Down for the Count
Insuring Major League Baseball player contracts is big business.
The MLB spends in excess of $55 million in annual premiums to obtain individual player contract protection policies and the premiums charged for these policies are not cheap.
Rates run as high as 10 percent of the annual value of the player’s contract to secure coverage for between 50 percent and 80 percent of the total contract value.
Most player contract policies today are written for three years and provide coverage at a 70 percent level, which means that a team may only be able to secure $70 million of insurance coverage for a $100 million contract.
That threshold varies, depending on the size of the total contract as well. For example, a $200 million contract might be insured at a level below 50 percent.
This is, of course, of special interest now to the New York Yankees, who may find themselves submitting eight-figure insurance claims due to injuries to ace pitcher C.C. Sabathia and rising star Masahiro Tanaka.
Sabathia, who had been sidelined since May 10 because of degenerative damage to his right knee, will miss the remainder of the 2014 season as he is scheduled to undergo arthroscopic debridement knee surgery.
On July 12, the Yankees announced that Tanaka has a partially torn ulnar collateral ligament in his pitching elbow which could keep him out of the lineup for six weeks and possibly longer.
Unlike baseball, which requires teams to purchase individual policies for player contracts, the NBA and the NHL each have league-wide plans for their teams. By pooling risks in this way, insurers are able to project claims more accurately and thus reduce the premium costs to less than 5 percent, instead of 10 percent in baseball policies.
MLB player policies work this way: If a player’s multi-year contract is insured for the first three years and the player sustains a career-ending injury during that initial policy period, the insurer will pay off on a percentage of the total contract value.
However, if the player gets through the first three years without injury and the team wants to maintain insurance coverage for that contract, the club will have to secure new coverage for the remaining years of the player contract at a higher premium based on new underwriting criteria such as the player’s increased age and any new medical issues.
In January 2014, Tanaka signed a seven-year, $155 million deal with the Yankees, which pays him $22 million in each of the first six years and $23 million in the last year. If insurance was purchased, a claim could reimburse the team for a percentage of the remaining monies due the pitcher this season.
If, Tanaka’s injury turns out to be career-ending, the Yankees could potentially recoup between 50 percent and 80 percent of the total amount of the deal (less salary paid to date), depending on the type of insurance coverage purchased.
As for Sabathia, the remainder of his seven-year $161 million deal signed in 2008 requires the team to pay him $23 million this year and in 2015; $25 million in 2016; and there is a $25 million vesting option for 2017, including a $5 million buyout that becomes guaranteed under a plan that is tied to the health of his pitching shoulder.
If Sabathia is unable to pitch again because of his current knee injury — as opposed to a shoulder injury — the Yankees will be obligated to pay him his full salary through 2017.
Little is known about the insurance coverage purchased by the Yankees for these pitchers, but some sources have reported that if Sabathia cannot pitch again, insurance would pay out about $58 million — which is 80 percent of the $73 million owed him for the 2015 through 2017 seasons.
Those same sources have also reported that the Yankees might also receive an additional $10 million insurance payout, which would be 65 percent of what is left on Sabathia’s $23 million salary for this season.
It’s possible that the Yankees’ premiums for Sabathia totaled about $13.1 million, meaning that it’s safe to assume the insurer is not simply going to write a check for over four times the premiums without a fight.
Underwriting and Exclusions
As contract values escalate, insurers are becoming more aggressive with policy exclusions and limitations. According to the former general manager of the Arizona Diamondbacks, “you can have a policy effectively excluded out from under you.”
Some pitcher contract policies exclude coverage for elbow and shoulder injuries. Pre-existing injuries are also generally excluded, which could result in another dispute over the Sabathia claim, since he had arthroscopic surgery in 2010 to repair a torn meniscus in the same knee.
It was in 2001 when the Baltimore Orioles filed a $27 million claim after Albert Belle was forced to retire due to an arthritic hip that insurance carriers began to increase premiums for MLB contract coverage. It is estimated that the Orioles received between $20 million and $23 million to cover the $39 million left on the last two years of Belle’s contract.
The Belle claim, coupled with claims arising out of 9/11, prompted insurance companies to become more cautious about the types of risks they were willing to insure and shortened from five years to three years the coverage term for baseball policies.
As with most insurance products, the premium cost for MLB player contracts is tied to a number of underwriting factors such as the length and total value of the contract, the player’s age and injury history, and whether there is any history of substance abuse or use of performance enhancing drugs.
There is a belief among insurers that a player using steroids is more likely to be injured and less likely to recover quickly.
Another truism of MLB player contract policies is that pitchers generally cost more to insure than position players because of the increased potential for injury to pitchers based on the physical stresses associated with throwing a baseball at 90 mph or 100 mph, and the different pitches that strain elbows and shoulders.
In addition to the physical issues, starting pitchers are also more expensive to insure because they are paid more. For example, the five starting pitchers on the Los Angeles Dodgers represent nearly 33 percent of the team’s $239 million payroll in 2014.
The availability of insurance can also play a role in whether a team even offers a player a new contract.
For example, in 2009, the Arizona Diamondbacks were looking to extend the contract of pitcher Brandon Webb for three years at a value of $50 million. Even though Webb passed a team physical, the Diamondbacks were advised that their insurer would not cover injuries to Webb’s pitching arm.
Based primarily on the inability to procure insurance for the contract extension, the team pulled Webb’s offer.
With the aid of hindsight, that decision seems prophetic because a series of shoulder injuries to Webb’s pitching arm sidelined him for much of 2009 through 2012 and, after several aborted comeback attempts, he retired in 2013.
Little Progress Reducing Shoulder Claims
While the nationwide frequency of workplace injuries impacting other body parts, such as lower backs, continues on a downward trend, workers’ compensation experts say they have not seen a corresponding drop in workers suffering from shoulder problems.
Shoulder injuries can require longer recovery times than do other body parts, diminishing the likelihood of a quick return to work, several medical experts said.
“Shoulder claims are huge now,” with the joints of an aging workforce wearing down, said Liz Thompson, CEO at Encore Unlimited LLC, a case management company in Stevens Point, Wisconsin. Treatment options are often expensive, particularly for older workers who are more likely to suffer accompanying comorbidities, she added.
Thompson recently analyzed the claims from one insurer client and found that 70 percent of those stemmed from extremity injuries, including many shoulder issues, she said.
Similarly, Judie Tsanopoulos, director of workers’ comp and loss control at St. Joseph Health System in Orange, Calif. said that beginning about three years ago she observed a rise in shoulder injuries and incidences of frozen shoulder.
“We see far more shoulders,” Tsanopoulos said.
When she drilled into her company claims data she found that women aged 40 to 60 years old accounted for many of those shoulder issues, she said.
Other workers’ compensation experts say they have not seen an overall increase in the frequency of shoulder-related injuries. Yet despite nationwide gains in reducing injuries to other body parts, shoulder injuries are not decreasing.
An NCCI Holdings Inc. report released on July 18 states, among other findings, that from 2008 to 2012 the frequency of lost-time claims for most body parts dropped an average of 13.9 percent.
“One notable exception is that the frequency of injuries involving the arm and shoulder, which represent more than 15 percent of all injuries, remained flat over the period,” dropping only 1 percent, according to NCCI’s frequency report.
In contrast, lower back claims dropped 15 percent during the period while upper back claims dropped 7 percent. Upper back claims showed the least amount of claims decline next to the 1 percent drop in arm and shoulders among body parts.
NCCI’s report stated that the flattening trend in arm and shoulder frequency “may be influenced by an older workforce, where rotator cuff injuries are not uncommon.”
Prior to the flattening in lost-time arm and shoulder claims seen from 2008 to 2012, injuries to those body parts had been declining. They decreased 13 percent from 2004 to 2008 while frequency for all lost-time injuries dropped 17 percent, said Jim Davis, an NCCI director and actuary.
In addition to an aging population more likely to suffer shoulder injuries, more treatments may be occurring today when workers complain about shoulder pain.
In contrast to 20 years ago, doctors are increasingly able to diagnose and address shoulder pain complaints that previously went untreated, said Ira Posner, an MD, orthopedic surgeon, and consultant to third party administrator Broadspire.
“So you are seeing a lot more people with a diagnosis now that we couldn’t make before,” Posner said. “People would present with shoulder pain and we didn’t know why they hurt — now we know why they hurt.”
The improved medical quality means doctors are able to help more workers while workers’ comp payers may now be feeling the increase in shoulder treatments.
“That is why you are seeing more pathology in the shoulder being treated, because we understand the shoulder better and we are able to do more for complaints of shoulder pain,” Posner said.
One cost mitigating factor, however, stems from a shift from conducting mostly open shoulder surgeries to performing more orthoscopic and outpatient treatments, added Jacob Lazarovic, senior VP and chief medical officer at Broadspire.
Still, shoulder injuries typically require more recovery time than do other body parts, experts said.
“Recovering from shoulder surgeries is a pretty prolonged process in the best of cases, but it would be even more prolonged for older workers,” Lazarovic said.
The complexity of shoulder joints adds to the problem, medical experts said.
In addition to a longer recovery time, shoulder injuries such as those requiring rotator cuff surgeries make it challenging for employers to return workers to certain jobs, such as those requiring overhead lifting, said Teresa Bartlett, senior VP and medical director at Sedgwick Claims Management Services Inc.
“Shoulder injuries in general are problematic,” Bartlett said. “Regardless of age, it’s the mechanism of the shoulder that tends to be very difficult.”
In response, Thompson at Encore Unlimited is seeing employers increasingly interested in shoulder protection and corresponding loss control programs.
“Anytime you have an injury group that is driving your claims costs, as an employer you have to evaluate what can you do to eliminate some of that risk,” such as making sure the worker fits the job, she said.
Achieving More Fluid Case Management
Risk management practitioners point to a number of factors that influence the outcome of workers’ compensation claims. But readily identifiable factors shouldn’t necessarily be managed in a box.
To identify and discuss the changing issues influencing workers’ compensation claim outcomes, Risk & Insurance®, in partnership with Duluth, Ga.-based Healthcare Solutions, convened an April roundtable discussion in Philadelphia.
The discussion, moderated by Dan Reynolds, editor-in-chief of Risk & Insurance®, featured participation from four tenured claims management professionals.
This roundtable was ruled by a pragmatic tone, characterized by declarations on solutions that are finding traction on many current workers’ compensation challenges.
The advantages of face-to-face case management visits with injured workers got some of the strongest support at the roundtable.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” participant Barb Ritz said, a workers’ compensation manager in the office of risk services at the Temple University Health System in Philadelphia.
Telephonic case management gradually replaced face-to-face visits in many organizations, but participants said the pendulum has swung back and face-to-face visits are again more widely valued.
In person visits are beneficial not only in assessing the claimant’s condition and attitude, but also in providing an objective ear to annotate the dialogue between doctors and patients.
“Oftentimes, injured workers who go to physician appointments only retain about 20 percent of what the doctor is telling them,” said Jean Chambers, a Lakeland, Fla.-based vice president of clinical services for Bunch CareSolutions. “When you have a nurse accompanying the claimant, the nurse can help educate the injured worker following the appointment and also provide an objective update to the employer on the injured worker’s condition related to the claim.”
“The relationship that the nurse develops with the claimant is very important,” added Christine Curtis, a manager of medical services in the workers’ compensation division of New Cumberland, Pa.-based School Claims Services.
“It’s also great for fraud detection. During a visit the nurse can see symptoms that don’t necessarily match actions, and oftentimes claimants will tell nurses things they shouldn’t if they want their claim to be accepted,” Curtis said.
For these reasons and others, Curtis said that she uses onsite nursing.
Roundtable participant Susan LaBar, a Yardley, Pa.-based risk manager for transportation company Coach USA, said when she first started her job there, she insisted that nurses be placed on all lost-time cases. But that didn’t happen until she convinced management that it would work.
“We did it and the indemnity dollars went down and it more than paid for the nurses,” she said. “That became our model. You have to prove that it works and that takes time, but it does come out at the end of the day,” she said.
The ultimate outcome
Reducing costs is reason enough for implementing nurse case management, but many say safe return-to-work is the ultimate measure of a good outcome. An aging, heavier worker population plagued by diabetes, hypertension, and orthopedic problems and, in many cases, painkiller abuse is changing the very definition of safe return-to-work.
Roundtable members were unanimous in their belief that offering even the most undemanding forms of modified duty is preferable to having workers at home for extended periods of time.
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Unhealthy households, family cultures in which workers’ compensation fraud can be a way of life and physical and mental atrophy are just some of the pitfalls that modified duty and return-to-work in general can help stave off.
“I take employees back in any capacity. So long as they can stand or sit or do something,” Ritz said. “The longer you’re sitting at home, the longer you’re disconnected. The next thing you know you’re isolated and angry with your employer.”
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Whose story is it?
Managing return-to-work and nurse supervision of workers’ compensation cases also play important roles in controlling communication around the case. Return-to-work and modified duty can more quickly break that negative communication chain, roundtable participants said.
There was some disagreement among participants in the area of fraud. Some felt that workers’ compensation fraud is not as prevalent as commonly believed.
On the other hand, Coach USA’s Susan LaBar said that many cases start out with a legitimate injury but become fraudulent through extension.
“I’m talking about a process where claimants drag out the claim, treatment continues and they never come back to work,” she said.
Social media, as in all aspects of insurance fraud, is also playing an important role. Roundtable participants said Facebook is the first place they visit when they get a claim. Unbridled posts of personal information have become a rich library for case managers looking for indications of fraud.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” said participant Barb Ritz.
As daunting as co-morbidities have become, roundtable participants said that data has become a useful tool. Information about tobacco use, weight, diabetes and other complicating factors is now being used by physicians and managed care vendors to educate patients and better manage treatment.
“Education is important after an injury occurs,” said Rich Leonardo, chief sales officer for Healthcare Solutions, who also sat in on the roundtable. “The nurse is not always delivering news the patient wants to hear, so providing education on how the process is going to work is helpful.”
“We’re trying to get people to ‘Know your number’, such as to know what your blood pressure and glucose levels are,” said SCS’s Christine Curtis. “If you have somebody who’s diabetic, hypertensive and overweight, that nurse can talk directly to the injured worker and say, ‘Look, I know this is a sensitive issue, but we want you to get better and we’ll work with you because improving your overall health is important to helping you recover.”
The costs of co-morbidities are pushing case managers to be more frank in patient dialogue. Information about smoking cessation programs and weight loss approaches is now more freely offered.
Managing constant change
Anyone responsible for workers’ compensation knows that medical costs have been rising for years. But medical cost is not the only factor in the case management equation that is in motion.
The pendulum swing between technology and the human touch in treating injured workers is ever in flux. Even within a single program, the decision on when it is best to apply nurse case management varies.
“It used to be that every claim went to a nurse and now the industry is more selective,” said Bunch CareSolutions’ Jean Chambers. “However, you have to be careful because sometimes it’s the ones that seem to be a simple injury that can end up being a million dollar claim.”
“Predictive analytics can be used to help organizations flag claims for case management, but the human element will never be replaced,” Leonardo concluded.