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By PHILIP K. GLICK, CPCU, RPLU, senior vice president of ECBM Insurance Brokers & Consultants in West Conshohocken, Pa., and president of Glick Risk Management Advisors, an affiliated insurance consulting firm

One of the "dark secrets" of a tightening insurance marketplace involves hidden or excessive fees built into workers' compensation insurance programs.

This repricing often occurs in two steps: from the amount billed down to maximum statewide fee schedules; then further discounted down to negotiated preferred provider organization or PPO levels.

Many workers' compensation insurers and third-party administrators are charging a flat percentage of the savings between originally billed medical charges down to the fee schedule, then further taking a percentage charge for the discount down to the preferred provider fee schedules. Oftentimes, charges of 20 percent to 30 percent of medical bill discounts are being charged in addition to review charges per line for actually reviewing the medical bills.

DOUBLE DIPPING

Other hidden cost increases are imposed in the form of so-called "double-dipping" by claims adjusters in the way they charge for medical case management services. In many cases, an insurance company's claims people or the TPA hired to handle large deductible workers' compensation claims are charging a per-claim fee that includes managed care services, such as for:

-- Completing three-point contact between the injured employee, employer and medical provider shortly after an injury

-- Coordinating medical services with physicians and medical providers

-- Confirming that appropriate medical care is provided

-- Monitoring follow-up medical treatment

In most cases these charges were to have been included in the flat per-claim adjusting fees, or loss conversion factor (LCF), adjusting charges already paid. At the same time, many claims adjusters or TPAs assign telephonic and field case management services for these same services to an outside medical management company, which then imposes an additional charge for the same work.

One large client saw an annual cost for this duplicate medical management in excess of $120,000 in one year!

RESERVES

Some insurers and TPAs are also setting inadequate initial reserves for workers' compensation and liability claims in the early years after an injury under large deductible or retrospective insurance programs. Establishing relatively low initial reserves provides a false initial feeling of comfort and sense of cost control. This is often called "stair-stepping" reserving. Later reserve increases are then imposed on large open files.

Besides understating true incurred loss amounts, this initial under reserving also results in later unexpected increases in the claims adjusting fees that will be paid where they are based on a loss conversion charge or percentage of deductible claims.

COLLATERAL

Insurance company collateral requirements, typically in the form of letters of credit under large deductible workers compensation programs, is another area where insurance companies' practices often result in significant additional costs that are often not recognized at the inception of a deductible program.

Insurance companies have tremendous discretion in the amount of letters of credit that they require to collateralize open deductible claims under paid claim deductibles or paid loss retrospective insurance programs. Insurers have notoriously "sticky fingers" for requiring collateral at the beginning of programs and then being very reluctant to release or reduce this collateral, even though claims have been settled and outstanding reserves become minimal.

The costs of these letters of credit have increased significantly over the last 12 months due to credit market tightening. Large credit-worthy companies were typically paying under 50 basis points for these letters of credit as recently as 12 months ago. Now, the annual costs of these letters of credit are often in excess of 1.5 to 2.0 percent of the letter of credit amounts. Insurers also require additional cash escrow accounts to cover up to three months of expected paid claims. They often hold onto the full amount of these cash amounts which accumulate from year to year even when actual monthly paid claims amounts decline.

Requiring excessive amounts of collateral and then delaying reduction or release of this collateral clearly increases the insured's true cost of coverage.

"RETAIL" MEDICAL PRICING

Even when using PPOs to obtain discounts off of maximum mandated medical fee schedules to provide workers' compensation medical care, most insureds are essentially paying for workers' compensation-related medical care for injured employees on a "retail" basis. This is particularly true for hospital and surgical costs for injured workers.

This is in sharp contrast to group medical insurers that often obtain substantial discounts from hospitals and other medical providers for covered medical care--often as much as 75 percent or more off of the standard "retail" fee schedules.

This pattern of paying for workers' compensation care at these higher "retail" costs significantly increases workers' compensation claims costs above possible further negotiated discounts.

DEPOSIT PREMIUMS

Another area where insurance companies are increasing costs is in the nature of the deposit premiums required on workers' compensation programs. Typically, premiums are paid based on estimated payrolls, which are essentially fixed for a 12-month policy term in advance.

These premiums are locked-in, even when the insured's revenues have declined significantly and staff lay-offs and salary cuts have occurred reducing actual insured payrolls. Given the reduction of insured workers' compensation payrolls for many clients, they are essentially fronting this excess money to their insurance companies.

Insureds then have to wait two to three months after the completion of the policy year to get a refund of their premium overpayments when their expired policy is audited.

WHAT YOU CAN DO

Given these trends, forewarned is forearmed. Specific steps should be taken by all risk managers to identify these potential cost drivers and take these steps to push back on any of these cost increases. These include:

1. Reserves established for deductible losses should be set to the best estimate of ultimate projected costs as soon as adjusting information permits realistic estimates.

2. Allocated loss-adjustment expenses should be carefully evaluated prior to program inception and negotiated to eliminate or reduce any flat percentage fees for obtaining medical fee discounts.

3. Double-dipping on fees charged for medical management on workers' compensation medical claims adjusting charges should be carefully evaluated and any duplicate charges pushed back on the insurance company or TPA.

4. Required collateral on deductible programs should be minimized. Written agreement should be reached at the time that an insurance policy is first written under a large deductible or paid loss retrospective insurance policy to establish a formula that outlines exactly how collateral will be calculated at the completion of each policy year.

Subsequent calculations should then be made to adjust the collateral at 12-month intervals using agreed loss development factors to adjust actual deductible incurred losses to their ultimate value. The methodology that will be used to calculate and then adjust letters-of-credit amounts should also be agreed in writing at policy inception.

Paid claim cash escrow accounts should also be reviewed each year and excess cash amounts returned to reflect actual monthly payment amounts.

5. Insureds should push to purchase workers' compensation medical care at heavily discounted "wholesale" rates. These discounts can often result in 50 percent to 60 percent additional savings off the traditional "retail" hospital charges paid for injured workers' hospital services.

6. With respect to deposit premiums paid on workers' compensation, several insurers will now provide monthly payment options where insureds report actual payrolls for the month and pay a corresponding monthly premium for coverage. These monthly premiums adjust automatically to reflect actual payroll exposures, including the impact of any staff layoffs or other payroll reductions.

This eliminates the typical pattern where an insured is locked into workers' compensation premium payments, even where sales and payroll activity decline. No more free loans to the insurance company!

With these proactive steps in hand, professional risk managers will be able to ensure that the competitive insurance marketplace really continues for his or her firm, and that any other hidden cost increases are avoided or minimized.

Read more at the WORKERSCOMP Forum^TM homepage.

December 14, 2009

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