The Workers' Compensation Crisis; The Hidden Truth 4

Saturday, January 17, 2004 | 0

The Ex-Mod Credit Card
How To Get Out of the Ex-Mod Credit Card Trap

b Part 4 of a 5 part series

Ah, the mysterious experience modification. Ode to the elusive modification rate, the Cleopatra of Comp, the unit statistical filing date. As you taunt me with your B values, I sit here and drink myself into actual excess as my W value turns into a primary expected loss, or is that a primary actual loss?

These terms still confuse me, so we're not going to have a pop quiz today. I'd bet that if Albert Einstein were alive today, even he might have a difficult time figuring this one out:

(Actual Primary Losses + Ballast + (Weighting Value X Actual Excess Losses) + (1 - Weighting Value) X Expected Excess Losses) / (Expected Primary Losses + Ballast + (Weighting Value X Expected Excess Losses) + (1 - Weighting Value) X Expected Excess Losses)

Now, there are always the people that say, oh yeah, it's easy; I can do the calculations in my head. That just sickens me.

So what do credit cards have to do with an ex-mod? No, I didn't say ex-model; let's just call it a mod' for short. The two have quite a bit in common, and that's the topic of this Hidden Truth.

Think of your workers' comp carrier as the bank that issues the credit card (workers' comp policy). When an employee has an injury, you send the employee to the clinic where some tests are run, then after seeing the Doctor, the employee has a prescription filled and several weeks of physical therapy are peppered with some lost-time.

If you're on a fully insured program, you will not see a bill for any of these costs because the bills are sent directly to the insurance company. As they say, out-of-sight is out-of-mind. It's just human nature to not be too concerned about expenses that we think we're not paying for. Do you think you might manage your injuries a bit better if you knew you the bill was due in 30 days? If that made you stop and think, you're going to want to buckle up as we head off on this crazy ride.

So instead of a bill that is due each month from the your Bank of Workers' Comp, you (hopefully) receive loss runs on a monthly basis (if not, call your broker or carrier right now and find out why). You want to take a good hard look at your loss runs every month, the same way you would your credit card bill. Your loss runs show the amounts paid for medical costs and for indemnity (time-off and permanent disability) - what's actually been paid. In this way it's similar to a credit card, but here's the difference, look at the total incurred cost - why is it higher then what's been paid?

Now this might be elementary for some, but it's important that everyone understands that the difference between the paid amount and the total incurred amount is called the reserve. Reserves are what the insurance company claims adjuster thinks will be paid out over the lifetime of the claim, a best guesstimate. Keep in mind that in workers' comp, claims may stay open for years, so reserves are set aside to pay future expenses.

There's not much in the way of standards or regulations on how reserves are set. There's a basic formula and worksheets that are used to work up reserves, but it's definitely more of an art then a science. Carriers are now hiring less expensive, less-experienced claims adjusters that simply do not have the experience required to effectively reserve a file.

When open rating was introduced in 1995 carriers slashed their costs to gain market share by going straight to the claims department. This is a story for another day, but that seems a bit backwards to me, that would be like firing all of your salespeople when you want to increase sales and later complaining that you weren't generating any new revenue.

Fast forward to today and we have claims adjusters that are just simply OVERWORKED. They're not bad people, they're just doing their job the best they can. Many times their best' is just keeping their head above water and in these cases forget any logic when it comes to reserving best practices.

As you would expect from anyone, they make sure to CTA (cover their assets). As a result, claims may be reserved on a worst-case' basis scenario, knowing that it may be awhile before they can get back to touch that file again. To a claims adjuster, it's always safer to be over-reserved on a claim on the basis of worst-case', than it is to be under-reserved.

Careful monitoring of the reserve amounts on your claims, in my opinion, is one of the most critical aspects of workers' comp cost-containment. Reserves drive much of the claim costs and are a HUGE gaping black hole your dollars are being sucked into. You can have the best safety program in your industry, but be missing the boat completely if you aren't paying attention to your reserves.

Although not as commonplace in today's environment, there are still a handful of brokers left who provide a really good claims management service. With some of the new tools we'll be showing off in this series, you can now accurately quantify the kinds of savings that can be generated from aggressively managing claims - and it's enough to make you think long and hard about changing brokers if you're currently not receiving claims management services.

In the last article, we talked about how brokers have no incentive to save their client money (another reason so few provide claims management). Well it's not much different with insurance companies, which makes sense because they're the ones who created the system.

Reserves are bad for you and for the most part, good for the carrier. Not only will reserves drive your mod through the roof and bring your premiums with it (more $ to the carrier), but the insurance companies can also write the reserves off and reduce their taxes.

How do you like that? I can't think of any other industry that charges their customers full-price today for something they don't have to pay out for up to three years or more in the future, but it doesn't stop there; this is where it starts to get really juicy.

You pay the insurance company a premium' for your workers' compensation insurance. If you look up the word premium in the dictionary, besides the definition the insurance companies made up, is:

"the amount paid, often in addition to the interest, to obtain a loan" What the mod essentially does is serve as a revolving charge card for your workers comp claims, all of your claims are charged against the mod and stay there until they are paid back over a four-year period.

And as we'll see later, not only are you paying interest on your charges, but you are also paying a hefty premium in monthly payments. So, the premium you pay each month is just the premium for the insurance company. Because they really make their money on your claims at an interest rate that would be considered illegal in any other industry. Even Vinnie the Shark would be embarrassed to charge you this much.

Don't forget what happens to your premium dollars, they go right out the back door and into the market to earn a nice return while you're working overtime to pay off the interest on your workers' comp claims. And the hamster wheel keeps on spinning around and around.

Now let's get back to your Mod and cut to the chase with what's really going on. Here's an actual analysis of three claims from different employers:

ModController