IMMEDIATE RELEASE

 

RiskTransfer Insight Series™
Critical Observations From Today's Insurance News Headlines

by Paul Hughes, CEO
RiskTransfer Holdings

 

FOR FURTHER INFORMATION:

Risk Transfer Holdings

Office Paul Hughes, CEO

Marsha Grover

mgrover@risktransfer.com

Direct: 321-281-0762

Volume I, Issue I
On Average, Cost Containment Vendors Amount to 20% of Incurred Loss or 13% Percent of Premium.
It's time to evaluate your current workers' compensation program and shine
a light on the high cost of "cost-containment."

 

ORLANDO, FL: The most misunderstood and abused aspect of the workers' compensation system is the cost and utilization of cost containment vendors and processes. Cost containment vendors in the workers' compensation system include managed care companies (networks, case management etc), legal, surveillance, and vocational rehabilitation professionals, among others.

 

These expenses roll up into the general term of allocated loss adjustment expense (ALAE), and will typically be shown on an aggregate basis under the terminology of "other" or "expense".  The workers' compensation system is arguably the most regulated of any line of insurance with costs, policies and outcomes well defined.

 

There are a multitude of rules, on a state-by-state basis, that determine, for example, what a death benefit is, how to calculate average weekly wages, and what triggers a temporary or permanent impairment, etc. 

 

With so much bureaucracy inherent in this line of insurance, it is shocking to note that there are very few rules or limitations as to when these ALAE vendors are used, for how long and at what cost.  To add to the madness, there is little data available to quantify that these costs are actually justified.  You will find many opinions, but few sources of data to back up (1) reduction in average claims costs, (2) reduction in loss days of work, and (3) increase in claims closure.

 

So what's the big deal you may ask?  There has been a shocking spike in the percentage of ALAE as a function of both paid and incurred losses.  In 2009, ALAE (as reported in insurance company financial statements as DCC) represented 20.6% of incurred losses in California and 21.4% in Florida.  In round terms, for every $1 million dollars of claims paid, $200 thousand of this amount goes into the expenses associated with the containment of loss.  That is a big number!  Note this is not the cost for the adjusting of claims.  Unallocated loss adjustment expense (ULAE) is typically charged on a per claim basis.  Therefore over utilization and over charging are not as prevalent because costs per unit are known.

 

A Risk Transfer client came to us with a proposal from another firm and asked for the breakdown on a "cost of goods sold" basis.  In short, the expected fixed and variable costs that make up the all-in total cost of a given workers' compensation deal.  The usual fixed costs are apparent (deductible charge, taxes, ULAE, etc.) and easy to evaluate as are the modeling for expected medical and indemnity losses utilizing actuarial techniques. A more often abused profit center for carriers, TPAs' and managed care companies is a simple calculation that charges the savings of network fees back to the file.  Most national carriers charge up to 25% of these savings.  The company that provided the proposal for Risk Transfer's client charged back a whopping 40% of medical savings to the file as an expense.  Below is what was observed on the managed care network charges alone:

 

            Manual Premium:                                       $6,000,000

 

            Expected Losses:                                          $4,000,000

 

            Expected Medical Losses (70%):               $2,800,000

 

            Expected Medical Billed:                           $5,600,000

 

            Expected Savings (50%):                            $2,800,000

 

            40% Charge to Savings:                             $1,120,000

 

            Other Carrier Charge for Bill Review:       $150,000

 

            Net Difference in Cost:                 $970,000

 

Due to something as innocuous as percentage of savings to network charges, this client would have paid additional hidden costs of $970,000; or over 15 points more in losses.  This amount, if coded improperly, may affect experience modification, collateral amounts needed, and expected loss picks (all things that drive insurability, cost and collateralization).  Last year this same company posted 50% of their incurred losses as ALAE!

 

Why would a carrier want to have a higher loss ratio?  They don't, but they do want to make money, and making it off of these types of vendors can be done without regulation or scrutiny.  A carrier is very limited as to what it can invest in.  Most carriers are responsible and publish expected costs and charges to their clients, but others do not.  Since the charges incurred are meant to contain the cost of a claim, most times it is at the carrier's discretion when these vendors get involved, for how much time and at what price.  This seems reasonable until it is the carrier that owns these vendors and has now been given your checkbook to create revenue streams for its internal managed care companies, subrogation, investigative, case management, etc. 

 

At Risk Transfer, we are aware of other carriers who do not own the ALAE vendors, but do negotiate deals with these same vendors and are rewarded with some type of kickback (usually a percentage of the billed basis).  Any way you look at it, these two scenarios put you, the consumer, in an adversarial position with the carrier in the containment of loss.

Risk Transfer strives to lower costs of workers' compensation by providing clients with information and education to understand the process. We dig into all agreements that carriers offer. We ask the tough questions like "when?" "how?" and "why?" We do not allow over utilization and overcharging. At Risk Transfer, transparency is routinely maintained by simplifying the insurance industry so that all can understand, and by carefully outlining from where each expense is derived.  Each client is given a one page executive summary of their losses and costs on a regular basis. Undisclosed fees should never remain an issue.  Carriers and TPAs must be honest with their clients about the fees that contribute to their revenue.  The client will be more trusting if the company provides this kind of transparency. 

 

Questions? Give us a call at (866) 481-9363 or email us at info@risktransfer.com. We are here not to just shine a light on the high-cost "cost-containment" but help evaluate your current workers' compensation program and advise what can be done to better predict future workers' compensation costs.

 

Risk Transfer. Our mission is to educate our clients about the risks within their business environment, and to deliver solutions with the highest integrity and unmatched insurance acumen. Through our specialized insurance companies and alternative risk facilities, we deploy the core competencies and experience to serve the unique insurance needs of your organization and business environment.