Zachry: A Settlement Philosophy

Wednesday, July 5, 2023 | 0

The workers' compensation claims settlement philosophy has a direct impact on the injured workers, and a financial impact on the employer and claims administrator.

Bill Zachry

For many generations, the workers' compensation industry did not change its philosophy for settling claims. It was one of the processes that was not questioned because “this is how we have always done it.” 

There are three primary methods to bring claims to a conclusion in workers' compensation. The actual details of these three can vary significantly depending on jurisdiction, local laws, rules and regulations. 

Findings and awards are usually the judge's determination of all issues after a trial in front of the local workers' compensation appeals board. 

Compromise and release is usually an agreement for settling the nature and extent of permanent disability, any questions of unpaid temporary disability and the determination of the amount of money to be paid for any future medical care needed to cure and relieve from the effects of the injury.

In most jurisdictions, the C&R includes future medical care as a lump-sum payment. The origin of this settlement was usually when there was a question of compensability. 

Stipulations usually were also a negotiated amount of permanent disability but included a provision for paying for all future medical care as needed. 

Due to a willingness to challenge the status quo, a better understanding of hidden costs such as collateral, reserve loss development calculations and an increased focus on analytics and financial results, the question of settlement philosophy has come to the fore.

The settlement philosophy is impacted by the following issues: 

• Some jurisdictions do not allow settlement of future medical care.   
• The Medicare set-aside system, which is designed to avoid cost-shifting.   
• Some jurisdictions also have the mandate to bring the claims to a legal resolution within a prescribed timeline of maximum medical improvement.   

Designing the optimum settlement includes the following issues: 

•  What is the best claims settlement for the injured worker? 
•  Which is economically the best settlement philosophy for the employer?   
•  Which is the best settlement philosophy for the claim’s administrator? 
•  Which is the best settlement philosophy for the state jurisdiction? 
•  Which is the best settlement philosophy that will result in the consistent provision of benefits to injured workers? 

It is possible that the correct answer may differ widely due to the age of the injured worker, the eligibility of the injured worker for Social Security or other retirement programs, the injured worker’s economic status, the skills of the injured worker, the injured worker's personality type, the nature of the injury, the employee’s occupation by jurisdiction and by the employer. 

The fundamental goals for a settlement philosophy: 

• Promptly paying the proper benefits to the injured workers. 
• Avoiding creating a significant financial or administrative burden for the injured worker. 
• Avoid cost-shifting. 
• Including a proper analysis of all costs including medical inflation, system creep, collateral and administrative costs. 
• The ability to achieve a full and final settlement or fully conclude the claim. 
• Aligning the proper incentives to obtain the optimum outcome. 
• How to consistently pay both represented and non-represented workers similar benefits for similar exposures.

A brief history

From the late 1950s well into the late 1990s, most new claims examiners (throughout the United States) were originally trained at insurance companies. They were all trained with one workers’ compensation settlement philosophy: If the employee is still working at the employer (and if the employer is still “on risk” with the insurance company) to stipulate the claim, or if the employee is no longer at the employer and or if the employer is no longer on risk, then C&R the claim.”  

If or when an employee eventually left the company, and or if the employer changed insurance companies, a C&R was then attempted. 

If the employee was still at risk with the insurance company, it was a common claims practice to ask the employee for a resignation as a part of the C&R process.  

Because of their original training, most self-insured claims adjusters never questioned the philosophy of stipulating if the employee was still employed. This resulted in a high number of stipulations within the self-insured community.   

Reasons behind the established philosophy: 

• By stipulating, it was easier to get apportionment of the permanent disability for prior injuries. The laws concerning apportionment throughout the United States are not consistent. A C&R does not always accurately define the extent of the permanent disability in the settlement. Therefore, apportionment based on a C&R was potentially problematic. 
• The employer and the insurance company did not want employees who settled by C&R waving big settlement checks at the work site, which might result in “me too” injuries. 
• The claims administrators believed that a C&R would allow the employee to submit claims multiple times for the same body part or same injury. 
• In most jurisdictions, if the employee did not use the future medical provision of the settlement for a few years, the file could then be administratively closed, thereby salvaging the reserves for the future medical back into the claim’s operations. Though the exposure technically remained if the employee was alive, a significant number of stipulated cases were administratively closed. 
• In some jurisdictions, stipulating the claims kept them open and on the books longer, which resulted in higher experience modifications, in turn resulting in higher premiums for the insurance companies. 
• By stipulating the claim, the employer would avoid cost-shifting. A C&R might result in the employer double-paying the medical costs when the employee used group health medical for treatment.   
• It was commonly believed that if employees got a lump-sum settlement for future medical care, they would then purchase a car, a boat or a house and use their group health medical care for the industrial injury treatment. 
• Some state jurisdictions did not want the expense of workers' compensation transferred to the state, so they forbade any permanent and final settlement.  
• When Medicare set-asides became the law of the land, most claims administrators then assumed that C&Rs were more expensive than stipulations. 
• If the future medical care was paid in a lump sum, the injured worker would not have the same access to the cost containment programs (such as bill and utilization review using evidence-based medicine) that claims administrators use to control the medical costs. Most doctors bill their usual and customary and do not bill in accordance with the local fee schedule. 
• It is easier for the defense attorney and for the claims examiner to stipulate a claim than to negotiate a C&R. (Just split the differences of the PD between the applicant and defense medical and agree to provide lifetime care for the medical costs.) 

These reasons were based on premises.

Premise 1: Compromise and releases are more expensive than stipulations. Obtaining a C&R will require extra money for future medical exposure. 

Reality: The settlement figure is a result of the examiner's professional judgment concerning the correct level to pay for a compromise and release. The examiner contemplates the entire medical record and factors how much money the claim will cost for future medical expenses. The figure is always reviewed and approved by the Workers' Compensation Appeals Board judge. Due to petitions to reopen permanent disability issues, and to deterioration of medical conditions, stipulated files may ultimately cost the insurance carrier and the employer more money for the same type of injury than permanently closed files. 

Premise 2: If a claim is compromised and released, the court will not allow apportionment of permanent disability.  

Reality: Courts apportion for permanent disability based on submitted medical records. It is as difficult to obtain apportionment for a stipulation as it is to obtain apportionment from the medical record for a compromise and release. Experienced practitioners within the industry utilize the medical record on compromised and released files to obtain apportionment when appropriate. The WCAB holds the defense community to very high standards when applying for apportionment. It is difficult to get apportionment on stipulated files as to get apportionment on compromised and released files. The correct handling of a file will give ample opportunity to set the record for apportionment notwithstanding the type of settlement obtained on earlier injuries.  

Premise 3: Lump-sum settlements paid to current employees would encourage others to file for benefits. 

Reality: All questionable claims are carefully investigated. With current video technology, it is difficult for employees to file false claims. The companies that have been using a lump-sum settlement philosophy have experienced relatively few copycat industrial injuries.  

Premise 4: If a claim is compromised and released and the injured worker has a need for more treatment, the applicant will then file a new claim when the original injury flares up. 

Reality: The companies that have been using a lump-sum settlement philosophy have rarely experienced this problem. A California case law from City of Anaheim v. WCAB 47CCC52 speaks directly to the issue of an applicant claiming a new injury when the case has been compromised and released. This is a case where a police officer with colitis compromised and released his case and then tried to allege a new injury for each flare-up. The city prevailed, the compromise and release stood and no new benefits were due.    

If there is a new alleged injury that is part of the old injury, it is up to the claims administrator to fight the question because the treatment was already paid for. If the applicant is alleging a new injury when benefits have already been paid for the old injury, it also has potential fraud implications. 

Working at an insurance company for 12 years, as a self-administered self-insured employer for 15 years and for a third-party administrator for three years, my research and experience found very few applications for adjudication of claims on the same claimant, and part of the body, when there has been a compromise and release obtained on the original injury.  

On the contrary, my findings were that there was a trend for midsize and larger files with stipulations to have a petition for new-and-further filed within five years of the date of injury.   

California compensation is replete with numerous cases involving new and further disability and more medical treatment. Open files become more costly the longer they are open. 

Premise 5: Many of the stipulated cases never utilize the future medical care that was awarded. 

Reality: There were a significant number of claims with stipulations that were closed due to inactivity. However, those were usually for minor accidents, and the salvage was inconsequential when compared to the costs of reopening claims for future medical care after they had been closed for several years and for the costs associated with the new-and-further claims that were filed on stipulated claims. 

Challenging the assumptions and status quo  

There are several problems with the established settlement philosophy and the associated assumptions: 

• There were no analyses done to determine what was the best ultimate outcome for the injured workers. 
• It is a poor claims practice, and perhaps even illegal, for insurance companies to discriminate their handling of claims based on the insured being a current policyholder vs. a former policyholder. 
• There is no definitive study concerning the issues of cost-shifting (medical and indemnity). 
• Very few examiners, insurance executives or employers fully understand the cost of collateral (or limitations on the investment of the collateral at insurance companies) required by the insurance companies or the state oversight bodies.  
• The exposure to future medical costs changed as the definition of injury expanded to include cumulative trauma and compensable consequences from the injury.
• Since the 1990s, there has been an explosion of “sisterhood of the traveling body part" injuries.
• Fewer claims are administratively closed after two years of no activity, and those that remain open are significantly more expensive. 
• There is no definitive study on the claims administration expense costs (C&R vs. stipulations) when determining what is more cost-effective to administer.   
• For insurance companies, because there is a differentiation in the calculation of expense vs. loss in the X-mod, there was no calculation of claims administration expense when determining the amount of a C&R. This practice extended to the self-insured companies.   
• The examiners do not know what the medical inflation will be and do not include a calculation of medical inflation in determining which philosophy to utilize. 

Conclusion 

The determination of a claims settlement philosophy should be a deliberative effort that considers what is best for the injured worker as well as what is best for the employer.  

I personally believe that artificially keeping the injured worker tethered to the workers' compensation system through stipulations encourages the employee to believe he is an injured worker rather than a productive worker. I also believe that any C&R should include a program to help the injured worker administer his future medical care program. 

There is probably no single settlement philosophy that can be applied to all jurisdictions.  The issues of cost-shifting and evolving Medicare regulations will need to be evaluated as part of the settlement philosophy. Collateral and claims administration expenses should be calculated and included in the decision to stipulate or settle the claim.  

I recommend that all claims administrators, self-insured employers and employers that share the risk with the insurance companies regularly evaluate their settlement philosophy to determine the best program to achieve their risk management goals.

Bill Zachry is a board member of the California State Compensation Insurance Fund.