General Reserving Guidelines on a Lifetime Work Comp Claim

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:

 

 

Indemnity Aspects

 

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.

 

 

State Funds

 

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.

 

 

Pension

 

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.

 

 

Medical Aspects

 

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

 

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.

 

 

Medicare Compliance

 

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.

 

 

 

Summary

 

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: mstack@reduceyourworkerscomp.com.


©2012 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. 

 


Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional about workers comp issues.

How To Properly Reserve a Work Comp Claim

When a workers’ compensation claim occurs, the insurer incurs a financial obligation to pay the future cost of the claim.  Proper accounting requires the insurer to set aside the amount necessary to pay the claim.  While the exact cost of this future obligation is unknown, the insurer needs to estimate the future cost of the claim as accurately as possible in order to set aside the appropriate amount of money to pay the claim.  The money set aside to pay the claim is referred to as the claim reserve. [WCx]

 
It is common practice in the workers’ compensation field to break the reserve down into components.  The three major components of the reserve are:
 
·         Medical cost
·         Indemnity cost
·         Expenses
Some insurers will break the expense component into two parts, expenses and legal.
 
Medical:
 
To establish how much money should be placed in the medical component of the reserve, the workers’ compensation adjuster will estimate the cost of:
 
·         Physicians
·         Hospitals
·         Diagnostic testing
·         Physical therapy
·         Ambulance
·         Prescriptions
·         Durable medical equipment
·         Attendant care
·         Other medical cost
 
A dollar amount is estimated by the adjuster for each of the above types of medical care based on the adjuster’s initial investigation establishing the nature of the injury and the level of severity of the injury.  For a sprained ankle, the adjuster might assign the following amounts to each category:
 
·         Physicians                                $1,000
·         Hospitals
·         Diagnostic testing                     $1,000
·         Physical therapy                       $2,000
·         Ambulance
·         Prescriptions                            $   250
·         Durable medical equipment
·         Attendant care
·         Other medical cost                    _____
               Total Medical Reserve      $4,250
 
The medical reserving for an amputated hand might look like:
 
·         Physicians                                $10,000
·         Hospitals                                  $25,000
·         Diagnostic testing                    $  2,000
·         Physical therapy                      $  5,000
·         Ambulance                               $  1,000
·         Prescriptions                            $  2,500
·         Durable medical equipment      $40,000
·         Attendant care
·         Other medical cost                    $  2,000
 
                 Total Medical Reserve      $87,500
 
Indemnity:
 
To establish how much money should be placed in the indemnity component of the reserve, the workers’ compensation adjuster will estimate the cost of:
 
·         Temporary total disability (TTD)
·         Temporary partial disability (TPD)
·         Permanent partial disability (PPD)
·         Permanent total disability (PTD)
·         Rehabilitation / vocational expense
·         Death benefits
·         Dependent benefits
 
A dollar amount is estimated by the adjuster for each of the above types of indemnity benefit based on the adjuster’s initial investigation establishing the nature of the injury and the level of severity of the injury.  For a sprained ankle, the adjuster might assign the following amounts to each category:
 
·         Temporary total disability (TTD)           $600 per week X 10 weeks = $6,000
·         Temporary partial disability (TPD)
·         Permanent partial disability (PPD)
·         Permanent total disability (PTD)
·         Rehabilitation / vocational expense
·         Death benefits
·         Dependent benefits                                                                                _____
                           Total Indemnity Benefits                                                     $6,000
 
The indemnity reserving for an amputated hand might look like:
 
·         Temporary total disability (TTD)          $600 per week X 20 weeks =  $ 12,000
·         Temporary partial disability (TPD)
·         Permanent partial disability (PPD)        $600 per week X 250 weeks= $150,000
·         Permanent total disability (PTD)
·         Rehabilitation / vocational expense
·         Death benefits
·         Dependent benefits                                                                                ________
          Total Indemnity Benefits                                   $162,000        
 
Expenses: 
 
To establish how much money should be placed in the expense component of the reserve, the workers’ compensation adjuster will estimate the cost of:       
 
·         Medical reports
·         Independent medical examinations or peer reviews
·         Experts
·         Attorney
·         Court reporters
·         Surveillance
·         Any other expense.
 
As with the medical component and indemnity component of reserving, an estimated amount is assigned to each expense category and the total estimated expenses is established. [WCx]
 
Total Reserve:
 
The total reserve on the file is the combined amount of cost estimated by the adjuster for medical + indemnity + expenses. 
 
The workers’ compensation adjuster should establish the initial reserve within 48 to 72 hours of the claim creation.  The adjuster should review the reserve whenever there is important new information obtained that impacts both the amount and type of medical treatment, or impacts the amount of indemnity that will be paid.  It is often the goal of the adjuster to establish the ultimate estimated value of the claim (reserve) within 6 months of the initial report of the claim.
 
Accurate reserving is very important to the insurer in establishing the amount of money to be set aside for the claim.  Accurate reserving is also important to the employer as the severity of the claims, as reflected by the reserving, is a part of the calculations used by the underwriters in establishing the premium for future years.
 
 

Author Rebecca Shafer, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. She is the author of the #1 selling book on cost containment, Workers Compensation Management Program: Reduce Costs 20% to 50%. Contact: RShafer@ReduceYourWorkersComp.com.

 

Editor 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 mstack@reduceyourworkerscomp.com

 


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©2012 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact us at: Info@ReduceYourWorkersComp.com.

5 Reasons Why Reserves Need to be Higher than You Think

As a Risk manager, claims coordinator, agent, human resources representative — whatever your title may be, the name of the claims game comes down to reserves. Reserves are the tangible part of what an injury costs you, either directly out of budget, or as potential future increased premium costs. A lot of speculation and estimation goes into reserving a file, but a good percentage of the time when you try and come up with a number for a file you find yourself way too low. Why are the numbers that your adjuster recommends so high? What exactly do we have to cover as future medical cost, even though this claimant may no longer work for you? How do adjusters learn how to reserve?  
 

1. It is the cost of the claim for “life”
When you think about reserving a file for the long term, you have to think long term. Not long term as in 10 years. Long term as in for the rest of that person’s life. In most states, if an injured worker needs long-term reasonable and necessary medical treatment for their injury, and the doctor relates  treatment specifically back to that injury, then your company is probably responsible. You can get an IME (Independent Medical Review), or record review to fight why the recommended treatment is not related but, typically, the burden of proof is just causal relationship. If the patient can show the need for treatment relates back to the injury of 20 years ago, they have met their burden of proof. This is when these injuries can come back to bite you. Instead of settling 10 years ago because you thought the number was “too high,” now you are going to have to scramble to come up with a defense and, if it is indeed related, not only will you have medical costs but you may have wage-loss costs as well. (WCxKit)

 
 
The future is your biggest enemy in surgical claims with long-term exposure. Once surgery is performed, nothing is ever the same. Scarring, nerve issues, accelerated arthritis symptoms, the need for ongoing medication and doctor evaluations, diagnostic testing, etc. These things all lie in wait for the future. Sure, right now in 2011 the claimant’s demand of $100,000 may seem like a lot. But you have to break the file apart, and this is what the adjuster does. If your injured worker is 30 years old, you potentially have  55 years of exposure. If back surgery was  in 2011, and the claimant is  30 years old, you have a ton of problems sitting there waiting for you. The claimant may be fine now and the surgery was a success. But what about 5,10,15 years from now? Will be needed another surgery? Maybe that one will not go as well. So consider the long term: The life of the claim, the life of your claimant, and the need for future medical treatment.
 
 
2. The injury requires potential future surgical risk
Surgical cases are major red flags for future problems, especially when some sort of hardware is implanted. Most of the time these people return back to doctors due to pain, usually due to hardware or screws becoming loose. Then this person has to undergo a procedure to have it removed. Then, they have to rehab from that, and then they can return to work. But, again, the issue here is when will the person need that hardware out? Some can live with it forever and never come back. Some come back in a year or two. Some have constant problems with it and it creates problems preventing them from making a full recovery from surgery.
 
 
Back surgery is especially risky. In the world of workers comp you do not hear about many success stories with major back surgery. It may lessen the pain, but it can create a ton of future issues. When you evaluate these claims and costs of settling them, be sure to account for future surgical risk. It is very costly, and very risky, and maybe you better get rid of that risk now if you can versus adopting a “wait and see” attitude.
 
 
3. The costs ongoing medications
If you pick up any newspaper you will run across a story about the costs of medications and how they are dramatically increasing. Each drug manufacturer has their reasons to increase price but, whatever the reason, the bottom line is prices are always going up. And if you have a claim where a claimant has to take ongoing medication for pain or nerve issues, those meds are typically not the cheapest ones. Sometimes generics are available and worth looking in to, but its still an ongoing monthly cost that can drag on for years. You can find out from your IME doctor if it is necessary for your claimant to continue taking these meds, how often they should be taking them, etc. That way you can properly estimate the future cost. But keep in mind to add in a percentage for inflation over the years, since prices show no indication of decreasing.
 
 
4. An MSA may be needed
Perhaps the biggest roadblock to settling a claim is the need for a Medicare Set-Aside (MSA). The MSA breaks down future cost for those who require future treatment while also being on Medicare or of retirement age. If your veteran worker sustains a major shoulder injury a year before retiring that is not good. Not only do you have to cover surgery and rehab on a veteran worker in your shop, but also, the chances for a good recovery are guarded, which means ongoing treatment could last for years. An MSA is needed if you want to move this case to settlement. MSA numbers are not small. There are several vendors who specialize in MSA reports and submissions, and they will tell you they are very costly once approved by CMS (Center for Medicare/Medicaid Services).
 
 
MSA’s are costly, speculative treatment estimations. And the key word here is “estimates.” There is no guarantee the claimant will need another surgery. But they may estimate it for you, and make you pay for one just in case. So maybe that is a scenario where you should not settle. It is something to discuss with your adjuster. The point is, be aware if an MSA is needed it is going to financially cost you to settle and resolve your risk involvement in this case.
 
 
5. The age/general health of the claimant matters
Obviously if a 22-year-old worker falls and breaks his neck, you have about 63 years of medical exposure. If your 67-year-old, part-time janitor falls and breaks his ankle, you have maybe 16 years of exposure. Age matters. The younger the claimant, the more severe the injury, the more costly it is going to be.  Reviewing employees  personal health histories correlates to cost as well. The healthier the person, the speedier the recovery and the less it may cost to get them  back to full duty work.
 
 
It is hard to control genetics. Everyone is different and heals differently, but you can get a good idea about if someone is “healthy” or not. If you have seen your claimant in the past eating fast food and chain smoking during  daily breaks or lunchtime, you know quick healing is probably not in that person's future.
 
 
Summary
The art of reserving a file for life expectancy is part science, part estimation, and part experience. Adjusters see the same injuries day in and day out. Sometimes they deal with poor healers and sometimes they deal with those who make a speedier recovery than planned for. This is why reserving a file for probable outcome is an art form. All you can do is look at the evidence and what the future may hold. If in doubt, aim for a higher rather than lower reserve figure.(WCxKit)
 
 
For your long, large claims, utilize the help of a life care manager or an MSA company. Talk about future medical needs and costs with your adjuster. Roundtable the file with your peers and see if you are missing anything. Ask your adjuster during your weekly roundtable meeting. If you don't have a weekly roundtable, it might be time to ask for one. It is complicated to think about every cost an injured worker may need between now and 40 years from now, but if you use the tools at your disposal you should be able to get an accurate, effective reserve for the life of the file. If you want to outsource this – and many do – to a an expert, consider the Life Care Planner services of your TPA or MSA company. Also, ask your adjuster for the Reserving Worksheet – this can clear up any problems.
 

Author Rebecca Shafer
, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and website publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. She is the author of the #1 selling book on cost containment, Manage Your Workers Compensation: Reduce Costs 20-50% www.WCManual.com. Contact: RShafer@ReduceYourWorkersComp.com.
 

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers comp issues.
 
©2011 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact Info@ReduceYourWorkersComp.com.

Four Possible Ways to Reduce the Potential Large Dollar Injury Claim

When the workers compensation adjusters receive certain types of indemnity claims, they know immediately to set a very large indemnity reserve on the claim. With a death claim, brain damage, second or third degree burns to most of the body, paralysis, and double amputations, reserving is basically adding up how much you will probably pay on the claim.

 

 

Where work comp adjusters often have a difficult time getting the reserves correct is on the potential problems claims that are handled at the on-set of the claim as just another routine claim. Some of the types of work comp claims that have the potential to become much larger than originally anticipated include: (WCxKit)

 

 

  1. Employees with a previous history of neck or back injuries.

 

  1. Claims involving back surgery (fusion, laminectomy, etc.) on a person who does manual labor.

 

  1. Employees who start out with a hostile attitude toward the employer or the insurance company.

 

  1. Any claim with a long lag time between the date of the injury and the date the claim is reported to the employer.

 

  1. Employee who are not happy with the medical treatment being received and switch doctors more than once (in claims lingo known as “doctor shopping” as the employee looks for a doctor who will not question the employee’s subjective complaints).

 

  1. Switching doctors, after obtaining an attorney, to a doctor known in the local insurance industry and medical community to be “pro-surgery” or “pro-claimant.”

 

  1. Any claim where the employee gets hooked on narcotics.

 

  1. The employee is near retirement age.

 

  1. The employer has announced an impending work-force reduction, or the employee has just been laid-off from work (work comp indemnity checks are usually much higher than unemployment checks).

 

10.The employee applies for social security disability (sometimes even before the adjuster has received the medical reports from the treating physician).

 

11.The workers compensation check is greater per week than the employee’s prior take home pay (when take home pay is reduced by union dues, 401K contributions, state income taxes, etc).

 

 

It is the adjuster’s responsibility to recognize and deal with these issues when they become known to the adjuster. If the adjuster does not respond to these type of issues when they arise, the claims will deteriorate {cost a whole lot more than they should}. The risk manager for the employer should act when the inexperienced adjuster does not recognize the impending problem or the lazy adjuster does not act on the impending problem. Any time either the adjuster, the adjuster’s supervisor or the risk manager see a potential problem developing they should take action immediately. It is a whole lot easier to stop a new problem claim from developing into a bad claim than it is stop a bad claim that is well established.

 

 

Many of these issues can be prevented, or stopped when they start, by taking strong action as soon as they are recognized. An in-depth initial investigation will stop most employees from building an otherwise legitimate injury claim into a monster claim, or a fraudulent attempt into a successful fraud. With claims that are reported late, or the employee has a hostile attitude, or the employee’s job is ending either due to retirement or a reduction in workforce, the appropriate investigation will stop these types of claims from mushrooming into major claims. If the employee sees a detailed investigation going on, they are much less likely to pursue building their claim up when they know they are being watched. On the other hand, if the employee never hears from the adjuster, or the adjuster only makes a perfunctory initial contact with the employee, the employee is emboldened by the lack of investigation.

 

 

After a strong initial investigation by the adjuster, the next best thing to stop many of these claims is a well-established, enforced early return to work program with modified duty available and provided to the employee. If the employee is back to work, it is difficult for them to convince even a “pro-claimant” doctor that they should be on social security disability. It is also difficult for the employee to go “doctor shopping” when they are working and being back at work does not give the employee the opportunity to net more pay out of work comp than they do on the job.

 

 

If the in-depth investigation and the early return to work program have not obtained control of the claim, in depth medical case management can prevent some claims from getting out of control. When a nurse case manager is working with the employee who has had previous back or neck problems, often they can work with the medical provider to obtain conservative treatment that returns the employee to their pre-injury physical status without surgery. Also, it is easier to keep employee from becoming narcotic addicted if they have not had surgery, or if they had surgery, their narcotic usage is monitored. (WCxKit)

 

 

If the employer, adjuster and nurse case manager work together as a team, most of the routine work comp claims that become large dollar claims can be prevented. Strong claim handling by the adjuster, an involved employer, and a dedicated nurse case manager can exercise the claim guidance needed to keep the routine claims with potential problems from becoming the large dollar claims.

 

Author Rebecca Shafer, JD, President of Amaxx Risks Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker and website publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing.  See www.LowerWC.com for more information. Contact:  RShafer@ReduceYourWorkersComp.com or 860-553-6604.


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©2011 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact 
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How Reserves Are Calculated

One of the most important functions  of the workers’ compensation adjuster is the establishment of reserves on each claim file. The reserves for the claim file are the amount or number of dollars needed to cover the legal and financial obligations of the insurer arising from the workers' compensation claim. Sarbanes-Oxley and other regulations require insurers to account accurately for their liabilities, which would include the workers' compensation claims of the insurer. 
 
The three types of reserves normally established on every lost time workers' compensation claim are indemnity reserves, medical reserves and expense reserves. The work comp adjuster should use a reserve work sheet to analyze the amount needed for each type of reserve on the claim file. If the adjuster does not take time to formulate properly the amount of reserves using a reserve worksheet, it is often said the adjuster is using the “wag” method…….the wild ass guess method. 
 
For an accurate analysis of what dollar amount is needed for each of the reserves, each of the three types of reserves are further divided into various subcategories. To assist our readers we will provide these subcategories as we illustrate the three main types of reserves.
 
INDEMNITY RESERVES:
Indemnity reserves are establish to pay the employee a disability benefit for the time the employee is unable to work or to compensate the employee for the partial or total loss of a body function. The five types of indemnity reserves are temporary total disability (TTD), temporary partial disability (TPD), permanent partial disability (PPD), permanent total disability (PTD) and death benefits. 
 
To establish the amount of the initial reserves for TTD, TPD, PPD and PTD, the work comp adjuster using a reserve worksheet, either paper or electronic, will calculate the employee's average weekly wage (AWW) from the payroll information provided by the employer. The average weekly wage will be multiplied by two-thirds (in most jurisdictions) to determine the “comp rate”–the amount the employee will be paid for each week the employee is unable to work. 
 
In this example we will have an employee earning $750.00 per week and a comp rate of $500.00 per week. Based on the nature of the injury and the initial medical report, the adjuster anticipate the employee will be off work 12 weeks, will return to work on light duty, one-half days, for another 6 weeks, and then will return to work full time with a 5% permanent partial disability rating (with a 100% rating equal to 400 weeks).
 
The calculations on the reserve worksheet would look like this:
          TTD weeks___12___ X comp rate $500  =      $6,000
          TPD weeks       6        X comp rate $250  =      $1,500
          PPD weeks      20       X comp rate $500  =     $10,000        (5% of 400 = 20)
          PTD weeks________ X comp rate _____ =      ______
          Other benefits                                                 ______
          Total Estimated Indemnity Reserve                  $17,500
 
In this example the PTD section is left blank as there is no reason to believe the employee will be permanently disabled. The “other” benefits section which could include death, burial, disfigurement or spousal/dependent indemnity is blank because none of them would apply. 
 
MEDICAL RESERVES:
In the medical reserves the work comp adjuster will estimate the anticipated medical cost for each type of medical treatment the injured employee will need. The skilled adjuster who has handled numerous work comp claims in the jurisdiction will normally be accurate within 10%-15% of the final medical cost of the routine claim. 
 
To establish the amount of the initial medical reserve, the adjuster will estimate the cost of each type of anticipated medical service. Based on the nature of the injury and the initial medical report, the adjuster anticipates the medical services the employee will need. The medical section of the reserve worksheet will look like this:
          Physician fees         $3,000                    Hospital fees           $5,000
          Surgical cost           $4,000                    Physical Therapy     $2,500
          Diagnostic test        $1,000                    Drugs                        $   500
          Ambulance              ______                   Attendant Care        ______
          Medical Rehab.       ______                   Other                        ______
          Total Estimated Medical Care Reserve             $16,000
 
In this example the medical care cost the adjuster does not expect to be incurred on the work comp claim are left blank.
 
EXPENSES:
There is much more variance in how insurance companies approach reserving for expenses then there is in the reserving for indemnity benefits or medical benefits. Some insurance carriers will have only one reserve for all claim expenses, while other insurance carriers will have separate expense reserves for litigation, vocational rehabilitation, private investigators, etc. 
 
There are claim cost that do not neatly fit into expenses or medical. Independent medical evaluations, medical record fees, medical management fees and medical equipment rental will be included in the medical reserve by one insurance carrier and will be included in the expense reserve by the next insurance carrier. For the purpose of this explanation of reserves, we will include these items under the expense reserve. 
 
Based on the nature of the injury and the initial medical report, the adjuster anticipates the expenses associated with the work comp claim file handling and getting the claim approved at the work comp board.   The expense section of the reserve worksheet will look like this:
          Independent Medical Exam          $   750     Medical Record Fees     $   250
          Medical Management Fees          $2,500    Vocational Counseling    ______
          Job Assessment Fees                 ______   Vocational Training         ______
          Defense Counsel 20 hrs x $150   $3,000   Subpoenas/Transcription  ____
          Expert witnesses              ______      Work Comp Board cost  $   500    
          Surveillance ____ x _____        ______         Other expenses     _____
          Total Estimated Expense Reserve     $7,000
 
In this example the adjuster does not anticipate incurring any cost for vocational rehabilitation, for expert witness or for surveillance. 
 
 
TOTAL CLAIM RESERVES:
In our sample reserve worksheet, the adjuster’s initial evaluation of the claim includes $17,500 for indemnity benefits, $16,000 for medical benefits and $7,000 for claim expenses, for a total reserve on this work comp file equaling $40,500 ($17,500 + $16,000 + $7,000). 
 
The adjuster knows the reserve may need to be changed when additional medical information becomes available of there are other developments within the claim. The employee could recover faster than anticipated and the indemnity reserves would be adjusted downward.   Or, the employee's surgery does not go well and the surgery has to be re-done. The employee is off work longer than anticipated and the medical cost is higher than originally expected, resulting in the indemnity reserve and the medical reserve being increased. (workersxzcompxzkit)
 
The adjuster needs to be both flexible and accurate at the same time in establishing and updating the claim file reserves. By applying the experience the adjuster has with careful consideration of the cost related to the employee's injury, the adjuster should be able to maintain accurate reserves on the work comp claim file.

Amaxx Risk Solutions, Inc
can be contacted at: RShafer@ReduceYourWorkersComp.com or 860-553-6604.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers' comp issues.
 
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