Insurance Asset Growth Lags
Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.
One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.
Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.
Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.
The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.
“The lower growth has likely contributed to the under-investment, not the other way around,” he said.
But clearly, this is an area that needs to be addressed, he said.
Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.
The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.
“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.
In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.
The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”
Insurers’ “exposure to high-growth specialties was similarly limited,” it said.
Regulatory and Organizational Inefficiencies
That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.
This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.
Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.
The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.
Insurers should move to a more global model to address those issues, said Schwetlick.
“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.
Third-Party Management Benefits
The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.
“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.
“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.
“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.
Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.
Insurer To Pay “Extra” Expenses
On May 22, 2011, a tornado struck Joplin, Mo., substantially damaging the Midwest Regional Allergy, Asthma, Arthritis & Osteoporosis Center and its contents.
While at the temporary location, Midwest Regional did not accept new patients, operated at a reduced schedule and did not install various pieces of specialty equipment — such as an MRI machine, X-ray machine and bone density machine — because of space restrictions and other reasons.
The new location finally opened on May 1, 2012, and Dr. Joseph requested additional reimbursement from Cincinnati Insurance Co. under the “extra expense” provision of his business owner’s policy for the cost to repair and relocate the MRI machine and other specialty equipment.
Cincinnati Insurance had already paid Midwest Regional the policy limits of $2.4 million for building loss, $388,000 for business personal property loss and $828,100 for business income interruption and extra expenses.
It denied the physician’s request for the additional payment, contending that the specialty equipment expenses had already been covered under the building and personal business property provisions.
After Midwest Regional filed suit in the U.S. District Court for the Western District of Missouri-Joplin, the federal court ruled the expenses were recoverable under the extra expense provision. It noted that the policy was ambiguous and therefore should be read as providing coverage.
Although the insurer and physician subsequently settled, the insurer appealed the court decision to the U.S. 8th Circuit Court of Appeals.
Cincinnati Insurance argued the expenses were not recoverable because they were connected to the policy’s business income provision. It also argued the request was the insured’s attempt to circumvent the policy limits of the building and business personal property provisions.
The court ruled on July 31 that “an ordinary person of average understanding” would interpret the policy’s definitions of extra expenses as “distinct and separate” from the business income provision, and that the policy “specifically states that ‘Extra Expense’ coverage is not subject to the policy limits.”
Scorecard: Although the insurance company had already agreed to a settlement, the ruling underscored that reimbursement was covered under the policy.
Takeaway: Because the policy did not clearly prohibit reimbursement of the extra expense coverage, “an ordinary person” would expect the insurer to pay the disputed amount.
Court Rejects Claim
On April 7, 2011, a custom-built bookmobile for the City of Beverly, Mass., was destroyed after fire spread from a nearby vehicle at Moroney’s Body Works Inc.
The city refused to accept delivery of the damaged bookmobile, and Moroney submitted a claim to Pilgrim Insurance Co., which had issued a garage insurance policy, and to Central Insurance Cos., which had issued a commercial property insurance policy.
Pilgrim paid $12,450 to Moroney, based on an appraiser’s estimate of repair costs. Central denied coverage, asserting that its policy was not triggered until Pilgrim’s coverage was exhausted.
Moroney sued both insurers in Massachusetts Superior Court, after which Pilgrim settled the case, with a total payment of $30,668. The judge found in favor of Moroney, and ordered Central to pay $126,232 – which was the difference between the original contract price for the bookmobile ($156,900) and the amount received from Pilgrim.
Central appealed. On Aug. 6, 2015, the state’s Supreme Judicial Court reversed the decision.
It ruled the “other insurance” provision in Central’s policy meant that it did not come into play until Pilgrim’s limits were exhausted. It also agreed with Central’s other argument that if it did have liability, its coverage was limited to the cost to repair the bookmobile.
“Because both policies insure the same insured’s interest (Moroney’s ownership) in the same property (bookmobile) against the same risk (fire), Central’s ‘other insurance’ provision applies,” the court ruled. “Accordingly, Central’s liability does not begin until Pilgrim’s policy limit is exhausted.”
The three-panel judicial panel also ruled that Moroney was not entitled to receive anything more than repair costs.
Scorecard: The insurance company did not have to pay $126,232 for the claim.
Takeaway: Claims involving “other insurance” clauses often default to allocation of liability between carriers, whether it is excess, such as in this case, pro-rata shared liability, or escape clauses, which result in no payment.
Paralyzed Man Can’t Collect From Insurers
In September 2009, Scot Vandenberg fell from the upper deck of a 75-foot chartered yacht during a five-hour cruise. The bench he was sitting on tipped over when turned around to speak to someone. It left him paralyzed from the chest down.
Rose Paving was insured by Westfield Insurance Co. for commercial general liability and an umbrella policy.
Vandenberg settled liability claims against the owners and operators of the yacht for $25 million on Oct. 10, 2012. In addition, RQM’s insurer paid $2 million; Rose Paving, Michael Rose and Alan Rose agreed to pay $300,000. The $25 million was to be satisfied through an assignment of rights of recovery under their insurance policies.
Earlier, in January 2012, Westfield had sought a court determination that it owed no duty to defend or indemnify Rose Paving. It noted that Rose Paving represented that it did not use watercraft on its insurance application and that the CGL policy had a “watercraft exclusion.”
A federal district court in Illinois agreed.
On appeal to the U.S. 7th Circuit Court of Appeals, Vandenberg argued the policy did not expressly exclude accidents on the yacht. He also argued that even if Rose Paving was designated a construction business, the policy should extend to all of that corporation’s businesses, including yacht charters.
The federal appeals court rejected the arguments, noting the insurance policy only covered premises and operations “in connection with construction, reconstruction, repair or erection of buildings.”
“A policy does not need to exclude from coverage liability that was not contemplated by the parties and not intended to be covered under the agreement,” according to the ruling.
“Such a speculative exercise in hypotheticals [such as requiring Rose Paving to explicitly exclude all possible risks] would be nonsensical,” the court ruled.
Scorecard: Westfield Insurance Company did not have to pay $25 million to settle the liability claim.
Takeaway: For Vandenberg to succeed, he would have had to prove his injuries were wholly independent of any negligent operation of the watercraft.
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.