Perceptions of Risk
Decisions we make today will shape our future. It is our experience that guides us. It is our ability to recognize the influences on each decision we make that allows us to make better decisions as we mature. Or so we hope.
The difficulty with decision-making is that our environment and influences are ever changing. Expectations are always changing. As such, leadership is difficult. Leaders must be confident enough to make decisions as they humbly seek wisdom and historical perspective from those with alternative views, experiences and understanding. As we might say, those who remember the past are less condemned to repeat it.
As a risk manager, I rely on experiential data. As I conduct strategic risk assessments, I purposely look for known threats or symptoms that may defeat a proposed decision or path. I look for flawed strategies that have caused failure in similar situations in the past. That approach is part of my craft. But is it reliable?
The insurance industry has plenty of historical failures to study. Unfortunately, we can only discuss failures that have already occurred. We cannot foresee the failures yet to play out.
The mortgage industry, specifically the subprime mortgage industry in 2006 and 2007, is an excellent example of how mimicking the success of many subprime lenders of years past looked like a fruitful and profitable venture. Many banks adopted the strategy. And why shouldn’t they have? Everyone was doing it. Risk? What risk?
But clearly the measure of risk in that situation was distorted. Huge risk existed, but at the time it was perceived that the risk of not entering the market was far greater than the risk of any financial disaster. Clearly, this turned out to be a disastrous gamble.
In the years following the meltdown, the entire banking system froze. This reaction was almost equally catastrophic. No one lent anything to anyone, at any rate, for any time, for any reason. This response was a disaster in of itself.
Except for a courageous and wise few, the opportunity to profit was missed. Decisions were made in a dangerously risk-averse environment fueled by some leaders’ loss of faith in the banking system. Those risk-averse leaders failed to seize a tremendous opportunity to make money.
During this time, I observed two environments: An environment of excessive confidence, and one of deep naiveté coupled with excessive fear and paralysis. It was a dramatic spread.
Leaders who kept their perspective and passed up the easy money maintained the ability to capitalize on tremendous opportunities after the crash. Those who stayed their course, were true to their values and recognized the distortions in the markets were able to lead their organizations through the disaster and come out stronger than their peers.
These leaders, we must cherish and embrace. The leaders who were paralyzed by fear are still immobilized or likely now unemployed.
But we shouldn’t be too hard on those leaders who only now may understand their failures.
Any point in time never seems historic when you are living through it. As we enter or exit the next realm of decision-making, I hope we are able to recognize the distortions and the opportunities, and sidestep the decisions that may cause us peril.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.