Reserving is One of Most Important Aspects of Claim Handling
Reserving is always one of the most important aspects of claim handling. Whether it is a normal run of the mill lost time claim, or a catastrophic (CAT) claim, the goal is always the same: To accurately place the proper amount of money or reserves in the claim for the duration of the injury, based on the associated risk drivers.
Every now and then it is good to have a refresher on what adjusters look at when reserving a lifetime claim. This is essentially a claim where the employer has come out and said that there is nothing further they can do with the claim, and the ongoing responsibility of wage and medical payment is now in the hands of the carrier/TPA.
Without getting into too much detail, let’s take a quick look at some common issues adjusters review when placing reserves in a claim:
Wage issues will always affect reserving. It is important to remember what the adjuster thinks of when they are placing reserves in a claim. For this article we are focusing on lifetime claims, where an injured worker has lifetime exposure, be it by a legal open award from litigation, or voluntary pay by the adjuster on the file.
Once you figure out what the actual comp rate is, you look at the exposure from the current time to the life expectancy of the individual. The adjuster looks at risk drivers to life expectancy. Some of those include comorbidities that may shorten the life span of said worker. This could be heart or lung issues, diabetes, severity of injury and if this severe injury could shorten the life span of this worker, tobacco use, and so on. The adjuster will take the weekly rate, multiply it by 52 weeks to get the yearly rate, and then multiply that by the number of years the adjuster anticipates this worker on living before they eventually pass away.
Variations in Indemnity
However, it is not always that easy. One thing to remember is potential wage coordination. Depending on the jurisdiction, you may be able to lessen the work comp rate when a worker turns 65, and then 66, and you can reduce the comp rate by a certain percentage for a number of years after that until age 70 or 75.
Some States have additional wages they pay to an employee. For example, let’s say they have lung issues or loss of industrial use of a limb or eye due to injury. In these cases the carrier pays this additional rate, and then files forms to be reimbursed by the State a few times per year. If this is overlooked, the carrier may be missing out on receiving monies back from the State, to be applied as a credit towards to overall expenses on the file.
Coordination is possible when the worker qualifies for a Pension, they begin to receive Social Security Disability, or their actual Social Security retirement pay from the Federal Government. Carriers can take a financial offset, and the overall comp rate is reduced by the mathematical formula the state provides.
Permanent Disability Ratings
Permanent Disability Ratings are sometimes referred to as Permanent Partial Disability (PPD), Permanent partial impairment (PPI), Permanent Total Disability (PTD), and so on. If an injured worker classifies for one of these ratings, they will be entitled to additional pay. If they undergo another surgical procedure, this impairment rating can climb higher and higher, which entitles the worker for more and more wage benefits.
Loss of Earning Capacity
Lastly included in this realm is Loss of Earning Capacity (LOEC), meaning that the worker can no longer financially make what they were making before, and this can entitle them to further wage loss. Included in those expenses can be vocational retraining that the carrier has to pay for, along with mileage to and from school, books, tuition, and so on.
So as you can see, potential wage costs can be astronomical, and each one of these scenarios has to be broken down piece and piece. Each cost has to be properly laid out in order to assess the proper exposure so the reserving is accurate.
Figuring out the unknown future medical costs of a claim to life expectancy is difficult. You never know if an injured worker will pursue further surgeries or not, and in this arena it is always better to reserve on the high end than the low end.
Depending on the injury, and the future possibility of further surgical procedures, the adjuster will weigh the odds of whether or not this worker will need more invasive treatment. With that come the odds of if this procedure will be successful, or lead to further setbacks. Any procedure carries increased medical costs with hospital fees, physical therapy, rehab costs, medication, attendant care, mileage, etc. These all have to be broken down and allocated properly.
Non-occupational comorbidities also carry a lot of weight. Smoking, heart issues, blood pressure issues, past surgeries, etc, all have to be weighed properly. It is common to think that a smoker has a shortened life span versus a nonsmoker, but this is not always true. Everyone knows of someone that smoked a pack a day since teenage years, and they live to be 90 years old. While this is a possibility, the adjuster will likely go with a shortened life span. This is also true of any other non-occupational issue that could lead to shortened life expectancy. It will be weighed properly, and factored in to the overall costs of the claim.
All of the forecasted medical cost issues are not just health related. The use of vocational vendors to find possible work has to be included, as well as probable legal costs.
In addition to these costs, if you decide to pursue a potential settlement, you will also have to include Medicare costs. Recently Medicare has become very involved in claims, to make sure they are not picking up the financial tab for costs associated with a work injury that should be the responsibility of the carrier. Medicare set-aside costs are very high, and most carriers use an outside vendor to sort out all of this information. This carries a fee, in addition to medical settlement fees, unknown medical liens from providers, and Medicare set-aside costs. Oftentimes the carrier sees the settlement as not financially sound, since this worker could live another 10 years or another 40 years. Why lump sum pay a person for 40 years of benefits when you cannot guarantee 100% that they will live that long?
Other Costs to Consider
Other costs that are reviewed include surveillance fees, on-site nurse case management, medical bill review/reduction fees, ongoing IME costs, Fit-for-duty evaluations, and the list goes on and on.
The good news in that carriers/TPAs have a checklist that helps them map out where a claim may go and the costs associated with lifetime exposure. This list always seems to be growing, as they uncover factors in other cases that they can apply to future cases when mapping out reserves. This is a helpful tool to make sure all of the bases are covered and the reserves are indeed accurate for known and unknown exposure.
As you can see, reserving a claim for a lifetime of exposure is no easy task. This is not something that can be done in an hour. Adjusters can spend days working to forecast life costs on one file. When these exposures come up, the adjuster has to present all of the issues to upper-level management personnel at the carrier/TPA, and they have to elaborate on their findings and why they projected these costs.
Nurses, vocational experts, MSA vendors, and the adjuster all have to work together to make sure every exposure and possibility is reviewed and weighed properly for probability for the application of the claim. Having a lifetime claim is not something the carrier likes to see because of the uncertainty of the future. These claims will be handled by seasoned adjusters that have years of experience in this particular specialty. If you have one of these claims, discuss it with your peers to make sure you think of every possible exposure, and in the end you will hopefully have accurate reserves.
Author Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: firstname.lastname@example.org.
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