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

 


WORKERS COMP MANAGEMENT MANUAL:  www.WCManual.com

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MODIFIED DUTY CALCULATOR:  www.LowerWC.com/transitional-duty-cost-calculator.php

 

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.

 

©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.

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

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