Aquifer: Nothing in the Bank
SCENARIO: Jon Gullo eyed the monitor as the nanobots burrowed underground, searching for moisture.
He and his lawyers had managed to convince regulators to let him explore the apparently empty aquifer under his 115 acres of almond trees in California’s Central Valley.
The nanobots were a last-ditch effort to find adequate water supplies in the face of a drought that was browning what had been the country’s richest agricultural zone.
Regulators were helping. Every other week, the U.S. Department of Agriculture collected data from satellites as they passed over the Western states. Like the nanobots, the satellites were searching, in vain mostly, for signs of water in the depleted aquifers, many of which had been pumped dry due to public and private sector mismanagement.
Now the chickens were coming home to roost. With the aquifers depleted, an economic sea-change was in the offing.
In the drought’s early years, businesses and governments invested billions in water recycling, desalination, and freshwater capture, storage and transport. They also drilled deeper and deeper into the aquifers, until stronger regulation of groundwater usage took effect. But the efforts couldn’t stop the aquifers, long a buffer against drought, from running dry.
Now the chickens were coming home to roost. With the aquifers depleted, an economic sea-change was in the offing.
Agriculture, one of the state’s biggest water users, was bearing the brunt of the shortage, and consumers paid for it at grocery stores and in restaurants. Although other areas of the world were ramping up production, fields were not producing fast enough to keep up, plus several batches of imported fruits and vegetables were found to contain traces of banned pesticides.
As the shortage continued, California’s politically powerful cities refused to take deeper cuts in their share of the remaining water supplies. And it was too costly in rural areas to pipe in water from desalination plants, or engage in the same aggressive recycling and conservation efforts used by larger metro centers.
Most of Gullo’s neighbors were already gone. His orchards were surrounded by fields of sand and dust, and abandoned food processing plants.
Undaunted, he was hoping to squeeze what he could from the depleted aquifers under his property.
The potential payoff was worth it, reasoned Gullo. Almonds were fetching astronomical prices thanks to production declines in the Central Valley, which had been the world’s leading grower.
Although he hesitated to admit it, he was frightened to try to sell his property. Few wanted to move to an area where jobs were disappearing and water was so scarce and expensive.
The dearth of homebuyers spurred by the water shortage resulted in a mini-foreclosure crisis up and down the Central Valley.
At least his county had oil and mining to fall back on, though automation and climate-change regulation had put dents in the workforce.
All newcomers could hope for were jobs in construction — fixing the damage to roads and bridges caused by the land subsidence that occurred after the aquifers ran dry.
But if there were no trucks ferrying crates of grapes, almonds and oranges, who needed roads?
ANALYSIS: As California’s drought wears on, no needles register precisely the decline of aquifers in the Central Valley, one of the country’s leading agricultural regions.
But water levels are clearly dropping. In some areas, the land has subsided more than a foot.
Ideally, the return of normal rainfall patterns will replenish the aquifers, though a full refill could take decades. However, the odds of even longer droughts — and even more strain on underground aquifers — are rising, according to climate scientists.
They cite the impact of global climate change, as well as the geological record. Medieval-era droughts in the American Southwest lasted 30 years or more.
Aquifers served as a buffer for those populations, which nonetheless succumbed to malnutrition and conflict, said B. Lynn Ingram, a professor of earth and planetary science at the University of California, Berkeley. That buffer is shrinking today.
“It’s kind of like the water in the bank that we’re using up now,” said Ingram, author of “The West Without Water.”
It’s not just a U.S. problem. Aquifers around the world are emptying, according to research by James Famiglietti, a professor of earth system science at the University of California, Irvine. Sao Paulo in Brazil, for example, has been hit hard, with the city experiencing widespread water shortages.
While modern economies are more technologically advanced, an extended drought and continued aquifer depletion would be painful, especially for agriculture.
The U.S. could see higher food prices and disruption to supply chains, according to insurance and agricultural experts.
The U.S. food supply is becoming more resilient, thanks to interest in local farms, said Dawn Thilmany, a professor of agricultural economics at Colorado State University.
But local farmers won’t be able to make up everything, and water scarcity may not be limited to California.
One alternative is crops genetically modified to withstand drought, experts said. More efficient water use is another. But as the globe warms, production may ultimately shift to northern states.
Imports from other countries also might make up the difference, but they bring new risks, especially if growers overseas are using pesticides or fungicides banned in the U.S., said Rodney Taylor, a managing director in the environmental services group for Aon Risk Solutions.
To guard against liability risks, food distributors and processors should scrutinize any new producers, said Tim McAuliffe, president of specialty casualty and programs for Ironshore. If crops shrink and prices rise, producers may be less rigorous about quality control.
VIDEO: California Gov. Jerry Brown announces the state’s first-ever mandatory water restriction rules.
New sources of surface water also pose a risk of contamination, as does water from deep inside an aquifer, he said. “I would call those a little more remote. But if the drought does continue at severe levels, it’s something that we would watch a lot closer.”
In California, urban areas could recycle wastewater and desalinate ocean water, said David Sedlak, a professor in the department of civil and environmental engineering at U.C., Berkeley. While costly, those efforts will keep the taps flowing.
“It’s just hard for me to imagine a situation where the cities run out of water,” said Sedlak.
Still, the shortage of water could have ripple effects. Electricity production, for example, may be stretched if dams are less productive and higher temperatures translate into greater demand.
“You could end up having situations where you have brownouts because there is so much strain,” said Kirsten Orwig, an atmospheric perils specialist for the reinsurer Swiss Re.
Risk managers will have to consider access to water when assessing supply chains and new operations, insurance executives said.
And if conditions stay dry, wildfires will worsen.
Interstate conflicts over water will flare, too, said David Bookbinder, a partner at Element VI Consulting, which focuses on climate change policy.
Aquifers and watersheds don’t follow state boundaries, he noted. The Supreme Court usually winds up arbitrating disputes over water.
“It’s problematic that our political structure is not set up to deal with this,” Bookbinder said. “That, I think, is going to be the biggest problem.”
Complete coverage of 2015’s Most Dangerous Emerging Risks:
Corporate Privacy: Nowhere to Hide. Rapid advances in technology are ushering in an era of hyper-transparency.
Implantable Devices: Medical Devices Open to Cyber Threats. The threat of hacking implantable defibrillators and other devices is growing.
Athletic Head Injuries: An Increasing Liability. Liability for brain injury and disease isn’t limited to professional sports organizations.
Vaping: Smoking Gun. As e-cigarette usage rises, danger lies in the lack of regulations and unknown long-term health effects.
Aquifer: Nothing in the Bank. Once we deplete our aquifers, there is nothing helping us get through extended droughts.
Most Dangerous Emerging Risks: A Look Back. Each year since 2011, we identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.
Transferring Polluted Properties
Close and trusting relationships among all parties is the single most important factor for the success of a real estate transaction involving an environmentally contaminated — or “brownfield” — property.
In the best of these transactions, the underwriter has good relationships with brokers, underwriters, clients and vendors, said Christopher Alviggi, business development leader, Alliant Insurance Services Inc., a Newport Beach, Calif.-based specialty insurance brokerage firm.
“You want to make sure everybody’s interests are aligned before you close. That will make claims settlement easier, post-close.”
And loop in the regulators, said Randall Jostes, chief executive officer, Environmental Liability Transfer Inc., an environmental liability buyout company. “If they’re included early in the transaction process, they’ll clearly communicate their expectations.”
Different states have different environmental standards and regulations, and different types of properties are subject to different federal regulation. To sort out the regulatory requirements, Jostes said, “we need relationships with federal and state regulators as well as other trusted parties: brokers, carriers, buyers and sellers. They all have their own jurisdictions and expectations.”
The circle of trusting relationships also extends to the consultant that performs the Phase I Environmental Site Assessment — the first step in environmental due diligence that identifies potential or existing environmental contamination liabilities — said David Rieser, head of the Environmental, Regulatory & Redevelopment Law practice at Much Shelist.
“Hire a reputable consultant,” he said. “A great deal depends on the quality of the people who do the work.”
A careless assessment could miss things such as underground storage tanks, which are prone to leaks, “weird pipes you can’t understand” and an unexplained patch of fresh cement — any of which should trigger further investigation, Rieser said.
Those problems could kill the deal or change its terms, since liability for problems on a property transfers with ownership.
Phase I Environmental Site Assessments also include reviewing public documents, such as government databases, building permits and historic fire maps. They create a safe harbor against liability from contaminations.
Demand for Phase I assessments boomed after enactment of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which holds a buyer, lessor or lender responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination.
Risk Transfer Strategies
The National Brownfield Association estimates that $2 trillion of real estate in the United States is devalued due to the presence of environmental hazards — an enormous opportunity for those who can unlock the properties’ redevelopment potential, said Jostes.
The money to be made is legendary: Think Manhattan’s Meatpacking District, the exorbitant neighborhood of young hipsters and boutique-lined streets whose name is the sole relic of its gritty past.
Every kind of property is game for redevelopment, each with its own possible contaminations and risks, said John Wasilchuk, account executive and environmental specialist, Lockton.
Abandoned residential buildings, for example, may have mold, asbestos or lead that require remediation. They may have housed meth labs, leaving behind chemical waste that may be reactive and toxic to human health and the environment, since meth cooks — unlike the fictional Walter White — tend not to be meticulous housekeepers.
Defunct gas stations may suffer petroleum contaminations in soil and groundwater from leaky underground storage tanks, and old agricultural sites could leave fertilizer, pesticide and herbicide contaminations behind, especially at points where the chemicals were stored, loaded or unloaded.
“Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?” — Matt O’Malley, president, North America environmental insurance business, XL Group
Between developers’ appetite for brownfield properties as the economy recovers and strict environmental regulation, the robust pollution legal liability market is “a huge enabler” of brownfield development, said Jim Vetter, environmental risk, insurance and solutions expert, managing director, Marsh.
Traditional pollution insurance will cover unknown contaminations that emerge post-sale, but not known contaminants, many of which buyers, sellers, insurers and regulators should be aware of from the due diligence studies, said Wasilchuk.
Along with “workhorse” pollution legal liability products, transactions also lean on the resurging remediation cost cap insurance market, said Vetter. Although many buyers and sellers still “play hot potato” with known cleanup liabilities through transactional methods, such as indemnification, purchase price adjustment and escrow accounts, they also look to environmental liability buyouts.
In these transactions, a third party assumes ownership in perpetuity of a property’s known environmental conditions in exchange for payment. The buyout company takes on responsibility for remediation and liability.
Among the advantages, said Jostes, is that such arrangements free property owners to concentrate on their core business while the buyout company “owns” and neutralizes the relationship with regulators, which can be adversarial with property owners.
The Power of Indemnification
In some cases, said Mary Ann Susavidge, chief underwriting officer, XL Group, sellers don’t want buyers to perform due diligence and will sell a property only on a “buy as is, where is” basis.
Lacking an appetite for environmental risk, banks often require a Phase I inspection, but buyers that finance the purchase themselves may still accept those risks for a desirable property, either stand-alone or bundled in a portfolio.
“If the property is so desirable, and if the buyer feels it’s educated enough about potential risks, it becomes a ‘don’t ask, don’t tell,’ situation,” Susavidge said. “If they poke around, state or federal regulations may force them to take corrective action.”
For example, the Industrial Site Recovery Act (ISRA) may pertain to New Jersey properties, where certain types of operations trigger a requirement to perform an environmental investigation that may not be required in other states.
“If the new entity wants to add the property to its portfolio, it might be motivated to take on the perceived risk. It’s a risk management choice,” Susavidge said.
A buyer forewarned of likely contamination may negotiate a reduced price, said Cathy Cleary, executive underwriter, XL Group, who is also an environmental attorney. She looks at a laundry list of contractual items that make a strong indemnity for buyers and sellers. It may come in the form of a purchase and sale agreement, or a separate indemnity agreement.
For example, who is responsible for investigation of any environmental issues and subsequent cleanups? If there are claims, how are they made, and who pays? What kind of protection is the buyer getting for future environmental liability obligations, and how long will the indemnity last?
Are there monetary caps on the indemnity — say, for the first $2 million only? Are there retentions before the indemnification pays? If contamination migrates to or from another property, who is responsible for the cleanup? Who is responsible for bodily injuries in the community? Property claims? Third party claims?
Most important is the financial strength of the indemnifier. A seller that is a limited liability company raises a red flag, said Matt O’Malley, president, North America environmental insurance business, XL Group. “Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?”
Quantify the Risks
Ann Viner, general counsel and director of environmental risk management, WCD Group, said brownfield risk management is like a three-legged stool composed of the contract, the insurance, and properly scoped schedule and budget.
All three are best managed by quantifying the property’s environmental risk, she said, which is separate and distinct from a qualitative “guestimate” based on the kind of contamination and historical outcomes of similar properties.
Quantifying the risk is relatively easy in transactions involving a single property, said Marc S. Faecher, senior vice president at TRC, a risk management, engineering, and construction management organization.
With a single property, he said, “you know where the property is located and what its issues are.”
However, he said, portfolios of real estate that blend desirable and impaired properties across primary, secondary and tertiary markets require more detailed analysis. Portfolios likely involve sites facing a variety of issues, and apportionment of responsibility between buyer and seller can be complicated.
“You need to analyze what ultimate cleanup costs would be and what cash flow impacts would be. You need to analyze when the liability would hit and deal with structuring remediation programs to reduce liability over time,” Faecher said.
Experienced consultants aim for a cost risk with a 95 percent degree of confidence, said Viner.
To quantify risk, the consultant develops data inputs for a risk modeling program, then runs iterations based on various scenarios. A lower confidence level can produce a spread of several million dollars in estimated cleanup costs, but a good quantitative analysis will identify the driver for the low confidence level, such as PCBs in the sediment.
Once aware of what information is missing, the consultant can obtain additional data on that driver. Using the new data, a risk modeling program produces a closer estimate of likely remediation costs.
“We know more about what remediations are called for, how much they’ll cost and how long they’ll take,” Viner said. “We can define better contract terms, better and more specific insurance coverage. Quantifying risk helps all three legs of the risk management stool.”
Mitigating Fraud, Waste, and Abuse of Opioid Medications
There’s a fine line between instances of fraud, waste, and abuse. One of the key differences is intent and knowledge. Fraud is knowingly and willfully defrauding a health care benefit program for personal gain or profit. Each of the parties to a claim has opportunity and motive to commit fraud. For example, an injured worker might fill a prescription for pain medication only to sell it to a third party for profit. A prescriber might knowingly write prescriptions for certain pain medications in order to receive a “kickback” by the manufacturer.
Waste is overuse of services and misuse of resources resulting in unnecessary costs, whereas abuse is practices that are inconsistent with professional standards of care, leading to avoidable costs. In both situations, the wrongdoer may not realize the effects of their actions. Examples of waste include under-utilization of generics, either because of an injured worker’s request for brand name medication, or the prescriber writing for such. Examples of abusive behavior are an injured worker requesting refills too soon, and a prescriber billing for services that were not medically necessary.
Actions that Interfere with Opioid Management
Early intervention of potential fraud, waste, and abuse situations is the best way to mitigate its effects. By considering the total pharmacotherapy program of an injured worker, prescribing behaviors of physicians, and pharmacy dispensing patterns, opportunities to intervene, control, and correct behaviors that are counterproductive to treatment and increase costs become possible. Certain behaviors in each community are indicative of potential fraud, waste, and abuse situations. Through their identification, early intervention can begin.
- Prescriber/Pharmacy Shopping – By going to different prescribers or pharmacies, an injured worker can acquire multiple prescriptions for opioids. They may be able to obtain “legitimate” prescriptions, as well as find those physicians who aren’t so diligent in their prescribing practices.
- Utilizing Pill Mills – Pain clinics or pill mills are typically cash-only facilities that bypass physical exams, medical records, and x-rays and prescribe pain medications to anyone—no questions asked.
- Beating the Urine Test – Injured workers can beat the urine drug test by using any of the multiple commercial products available in an attempt to mask results, or declaring religious/moral grounds as a refusal for taking the test. They may also take certain products known to deliver a false positive in order to show compliance. For example, using the over-the-counter Vicks® inhaler will show positive for amphetamines in an in-office test.
- Renting Pills – When prescribers demand an injured worker submit to pill counts (random or not), he or she must bring in their prescription bottles. Rent-a-pill operations allow an injured worker to pay a fee to rent the pills needed for this upcoming office visit.
- Forging or Altering Prescriptions –Today’s technology makes it easy to create and edit prescription pads. The phone number of the prescriber can be easily replaced with that of a friend for verification purposes. Injured workers can also take sheets from a prescription pad while at the physician’s office.
- Over-Prescribing of Controlled Substances – By prescribing high amounts and dosages of opioids, a physician quickly becomes a go-to physician for injured workers seeking opioids.
- Physician dispensing and compounded medication – By dispensing opioids from their office, a physician may benefit from the revenue generated by these medications, and may be prone to prescribe more of these medications for that reason. Additionally, a physician who prescribes compounded medications before a commercially available product is tried may have a financial relationship with a compounding pharmacy.
- Historical Non-Compliance – Physicians who have exhibited potentially high-risk behavior in the past (e.g., sanctions, outlier prescribing patterns compared to their peers, reluctance or refusal to engage in peer-to-peer outreach) are likely to continue aberrant behavior.
- Unnecessary Brand Utilization – Writing prescriptions for brand medication when a generic is available may be an indicator of potential fraud, waste, or abuse.
- Unnecessary Diagnostic Procedures or Surgeries – A physician may require or recommend tests or procedures that are not typical or necessary for the treatment of the injury, which can be wasteful.
- Billing for Services Not Provided – Since the injured worker is not financially responsible for his or her treatment, a physician may mistakenly, or knowingly, bill a payer for services not provided.
- Compounded Medications – Compounded medications are often very costly, more so than other treatments. A pharmacy that dispenses compounded medications may have a financial arrangement with a prescriber.
- Historical Non-Compliance – Like physicians, pharmacies with a history of non-compliance raise a red flag. In states with Prescription Drug Monitoring Programs (PDMPs), pharmacies who fail to consult this database prior to dispensing may be turning a blind eye to injured workers filling multiple prescriptions from multiple physicians.
- Excessive Dispensing of Controlled Substances – Dispensing of a high number of controlled substances could be a sign of aberrant behavior, either on behalf of the pharmacy itself or that injured workers have found this pharmacy to be lenient in its processes.
Clinical Tools for Opioid Management
Once identified, acting on the potential situations of fraud, waste, and abuse should leverage all key stakeholders. Intervention approaches include notifying claims professionals, sending letters to prescribing physicians, performing urine drug testing, reviewing full medical records with peer-to-peer outreach, and referring to payer special investigative unit (SIU) resources. A program that integrates clinical strategies to identify aberrant behavior, alert stakeholders of potential issues, act through intervention, and monitor progress with the injured worker, prescriber, and pharmacy communities can prevent and resolve fraud, waste, and abuse situations.
Proactive Opioid Management Mitigates Fraud, Waste, and Abuse
Opioids can be used safely when properly monitored and controlled. By taking proactive measures to reduce fraud, waste, and abuse of opioids, payers improve injured worker safety and obtain more control over medication expenses. A Pharmacy Benefit Manager (PBM) can offer payers an effective opioid utilization strategy to identify, alert, intervene upon, and monitor potential aberrant behavior, providing a path to brighter outcomes for all.