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Although the workers' compensation industry is viewed as a provincial, state-by-state system, it cannot completely escape the technological and demographic trends that speed globalization in other industries. Claims-payers today depend upon the ubiquitous availability of a high-speed network, capable of carrying both their millions of bytes of policy and claims data, as well as their seeming billions of e-mails. Many claims-payers now leverage Web-based, platform-independent standards, workflow software and "technology steroids" to improve their ability to collaborate internally and externally.

But technology often enables important changes in an organization's business processes. Many claims organizations are in the midst of aggressively attempting to re-engineer their claims processes. In that discussion emerges the question of whether or not to outsource and move some operations offshore. While there are clear cost advantages to the companies that choose to outsource functions overseas, there have also been numerous customer service satisfaction issues as well. So where is the claims industry?

Historically, claims-payers vacillated between internalization versus outsourcing certain ancillary claims functions, such as first notice of loss or medical bill review. However, the availability of relatively cheap network bandwidth and the development of platform-independent standards for exchanging insurance data now allow for the outsourcing of even core claims functions, as well as the potential use of offshore resources for ancillary claims functions. The facts beg the question: Can offshoring, in combination with new technologies and more traditional internalization strategies, help payers cope with the environmental challenges shaping the workers' compensation industry?

Back in the mid-1990s, many of the largest property/casualty payers implemented a strategy of keeping in-house the supplementary elements of the claims process, such as first report of injury, case management and bill review. This, claims executives thought, gave them greater control over the processes and associated outcomes. Unfortunately, the price of greater control was typically far greater fixed costs and less flexibility to respond to rapid changes in the market. Large claims-payers then began to outsource these kinds of noncore claims-handling functions once more. Today, a vast majority of payers appear to make decisions regarding outsourcing based upon whether one of several conditions exists:

* The process in question requires a special skill or competency.

* The process requires significant scale to be performed cost-effectively.

* The process is largely clerical in nature and does not directly touch the payer's customers.

While there seems to be a consensus in the industry about which parts of the claims processes require special competencies (such as building/managing a preferred provider medical organization) or significant economies of scale (such as owning a field network of case managers), what is perhaps most surprising is how conservative the workers' compensation industry has been in terms of outsourcing, much less offshoring, the clerical tasks that burden the claims process.

Most payers would agree that over the last decade the professional level of claims-handlers has continued to decrease, while the amount of administrative and clerical work has increased dramatically. Rather than taking time to build strategies to resolve their claims most efficiently, adjusters spend more time managing a growing mountain of mail, bills and e-mails. Where claims organizations differ is the strategies they try to reverse this trend. While other industries have turned to outsourcing and even offshoring to help solve these administrative transactional challenges, the workers' comp industry appears to still prefer to process and control these functions in-house by using greater automation.

INTERNALIZED & AUTOMATED

According to Ken Martino, senior vice president at Specialty Risk Services in Hartford, Conn., a growing number of claims organizations keep most processes in-house or are even moving back from an outsourcing strategy to increased internalization. This appears to be partially in response to Sarbanes-Oxley requirements and the investigations of New York Attorney General Eliot Spitzer into claims-payer/vendor relationships, but according to Martino, companies like SRS are also internalizing as a way to differentiate their services. SRS has historically kept processes such as first report of injury, nurse case management and bill review in-house and has tightly integrated them into the claims process.

Internalization is also no longer limited to just the largest payers in the market. Improvements in software usability and the ability to leverage Web-based standards to interface different software tools have made it easier for midsize carriers, third-party administrators and even self-insured employers to internalize key functions in the claims process. Many claims organizations will replace their legacy claims systems with new applications that include rules engines and at least some elements of workflow automation. The goal of these system upgrades appears to be to take much of the administrative burden off the adjusters' shoulders while also standardizing their claims-handling processes around best practices learned from veteran claims-handlers.

Sally Harris, vice president, shared services, at the regional carrier FCCI Insurance Group, notes that the balance in the traditional cost-benefit equation has shifted dramatically in favor of internalization. As a payer that prides itself on its high-touch customer service, Harris points out that only by owning all the key functions of the claims process (especially those that touch their clients directly) can FCCI truly guarantee the level of customer service their clients expect. While FCCI looked at outsourcing "noncore" components of the claims process (such as medical bill review), they found that as powerful software tools become easier to implement and integrate, they could achieve better results and a greater sense of ownership using their own staff than they could outsourcing or shipping the work offshore.

Bob Kulbick, president of Crawford Integrated Services, the large TPA based in Atlanta, agrees that advances in automation make it feasible to keep operations in-house and manage all aspects of the claims process. Long known as an organization that heavily favored internalization (Crawford even built its own field and telephonic case management organization), Crawford recently implemented a host of new technologies to maximize the capabilities of its diverse internal resources. A new claims system from CSC allows Crawford to automate much of the administrative processes that threatened to turn its claims professionals into mere "paper-pushers." A new triage system from e-Triage Inc. has helped standardize Crawford's three-point contacts around best practices, as well as assist adjusters in building customized strategic action plans for each new claim. Supplementing these automation tools is an aggressive internal training program designed to help Crawford improve the strategic skills of their adjusters and cope with the growing shortage of experienced professional claims-handlers.

However, even large claims organizations committed to internalization cannot escape the fact that the advantages of offshoring are often too compelling to ignore. A majority of payers have outsourced a few routine backroom processes, such as paper conversion (scanning and basic data capture), to partners that can offer significant cost savings in the labor-intensive processes. However, these same organizations are clear that they will not outsource or offshore any of the core claims-handling processes. What is perhaps most surprising is that one of these large payers, an organization that offers true offshore business processing outsourcing services, actually agrees with that philosophy.

OUTSOURCED & OFFSHORED

In addition to its core offering of third-party claims administration services in the United States and Australia, Cambridge Solutions Ltd. also provides information-technology development and true "follow the sun" BPO transaction processing in locations such as the United Kingdom, India, Australia and Malaysia. Despite their obvious commitment to the BPO market, Wes O'Brien, president of the claims and risk management division at Cambridge, says, "The company is more committed than ever to all the 'core, client-facing positions' in the claims process located here in the United States. Positions such as adjusters and/or nurses that are heavily involved in setting the claim's direction need to reside here because of the unique training, communication and skill requirements imposed by the complex claims process. This drives our quality and improves the outcomes for clients."

O'Brien also agrees that the role of the adjuster has changed dramatically over the past decade. While the volume of administrative details that must be managed daily has grown, the amount of time required for critical functions like strategic thinking, especially in the resolution of complex claims, has lessened. According to O'Brien, mail processing is one of the most time-consuming tasks for the claims adjuster, so Cambridge has automated the process by scanning all the day's mail into their document management system. Once a document is scanned, it is then sent to one of their global locations for overnight processing so that the following day all documents are organized and prioritized for the U.S.-based adjusters. By offloading clerical functions in this way, Cambridge allows its adjusters to focus on outcomes rather than process.

In the same vein, once an adjuster approves a payment on a claim, the actual generation of that payment is handled by one of its global locations capable of continuous processing 24-hours per day. Some medical-only claims that have been triaged and found to have no potential indemnity issues can be scanned, indexed and then positioned for automated payment offshore.

Many claims-payers are beginning to view outsourcing as a way to add new capacity for growth or improve their outcomes. Even a company that believes in internalization as much as SRS occasionally uses outsourcing to test new ideas or quickly add new capabilities to their product portfolio. SRS is currently piloting a program that combines their internal first report of injury capability with outsourced nurses to radically change the initial claims triage process. By using a nurse rather than a clerical intake resource, SRS is able to identify potential clinical issues, ensure that an injured worker gets to the right provider and adjuster immediately, and ultimately reduce much of the "friction" from the claims process to drive better outcomes more quickly.

THE FUTURE

While they may differ slightly in degree and approach to outsourcing, workers' compensation payers are still firmly committed to only considering clerical, nonprofessional activities for potential offshore outsourcing. It is, however, always interesting to track the changes and innovations in the group health marketplace because the workers' compensation industry often follows their lead. Several large health-care organizations offshore some processes that use professional staff overseas.

The group health market has been struggling with a well-publicized nurse staffing shortage for much of the last decade. In California, where the nursing shortage is especially acute, there are currently an estimated 14,000 open nursing jobs. The federal government expects the national nurse shortage to hit 800,000 by 2020.

As the nursing staffing shortage has reached crisis proportions, some group health insurers have turned to offshore outsourcing as an innovative way to solve their staffing shortages. One large managed health-care company recently turned to MediCall, a U.S.-based firm that offers a Philippines-based call center staffed by nurses, to help them save money and improve customer service simultaneously. In one program, the health plan had the MediCall nurses call patients within two to seven days post-discharge of a hospital stay to confirm that the original discharge plan was working well and that there were no issues that could impede the patient's recovery.

While the MediCall staff often helped patients with administrative issues (such as equipment rentals not being delivered or home health care visits not initiated in a timely manner), the fact that the calls were being made by professional nurses also enabled them to identify and begin to resolve potential clinical issues that previously would have likely been overlooked and led to a readmission.

Any serious clinical issue uncovered by the call center can be immediately soft-transferred to a staff nurse stateside. According to the health insurer, by offshoring the program, they were able to use professional nursing staff with clinical expertise, which resulted in better outcomes for their clients, for far less than what it would have cost them to use less qualified clerical resources based in the United States.

ADJUSTER CRISIS

This trend is important to the claims industry, not only because they also compete for trained nurse case managers to help manage claims, but also because a similar staffing crisis looms with professional claims adjusters.

Payers remarked that one of their most significant business challenges is finding qualified claims staff.

As a significant portion of the experienced claims adjusters and managers reach retirement age in the next decade, their potential replacements--young college educated professionals--now turn to other, sexier industries, leaving claims organizations short of personnel.

Will the workers' comp industry ultimately be forced to offshore at least some of the core parts of the claims-handling process? Will the workers' comp industry have to undergo a core claims-processing paradigm shift?

The labor trends are too powerful and the inherent cost advantages are simply too large to ignore.

If the SRS idea of using nurses in the first-notice triage process does improve the quality of care while lowering the ultimate cost of claims, why wouldn't a claims organization use offshore nurses that are equally skilled but cost only a third of their domestic counterparts?

As more property/casualty claims organizations go global with their customers, won't the opportunities to offshore parts of the U.S. claims process become more attractive?

Management, client and union resistance seems to be the greatest barrier at this point, but over time, even that significant obstacle should be minimized as the younger "millennial" generation ascends in the work force. This generation expects technology to allow them to communicate and collaborate instantaneously from anywhere at any time.

As they increasingly fill the ranks of the risk managers, claims managers and even claimants in our industry, they will have no problem dealing with adjusters or nurses based in Bangalore or Manila, so long as they are available 24/7 from a Bluetooth-enabled cell phone with high-speed Web access.

While it may take, as one claims vice president put it, "the retirement of the current generation of senior managers who fought their way up through paperbound claims organizations," the globalization of the claims process will come. Ultimately, the companies that will be best positioned to take advantage of this seismic shift in our industry will be those that have zeroed in on their true core competencies, invested in technology that enables them to collaborate seamlessly and show a willingness to leverage the advantages that a truly global economy brings.

What does the future hold for the workers' comp industry with regard to outsourcing and offshoring? We would welcome your feedback and views on these potentially industry changing trends.

To track the "flattening" of the workers' compensation industry more fully and to gain a better understanding of the potential barriers, we are conducting a national survey at: http:// www.zoomerang.com/survey.zgi?p=U255D4XPS8DS

Please share your views with us. The results of the survey will be presented at the National Workers' Compensation and Disability Conference & Expos from Nov. 14 to 16 in Las Vegas (online at www.wcconference.com) and in a subsequent edition of Risk & Insurance®.

MADDY BOWLING, president of Chicago based Maddy Bowling & Associates Consulting, has been in the industry for 27 years and is a frequent speaker and contributor.

DAVID HUTH is a senior associate at Maddy Bowling & Associates Consulting specializing in insurance analytics, systems and strategy.

September 15, 2006

Copyright 2006© LRP Publications