Where There's Smoke, There's Fire

“Where there is smoke, there's fire,” is an oft-repeated adage. For the property/casualty claims industry, “Where there is pain, there is gain,” is probably the more appropriate way to put it. In 2004, property/casualty insurers paid $300 billion to cover losses and loss adjustment expenses. If better use of technology could save the industry just one percent of this total, the savings would be $3 billion!

Some claim costs are inevitable, but in many instances they can be reduced. Four factors that contribute significantly to unnecessarily high costs are: the legal system, the health-care system, adjustment processes, and compliance management. This article identifies those four specific areas of excessive cost and the root causes for the significant expenses they represent while making a recommendation for what can be done to reduce those expenses.

Cutting Legal Costs

Insurers can realize great savings by streamlining interactions with the legal system and optimizing litigation-management technology in the claim-management process. Managing a property/casualty claim in litigation is a complex process that involves iterative exchanges of information between parties and requires compound decision points throughout the lifecycle of the claim. Claim managers must gather and evaluate the facts, make a compensability decision, and handle the claim so that benefits are provided in a cost-effective manner while meeting the letter and spirit of the law.

Avoiding litigation is the most effective cost-control measure. Early and frequent contacts with insureds and third parties provide the key ingredients for litigation avoidance. There are ample ways to decrease costs of contacting the insured, such as automated e-mail, fax, and voicemail systems. But sometimes litigation cannot be avoided. A study of the U.S. tort system by Tillinghast Towers-Perrin indicates that the U.S. has the most expensive in the world. Three percent of our gross domestic product is consumed by tort lawsuits, including payments and legal expenses!

What can claim adjusters and managers do to control and minimize the costs associated with litigation? By using a superior litigation management tool, claim professionals can mitigate exposure. That translates into greater savings in overall claim costs. The key to reducing litigation exposure is developing a litigation plan to bring the claim to a cost-effective conclusion.

The litigation plan streamlines the mire of paper work associated with legal notices by seamlessly associating all parties to litigation in a single transactional medium and allowing users to centralize legal documents. Second, technology offers users the tools to track key events in the litigation process for discovery and court appearances. Third, claim representatives can document settlement negotiations from initial demand and offer through final settlement, or to track disposition of the claim.

Finally, the litigation module can help define disputed case issues, evaluate potential claim exposure, review reserves for adequacy, and create a plan of action to minimize exposure. Given this proactive approach, the cost of litigation can be reduced because adjusters can stay focused on moving cases to disposition in a timely, effective, and efficient manner.

Controlling Health-Care Costs

Workers' compensation medical care costs have risen far more sharply than health-care costs in the last several years. Why is there such a variance between private-sector costs and workers' compensation medical expenses? According to the National Council on Compensation Insurance (NCCI), much of the difference is based on the volume, duration, and mix of services used by injured workers versus the general population.

There has been a dramatic shift in the way the workers' compensation dollar is spent. A 2004 Insurance Information Institute study indicates that in 2002, 53 percent of every workers' compensation dollar was allocated to medical costs, with 47 percent paid in indemnity benefits. Twenty years earlier, the medical portion of the workers' compensation dollar represented just 40 percent of payments versus 60 percent for indemnity. Today, the statistics are arguably much worse than in 2002.

Claim representatives face the daunting challenge of referring injured workers to the appropriate medical providers early in the claim process. Using preferred provider organizations offers the most effective solution to providing quality care at an affordable price as permitted by law and regulation. Managed care is becoming much more important with each passing day because of the need to control costs, but it is no longer effective enough to manage cost containment with medical-bill audits. While auditing medial bills is an essential ingredient in the claim process, this approach opens the door to other opportunities by following processes that are prevalent in the managed-care industry.

Technology can help. Using a case-management system in conjunction with a nurse case manager or an experienced claim representative allows medical and claim professionals to focus on treatment and costs. Through technology, the nurse and the claim representative are provided with reference tools to document the injured party's condition and authorize or deny care for specific timeframes. The documentation facilitates medical-bill processing with minimal intervention by the nurse case manager or claim representative. By using a common system, professionals can set targets for return to work, consider modified work duties, and provide the patient with the best treatment based for recovery.

Medical case-management modules can interface with industry-recognized medical protocols that enable a company to measure the effectiveness of a treatment plan against accepted standards for care. A key goal in any treatment plan is get the disabled individual back to work. Assisted by the use of protocols and working with the employer, the claim representative can focus on returning the disabled party to work in a modified capacity. These proactive practices generate medical cost savings, which also can contribute to reducing the indemnity dollars. This organized approach restores equality between the health-care industry and the medical costs involved in worker's compensation insurance.

Streamlining the Adjustment Process

The third critical factor contributing to high claim costs is the demanding job of claim adjusting. A claim representative is pulled in a myriad of directions simultaneously and is constantly expected to provide immediate answers. It has been estimated that claim representatives spend 80 percent of their time managing 20 percent of the claims. Assuming this is an accurate assessment, there is not much time left in the day for processing the remaining 80 percent!

Fortunately, today's claim systems can create automated workflows that enable claim managers to route claims to different claim representatives based on distribution rules. Distribution rules prompt the system to solicit additional information, such as accident reports and background data, at the appropriate times during the claim lifecycle. With instant access to claim data, claim representatives make more informed decisions. Automating routine tasks such as soliciting wage statements for lost-time workers' compensation claims affords claim representatives the opportunity to spend more time reviewing information, correlating facts, and making decisions that translate into saved dollars.

Medical bills are frequently entered more than once by a data entry clerk, often inaccurately. Medical case managers spend time reviewing those bills and every manual process contributes to cost. But it's not necessary for a human to review every bill. Software incorporating an “expert system” can review routine bills. Automated medical bill review, when integrated with the claim workflow, creates cost-saving efficiencies, decreases loss-adjustment expenses, and improves loss ratios.

Eighty percent of claims handled by inside adjusters are routine and require only limited intervention by the claim representative. Expert systems powered by rules engines and knowledge-based software can process such claims automatically and designate the remaining 20 percent for human involvement. Freed from the flood of routine claims, adjusters can review and more effectively manage those claims that most need their attention. Automation that integrates information such as accident reports and background information reduces cycle time and overall cost.

Meeting Compliance Demands

Claim representatives carry the heavy burden of maintaining claim compliance for regulatory reporting mandated by the state jurisdiction governing each specific claim. This is no easy task given the voluminous nature of statutory forms and regulations. Unfortunately, given the multiple demands on the claim representative's time and the mandates for seemingly superhuman knowledge of changing laws and regulations in every state, adjusters and insurers don't always send the proper forms on time.

In certain states, such as California, insurers that fail to make a timely filing must pay penalties to the injured employee. Even more daunting than these self-imposed penalties are state compliance audit penalties and the impact on the claim administrator's state rankings for timely filings and payments. It has been estimated that satisfying compliance requirements takes 30-50 percent of the claim representative's time. Almost all compliance processes can be automated, including: selecting and collating mandatory and optional forms, identifying companion documents, managing notice periods, identifying appropriate recipients, and state compliance to bureau submission.

To simplify regulatory compliance and to improve outcomes, software incorporating a rules engine can provide the claim staff instant access to reference information on every state's claim regulations, laws, and forms. This tool defines the proper form to use based on claim circumstances, the appropriate timeline for filing the form, the mandatory and optional fields on the form, the companion documents that need to be filed concurrently, and the form recipients.

Whenever possible, the compliance tool also automates the creation of the form in conjunction with the client's data and claim file. The compliance tool's distribution rules kick in, defining how the form is to be filed, using a paper or electronic process to submit the information to the states and bureaus. Innovation in this arena is just now emerging to address the needs of the industry. With the right technology, the claim representative's time spent on regulatory compliance can be significantly reduced and refocused on the cost-containment issues of the overall claim.

Madonna Eddy-Brown is the product manager and Badri Narasimhan is the vice president of the claims business unit of Insurity Inc., a provider of property-casualty software and services. They can be reached at madonna.eddy-brown@insurity.com, badri.narasimhan@insurity.com.