Settlement Authority Risk Management and Claims Administration

Introduction

An analysis of the Settlement Authority Process and position paper on How to efficiently manage the process.

Settlement authority is used as a financial control mechanism to make sure that claims are not settled for more than their true value. An unintended consequence of the settlement authority process is that failure to obtain (or give) the appropriate settlement authority can delay settlement and increase the ultimate cost of the claim.

This paper is intended to explore the mechanisms of settlement authority. This paper will identify some of the unintended consequences of the settlement authority mechanism and provide practical solutions to avoid the negative unintended consequences associated with the settlement authority process.

Settlement Authority Axioms and Comments:

• Examiners are told that they should treat the money that they spend as if it were their own. Most do.
• The settlement authority process is perceived by some Judges and attorneys as one of the biggest barriers to claims settlement and claims closure. “The biggest barrier to settling the claims is that the attorneys and examiners in front of me do not have adequate settlement authority. They eventually get it, but it usually takes more than six months longer than it should have” Quote from WCAB Judges.
• “One of the biggest barriers to claims closure is the defense attorney. They just don’t seem to be as interested in claims closure as their clients or the applicant attorneys.” As quoted tome by WCAB Judge
• “As a negotiating tool, I like to pretend to call the examiner (or the claims office) for a higher settlement authority. This process sends a message to the applicant’s attorney that I am at my limit” and helps facilitate closure. As quoted by multiple claims examiners, hearing representatives and defense attorneys who are at the court settling claims.
• “I just can’t get settlement authority from that claims organization. I have been waiting for a year since I submitted my initial request. I update it regularly with increased exposures and I just get no response.” Quotes to me from three different defense attorneys discussing the settlement process.
• “I just can’t get anyone to give me the necessary settlement authority to get the file closed.” Quotes from examiners, and from risk managers.
• “Even if I have made an extremely reasonable settlement demand, they take forever to get back to me” applicant’s attorney discussing the settlement process.
• “I could settle every case if I just had the right settlement authority.” Larry Fleming (a claims settlement specialist)
• All financial institutions, such as insurance companies, must have appropriate financial controls in place to ensure that their payments are appropriate and that their balance sheets are accurate. Claims settlement authority (levels and compliance with the authority levels) is one of those controls. Insurance companies are regularly audited for compliance with those controls.
• Many self-insured employers and claims operations use settlement authority as a control mechanism in an effort to make sure that no claim is settled over its true value.
• Some employers also use the settlement authority process as away to manage their cash flow. When they know that a large settlement is in the offing they can anticipate and manage their cash flow better.

Settlement Authority levels

Settlement authority for front line claims examiners is usually determined by the length the examiner has been on the job (their theoretical experience level). New examiners are usually given very little settlement authority. As their skills increase the supervisor adds to the discretionary level of settlement independence.

In most claim’s operations, overlaying the skill levels are artificial settlement levels based on job title. For example, based on the examiner’s demonstrated skills, the supervisor is allowed to give the trainee examiners up to $5,000 settlement authority, and their examiners up to $15,000. Supervisors usually have a higher discretion level, managers even higher and usually the VP has the highest level of authority within a claims operation. The actual numbers vary widely by organization and operation.

Some claims operations also have overlaying control mechanisms built into their claims systems; which require reserves, settlements or payments above certain levels to be authorized by the next higher authority within the organization.

Most of these mechanisms work. It is rarely a situation where settlements are paid where the payment far exceeds the actual value of the claim.

Very rarely have I seen clams settled over the settlement authority level.

The examiner who has to obtain settlement authority usually has to know the facts of the claim well and be able to articulate those facts in a cogent manner. Just the experience of asking for settlement authority focuses the examiner and forces an analysis of the claim facts, its strengths and weaknesses. This experience sometimes creates a better claims outcome for the employer.

Almost all of the worker’s compensation claims settlements in the USA are reviewed for adequacy by the local board or court. Settlements where the worker is not represented usually receive a higher level of scrutiny. This means that most settlements are negotiated within a range prescribed by the facts of the claim,

Failure of the Settlement authority process

Failure to settle timely can be broken down into three parts.

The first two are performance issues:

1. The claims examiner, supervisor or other person in the authority protocol fails to analyze the claim value timely.
2. The defense attorney received settlement authority but failed to communicate or negotiate a settlement timely or effective. 3) Thein-pro per claimant refuses to settle and/or the applicant’s attorney will not settle unless it’s on the steps of the courthouse or a judge pressures the attorney to be responsive to a reasonable settlement offer.

Defense attorneys should not wait an unreasonable amount of time for the claims examiner to respond to a settlement request. The typical excuse is that they didn’t want to rat out the claims examiner for fear they wouldn’t receive new referrals. Their allegiance has to be to the company, not its employees.

Unintended Consequences associated with the settlement authority process

There are some unintended consequences with the claims settlement authority process.

The biggest problem with settlement authority-level controls is the delays associated with compliance. Any significant delay in obtaining the settlement authority increases the exposure to the claim (more TD, added body parts, more medical treatment, more medical legal evaluations, etc.)

Obtaining settlement authority (from the supervisor, from the manager, from the VP, from the employer) takes work. Each level of the food chain requires more work and takes longer. For many examiners, explaining the nuances of the claim can be problematic. Sometimes the examiner does not know the case well (this can be due to examiner turnover; and is one of the contributing factors why claims examiner turnover increases the cost of the claims.)

Getting settlement authority can be particularly problematic when there is a significant difference between the levels of disability and the need for future medical care as delineated in the applicant’s and the defense’s medical reports.

Good reserving practices (accurate) usually beget good settlement requests. Asking for 100K on a claim that has 10k in reserves will always raise eyebrows. However, when settlement authority is requested on a file that is not adequately reserved, appropriate consideration still needs to be given. In this circumstance, reserves need to be adjusted based on the settlement request. More often, the settlement authority which is requested is for a sum far less that there serves indicate. This is usually done because the examiner is afraid to ask for the actual exposure on the claim.

Asking for settlement authority from an employer can be problematic. This is particularly true if the person with the ultimate settlement authority at the employer is not well-versed in worker’s compensation. In some situations, this results in a risk manager (who is not necessarily well versed in the worker’s compensation process) trying to do the “workers’ compensation exposure to financial English” translation while asking for settlement authority from the CFO or CEO of the company.

There is a natural bias for examiners to do what they are most comfortable with. Some examiners (and even supervisors) are intimidated by having to talk to the claims manager, the claims VP, the risk manager, or the CFO at the employer. This bias can result in delays in requesting and obtaining settlement authority.

Artificial settlement authority levels can become the target rather than the intended control level. For instance, I have seen examiners who had $25,000 settlement authority settle many of their claims for$24,999. This prompted the question “Were the claims really all worth$24,999? Audits told an interesting story. Some of the claims had a higher exposure but the examiner had worked very hard to make sure that the claims were still settled within their authority. Some of the claims may have been worthless but in the hurry to close claims the examiner went up to their level of authority to get it done. Usually, and more importantly, there were significant claims languishing because their true exposure exceeded the settlement authority, and the examiner was not comfortable asking for the appropriate settlement authority.

Another barrier to settlement authority is the reluctance of the examiner to request settlement authority on claims where they have made a mistake in a compensability decision or a mistake during the claims administration and as a result were reluctant to ask for settlement authority because the underlying cost driver was their fault.

Mechanisms to facilitate settlements through appropriate authority

• Set expectations regarding when claims must be analyzed for settlement have to be clearly articulated to the claims staff and defense attorneys. Settlement analysis for accepted claims should be completed as soon as the claimant is no longer receiving TTD and PD advances have commenced; when the claimant has reached MMI, when there is a demand for settlement; when the claimant has terminated; and, at least two weeks prior to the settlement conference or trial.
• In a denied claim, the claims examiner should prepare a case evaluation and request settlement when not settling presents a(potential) substantial risk to the employer and/or insurer. The risk should include the potential for making bad case law if the clam is lost at trial.
• All parties should know that delays in asking for and getting claims settlement authority results in a delay in claims closure. Every day delay in reporting of claims results in a $1200increase in ultimate claims costs. There are no exact specific studies on delays in settlement
• Put in place a settlement authority process. Set prescribed timelines for requests and responses. What mechanisms are in place to ensure compliance? Are there mechanisms in place to obtain authority should there be absences in critical positions? When I was out for surgery, I came back to a large backlog of settlement requests. This resulted in setting new protocols for any absences from those who were supposed to give settlement authority.
• Does the protocol include a process for emergency requests? Despite the best planning, sometimes events conspire to demand a settlement at the last minute while the parties are in court. Each such demand should also result in a careful analysis of the circumstances to help avoid such activity in the future.
• In the written protocol, how long does it take for approval from each level of authority? If the protocol takes six weeks maximum for compliance through all levels, and if the local court is setting trials only four weeks out from notice, then the protocol has to be re-evaluated. If the protocol calculates out to four weeks, then the examiner should know that the settlement request should be completed at least five weeks prior to the trial or the projected date of negotiations.
• The claims settlement authority process is not usually based on a specific amount to settle the claim. Most organizations have a settlement form that outlines the exposures, the relative credibility and strength of the medical reports, and the various kinds of future medical care which may be paid to settle the claim. If the employer is used to a specific form and format, it usually makes it easier for the examiner to get the authority process completed.
• The settlement analysis should include the cost of all potential methods of settlement. C&R, stipulated award, and likely value of an F&A.
• Whoever will be authorizing deserves to know what the examiner and/or defense attorney think are the pros and cons of each possible resolution — especially when the authority is being sought from a person who isn’t versed in WC.
• Some risk managers, CFOs and finance people like to have exact numbers when giving settlement authority. However, this can be quite problematic. Examples of the vagueness and difficulty in projecting future medical care can be the projected number of knee replacement operations that may be required for the lifetime of the worker or the number of times someone will have to be detoxed to finally get off opioids. Therefore, some claims examiners request ultimate authority with the anticipation of settling at a figure less than what had been given. Some examiners provide an analysis of their “starting point, target, and walk away” (using these is sometimes part of a larger negotiating process).
• Regularly review the current settlement authority levels. Has the authority changed over the last few years? If the examiners all had $5,000 ten years ago, perhaps that level should be increased based on the fact that the same level of exposure is now worth more.
• There should be a master list for each program outlining the initial reserve, reserve change, payment and settlement authority for every examiner in the office.
• If ultimate settlement authority emanates from the employer that employer should sign off on the authority levels and projected timelines for all examiners, supervisors and managers.
• Those who are in the settlement authority process should agree that they will provide a response within the prescribed timelines. They should be realistic in understanding the demands of their time (and how much time they can expect the settlement authority process to take.) They should understand that delays in settlement are expensive. They should also be realistic about access (many CFOs are unavailable just prior to earning releases and board meetings). If they really won’t have time for the process, find someone else in the organization with the appropriate authority level who will do the job on a timely basis.
• A more difficult process is to identify claims which are ready for settlement. One mechanism is to review all claims which are six months old after the end of the last temporary disability check. Another mechanism is to review all claims where TD has stopped and there is a large amount of Permanent Disability outstanding.
• Comorbidities can seriously increase the exposure of the claim and increase the amount needed to settle the claim. Even when not pled, hypertension and diabetes (especially if the applicant is obese) in a claim that has a future surgery will result in higher settlement values.
• The Medicare set aside process has impacted the settlement authority process. In addition to settlement within the organization, some claims also require settlement authority from Medicare. This can delay the settlement process.