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.

Lower Your Workers Comp Premiums – Do Reserve Audits Before This Secret Date

Each workers compensation file has a reserve set on it. A reserve is an estimated amount of money that will be needed to pay the cost of the workers compensation claim. Determining the correct amount of money that is needed for each claim file is a combination of knowledge and experience. The work comp adjuster needs to be both accurate in the original estimation of the reserves needed, and flexible to adjust the reserves up or down when the information that affects the reserves changes. Read on to find out how to time your audits so they benefit you. If you wait too long, the benefit will be reduced.
 
 
To properly establish the reserves on a work comp claim file, the adjuster needs to know the average weekly wage of the employee, the estimated amount of time the employee will be off work, the estimated amount of disability the employee will incur from the accident and the nature and extent of the medical treatment. To assist the adjuster in establishing these reserves, insurers, self-insurers and third party administrators will provide their adjusters with a reserve calculation sheet that includes spaces for each of the following three types of
monetary expenditures: (WCxKit)
 
 
1.Indemnity
1.      Temporary Partial Disability (TPD)
2.      Temporary Total Disability (TTD)
3.      Permanent Partial Disability (PPD)
4.      Permanent Total Disability (PTD)
5.      Rehabilitation/Vocational Expense
6.      Death Benefits
7.      Dependent's Benefits
 
2.Medical
1.      Physicians
2.      Hospitals
3.      Diagnostic Testing
4.      Specialists
5.      Medication & Durable Medical Care
6.      Transportation Expense
7.      Attendant Care
 
3. Expenses
1.      Medical Reports
2.      Experts
3.      Peer Reviews and/or IMEs
4.      Attorneys
5.      Court Cost
6.      Surveillance
7.      Other expenses
 
 
Most adjusters follow this or a very similar outline in their initial reserve calculations. The Best Practices of the insurance industry and the individual Best Practices of most claims organizations will require the adjuster to establish the claim file reserves early on in the claims handling.
 
 
Where most adjusters and claims offices fall down is on verifying the accuracy of the reserves over time. The initial reserves are often accurate enough, but become inaccurate as the facts of the claims develop further.   There are many factors that can make the original reserves on the file inaccurate including:
 
 
1.      the medical treatment last longer or is shorter than expected,
2.      the employee is off work longer than originally estimated or returns to work sooner than originally estimated,
3.      the medical status of the employee deteriorates,
4.      the employee recovers faster than normal,
5.      the disability rating for the employee is higher or lower than expected,
6.      the claim becomes contested before the work comp board.
7.      When any of these developments occur and the adjuster does not adjust the reserves, the reserves become inaccurate.
 
 
Inaccurate reserves can be either higher than needed or lower than needed. Either scenario creates issues and problems for the insurer, or the employer or both the insurer and the employer. 
 
 
Inadequate reserves have a negative impact on the insurer. When the reserves are too low, the insurer has more money on the financial books of the company to undertake new business or to use for other business purposes. However, eventually the claims with the inadequate reserve have to be paid, forcing the insurer to liquidate other assets to provide the monetary funds to pay the claims. This has a negative effect on the company's financial stability ratings with insurance rating firms and with regulatory department of state governments.
 
 
Under reserving also has a negative impact on the insurance premiums the insurer charges. Insurance premiums are calculated on both the frequency of claims and the severity of claims. Under reserving leads the insurer to believe the severity is milder than it actually is, resulting in the insurer charging inadequate premiums on both renewal business and new business in the same rating category.
 
 
Excessive reserves – over reserving — have a negative impact on the employer. When the reserves are too high, the insurance company is lead to believe the severity of the claims is greater overall than it actually is. The insurer raises the premium charged to the employer to compensate for what the insurer see as a riskier book of business. 
 
 
Under reserving or over reserving is normally minimal on the medical only claims and the small indemnity claims. Where under reserving or over reserving has a major impact on the insurer or employer is on the larger indemnity claims where the employee has a serious medical issue.   A reserving error of $1,000 will normally have little impact on either the employer or insurer. A reserving error of $100,000 can have a significant impact, especially on the smaller or mid-size employer.
 
 
Adjusters do not set out to have inaccurate reserves. Inaccurate reserving usually occurs because either the adjuster is not paying attention to the reserves, or the adjuster does not understand the impact of the medical, indemnity or legal issues on the claim. Either way, the reserves need to be corrected. The best way to verify reserves are correct is to have a reserve audit.
 
Reserve audits can be conducted by:
 
1.      the claims office itself
2.      the insurer
3.      the employer's broker
4.      an independent claims auditor
 
 
Timing is important to maximum the effect of your reserve audits. If you want the reserve audit to impact your workers comp premium charges, the audit needs to be completed AND THE RESERVES CORRECTED before the Unit Statistical Date (known as the "unit stat date".) The unit stat date is 6 months before the effective date of the experience mod.  The data from the unit statistical loss run (both the frequency of claims and the severity of claims) is used to calculate the experience mod for the next premium adjustment.  So doing a reserve audit a few weeks before the unit stat date won't help reduce your next annual premium…schedule it early.
 

Many employers,
and some insurers, will take the approach of telling the claims office to self audit all of its reserves. This can result in some of the reserving errors being corrected, but many or most reserving errors are missed. If the adjuster did not realize before the claims office self audit that the reserves were in error, the adjuster will often make the same mistake again. Plus, the adjuster has self-interest in the reserve audit outcome (his/her performance evaluation being impacted by the number of files improperly reserved).
 
 
The insurer can perform the reserve audit, but the insurer can also be biased. If the claim files are under reserved and the insurer is struggling to maintain adequate capital, they can be biased against raising the reserves too quickly. On the other hand, if the reserves are set too high, an insurer can justify a higher than necessary premium.
 
 
Employers often think they can bring in their insurance broker to review the claim reserves. Many brokers have the claims background needed to understand the medical, indemnity and legal issues of the larger, complex claims, but there are a few who do not, so ask your broker if this is their area of expertise and if not hire an independent to work with the broker or go solo.
 
 
The best approach for reserve auditing is to hire an outside, independent claims auditor to work in conjunction with your broker. The independent claims auditor has no self interest to protect. The independent claims auditor who has extensive claims experience handling complex medical and legal issues is the best qualified person to accurately evaluate the claim reserves on each claim reviewed. (WCxKit)
 
 
If as an insurer, you feel the third party administrators claims office(s) or your own claims office(s) are not getting the reserves right, it is in your financial self interest to get them corrected. If as an employer you believe the reserves of the insurers claims office(s) or the third party administrators claims office(s) have the reserves set too high, you can often reduce the size of your future work comp premiums by having a reserve audit. If you need any assistance in identifying an independent claims auditor for a reserve audit, please contact us.
 
 
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

Over Reserving — Or How to Impress the Boss

The claims quality control auditor noticed something unusual on the first file of the workers compensation claims audit. The auditor quickly realized the error he noted on the first claim file had been made on the second file, third file…….every file in the audit. It was a very unusual error, too. Every claim file was grossly over reserved, not just within the margin of being overly cautious, but on average four to five times the amount of total reserves that would normally be needed.
 
 
The claims office was operated by one of the largest third party administrators (TPA) in the country with an odd exception. The exception was the claims manager who was an employee of the self-insured employer. Everyone in the claims office – approximately 40 employees, who were employees of the TPA, reported through the office chain of command to the claims manager. (WCxKit)
 
 
In the first file reviewed where the claims auditor first noticed the over reserving, the claimant had a crushed finger. As the state where the injury occurred had a chart for Scheduled Injuries for limbs, hearing and vision, the maximum the self-insured employer could pay on the claim per the Schedule of Injuries for the state was $10,220.   The indemnity reserve? $50,000. A back injury with a 10% rating had a $500,000 reserve. An ankle sprain had a $200,000 reserve.   What the heck was going on?
 
 
In interviews with the staff, the claims auditor learned the claims manager was providing the reserve amount he wanted on every indemnity claim. In a discussion with the claims manager, he stated he had been instructed by his boss back at the self-insured employer to make sure there were adequate reserves on every claim. It became apparent to the auditor that the claims manager, who was put in charge of the work comp claims office, had only basic knowledge of workers compensation. All of the work comp adjusters realized the reserving was way high, but were following the manager's instructions. 
 
 
The auditor realized that the gross over-reserving was causing the self-insured employer to have way too much money set aside for the workers compensation claims. Instead of the approximate $25 million they needed in reserves for their indemnity claims, the company had over $110 million in indemnity reserves. The extra $85 million in reserves was a substantial amount of cash for the self-insured employer. So much in fact, that the self-insured employer was borrowing money to meet its other financial needs to operate their business.
 
 
The claims auditor took the unusual step of contacting the Chief Financial Officer (CFO) to see why the self-insured employer was grossly over reserving every claim file. It did not take long for the claims auditor to realize the CFO (and for that matter, the entire senior management of the self-insured employer) knew nothing about workers compensation or the operation of a claims office.
 
 
The CFO was ebullient in his praise of the workers compensation claims manager, stating “he does a fantastic job of managing the work comp claims, he gets almost every claim settled for 20 to 25% of what they would normally cost.” When the CFO was questioned about his knowledge of work comp, he admitted he had none. In further discussion, it came to light that the CFO was determining what they would normally cost  by the amount of reserves set on each claim file!
 
 
The claims office manager who reported to the CFO was intentionally overstating the reserves on each work comp indemnity claim. His purpose? Simply to look good and impress his boss on what “ a fantastic job” he was doing in managing the claims office.   In reality, the TPA's claim staff was doing an adequate job on the claims, but not a fantastic job by any means. On average, the work comp claims were settling for what they worth.
 
 
The claims file auditor, seeing that neither the claims manager nor the CFO had an understanding of how the gross over reserving was impacting the ability of the self-insured employer to manage their company's financial operations, realized something needed to be done. The auditor decided to assist them without embarrassing the claims manager for his intentional over reserving or embarrassing the CFO for his lack of understanding of what was happening.
 
 
The auditor invited the CFO to attend the audit wrap-up session with the claims manager. In the wrap-up discussion, the auditor noted on average, the claims were consistently settling for 20 to 25% of the reserve amount. The auditor asked the claims manager if there was any reason the office could not continue to settle the work comp claims as they had been doing. The claims manager acknowledged they should be able to continue to settle the work comp claims along the same lines as they had been doing. The auditor recommended that since the claims were almost always settled for less than 25% of the reserve amounts, that the reserves across the board be reduced by 75% each (which left all the files adequately reserved for their ultimate settlement value). (WCxKit)
 
 

The CFO was ecstatic to learn they could move $85 million from the work comp claim reserves into their operations cash. The claims manager smiled (an unhappy forced smile) knowing from that point forward he would have to impress his boss by actually accomplishing something rather than playing games with the claim reserves.


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.

WORK COMP CALCULATOR:   http://www.LowerWC.com/calculator.php
 
WC GROUP:  http://www.linkedin.com/groups?homeNewMember=&gid=1922050/
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Review files to determine reserve adequacy

A service you might find useful, and should have a look at is Jim Moore's. Occasionally, I recommend firms my visitors and clients will find useful, and auditing your files is one of the BEST things you can do. Make sure your claims are administered according to your carriers best practices and reserving accuracy. Jim has an excellent understanding of claim administration practices. It's good to get an independent audit at least once every 3-4 years even if it's just at several offices/states of your current carrier. www.CutCompCosts.com If you are not satisfied with how your claims are being handled, this is a good first step to evaluate carrier and TPA performance. For more cost savings tips go to WC Cost Reduction Tips.

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