdiagnosis can mean increased costs associated with inappropriate care as well as delays in healing.
It is the intersection of all these different variables that can drive uncertainty on what loss experience may look like in the future. While it is impossible to precisely predict the future, what cannot be ignored is that the ground is shifting in Workers' Compensation. Long-term viability will require a rethinking of how one manages these new risks and the future will belong to those who know how to evolve with it - those who know how to anticipate and to lead. That brings us right back to looking at questions to ponder for 2016.
Workers' Comp Survival Kit for 2016 and Beyond
Let's start with numbers. What we have seen is that typically 65%-75% of all losses will be generated by three types of injury:
- First are the genuine catastrophic events; most serious injuries are still caused by unsafe acts often compounded by unsafe conditions. For the sake of this discussion, these injuries represent 20%-30% of losses.
- Another category we refer to is the "creeping catastrophic injuries," and these include fairly benign injuries that blossom into chronic pain and chronic regional pain syndrome cases, which can represent about 35%-40% of loss experience. These situations often evolve into claims with $250,000 to $500,000 incurred valuations, or more, over the life of the claim.
- The last population represents injuries that are essentially what I refer to as medically inefficient; they will get better with time, but because of the behavior of an under-responsive medical system, the seriousness of the claims blossoms a bit due to delays in access or clinician unfamiliarity with productivity as a necessary endpoint.
As a public health guy, I was taught that I'd have at most one dollar to spend, so I'd better spend it where it would do the most good. This is a good approach for dealing with the population that has creeping catastrophic injuries. Improvement in a percentage of the outcomes of those claims would have a dramatic effect on ultimate loss ratios.
The future of Workers’ Compensation will belong to what I will refer to as the specialist. The specialist will need to have the following four core competencies in order to achieve medical efficiency.
Core Competencies Needed:
- The Loss Control function in the insurance industry will focus on injury prevention and health risk reduction among insureds.
- Applied data analytics will be integrated with claims handling.
- Claims handling will evolve from claims processing to behavioral and claims management.
- Medical expertise will be integrated as a core Workers’ Comp organizational competence.
Core Competencies for Medical Efficiency
1. Loss Control Moves to Focusing on Injury Prevention and Health Risk Reduction
While loss control has historically focused on maintaining a safe workplace, the vast majority of injuries are the result of unsafe acts, not unsafe conditions and, when one looks at actual loss experience, it is pre-injury risk factors and inappropriate care that lead to "creeping catastrophic" injuries. Smoking, obesity, substance abuse and failed social relationships, as well frequent job changes, are among the more common predictors of compromised clinical and vocational outcomes.
While it is magical thinking to believe one can change a lifetime of behavior, it is not at all unrealistic to develop a treatment and rehabilitation plan that includes careful consideration of risk factors. We know that the content of cigarette smoke precludes healing. We also know that obesity puts patients at much greater risk for degenerative joint disease and co-morbidities of diabetes and heart disease. We can assist employers in creating smoke-free work environments or swapping out the junk food in the vending machines to healthier options. It is well understood that smokers will have both higher group health and Workers' Compensation costs than their non-smoking counterparts.
Creating awareness at the employer level can encourage real changes in organizational culture and tools to foster a healthier work environment. This will not happen overnight, but promoting health risk reduction strategies and, more importantly, assessing an employer's efforts to mitigate health risk, should be a serious consideration for client underwriting, acquisition and retention.
Again, simply do the mental math: What would be the impact on loss experience if a population reduced the number of smokers by 50%?
2. The Integration of Applied Data Analytics With Claims
Data analytics is a hot buzzword in the Workers' Compensation industry, but now we also have applied data analytics, which can change a claim professional's world.
The toughest part of the job for a claim professional is keeping track of the myriad sentinel events that can occur during the course of an injury - an event that is a marker indicating something about the injury has occurred that will change the expected trajectory. Obvious examples are the retention of an attorney or the injured worker being terminated from his/her position. Much less obvious examples are the presence of bio-psycho-social risk factors, the prescribing of an extended release opiate or compound, a referral to a specialist who is not skilled with work-related injuries, or a history of non-workrelated degenerative conditions.
More often than not, a claim professional can miss these sentinel events during typical claims processing, leading to increased loss experience. However, a different future will belong to those organizations that develop applied data analytic capabilities that alert the claim professional on a daily basis of sentinel events that can positively or adversely affect the outcome of a specific claim. Having tools that alert claims managers to these events on a real-time basis will allow for much better time management and focus on claims where the claims manager can do the most good. This is not the stuff of the future; the success of this approach is already apparent at companies where it's being applied.
3. Claims Handling Moves From Claims Processing to Behavioral and Claims Management
We also need to appreciate how life-changing a work-related injury can be for someone who makes their living through their ability to push, pull and lift. The good news is that 80%-90% of those who suffer a work-related injury actually make their way through the system just as they should. But what about the minority who do not? We have already described the pre-injury scenarios that will run a claim awry.
Studies show that injured workers will seek attorneys if they have a fear of being fired, do not hear from their employer or are faced with difficulties receiving their medical or indemnity benefits. Indeed, there is a small population of "claimants" with agendas prior to the injury. But more often than not, the retention of an attorney represents the existence of an issue between employee and employer, a failure to effectively communicate between the claim professional and injured worker, or a frustrating experience with unpaid or unauthorized medical care - all of which a claim professional can help mitigate if he or she has the know-how and the skills.
Understanding how to engage, how to motivate and how to redirect negative behaviors is an important skill set - and will be as important as understanding jurisdictional rules and regulations.
Investing in training initiatives that help claim professionals better understand the mind set of an injured worker, and how to foster and maintain a constructive relationship, will go a long way to reducing the number of claimants who seek attorney representation. Put another way, one can choose to be in the "claim processing business" or one can choose to address the issues that concern legitimately injured workers. A will not accomplish B, but a focus on B will certainly accomplish A.
4. Integrating Medical Expertise as a Core Competence
One aspect that has not changed in Workers' Compensation: A claim typically arises because medical care was required and provided by an emergency room, primary care physician or medical specialist. Unlike our group health colleagues, however, we have never made much of an effort in the Workers' Compensation industry to understand how to reduce inappropriate care or how to guide injured workers into more appropriate clinical environments. Even when we do make the effort, the process is often delegated to subcontractors (vendors) that provide the same services to our competitors.
Another aspect of Workers' Compensation is the belief that a nurse's expertise is the same as a doctor's medical expertise. To illustrate this mistake, calculate how many Workers' Compensation dollars are spent on medical care. Then calculate how many dollars are invested in medical experts that are engaging directly with your C-suite and claims leadership to improve quality of care.
Many people have recommended the development and implementation of narrower physician networks, with a greater focus on quality and outcome. I believe, however, that we need to imbed medical expertise as a core competence of the enterprise. And to be clear, that core competence is not simply being an orthopedist or expert in physical medicine. It is expertise with the actual clinical drivers of Workers' Comp losses and the ability to constructively engage with the medical community, injured workers and the attorneys who represent them.
As in the world's best hospitals, those physicians are supported by expert nursing, pharmacology and behavioral health resources. This may sound like a radical departure from the use of PPOs, utilization review and nurse case management, but it is really a design predicated on what the genuine cost drivers have become in the rapidly evolving world of Workers' Compensation.
We humans are kind of funny. We may say that we like and embrace change, but in reality we find much more comfort in old, predictable patterns of behavior. Genuine innovation generally occurs in enterprises that passionately believe there is always a better way and are willing to take calculated risks to prove it.
Rapid changes in the organization of medicine, in the demographics of the workforce and in the financial incentives for both providers of care and patients are already creating a new dynamic in the market.
Those in leadership roles of Workers' Compensation will be faced with very real dilemmas of either choosing to evolve to meet these realities or reiterating the question posed earlier, "Are your seat belts fastened?" Or said another way, "So why are we writing Workers' Comp?" What has been described above is not the stuff of fiction or dreams. These approaches have already been adopted by the innovators in our industry and the results are speaking for themselves.
1 Best Doctors Inc.