WORKERS' COMP THOUGHT LEADERSHIP SERIES
Presented by Plethy Recupe
Simple Ideas for a Complex System
A Settlement Philosophy Determining the Optimum Method for Worker's Compensation Settlements
by Bill Zachry, SCIF Board Member
The workers compensation claims settlement philosophy has a direct impact on the injured workers, and a financial impact on the employer and claims administrator. For many generations the workers compensation industry did not change its settlement philosophy for settling claims. It was one of the processes which was not questioned because “this is how we have always done it”.
There are three primary methods to bring claims to a conclusion in workers compensation. The actual details of these three can vary significantly depending on jurisdiction, local laws, rules, and regulations.
- Findings and award. (F&A) Findings and awards are usually the Judge’s determination of all issues after a trial in front of the local worker’s compensation appeals board.
- Compromise and Release (C&R) C&R is usually an agreement for settling the nature and extent of Permanent Disability, any questions of unpaid Temporary Disability, and the determination of the amount of money to be paid for any future medical care which is needed to cure and relieve from the effects of the injury. In most jurisdictions, the C&R includes the future medical care as a lump sum payment. The origin of this settlement was usually when there was a question of compensability.
- Stipulations. Stipulations usually were also a negotiated amount of Permanent disability but included a provision for paying for all future medical care as needed to cure or relieve the injured worker.
Due to a willingness to challenge the status quo, a better understanding of hidden costs such as collateral and the reserve loss development calculations, an increased focus on analytics and financial results, the question of settlement philosophy has come to the fore.
The settlement philosophy is impacted by the following issues:
- Some jurisdictions do not allow settlement of future medical care.
- The Medicare set aside system which is designed to avoid cost shifting.
- Some jurisdictions also have the mandate to bring the claims to a legal resolution within a prescribed timeline of MMI or maximum medical improvement.
Designing the optimum settlement includes the following issues:
- What is the “best” claims settlement for the injured worker?
- Which is economically the best settlement philosophy for the employer?
- Which is the best settlement philosophy for the claim’s administrator?
- Which is the best settlement philosophy for the State jurisdiction?
- Which is the best settlement philosophy which will result in the consistent provision of benefits to the injured workers?
It is possible that the “correct” answer may differ widely due to the age of the injured worker, the eligibility of the injured worker for social security or other retirement programs, the injured worker’s economic status, the skills of the injured worker, the injured workers’ personality type, the nature of the injury, the employee’s occupation by jurisdiction and by the employer.
The fundamental goals for a settlement philosophy:
- Promptly paying the proper benefits to the injured workers.
- Avoiding creating a significant financial or administrative burden for the injured worker.
- Avoid cost shifting.
- Including a proper analysis of all costs including that of medical inflation, system creep, collateral, and administrative costs.
- The ability to achieve a full and final settlement or fully conclude the claim.
- Aligning the proper incentives to obtain the optimum outcome.
- How to consistently pay both represented and non-represented workers similar benefits for similar exposures?
(A brief) History of the worker’s compensation settlement philosophy in the United States.
From the late 1950s well into the late 1990s most new claims examiners (throughout the United States) were originally trained at insurance companies. They were all trained with one workers’ compensation settlement philosophy.
“If the employee is still working at the employer, (and if the employer is still “on risk” with the insurance company) to “Stipulate” the claim. If the employee is no longer at the employer and or if the employer is no longer on risk, then C&R the claim.”
If or when an employee eventually left the company, and or when or if the employer changed insurance companies a C&R was then attempted.
If the employee was still at risk with the insurance company, it was a common claims practice to ask the employee for a resignation as apart of the C&R process.
Because of their original training, most self-insured claims adjusters never questioned the philosophy of Stipulating if the employee was still employed. This resulted in a high number of stipulations within the self-insured community.
Reasons behind the established philosophy:
- By stipulating it was easier to get apportionment of the PD for prior injuries. The laws concerning apportionment throughout the United States are not consistent. A Compromise and Release do not always accurately define the extent of the permanent disability in the settlement. Therefore, apportionment based on a C&R was potentially problematic.
- The employer and the insurance company did not want employees who settled by C&R waving big settlement checks at the work site which might result in “Me Too” injuries.
- The claims administrators believed that a C&R would allow the employee to submit claims multiple times for the same body part or same injury.
- In most jurisdictions, if the employee did not use their “Future Medical” provision of the settlement for a few years, the file could then be “administratively closed” thereby “salvaging the reserves for the Future Medical back into the claim’s operations. Though the exposure technically remained if the employee was alive, a significant number of stipulated cases were administratively closed.
- In some jurisdictions, stipulating the claims kept them open and “on the books” longer which resulted in higher Experience Modifications (X Mods) which resulted in higher premiums for the insurance companies.
- By stipulating the claim, the employer would avoid “Cost Shifting”. A C&R might result in the employer double paying the medical costs, when the employee used the group health medical for treatment which was caused by the industrial accident.
- It was commonly believed that if employees got a lump sum settlement for their future medical care that they would then purchase a car, a boat or a house and use their group health medical care for their industrial injury treatment.
- Some State jurisdictions did not want the expense of worker’s compensation transferred to the State, so they forbid any permanent and final settlement.
- When Medicare Set-Asides became the law of the land, most claims administrators then assumed that C&Rs were more expensive than Stipulations.
- If the future medical care was paid in a lump sum to the employee that the injured worker would not have the same access to the cost containment programs (such as bill review and U
R utilizing evidence-based medicine) which claims administrators use to control the medical costs. Most doctors bill their “usual and customary” and do not bill in accordance with the local fee schedule.
- It is easier (takes less effort) for the Defense Attorney and for the Claims Examiner to stipulate a claim than to negotiate a C&R.(Just split the differences of the Permanent Disability between the applicant and defense medical and agree to provide lifetime care for the medical costs).
These reasons were based on premises that were not based. Premise one: Compromise and Releases are more expensive than Stipulations. To obtain a Compromise and Release will require extra money for Future Medical exposure.
Reality: The settlement figure is a result of the examiner’s professional judgment concerning the correct level to pay for a Compromise and Release. The examiner contemplates the entire medical record and factors how much money the claim will cost for future medical expenses. The figure is always reviewed and approved by the WCAB judge. Due to petitions to reopen Permanent Disability issues and deterioration of medical conditions, Stipulated files may ultimately cost the insurance carrier and the employer more money for the same type of injury, than permanently closed files.
Premise Two: If a claim is Compromise and Released the court will not allow apportionment of Permanent Disability.
Reality: Courts apportion for Permanent Disability based on submitted medical records. It is as difficult to obtain apportionment for a Stipulation as it is to obtain apportionment from the medical record for a Compromise and Release. Experienced practitioners within the industry utilize the medical record on Compromise and Released files, to obtain apportionment when appropriate. The WCAB holds the defense community to very high standards when applying for apportionment. It is difficult to get apportionment on Stipulated files as to get apportionment on Compromise and Released files. The correct handling of a file will give ample opportunity to set the record for apportionment notwithstanding the type of settlement obtained on earlier injuries.
Premise Three: Lump sum settlements paid to current employees would encourage others to file for w/c benefits.
Reality: All questionable claims are carefully investigated. With the current video technology, it is difficult for employees to file false claims of injury. The companies that have been using a lump sum settlement philosophy have experienced relatively few “copycat” industrial injuries.
Premise Four: If a claim is Compromised and Released and the injured worker has a need for more treatment, the applicant will then file a new claim when the original injury flares up.
Reality: The companies that have been using a lump sum settlement philosophy have rarely experienced this problem. A California caselaw, The City of Anaheim v. WCAB (Advise) 47CCC52 speaks directly to the issue of an applicant claiming a new injury when the case has been Compromised and Released. This is a case where a police officer with colitis Compromise and Released his case and then tried to allege a new injury for each flare-up. The city prevailed, the Compromise and Release stood, and no new benefits were due.
If there is a new alleged injury, which is part of the old injury, it is up to the claims administrator to fight the question because the treatment was already paid for. If the applicant is alleging a new injury when benefits have already been paid for the old injury it also has potential fraud implications.
Working at an insurance company for 12 years, as a self-administered self-insured employer for fifteen years and at a TPA for three years my research and experience found very few applications for adjudication of claims on the same claimant, and part of the body, when there have been a Compromise and Release obtained on the original injury.
On the contrary, my findings were that there was a trend for mid and larger files with stipulations, to have a petition for new and further filed within five years of the date of injury.
California Compensation Cases are replete with numerous cases involving new and further disability and more medical treatment. Open files become more costly the longer they are open.
Premise five: Many of the cases stipulated never utilize the future medical care that was awarded.
Reality: There were a significant number of claims with stipulations that were closed due to inactivity. However, there were usually for minor accidents and the salvage was inconsequential when compared to the costs of re-opening claims for future medical care after they had been closed for several years and the costs associated with the new and further claims which were filed on stipulated claims.
Challenging the Assumptions and Status Quo (Cognitive biases driving the Status Quo)
There are several problems with the established settlement philosophy and the associated assumptions:
- There were no analyses done to determine what was the best ultimate outcome for the injured workers.
- It is a poor claims practice and perhaps even illegal for insurance companies to discriminate their handling claims based on the insured being a current policyholder vs a former policyholder.
- There is no definitive study concerning the issues of cost shifting(medical and indemnity).
- Very few examiners, insurance executives, or employers fully understand the cost of collateral (or limitations on the investment of the collateral at insurance companies) required by the insurance companies or the state oversight bodies.
- The exposure to future medical costs has changed as the definition of injury expanded to include cumulative trauma, and compensable consequences from the injury. In the 1990s and2000s there has been an explosion of “Sisterhood of the traveling body part injuries.” Fewer claims are administratively closed after two years of no activity and those which remain open are significantly more expensive.
- There is no definitive study on the claims administration expense costs (C&R vs Stipulations) when determining what is more cost effective to administer.
- For insurance companies, because there is a differentiation in the calculation of expense vs loss in the X mod, there was no inclusion of the calculation of the expense of claims administration when determining the amount of a C&R. This practice extended to the self-insured companies.
- The examiners do not know what the medical inflation will be and do not include a calculation of medical inflation in determining which philosophy to utilize.
The determination of a claims settlement philosophy should be a deliberative effort which considers what is best for the injured worker as well as what is best for the employer.
I personally believe that artificially keeping the injured worker tethered to the worker’s compensation system through stipulations encourages the employee to believe that they are an “injured worker” rather than a productive worker. I also believe that any C&R should include a program to help the injured worker administer their future medical care program.
There is probably no single settlement philosophy which can be applied to all jurisdictions. The issues of cost-shifting and the evolving Medicare regulations will need to be evaluated as part of the settlement philosophy. Collateral and claims administration expenses should be calculated and included in the decision to stipulate or settle the claim.
I recommend that all claims’ administrators, self-insured employers, and employers who share the risk with the insurance companies all regularly evaluate their settlement philosophy to determine the best program to achieve their risk management goals.