Risks in Three Dimensions
Companies are leaving themselves exposed to a host of costly and unexpected risks if they fail to come to grips with the new challenges presented by 3D printing technology.
Industry experts said that businesses need a fundamental review of their risk management processes and controls to deal with the potential problems caused by this new technology or they could find themselves being sued for copyright infringement or, worse still, having to pay out millions in product liability claims.
3D printing or additive printing, as it is commonly known in the industry, is the process of producing solid three-dimensional objects using a digital blueprint. It works by using a computer to send the design to a printer that then builds the product.
PwC estimates that 67 percent of manufacturers already use 3D printing, while NASA has been testing the technology in its space station for years. It is widely used for creating prototypes in the aviation, automotive and medical industries, and applications range from plane engines and car spare parts to surgical implants and prosthetic limbs.
With the industry expected to grow in value by 25 percent to $17.2 billion by 2020, according to consultancy firm A.T. Kearney, the scope for the technology is almost limitless — as are the potential risks, including counterfeiting and the manufacture of illegal drugs.
“The biggest risk of 3D printing is that you can make anything, anywhere in the world and that presents a host of potential problems,” said Mark Schonfeld, a partner at Burns & Levinson LLP.
“Those problems in the main include product liability, intellectual property, and safety and security issues.”
Supply Chain Risks
Schonfeld said that the biggest difference between 3D printing and traditional manufacturing is the complexity of the supply chain and the number of different parties involved.
“With 3D printing, you have more players than you would have in the traditional manufacturing process, where most of the participants work for the same company,” he said.
“So if something goes wrong with the product, who is liable – is it the designer, the supplier, the manufacturer or even the end user?
“Currently there is no legislation governing 3D printing, so it is often very hard to tell who is responsible.”
Rob Gaus, global product risk group leader at Marsh, said there are three key factors affecting any manufacturing process: “It’s about having a clearer focus on the materials that are being used, the financial strength of your supply chain partners, and the quality assurance program and processes that you have in place,” he said.
“Overarching all of those risks is the product risk management process, which revolves around risk assessment and how they apply in foreseeable use and misuse scenarios.”
Robert Weireter, vice president and senior underwriter at Swiss Re, said that increasing the scale of 3D print manufacturing also creates the problem of ensuring the quality and durability of the end product.
“When you print out something in a small-scale environment, you have a lot of control over the process, and therefore over the quality of the finished product,” he said.
“However, with 3D printing, questions arise when you increase the scale to a commercial level. Can you still ensure the quality of the finished product?”
Another key issue with 3D printing is counterfeiting or the illegal copying of products.
Provided you have the right design or blueprint and a 3D printer, it’s easy to quickly produce, for example, your own iPhone at home.
“It’s very easy if you have your own 3D printer at home to scan a design into your printer, print it out and sell it,” said Cindy Slubowski, vice president and head of manufacturing at Zurich North America.
“We have seen some claims, and the real issue is that the original manufacturer who has the rights to that product now has a counterfeit product out there that it knows nothing about and that can cause serious issues in terms of liability, patent and trademark infringement.”
No one is immune from the intellectual property risks associated with 3D printing, said Tom Srail, technology, media and telecommunications industry group leader at Willis North America.
“Intellectual property is a significant risk not only for the organization making the product but also for the supply chain as a whole and for other companies’ copyrights, trademarks and patents in similar types of products and areas,” he said.
“Even if you’re not producing anything using 3D printing, you can still be exposed to risks in the supply chain with other entities using the technology to counterfeit or copy what you are doing.”
Michael Bruch, head of emerging trends/ESG business services and chief underwriting officer, risk consulting, at Allianz Global Corporate and Specialty SE (AGCS), said that the convergence of manufacturing and digital technology also make unauthorized copying of product designs easier to do in the future.
“Because it will be much harder to track these products, traceability will become an even bigger issue than it was before,” he said.
“It will also bring a whole suite of issues such as piracy and copyright infringement to the fore.”
Therefore, it’s important for companies to do due diligence before manufacturing new products, said Shawn Ram, executive managing director and western regional manager at Crystal & Company.
“When manufacturing or technology companies develop a certain product, they have to do due diligence on patents and discovery on trademarks and copyrights, which is often overlooked because of the time and cost involved,” he said.
Security and Privacy Fears
The shadow of cyber risk also lurks around 3D printing. It’s no stretch to imagine someone hacking into a computer system and fundamentally changing the design of a product.
“You have this whole file sharing component in 3D printing that you don’t have in traditional manufacturing and so that automatically becomes a huge potential security and privacy issue,” said Zurich’s Slubowski.
“We are seeing a lot of 3D printing going into hospitals these days and if someone were to hack into their computer system and modify the design of a key component they produce, such as a heart valve for a patient, then the consequences would be unthinkable.”
Ram said that the lack of a strong regulatory environment in 3D printing also makes it much easier to manufacture a product such as a weapon that can cause harm or damage.
“There are still a lot of gray areas because there are so many different parties involved in the process, so it can be hard to create any meaningful regulations,” he said.
AGCS’s Bruch said that like any new technology, 3D printing will have its teething problems at first, but provided it is closely monitored, risks can be eliminated early in the manufacturing process.
“In terms of cyber risks, risk managers will need to review all of their IT risks in both their office computer systems and production lines and throughout the whole digitalized manufacturing chain from the first idea to the final 3D printed end-product,” he said.
3D printing also opens up the possibility of criminals exploiting the technology for their own gain, said Emily Cummins, managing director of tax and risk management at the National Rifle Association.
“Quite simply, any company that uses credit cards to run its business, which is most, carries a potential threat of being exposed to cyber risk,” she said. She cited a recent case where a criminal gang used a 3D printer to produce an ATM skimmer that was used to steal customers’ details.
“The kind of fraud that can be perpetrated from extracting the information on credit cards includes identity theft and financial theft.”
Risk Management Procedures Lag Behind
All of these risks have opened up companies to a host of potential claims running to millions of dollars, particularly on the product liability side.
Slubowski said the biggest danger to companies is failing to understand their exposures.
“If you don’t understand all of the nuances around 3D printing, then you will probably find yourself with claims that you didn’t anticipate you were going to have,” she said.
“We have seen it in the industry before where small companies get hit with large claims and they go out of business because they can’t come back from the reputational and monetary damage they have suffered.”
Despite companies’ best intentions, many are still lagging behind in terms of their risk management procedures for dealing with the risks of 3D printing, experts said.
Willis’ Srail said that the evolving technology of 3D printing means that companies have to continually adapt their risk management models.
“Some companies are well along the way with that,” he said. “However it’s safe to say that most companies are not ready for everything that is coming.
“It’s something that organizations will need to look at internally, externally and throughout their supply chain, and to undergo an ongoing improvement process by reviewing all of these risks on a continual basis.”
Ram went even further to say that 3D printing is still not even on some risk managers’ radar.
“Our general awareness of the value and opportunity of 3D printing is relatively nascent and so many risk managers aren’t prepared for it,” he said.
However, despite all the risks and possible downsides of 3D printing, Cummins is upbeat about the future.
“As an innovation, 3D printing can be managed either as a sustaining innovation that you can use to improve your business or as a disruptive innovation that overtakes an existing market and puts companies out of business,” she said.
“So those companies that get on board early on with the new technology can use it in a sustaining way to enhance their product and become industry leaders.”
A Challenging Environment
The excess and surplus (E&S) lines market is at a critical point in its development, according to industry experts.
The industry has reversed a five-year decline in direct written premiums between 2007 and 2011, with premiums up 7.6 percent during 2014, according to the latest figures from SNL Financial.
The sector has also more than doubled its share of direct written premiums for the property/casualty (P&C) market, from 3.3 percent in 1993 to 6.9 percent in 2013, as well as its share of total commercial lines premiums (13.7 percent), said A.M. Best.
However, with increasing competition from new entrants and more capital than ever flowing into the market, rates — particularly in P&C — are starting to slow. Subsequently, profit margins have been hit.
A.M. Best currently views the surplus lines market as “stable,” but warned that profit margins may shrink in the near term as average rate increases diminish on various lines of coverage.
“Accident year reserve development for surplus lines companies has been slightly more favorable than the overall P&C industry, but the gap has been shrinking as the markets wrestle with excess capacity, low interest rates and capital outlays to enhance operational efficiencies,” said the ratings agency in a recent report. Added to that, the industry faces a constant battle to attract and retain new talent and to keep up with emerging risks and regulations, or risk getting left behind.
All of these issues will be at the top of the agenda when the National Association of Professional Surplus Lines Offices (NAPSLO) meets at its annual convention in San Diego this month, where 4,000 E&S brokers and wholesalers are expected.
“For NAPSLO members and the market in general, it is an extremely challenging environment right now, particularly in property and casualty,” said Scott Culler, regional president at Markel.
“The biggest question on people’s minds is whether the amount of capacity currently available in the market is sustainable.
“Everybody is scrambling just to maintain market share and to stay one step ahead of the competition. So we are constantly having to come up with new and innovative ways to write business in order to remain viable.”
The recent clamor for market share has seen several big players enter the space, most notably Berkshire Hathaway Specialty Insurance (BHSI), and Tokio Marine Holdings, following its acquisition of HCC Insurance Holdings for $7.5 billion.
Other companies such as XL and Catlin have also merged for greater scale and efficiency, and ultimately to increase market share.
BHSI’s Executive Vice President David Bresnahan said that the trend of consolidation would continue as long as there was excess capital available.
“We see evidence that customers are trying to get in front of those trends, and they are beginning to award larger participations to those carriers with a long-term focus and strong balance sheets who can control their own destiny,” he said.
An adverse effect of increased competition, added Culler, has been to squeeze prices further. For rates in a line such as property, he said, “it’s 10 percent off just to start the conversation.”
“Last year, I thought we were at a point where the prices couldn’t go much lower, but every deal is under pressure now — there’s no such thing as a normal renewal.”
Henry Witmer, assistant vice president at A.M. Best, said that competition from the primary market for risks typically covered by E&S has also accentuated market cycles. As a result, insurers need to be prepared to scale up or down their operations and to adjust their prices accordingly.
“As products offered by the E&S insurers gain recognition and are imitated by others, the true innovators within the market need to study, evaluate and develop replacement products in order to stay on the forefront of the market,” he said.
Despite these challenges, Culler said, insurers are increasingly finding ways to differentiate themselves in a competitive market, while brokers are developing specialist niches.
“As the economy starts to recover, more entrepreneurs are entering the market and new cutting-edge ideas and products are being developed all the time, as well as opportunities being created in lines that the traditional market doesn’t want to write,” he said.
James Drinkwater, president of AmWINS brokerage and one of NAPSLO’s wholesale broker directors, is also bullish about the prospects for companies willing to take on such risks.
“As products offered by the E&S insurers gain recognition and are imitated by others, the true innovators within the market need to study, evaluate and develop replacement products in order to stay on the forefront of the market.” — Henry Witmer, assistant vice president, A.M. Best
“Prices are, on average, declining steadily, due to the amount of capital coming into the market and at the same time the market has become very competitive,” he said.
“However, there are still some hard pockets if you are willing to look, such as the New York City construction and transportation sectors.”
Investment in Technology
Going forward, Drinkwater said, companies need to focus more on improving their technology, and the training and development of their staff.
“Everybody will naturally be focused on the rate environment, but I think there are more important factors at play — for example, keeping an eye on what’s happening with regulation and improving the delivery of our product through greater investment in technology and personnel.”
The greater use of technology and analytics has enabled companies to price more accurately, identify new lines of business and, ultimately, to deliver better cost efficiencies to the customer.
It has also spawned a host of new industries such as unmanned aerial vehicles or drones.
“Everything is revolving around technology right now,” said Wyeth Coburn, associate broker at CRC Insurance Services.
“A lot of companies are sitting and waiting to see what happens, particularly with the drone industry, but as soon as the new regulations come in I would expect there to be a big take-up from carriers.”
Culler added that cyber liability has now overtaken energy as the No. 1 risk for the E&S industry following the rise in cyber attacks.
“I think we are just scratching the surface with cyber, trying to understand the exposures companies face because they change almost on a daily basis,” he said.
Drinkwater added: “The cyber marketplace is one that is evolving quickly and with the recent spate of high profile breaches, insureds are steadily realizing that this is an exposure that they must protect themselves against.”
Amid all these new developments, Bryan Salvatore, president of Zurich North America Commercial’s specialty products business unit, warned that it is important for companies not to lose sight of their core value of customer service.
“I prefer to focus on how we can differentiate ourselves in terms of the value proposition that we offer,” he said.
“In that respect, the whole market needs to think about what it can bring to the table.”
That involves a heavier investment in technology to help both the company and the customer better understand their pricing and exposures, he said.
“At the end of the day, we have to remind ourselves that we’re providing an important end solution to the customer for complex and hard to place risks rather than thinking of ourselves simply as a commodity,” he said.
There are also a host of key regulatory hurdles that the market has to overcome in the short- and long-term if it is to maintain its recent growth.
“I think we are just scratching the surface with cyber, trying to understand the exposures companies face because they change almost on a daily basis.” — Scott Culler, regional president, Markel
Brady Kelley, executive director at NAPSLO, said that the main piece of legislation currently impacting the industry is the Terrorism Risk Insurance Program Reauthorization Act 2015 (TRIA), enacted at the start of this year.
TRIA, which was first enacted in 2002 to provide a federal backstop for terrorism claims, was reauthorized at the start of this year and remains in effect until 2020 to cover new policies that run beyond 2014.
Kelley said that the most important part of the bill is the enactment of the National Association of Registered Agents and Brokers Reform Act 2015 (NARAB II), providing a one-stop licensing system for agents and brokers operating in multiple states.
“That will be a tremendous opportunity for us because it will put in place a national set of standards and a new national electronic system for the processing of insurance licenses, meaning that everything is much more consistent and efficient going forward,” said Kelley.
Fight for Talent
“Many of the veterans in our business are starting to retire now and need to put in place a succession plan for the next generation,” he said.
“That means equipping themselves with the best standards and professional talent available and to prepare them so that they are ready to take on those top leadership roles.”
Despite all the challenges it faces, the industry is well placed to capitalize on the new opportunities and risks, such as cyber liability, that the traditional market doesn’t typically extend to.
Markel’s Culler concluded: “I’m bullish about the E&S market — it’s true, there are a lot of new competitors out there, but there’s also a lot of room for growth.”
It’s all in the Code: Five Essential Characteristics of HCPCS that Influence Outcomes
Payers are no stranger to codes. Claim and policy administration systems are filled with them. Moreover, whether designating claim type, feature, branch office, policy term, type of injury, or another classification, their use facilitates consistency and understanding. Codes also guide clinical and financial decision-making. At the foundation of medical cost management are three code sets. The International Statistical Classification of Diseases and Related Health Problems (ICD) diagnostic and procedure codes, ICD-10-CM and ICD-10-PCS respectively, are used to classify diseases, disorders, injuries, infections, and symptoms. National Drug Codes (NDCs) help ensure claimants received the correct strength, dosage form, and type of medication. Their use also helps pharmacists recognize the difference between products that may look or sound alike. Yet another useful code set is the Healthcare Common Procedure Coding System (HCPCS) created to identify services, products, and procedures rendered for the condition. It is on this code set we will focus.
When processing ancillary benefits in workers’ compensation and auto no-fault, HCPCS can determine whether the item is considered medically necessary and therefore, available to the claimant and otherwise related to the compensable condition. Codes can also affect the reimbursement amount. Thus, if a coding error is made, there can be significant adverse impacts to payers and claimants alike. For example, the vendor could stop supplying the item based on insufficient reimbursement, or the payer could deny the product or service completely. Both are detrimental to the claimant or overall claim outcomes. Coding errors may also result in claim leakage if applied incorrectly or misunderstood in the review process. It is therefore essential that payers be mindful of five essential characteristics of HCPCS.
#1 – HCPCS are generic
Like pharmaceuticals, there are many different providers and manufacturers of similar durable medical equipment (DME) items. However, HCPCS are not specific to brand and usually hundreds of different products can fall under the same HCPCS. In addition, some codes include certain services, such as evaluations and fitting fees, whereas some codes do not. For example, some health HCPCS rarely indicate the actual services being provided in the home, such as wound care or home infusion, but instead simply indicate an RN or LPN visit.
#2 – Unit of measure influences coding
Some supply codes have very specific units of measure, which can result in HCPCS quantities that are not whole numbers and can result in mathematical errors or rounding. For example, HCPCS code A4450 has a unit of measure of ‘per 18 square inches’ and is assigned to a roll of tape that is 2 inches by 5.4 yards, equaling 388.8 square inches. The quantity for this HCPCS code would therefore be 21.6. Additionally, some HCPCS codes specify ‘per pair’ or ‘each,’ so understanding the actual supply is important to determine the appropriate quantity.
# 3 – Sometimes, there is not a specific code
Centers for Medicare and Medicaid Services (CMS) has created a number of miscellaneous codes that have generic definitions and can be used when no other CPT or HCPCS code matches the description of the product or service provided. Miscellaneous codes can be easily abused either unintentionally due to lack of time and knowledge, or intentionally by a provider seeking a higher reimbursement rate. This is because miscellaneous codes typically do not carry a fee schedule due to their versatility and, therefore, may be reimbursed at higher amounts than a non-miscellaneous code. For example, K0108 defines a ‘wheelchair component or accessory, not otherwise specified;’ however, most wheelchair parts have a specific code outside of this one which could be more appropriate while also carrying a lower allowable amount.
#4 – Supplemental modifiers are useful
A supplemental modifier or identifier is a billing value that further clarifies the HCPCS/CPT code by telling the payer more about the billed product or service. Their application influences reimbursement because fee schedules largely differ depending on which modifier is reported. A rental (RR) for example, does not warrant the same reimbursement as a purchase (NU) yet both a purchase and rental of the same product carry the same HCPCS. Consider the following codes, K0001 = ‘STANDARD WHEELCHAIR’, K0001 RR = ‘STANDARD WHEELCHAIR’ that has been rented, and K0001 NU = ‘STANDARD WHEELCHAIR’ that has been purchased. Depending on the fee schedule, reimbursement could be $45 or $500.
Modifiers are also useful because they can define the unit of measure. By default, a HCPCS with a modifier of ‘RR’ is a rental per month. However, in some cases a provider may bill for a device daily and therefore interpret the fee schedule as daily rather than monthly. In this scenario, the provider may bill with a daily unit of measure, billing a quantity of 30 instead of the allowable amount of one. For devices that are rented daily, such as a negative pressure wound therapy device or continuous passive motion device, it is important to understand the unit of measure being used (monthly or daily) and be mindful that the daily billing exceeds the monthly allowable.
# 5 – The diagnosis influences allowable amounts
Some HCPCS change based on the diagnosis of the injured person and therefore, the allowable amount may fluctuate. For example, depth-inlay shoes are coded as an Orthotic (L – code) if the patient does not have a diabetic diagnosis and is using the shoes for orthopedic reasons. The same depth-inlay shoe may be used for a diabetic patient, but it would warrant an A-code, which can have a higher reimbursement level.
The use of coding assists claims professionals in compensability decisions, guides clinical decision-making, informs point-of-sale utilization controls, influences claim handling policies and procedures, and provides a valuable data point in statistical and analytics models. Moreover, their use facilitates better clinical and financial claim management in terms of payments that are more accurate, greater processing efficiency and consistency, and improved clinical management as a result of better understanding the medical condition(s) associated with the claim and the various therapies in use. Remaining mindful of the aforementioned five essential characteristics of HCPCS can therefore not only mitigate claim leakage but also achieve a better outcome.