“If By Compensation…”
In 1952, Noah Sweat, Jr. a lawmaker from the then-dry state of Mississippi found himself explaining his position on whiskey to an audience of pro- and anti-prohibitionists. His speech, known today as “if by whiskey,” cheered both sides.
“If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence… I am against it.”
“But, if when you say whiskey you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together … I am for it.”
General Motors CEO Mary Barra faced a similar challenge developing the company’s compensation strategy for victims of its faulty ignition switches.
Customers expected GM to fully compensate victims, and capital providers expected GM to protect assets from litigation and compensation funds: One of GM’s major stakeholders was bound to be disappointed.
Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides. Kenneth Feinberg’s reputation makes the “if by whiskey” approach to GM’s compensation strategy possible.
Feinberg has been pivotal in resolving many of our nation’s most challenging and widely known compensation matters.
GM customers and victims are warmed by Feinberg’s experience directing the September 11th Victim Compensation Fund. Working pro bono, he spent three years meeting with families and calculating claim awards. Feinberg also handled compensation issues for the Virginia Tech shooting and the Boston Marathon bombing.
Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides.
GM’s stakeholders breathe easier knowing that Feinberg, as administrator of BP’s $20 billion fund to compensate victims of the Deepwater Horizon disaster, carefully manned the funding spigot.
Almost one year after the spill began, he had paid only 168,000 claimants out of more than 490,000 people who had filed. Feinberg explained then that 80 percent didn’t have proper documentation; the terms of the GM compensation plan similarly have strict documentation requirements.
Nor is he anti-corporatist. His firm accepted $850,000 a month from BP to administer the compensation fund, which led a New Orleans federal judge to order Feinberg to quit claiming independence from BP.
The “if by compensation” strategy is working, according to analysis published by Consensiv, the reputation controls company, based on reputation value metrics we use at Steel City Re.
The bump on the graph starts June 15th, the week Google Trends shows a steady uptake in searches for Kenneth Feinberg that accompanied an uptick in GM’s reputation metrics.
GM’s reputation premium, a measure of additional value arising from favorable stakeholder expectations, rose to the 46th percentile within its peer group, while the consensus trend, a measure of stakeholder surprise, showed an increase to 1.2 percent.
Reputation is about setting, meeting or beating expectations. Reputation restoration is about acknowledging fault, repairing the damage, and raising future standards.
Barra has been candid in exposing the faults.
Her challenge in repairing the damage was assuring customers and victims without frightening creditors and investors. By hiring Feinberg, Barra appears to have pleased both key stakeholder groups, boosting GM’s reputation.
Read all of Nir Kossovsky’s Risk Insider contributions.
The Thrill of the Risk
In the ever-constant battle for the scariest rides, amusement park risk managers have their work cut out for them.
Owners constantly push the envelope in ride design to create an atmosphere of heightened risk to attract thrill-seeking patrons. That risk is only supposed to be an illusion, but it can become all-too-real thanks to the subjective decisions of park owners, ride operators and patrons themselves.
Case in point: In 2013, Rosa Esparza, a heavyset woman was allowed to ride a roller coaster at Six Flags Over Texas, but then fell out of the car and to her death when the ride turned upside down. Esparza’s family is now suing Six Flags and its parent companies, as well as the ride’s manufacturer, Gerstlauer Amusement Rides in Münsterhausen, Germany.
Video: ABC News reports on the deadly accident on the ‘Texas Giant’ roller coaster ride at Six Flags amusement park in July 2013.
Roughly 297 million people visit the 400 U.S. amusement parks annually and take 1.7 billion safe rides, according to the 2011 Fixed-Site Amusement Ride Injury Survey of the Association of Amusement Parks and Attractions. The chance of being seriously injured on a ride at a fixed-site park in the U.S is 1 in 24 million, and 61 of the 1,415 ride-related injuries, or less than 5 percent, required some form of overnight treatment at a hospital.
Most parks design and operate rides with the utmost safety in mind, but the tricky part is making sure the rides seem like they’re very risky, said Robert Murphy, global entertainment and events practice leader at Marsh in Philadelphia.
“If a park is marketing itself for thrill-seekers, they are typically pushing the big coaster speed rides,” Murphy said. “Then it becomes the battle for the most advanced ride – the fastest, tallest, most loops. There’s this constant competition to upgrade.”
Loss of public trust may be a park’s greatest exposure. “That’s what will kill your company.” — Jim Petersen, attorney specializing in risk management litigation
Likewise, risk managers of water parks have to contend with their own set of challenging risks, particularly patron drowning, or water-borne illnesses that may affect not just one or two patrons, but hundreds, he said.
The risks assumed by a park can rarely be transferred, but they can be shared by patrons and “designer engineers,” said Boyd F. Jensen II, owner of Garrett & Jensen law firm in Riverside, Calif., who sits on the safety and ASTM executive committee of the International Association of Amusement Parks and Attractions.
Personal injury lawsuits against park owners can be more easily defended if the owners provide documentation that their rides have been operated in a safe manner by trained employees, maintained routinely, complied with accepted safety standards and passed periodic inspections, Jensen said.
Park owners should document incidents as specifically and thoroughly as possible, ideally accompanied with photos and statements, he said. Owners should also demonstrate that they have posted signs and audible warning of known risks, and have ensured that patrons can witness a ride’s characteristics prior to boarding.
Impact on Reputation
But lawsuits can still be challenging because of the resulting perception that the park is not safe, Jensen said. Parks often settle to avoid additional public scrutiny, even though sometimes they could have shown that the patrons did not heed warnings, such as if they had existing heart or back trouble.
“Substantial sums of money can be wasted in settlements and jury verdicts due almost entirely because of inexperienced advisers,” he said.
Indeed, loss of public trust can often be the greatest exposure for a park, said Jim Petersen, a Chicago attorney specializing in risk management litigation. “That’s what will kill your company.”
When theme parks are under pressure to build the next biggest, fastest, tallest rides, certain biases can enter into the risk assessment process, Petersen said.
There is the bias of confidence based on the fact that ride designers have been good at what they’ve done up until this point, so park owners and managers assume they’re going to be good at whatever they do in the future.
Moreover, park managers tend to assume that that the scale of risk rises in a linear way – for example, if they build a ride that’s 10 percent bigger, that means a 10 percent increase in risk, Petersen said. However, increases in risk are typically exponential, so park managers need to prepare instead for greatly elevated risk levels.
“If theme parks are under pressure to get it done … to start the revenue stream, they may be hurt by these biases and build something far more risky — or move too quickly in disregard of the need for a higher degree of prudence,” Petersen said. “They need to slow down and be careful enough to not only think of the risks they do know, but conceive of things they might not know.”
“A theme park can only transfer the monetary loss to insurers, but not the legal liability and loss of reputation if they are sued.” — Frankie Hau, risk and environmental manager, Ocean Park, Hong Kong
Frankie Hau, risk and environmental manager at Ocean Park in Hong Kong, said that too few parks focus on enterprise risk management, and many risk managers tend to focus more on the insurance program for high-risk rides than managing risks across the entire enterprise.
“A theme park can only transfer the monetary loss to insurers, but not the legal liability and loss of reputation if they are sued,” Hau said. “If there is gross negligence that results in worst-case scenarios such as a fatality, then directors can go to jail.”
Ride manufacturers are generally responsible for the mechanics for the life of the ride, but parks must strictly follow procedures outlined in the manufacturers’ operations and maintenance manuals, or they will be found liable in court, he said.
In the current Six Flags case, Gerstlauer has filed a cross-complaint against the Texas park for not using a “test seat” that the manufacturer provided to test weight loads on the restraint system. Attorneys for Six Flags, Gerstlauer and the Esparza family did not return phone calls seeking comment.
Typically local authorities require that parks load test each of their rides with dummies, sand bags or concrete buckets per the manufacturer’s test weight recommendations, said Michael Greear, director of risk control services with Aon Risk Solutions’ entertainment practice in Denver.
Many manufacturers have training sessions on their rides for park mechanics, and completion of courses should be documented and presented in court cases.
But the weight of patrons can be a very challenging issue for parks, Murphy said.
“You can’t put a scale at the ride entrance and require people to stand on it — it has to be by sight, and so basically the park has to say to the operator to use their best judgment,” he said.
Patrons should be able to fit into the seat and have the safety bar closed, locked and fully supporting them, Murphy said. Moreover, if the ride malfunctions, operators have to be able to help the heavy person out of the car and down steps.
It helps to have another employee there to maintain “zero tolerance,” and if there is a disagreement, the other operator can call the supervisor, he said. Many parks try to screen for height and weight at the beginning of the ride’s line, so the person doesn’t have to wait in line or face even greater embarrassment.
For water parks, lifeguards must routinely patrol pools not only to watch for drownings, but also floating debris that could contaminate the pool, Hau said. Then, they must clear the pool, retrieve the substance, sanitize the water with a suitable dose of chlorine and then test the condition of the pool.
In the event of a claim for sickness, parks need to provide documentation to the court that they constantly tested the water’s quality, making sure chlorine, acidity and turbidity levels conform to international standards.
Risks increase on busy days when operators take shortcuts about cleaning testing, treating and then reopening pools, Greear said. “Many times, a business decision is a risk acceptance decision.”
From an insurance perspective, park risk managers can avoid some headaches if they understand what their policy covers and doesn’t cover — understanding the exclusions, coverage limits and requirements for reporting a claim if an event occurs, he said.
Risk managers should also work with their carriers and brokers as partners, because they have a great deal of expertise in loss control within their health and safety groups.
“By doing so, an operator could either avoid an incident or claim altogether or be in a position, through training and documentation, to show that they took the reasonable steps to reduce or eliminate a risk,” Greear said.
Beware of Medical Hyper-Inflation!
Historically, medical inflation rates nationwide have been fairly consistent. However, data is now showing that medical inflation is not a “one size fits all” phenomenon, with hyperinflation spikes occurring in some locations…but not others.
This geographical conundrum means hyperinflation can occur as narrowly as two hospitals having dramatically different charges on the same street in Anytown, USA. So, uncovering these anomalies is akin to finding the proverbial needle in a haystack.
“In recent years, workers’ compensation saw claim frequency decline, while severity rates went up. This basically means that increased job safety has offset increased medical costs,” explained Jason Beans, CEO of Rising Medical Solutions, a national medical cost management firm. “So, whenever a client’s average cost-per-claim went up, it was almost always caused by catastrophic, outlier-type claims.”
But beginning in 2013 and extending into 2014, Beans said, things changed. “I’ve never seen anything like it in my 20-plus years in this industry.”
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation. The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
– Jason Beans, CEO, Rising Medical Solutions
Data dive uncovers surprising findings
On a national level, most experts describe medical costs increasing at a moderate annual rate. But, as often is the case, sometimes a macro perspective glosses over a very different situation at a more micro level.
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation,” explained Beans. “The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
This conclusion is supported by several key data patterns:
- Geographic dependency: While many payers operate at the national level, only relatively small, geographically clustered claims showed steep cost increases.
- Median cost per claim: The median cost per claim, not just the average, increased greatly within these geographic clusters.
- Hospital associated care: Some clusters saw a large increase in the rates and/or the number of services provided by hospital systems, including their broad array of affiliate locations.
- Provider rates: Other clusters saw the same hospital/non-hospital based treatment ratios as prior years, but there was a material rate increase for all provider types across the board.
- Utilization increases: Some clusters also experienced a larger number of services being performed per claim.
One of the most severe examples of hyperinflation came from a large Florida metropolitan area which experienced a combined 47 percent workers’ compensation healthcare inflation rate. Not only was there a dramatic increase in the charge per hospital bill, but utilization was also way up and there was a shift to more services being performed in a costlier hospital system setting.
“The growth of costs in this Florida market stood in stark contrast to neighboring areas where most of our clients’ claim costs were coming down or at least had flat-lined,” Beans said.
An Arizona metropolitan area, on the other hand, experienced a different root cause for their hyperinflation. Regardless of provider type, rates have significantly increased over the past year. For example, one hospital system showed dramatic increases in both charge master rates and utilization. “Even with aggressive discounting, the projected customer impact in 2014 will be an increase of $773,850 from this provider alone,” said Beans.
ACA: Unintended consequences?
So what is going on? According to Beans, a potential driver of these cost spikes could be unintended consequences of the Affordable Care Act (ACA).
First, the ACA may be a contributing factor in recent provider consolidation. While healthcare industry consolidation is not new, the ACA can prompt increased merger and acquisition efforts as hospitals seek to improve financials and healthcare delivery by forming Accountable Care Organizations (ACO). ACOs, the theory goes, can take better advantage of value-based fee arrangements in existing and new markets.
“As hospital systems grow by acquisition, more patients are being brought under hospital pricing structures – which are significantly more expensive than similar services at smaller facilities such as independent ambulatory surgery centers and doctors’ offices,” Beans said.
Unfortunately, there is little evidence that post-consolidation healthcare systems have become more efficient, only more expensive. For example, a recent PwC study reported that hospital IT infrastructure consolidation alone is projected to add 2 percent to hospital costs in 2015.
Another potential ACA consequence is group health insurers may have less incentive to keep medical costs down. An ACA provision requires that 85% of premium in the large group market must be spent on medical care and provider incentive programs, leaving 15% of premium to be allocated towards administration, sales and subsequent profits. “Fifteen percent of $5000 in medical charges is a lot less than 15% of $10,000,” said Beans. “This really limits a group health carrier’s incentive to lower medical costs.”
How do increased group health rates relate to workers’ comp? In some markets, a group health carrier may use its group health rates for their work comp network so any rate increase impacts both business types.
In the end, medical inflation is inconsistent at best, with varying levels driven by differing factors in different locations – a true “needle in the haystack” challenge.
What to do?
Managing these emerging cost threats, whether you have the capabilities internally or utilize a partner, means having the tools to pinpoint hyperinflation and make adjustments. Beans said potential solutions for payers include:
- Using data analytics: Data availability is at an all-time high. Utilizing analytical tools to spot problem areas is critical for executing cost saving strategies quickly.
- Moving services out of hospital systems: Programs that direct care away from the hospital setting can substantially reduce costs. For example, Rising’s surgical care program utilizes ambulatory service centers to provide predictable, bundled case rates to payers.
- Negotiating with providers: Working directly with providers to negotiate bill reductions and prompt payment arrangements is effective in some markets.
- Underwriting with a micro-focus: For carriers, it is vital that underwriters identify where these pockets of hyperinflation are so they can adjust rates to keep pace with inflation.
“This trend needs to be closely watched,” Beans said. “In the meantime, we will continue to use data to help payers of medical services be smarter shoppers.”