How Subrogation Audits Reduce Workers Compensation Premiums

When an employee is injured due to the negligence of someone else, they have the legal right to pursue a claim against the person or company that caused them the injury. However, in most situations the employee will elect to pursue a worker compensation claim against the employer. When it is said an insurance company or self-insurer has the “right of subrogation”, it means that the insurer, upon payment of a claim due to the negligence of someone else, is substituted for the employee in the right to pursue the recovery of damages from the person or company who caused the injury. Some of these subrogation claims will be product liability actions against the manufacturer of equipment that injured on which an employee was injured.
 
 
Subrogation is based on the principles of negligence and tort, or better understood as “someone else is at fault and they should pay for it.” Workers compensation adjusters who are cross-trained as liability adjusters seldom miss the opportunity to pursue subrogation against another party. Unfortunately, in today's insurance world, most workers compensation adjusters are specialists in work comp and have little, if any, background in liability claims. This results in the work comp adjusters often missing subrogation opportunities. (WCxKit)
 
 
The workers compensation adjusters normally recognize subrogation in situations that occur frequently like car accidents. The work comp adjusters know that another person caused the car accident and they can recover from the driver (or the insurance company) of the other car. It is unique or unusual situations where subrogation is often overlooked by the work comp adjuster. Some actual examples of missed subrogation include:
 
1.      The deliveryman bitten by the homeowners dog
 
2.      The meter reader who stepped in a hole in the yard
 
3.      The policeman assaulted during the arrest of a criminal suspect
 
4.      The electrician shocked / electrocuted by the faulty work of a prior electrician
 
5.      The factory worker injured by a machine malfunction
 
6.      The construction worker injured due to a ladder failure (or the failure of scaffolding)
 
7.      The carpenter injured by a nail gun that malfunctioned
 
8.      The office worker who tripped on new carpet that was installed incorrectly
 
9.      The strip club dancer whose dance pole collapsed unexpectedly
 
10.The preacher who banged his hand on the pulpit to emphasize a point and the pulpit splintered, puncturing his hand
 
11.The grocery store clerk who opened a newly delivered box of produce and was stung by a scorpion
 
 
The above list of missed subrogation opportunities is only a very small example of possible subrogation recoveries. The actual list of subrogation possibilities is almost endless.
 
 
There is one major benefit to the insurance company or self-insurer from the pursuit of subrogation – every dollar recovered through subrogation goes straight to the bottom line of the company's financial statement. The amount paid on the claim is immediately apart of the money going out – the liability has been incurred and paid.   When a dollar is recovered through subrogation, it is profit added immediately to the bottom line.
 
 
With the financial aspect of subrogation, you would think the insurer or self-insurer would carefully search for subrogation opportunities.   However, when the work comp adjuster is reviewing the file, if they do not understand tort law, they will not recognize the potential for subrogation. Unfortunately, the work comp adjuster's supervisor or claims manager will often not recognize subrogation either, as their claims background and expertise is in workers compensation, not liability claims or tort.
 
 
To find the missed subrogation opportunities, the workers compensation claims office should bring in an outside, independent claims auditor who has both an extensive background in work comp claims and an extensive background in liability claims. It takes this dual knowledge to perform a subrogation audit successfully.
 
 
The subrogation audit will identify missed subrogation opportunities and maximize the recoveries of the money paid on the workers compensation claims. The sooner the subrogation opportunity is identified, the easier it is to document the claim with the proper investigation needed to pursue the subrogation. However, to maximize the recoveries, the subrogation audit should include not only the open files, but also all closed files that are still within the statute of limitations. (WCxKit)
 
 
If you are interested in a subrogation audit for your company, please contact us as we have experienced, independent subrogation auditors that are willing to assist you in the recovery of previously missed subrogation opportunities. Our subrogation auditors can work on site or remotely with electronic files, whichever is best for your situation. The auditors can review all files of just the files over a pre-determined dollar threshold. Most subrogation audits can add money to your bottom line.
 
 
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.
 
 
 
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.

7 Unexpected Ways Claim Audits Save Money

In a recent conversation between the risk manager of a self-insured employer and an independent claims auditor, the risk manager advised he was canceling the annual workers compensation claims file audit as a way to save money. The independent claims auditor immediately thought “penny wise and pound foolish”.   The risk manager was going to obtain a short term savings by not having the audit, but based on the claims handling mistakes uncovered in prior audits, the long term costs of canceling the audit would far outweigh the short term gain.
 
 
The independent claims auditor knew if he could get the risk manager to think this decision through, the risk manager would not cancel the annual claims audit. In this scenario the claims auditor is not affiliated with the broker because although brokerage claims auditors are excellent, in some cases, it is be more difficult for them to bring forward issues that are not favorable for the insurance carrier. The claims auditor pulled out the prior two audit reports for this self-insured employer and started discussing the findings from the previous year and the year before that. The topics the independent claims auditor discussed are as follows: (WCxKit)
 
 
1- To Make Quality of Handling Clear
In the initial audit in 2009, the TPA handling the claims for the self-insured employer was doing a mediocre job. Investigations were often incomplete and compensability issues were decided without the proper information. Seven files had been paid where the compensability was doubtful, costing the self-insured employer $27,000+.   Due to the Best Practices the independent claims auditor recommended to the self-insured employer, in the 2010 audit the TPA was doing a better job, only 3 files had been paid without proper compensability documentation, at a lost of $11,000.    Would the TPA's claim handling be perfect in 2011?   Not likely, but without the claims audit in 2011, the self-insured employer was making a non-verbal statement to the TPA that further improvement in their claims handling quality was not expected.
 
 
2- Make Reserving More Accurate
The 2009 audit of 125 workers compensation files identified 27 files that were under reserved and 8 files that were over reserved, with a net under reserving of $520,000. The independent claims auditor asked the risk manager if he remembered the consternation he had over that problem and how he had to explain it to the CFO, and add over a half million dollars to the reserves at one time.   While the 2010 audit results were much better, there were still 12 files that were under reserved and 3 files over reserved, resulting in a $127,000 increase in the reserves.
 
 
3- Identify Leakage
The claims auditor reviewed the audit results for leakage. In 2009, numerous medical bills were being paid without being submitted for repricing to the medical fee bill schedule. Based on extrapolation of the unaudited fee bills for the 125 files to the total fee bills for all files, it was estimated the TPA has paid out approximately $117,000 more than should have been paid. To the TPA's credit (and the self-insured employer's insistence that future medical bills overpayments be reimbursed to the self-insured employer), the 2010 claims audit did not identify any medical bills subject to the fee schedule that were not submitted for review and repricing. (Failure to use the medical fee bill schedule is just one of many possible areas for leakage in a claims office).
 
 
4- Find Subrogation Potential
In the 2009 audit, 3 files totaling $9,000+ were identified as having subrogation potential but no subrogation activity. In the 2010 audit, 5 files totaling $13,000+ were identified as missed subrogation opportunities.   The claims auditor pointed out to the risk manager that just the money recovered on the missed subrogation opportunities covered the cost of the claims file audit for each year.
 
 
5- Locate Fraud
The claims auditor pointed out that in the 2009 audit, one file where the work comp adjuster has missed several red flags that were noted by the claims auditor, resulted in the file being referred to the TPA's Special Investigation Unit (SIU). The file was checked in the 2010 audit and it was noted after the SIU investigation and the facts were presented to the attorney for the employee, the attorney dropped the demand of $175,000 to $5,000, and then later dropped the claim altogether with nothing further being paid to the employee.
 
 
6- Determine Reimbursement from Reinsurance
The 2009 audit identified a file where $637,000 had been paid out on a work comp claim open since 2003. The self-insured employer had a $500,000 retention.   While the excess carrier had been notified of the exposure in 2004 when the dollars paid on the claim passed the $250,000 mark, neither the TPA or the self-insured employer had ever sent a request to the excess carrier seeking reimbursement of the $137,000 paid out in excess of the self-insured employer's retention. (After the claims auditor pointed out this oversight, they requested and received their $137,000 reimbursement).
 
 
7- Get Second Injury Fund Recoveries
In some of the states where the TPA was handling claims for the self-insured employer, the states operated a second injury fund. Two files in the 2009 and one file in the 2010 audit were eligible for partial reimbursement from the second injury funds. After the claims auditor brought these files to the attention of the TPA, all 3 files resulted in recoveries for the self-insured employer.
 
 
After about fifteen minutes of reviewing the results of the two prior audits, the risk manager did an about- face, realizing the claims audit was not a cost of doing business, but a method of reducing cost. The 2011 claims audit has been scheduled. (WCxKit)
 
 
If you would like to reduce your claims handling cost, please contact us about finding a qualified claims file audit firm.
 
 
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.
 
 
 
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

Stair Stepping Reserves Occurs When Work Comp Adjusters Ignore Claim Basics

Whenever a claim quality auditor or actuarial auditor sees numerous small upward changes in the workers’ compensation claims reserves, he knows he has a case of an adjuster stair-stepping the reserves. If you draw a graph of the reserves, it looks like a set of steps—flat, up, flat, up, flat, up

When the adjuster keeps raising the reserves in relatively small increments to pay medical bills, indemnity or expenses, a basic principle of accounting is ignored. Sound accounting for an insurance company or self-insurer is to set aside money to meet the financial obligation brought on by the claim against the insurance policy. When the adjuster does not establish the correct reserve, the insurer’s financial balance sheet is inaccurate, either overstating or understating its assets. With stair-stepping of reserves, the insurer assets are overstated on the balance sheet, as the liabilities—the claim where the reserves are understated—are incorrect.

The ultimate cost (also known as total cost) of the workers compensation claim is the amount that should be shown on the reserves at all times. When the claim is assigned to the adjuster, all the information needed to establish the ultimate cost of the claim is not known to the adjuster, hence there will often be changes in the amount of reserves over the life expectancy of the file. The initial reserves should be based on the adjuster's experience with similar claims, but as facts change – the employee has surgery, the employee's level of disability is greater or lesser than normal, the claimant has co-morbidity issues that lengthen the recovery process, etc. – the reserves should be raised, or lowered, as needed. However, if the adjuster is raising the reserves to pay for this week's medical treatment, and raising the reserves next month to pay for the next doctor's visit, the adjuster is “stair-stepping the reserves." 

 
The difference between the adjuster who increases the reserves correctly and the adjuster stair-stepping the reserves is the number of reserve changes. A few well-reasoned and carefully thought out reserve changes is the proper way of making reserve changes.   Many small reserve changes without any thought as to the ultimate value of the claim is stair-stepping the reserves.
 
 
To avoid stai-stepping the reserves, the adjuster needs to know several things including:       
 
1.      the expected recovery time for the employee,
 
2.      the average weekly wage and the indemnity rate (as all indemnity calculations flow from these numbers)
 
3.      the ability of the employer to return the employee to work on modified duty or light duty while they recover from their injury
 
4.      the approximate cost of the medical procedures the employee will have for the type of injury incurred,
 
5.      the reputation of the medical provider for returning employees to work or keeping them off work
 
6.      the anticipated level of permanent disability the employee will have
 
7.      the cost of services for medical case management, legal, and other claim associated cost
 
8.      the requirements of the workers compensation statutes where the employee will receive benefits
 
 
The claims office will have either an electronic or paper reserve worksheet calculation page where the adjuster can fill in the calculations for each of these items to obtain an accurate projection of the future / ultimate cost of the claim. This will result in the accurate projected value of the claim and the correct amount of money for the adjuster to place in reserve for the claim.   When the adjuster skips the reserve worksheet calculation step, they often end up stair stepping the reserves. (WCxKit)
 
 
Stair stepping of reserves by adjusters should be avoided, and can easily be done by the utilization of the known information about the medical, indemnity and expenses for the individual claim. Proper reserving keeps the insurers financial balance sheet accurate, while stair stepping reserves understates the insurers liability.
 
 
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.
 
 
 
 
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

Leakage Audits Find 18 Types of WC Claim Leakage

 
Leakage in workers compensation is defined as the difference between what was paid on the claim and the amount the adjuster should have spent on the claim. Leakage is lost dollars through over payment of medical expenses, indemnity benefits, and claims handling cost — all ultimately resulting in higher workers compensation premiums for the employer.
 
 
Leakage can be divided into two types: hard and soft leakage. Hard leakage occurs when there is no doubt the payment should not have been made. Examples of this would include no coverage, a payment that is not owed, or an unquestionable overpayment. Soft leakage is more subjective, for instance; the payment of a questionable compensability claim or the high negotiated settlement. (WCxKit)
 
 
Adjusters, supervisors, and claim managers are normally reluctant to admit they have made monetary mistakes. File reviews by the supervisor or manager will focus on the adjuster's compliance with service standards set forth by the claims office. These internal file reviews are checking criteria and grading the process, they are not looking for financial mistakes – leakage.
 
 
An independent claims auditor on the other hand does not have to worry about the impression made on management when leakage is identified. The independent claims auditor can be totally objective in the review of the claim file. From the claims auditor's perspective, the auditor is assisting the claims office to identify areas where they have made financial mistakes and will provide them guidance to avoid the same mistakes in the future. Plus, in some situations part or all of the leakage can be recovered.
 
 
When the claims auditor reviews the claim files, the auditor will pinpoint both hard leakage and soft leakage.
 
 
18 financial areas reviewed by an independent auditor:

1.      The accuracy of the average weekly wage calculation.

2.      Accuracy of the weekly indemnity calculation.

3.      The payment of the correct number of lost work days, including the waiting period and the retroactive period.

4.      The continuation of indemnity benefits after the employee has returned to work.

5.      Failure to arrange modified duty when the medical provider permits the employee to return to work with restrictions.

6.      Payment of the same medical bills more than once.

7.      Payment of medical bills without the appropriate fee schedule reductions.

8.      The over- or under-utilization of medical case management.

9.      Identification of subrogation opportunities and the pursuit of subrogation.

10.  The proper application of offsets including social security, unemployment benefits, and other types of governmental compensation.

11.  Proper use of utilization reviews for pre-certification of treatment, concurrent treatment, and retrospective reviews.

12.  Management of defense counsel.

13.  Settlement of disputed cases at the optimum cost point.

14.  Payment of claims that are not compensable.

15.  The failure to recover reinsurance for claims that exceed the self-insurance retention.

16.  The failure to appropriately evaluate the disability rating.

17.  Failure to appropriately evaluate the value of future medical benefits when settling a claim.

18.  The failure to properly reserve the claim for medical, indemnity, and expense.

 

It should be noted that even the most experienced workers compensation claims auditor will not uncover ever occurrence of leakage.

 
Every leakage audit will identify “loss economic opportunities” (insurance talk for the failure to save money.) The leakage amount will vary from only two to three percent of the dollars spent in an excellently managed and operated claims office to a more disheartening 10 to 15 percent of the dollars spent in the poorly operated claims office. However, for a small claims office that pays out $50 million a year, a 2 percent leakage is $1 million. If the same claims office has a 10 percent leakage, that is a hefty $5 million lost. Leakage is often the difference between an insurer and self-insurer making or losing money on their claims program. (WCxKit)
 
 
Due to the many ways leakage can occur, a claims leakage audit has to be conducted by an auditor with a high level of expertise in workers compensation. The inexperienced auditor may recognize some of the mistakes and missed opportunities to favorably impact the claim's overall cost, but it takes an experienced professional to identify most of the leakage in a claims office operation. If you would like to get an idea of the amount of leakage that is occurring in your claims operation, please contact us. We have experienced claims auditors that can help you identify the leakage in your claims operation.
 
 
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 .
 
 
 
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.

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