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Today we examine one of the great conundrums in workers comp claims: the old injury that may or may not be defined as a new injury.

In 2006 David Poulton worked for Martec Industries in Rochester, New York, as a laborer. Poulton had a bad back, having already filed workers comp claims in 1998 and 2000. When he visited his treating physician in June 2006, he had the same old complaint: his back hurt, as it had virtually every day since his first injury in 1998. He told his doctor that he re-injured his back at work the prior day while lifting materials. At this appointment, a discouraged Poulton told his doctor he wanted to quit working.

In consideration of Poulton's long-established problem, apparently compounded by the prior day's incident, the doctor disabled him from work. He cited "old injuries and his continued decline." He characterized the situation as involving "episodic increases in pain" that had troubled Poulton for several years. The doctor, in fact, had been encouraging Poulton to stop working prior to this particular visit.

An independent medical exam determined that Poulton suffered from degenerative disc disease and that his disability was caused primarily by preexisting problems.

So is this a new injury, as reported by Poulton, or simply the recurrence of an old one?

Who Pays?
An administrative law judge found in Poulton's favor, determining that the lifting incident at Martec aggravated the pre-existing condition. However, this ruling was reversed by the appelate division of the NY supreme court, which found no evidence of a new injury and remanded the case for further consideration.

Poulton may yet succeed in re-establishing his workers comp claim, but it will draw upon the resources of the carrier for his prior employer, not the carrier for Martec. As is usually the case in workers comp, the narrative is driven by the evidence. In this case, the history of pain and suffering is so unrelenting and consistent, the "new injury" theory goes up in smoke. With his working days apparently at an end, Poulton probably does not care who pays for his troubles. He has suffered for a long time.The remaining question, of course, is who pays and how much.

We return to the beautiful state of Maine, where moose wander the woods looking for whatever interests a moose and where employers self-insured for workers comp look for a fee schedule. The moose are a lot happier than the self-insureds. As we have pointed out in prior blogs, the legislature mandated the creation of a fee schedule for medical services nearly 20 years ago. There is still no fee schedule. So while insurance carriers are free to negotiate with hospitals to determine rates, self-insureds - Bath Iron Works (BIW) the most notable and vocal - are stuck paying the exorbitant "usual and customary" fees.

BIW has sued a number of times to move this process to a conclusion. Most recently, they sued to remove Paul Dionne, chairman of the workers comp board, from heading up the fee schedule committee. Dionne is also board chairman of Central Maine Healthcare Corp., which includes Central Maine Medical Center in Lewiston. While he claims objectivity, Dionne is in an untenable situation: you do not ask a medical provider how much they want to cut their own revenues.

In deference to the "appearance" of a conflict of interest, and perhaps in an acknowledgement that after 20 years, enough is enough, Dionne has recused himself from any further involvement in the fee schedule process.

"It's a hard decision because this is a very important issue for the workers' compensation system," he said. "But I've got a lot of confidence in the board members."

So from here on Dionne will follow the debate from the sidelines: no conflict, but plenty of interest. His confidence in the other board members might give rise to anxiety for BIW. Regardless, this is surely a step in the right direction.

When it comes to the long-mandated, long-absent fee schedule, patience is wearing a bit thin in Maine. The moose may wander where they choose, but self-insureds are caught in a very expensive trap. Too bad they don't sell fee schedules at L.L. Bean.

The saga of the New York self insurance trusts continues. We reported in April that justice had been served by Judge Kimberly O'Connell, who ruled that requiring solvent trusts to pay for the sins of insolvent trusts was unconstitutional. Now, according to Work Comp Central (subscription required), O'Connell herself has been overruled by a four judge panel, which has reinstated the assessments on the solvent trusts. While the justices are undoubtedly correct in their literal interpretation of the law, the ruling comes under the heading of "let no good deed go unpunished." It may be legal, but it is in no way just.

Here's the (rotten) deal: 15 self-insurance trusts are shut down by the state. They ran out of money because they under-priced their premiums, under-reserved claims and sold insurance like a ponzi scheme. Oh, they also paid themselves handsomely for their fine work as administrators. These defunct trusts are in the hole to the tune of $500-$600 million. State oversight? There wasn't any.

Who Pays?
The WCB decides to assess the remaining, solvent trusts to make up the deficit. In other words, the "joint and several liability" within a trust group now expands to include liability for all trust groups. To be sure, the enabling legislation allows the WCB to do this. After all, someone has to pay and this is New York, so deal with it. In this case, the trusts that operated by the rules, fairly pricing and fairly reserving claims, are penalized for the sins of the clowns who are no longer in business.

As we pointed out in yesterday's post, a task force has recommended that New York get out of the self insured trust business. We concur. Any state that loads the dice of "joint and several liability" to this absurd point makes a mockery of the concept. Self-insurance is based upon the ability to limit risk and contain exposures. Given New York's operating rules for self-insured trusts, conventional management tools are rendered useless. The liabilities of operating a group trust are uncontrollable and virtually infinite. Why would any company choose this path for managing risk?

Two years ago, New York Governor Patterson convened a task force to examine the status of self-insured trusts for workers comp. He was forced to take action when a number of trusts failed, most notably those administered by Compensation Risk Managers (CRM). The insolvent trusts left behind a deficit of $500 million. (See our prior blogs here and here.) The task force recently presented its findings to the governor. In 189 pages of closely reasoned text, the commission recommends that New York abandon this particular model for insurance. The risks, in their view, outweigh the benefits and perhaps most important, the state lacks the resources to adequately monitor how these groups operate from day to day. You cannot trust the trusts.

The commission zeroed in on what it considers to be the (fatal) flaws in the group trust model:
: Joint and several liability, where prudent employers are held accountable for the actions of the weakest members
NOTE: it's one thing to have "joint and several" liability; as the commission points out, it's quite another to actually collect on these obligations: less than 15% of what is owed by participants in the failed trusts has been collected to date.
: potential conflicts of interest involving group administrators and TPAs, who seek to grow the business by keeping rates artificially low and by understating losses
: inability of trustees to understand what is really going on
: inability of the state to monitor and assess the true status of each operating trust

Death Spiral
Self insurance groups currently operate successfully in 18 states, but not in New York. As we pointed out in a prior blog, the NY comp board tried to assess all trust members - not just those in the insolvent trusts - to make up the $500 million deficit. The solvent trusts sued and for the moment, have prevailed. (The Held decision can be read in the appendix of the task force report).

There is a certain logic to assessing all members for the failings of a few, but this only works when you are dealing with very large numbers, so the individual assessments are relatively small. This was not the case back in 2008, when there were about 18,000 employers participating in NY trusts. After all hell broke lose, the number dwindled to 4,000.

The crippling assessments issued by the comp board to cover the trust deficit created a death spiral, with solvent trusts folding their tents and moving out of the state. Even though those assessments have been retracted by the courts, that action comes too late to save the viable trusts. New York probably has no choice but to abandon the group trust model.

Rotten Apples
The New York narrative, as written by the governor's commission, attributes the trust failures to fatal flaws in the business model. But where New York sees an insurance approach that cannot work, other states see vulnerabilities that can be addressed through prudent management. Self-insured groups still operate profitably and effectively in many states. What happened in New York was the result of rogue and perhaps felonious trust management combined with inadequate state oversight. The state failed to see the true status of the troubled trusts in a timely manner and then took exactly the wrong action to correct it. That's not a problem with trusts themselves, but with the people entrusted to run them.

There are five towns in Massachusetts that do not carry workers comp insurance for their employees. Four of them - Dana, Prescott, Enfield and Greenwich - are under 412 billion gallons of water: they were submerged during the 1930s in the making of the Quabbin Reservoir, which supplies drinking water to Boston and a number of suburban cities and towns. The fifth, Tewksbury, voted to join the workers comp system way back in 1914, but a clerical error recorded the positive vote as negative, resulting in nearly 100 years of a go-it-alone, pay-as-you-go, hope-for-the-best approach to comp among the residents of the town, now nearing 30,000 people.

To date, Tewksbury has been pretty lucky. The town has paid out between $100,000 and $189,000 per year for claims in recent years. That's not bad, considering that one failed back can run upwards of $500,000. But just because Tewksbury has been lucky does not mean they are going to stay lucky. The liability to the town's tax payers is precariously open-ended. In these challenging times of reduced budgets for all municipal services, the specter of an unanticipated claim could put Tewksbury on the verge of bankruptcy. Because the town did not participate in the comp system, injured workers had the option of suing for damages unavailable in the comp system.

As we read in Insurance News Net, last month the town meeting voted to adopt workers comp coverage. (Presumably, the vote was properly recorded this time.) It will take a few years to develop an experience rating, based upon actual losses and statutory benefits. Overall the cost of insurance will run a bit higher than an average loss year, but that's price you pay for transferring the risk to a third party.Comp will finally become a set cost in the town budget. A workers comp policy comes with a comfort factor that cannot be measured simply in premium dollars: any claims, large or small, any catastrophic losses involving multiple town employees, will now be covered by insurance. That should help town residents and officials sleep a little better at night.

As for the surviving citizens of Dana, Prescott, Enfield and Greenwich, displaced long ago by the state's appetite for water, comp is not a likely component in their dreams. I imagine they welcome a nocturnal glimpse of the communities where they once lived and waken with sense of sadness and of loss.

Joe Cassano, the man who brought insurance giant AIG - and the world economy - to their knees, has dodged the proverbial bullet: he will not be indicted for his actions in the collapse of AIG's Financial Products unit, which he ran until his resignation in 2008. Federal prosecutors searched diligently for evidence of wrong doing. What they found, however, was evidence of cluelessness. Joe Cassano was no crook: he was just a manager in way over his head. He apparently believed that underwriting credit default swaps was relatively risk free. Oh, well, it seemed like a good idea at the time.

If no good deed goes unpunished, incompetence on a cosmic level is not without its rewards: Cassano made about $280 million in eight years of running the FP unit, in addition to receiving a performance bonus of $35 million in his final year with the company. That last payment truly boggles the mind. Cassano was paid for high volume sales of a product that destroyed his company.

Joe Warin and Jim Walden, Cassano's (presumably high paid) attorneys were delighted with the outcome of the investigation:

Although a two-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client's factual innocence. This result was the product of two things: an innocent client and fair prosecutors and agents. The system worked.

It would be more accurate to say that the system was worked. As was evident in a prior blog, Cassano was not a nice guy who happened to make a mistake. He was a thug dressed up in a fancy suit. Perhaps on some level it's reassuring that his actions were not criminal, that he acted in the expectation that his company would make money. Cassano certainly made an obscene amount of money, but AIG rank and file, the shareholders and the tax payers have to foot the bill for the mistakes of one greedy goon.

Arizona has been getting a lot of criticism lately. Frustrated by the federal government's inability to confront the undocumented worker problem, they took matters into their own hands and passed their own law. Now police are required to stop anyone who "looks illegal" and ask for papers. I'm not sure that illegal immigrants from Ireland have much to worry about, but Hispanics - who make up one third of the state's population - had better be careful. The Arizona legislature missed an opportunity by not requiring Hispanics to wear their documents in a packet around their necks. Perhaps they can amend the law.

I have been on board with the need to deal with illegal immigration. Back in 2006 I strongly endorsed the congressional initiative to build a wall at the Mexican border. This new version of the "Great Wall" offered an tremendous opportunity to ineffectively seal the border, build a tourist attraction/theme park and temporarily employ thousands of undocumented workers until the project was finished, at which point we would escort the workers through the wall back to Mexico.

Some people feel that Arizona has created a law that penalizes people simply for looking Hispanic. Others believe that only the federal government has the power to deal with immigration issues. As we await the legal challenges that may or may not resolve the issue, we need to shift gears and recognize an area where the maligned state has actually gotten it right.

Public Versus Private
I am referring, of course, to the decision to privatize the state fund for workers comp insurance. Arizona has provided insurance since 1925 through the State Compensation Fund (SCF). With 40 thousand employers and $191.8 million in premiums, SCF is the largest workers' compensation carrier operating in the state, with a 31.5 percent market share.

One of its subsidiaries, SCF Premier Insurance Co., is the second-largest, with $34.1 million in 2009 direct premiums written. Another subsidiary, SCF Western Insurance Co., is the 10th-largest, with $10.7 million in 2009 direct premiums written. In other words, SCF is by far the dominant player in the insurance market for comp.

Under the recently signed law, SCF will become a mutual fund in 2013. This move should open the door for more carriers to do business in Arizona, which will join the vast majority of states in operating a private insurance system for workers comp. I find it encouraging that in this area, at least, the goal is not to make the rest of us "Arizonians," but to have Arizona join the mainstream of American culture. Bienvenida, las damas y caballeros!

Massachusetts has the lowest workers comp rates among the major industrial states and just about the lowest rates in the nation. The cost of comp in the other New England states is roughly double that in the Bay state. So you would think that the rates in MA would at best stay the same from year to year, or increase slightly. Well, think again. Martha Coakley (yes, that Martha Coakley), the current and future Attorney General, has brokered a deal for yet another rate reduction: an average of 2.4 percent across all classifications. The insurance industry had argued for an increase of 4.5 percent. I guess they did not exactly convince Martha.

The AG thinks that the insurers are overstating future losses. In my experience with carriers operating in MA, they are actually understating losses, but that's a matter for the actuaries. If, as the AG argues, rates are too high in MA, what can you possibly make of rates in the other New England states and across the country? Are MA employers really that much better at preventing injuries and at getting injured workers back to their jobs? If you buy that argument, I have a nice bridge spanning the Mystic River that you might be interested in owning.

The trends in MA are no different from those across the country: while frequency is down, severity is rising at an alarming rate. In MA, severity is spiraling out of control. The state's generous wage benefit structure, combined with a first rate (and pricy) medical system and a judiciary that tilts strongly toward the injured worker, are making six figure reserves all too common. It's truly puzzling that the AG can look at the performance numbers for the insurance industry and conclude that rates are too high. They are way too low.

Politics: Local and Loco
It's not hard to fathom why an elected official chooses to drive deflated rates even lower. It's politically popular; any rate increase - even the marginal bump proposed by the industry - would be met with howls of outrage from small businesses, who are already under seige in a struggling economy. Strange to say, the depressed cost of comp is subsidizing the otherwise high cost of doing business in MA.

The AG is not finished with her rate scalpel: she thinks a few more points can be carved out next year. It will be fascinating to see how the carriers respond. Not too many folks think there is much money to be made in MA comp. And that rapidly dwindling club is about to get a lot smaller.

At its annual conference in Orlando, the National Commission on Compensation Insurance (NCCI) recently presented an overview of the state of workers compensation insurance across the country . Dennis Mealy, NCCI's chief actuary, presented to a standing-room only crowd, which is notable in itself, as the normal crowd for an actuary would fit in the proverbial phone booth.

Anyone with an interest in workers comp should take a peak at Mealy's presentation. As is often the case, viewers will pull out different nuggets, depending upon their points of view. Here's what jumped out at me:

• From 2008 to 2009 workers comp premiums dropped by 11.8%. No surprise, as premiums are tied to payrolls and the latter have tanked along with the economy. In addition, average premium rates have declined steadily since 2003, as no politician wants to approve a rate hike.
• Net written premium from 2007 to 2009 is down 23%.
• The payroll for manufacturing has been on a steady decline over the past two decades.
• The payrolls for manufacturing and contracting comprise 20% of comp payroll nationwide, but generate 40% of the premium. Again, no surprise, as the manual rates in these areas are higher then the rates in other occupations.
• Investment gain - the crucial money made off the float of premium dollars - dropped to 7.1% in 2008, after averaging nearly 15% in prior years.
• The combined ratio for workers comp is running around 110 - in other words, for every dollar insurers collect in premium, they are spending $1.10.
• Insurers continue to offer premium discounts in order to secure new business or retain existing business (what my colleague Tom Lynch refers to as "eating their young").
• Frequency of injuries continues to trend downward.
• The average cost of indemnity per lost-time claim and the average medical cost per claim continue to rise.

As is usually the case, insurers are betting that they can beat the odds of a tough market: by writing only the best businesses, by preventing injuries through loss control, by managing claims aggressively and by investing prudently.

There's Always Tomorrow
What you see from the bridge depends upon what you are looking for: where the despairing see reasons for jumping, the optimist simply enjoys the view. The risk transfer business requires optimism (for everyone, that is, except the actuaries). The great insurance wager never really changes: carriers are betting that premium dollars collected will ultimately exceed what they have to pay out in losses. The negative results of the last few years are viewed as an aberation. Just wait 'til Tomorrow:

The sun'll come out
Tomorrow
So ya gotta hang on
'Til tomorrow
Come what may
Tomorrow! Tomorrow!
I love ya Tomorrow!
You're always
A day
A way!

For insurers, that "tomorrow" hopefully includes more favorable rates, improved return on investment, employers truly committed to safer workplaces, employees who really pay attention, and, while we're making a wish list, selfless attorneys. You gotta love tomorrow!

We recently blogged the collapse of the self-insurance trust market in New York. When CRM Holdings, a Bermuda based operator of self insurance groups (SIGs), folded like a house of cards, the New York comp board went after the healthy SIGs to cover CRM's liabilities. They hit these innocent folks with a whopping $11 million assessment. As a result, a number of SIGs abandoned the New York market, only to learn two years later that the comp board's assessments were illegal. Oh, well. It seemed like a good idea at the time.

Now we move a few miles to the east and find a similar situation brewing in Connecticut. Municipal Interlocal Risk Management Agency (MIRMA) has been writing comp policies for municipalities since 2002. The great thing about comp is that it's so easy: offer coverage at rates lower than competitors, collect the premiums and pay the claims as they come in. Unfortunately, the premiums MIRMA has been collecting are not covering the claims generated by the insured municipalities. So MIRMA is in the uncomfortable position of trying to collect additional funds from cash-strapped municipalities. For example, North Branford owes $600,000, Westbrook owes $158,000; and Killingworth owes $71,188. In these trying times, that's not exactly chump change.

The legislature passed a bill to give the municipalities more time to come up with the money. The bill would have amended the amount MIRMA was required to keep in its reserves, and thereby allow the towns to pay the amounts they owe, interest free, over four years. Governor Jodi Rell is not buying that approach; she vetoed the bill. The governor issued a statement:

MIRMA has been undercapitalized since its creation. Although it has been given several years to remedy its financial situation, it has failed to do so. Now, providers are not being paid and injured workers are at risk of not being treated. MIRMA can no longer exist in its current state of outright capital inadequacy.

The governor went on to state that MIRMA stopped paying workers' compensation claims simply because it does not have the money to pay, which is "wholly unacceptable." She wrote that MIRMA's deficit has grown by more than 300 percent in the last six years, and is predicted to reach well over $15 million by 2013. That might seem small by CRM standards - their deficit was upwards of $50 million - but then again, Connecticut is a lot smaller than New York.

Untrustworthy Trusts
The governor has ordered a complete review of MIRMA's finances. I could write the report without even looking at the books. In their effort to build market share, MIRMA underpriced their policies. They probably spent a lot on marketing and frills. To balance the books, they under-reserved claims, hoping to cover the cash short-fall by building market share. It worked until it didn't. Now they have run out of money, so they cannot pay the claims. If the auditors have a sense of history, they will conclude that MIRMA operates like a subsidiary of CRM.
NOTE: CRM, still operating in California, appears to be on the ropes.

Connecticut's short term solution - requiring the insured municipalities to come up with the money - is fair, if hardly feasible. At least Connecticut is not going to penalize the municipalities who declined to participate in what appears to be MIRMA's modified Ponzi scheme. That's good. But it remains to be seen how cash-strapped municipalities - already facing substantial budget cuts - are going to come up with these substantial sums of money.

When it comes to self-insurance trusts in the Empire and Nutmeg states, it's time to put away the beer kegs and cancel the golf outing: the party is over.

We have been following the implosion of self insurance groups (SIGs) in New York. Back in June 2008, SIGs operated by Compensation Risk Management (CRM) collapsed. CRM had grown their business by offering comp coverage at very low rates. For a long time, they were able to maintain an illusion of profitability by under-reserving losses. Eventually, it all caught up with them.

When the CRM SIGs went belly up, the state worker's comp board looked around for some free cash to pay for the $450 million in unfunded liabilities incurred by CRM. They decided to penalize all the SIGs that had been operating in the black. In a move stunning for its arrogance (facilitated by legislation passed in 2008), they decided to raise assessments on these SIGs from the modest annual total of $104,000 to a whopping $11.1 million.

In other words, the insurance groups operating prudently - charging adequate premiums, controlling losses and turning a modest profit - were forced to make up the losses incurred by a company operating like a ponzi scheme. Well, as they like to say in New York: "You gotta problem with that?"

Acting state Supreme Court Justice Kimberly O'Connor had a problem with it. She ruled on April 14 that the 2008 laws that empowered the comp board to assess the SIGs were unconstitutional, as were the assessments issued by the board.

Justice Too Late
Unfortunately, judicial relief comes long after the once-profitable SIGs have folded their tents. First Cardinal once operated 13 SIGs in New York, with $166 million in premium. When hit with the exponential increase in assessments, First Cardinal decided to move its business out of the state (in itself a sure sign of management that was paying attention). They stopped writing in New York and laid off the 57 (innocent) workers who were doing a good job of managing the New York business.

You may recall the old saying: "The wheels of justice grind slow but they grind exceeding fine." In this case, justice - and fairness - were eventually served. But the pace of the process seems to have crushed the parties harmed by an unjust law.

Of course, the comp board believes that the assessments are legal and is planning to appeal. That should add a few more months to this ridiculous situation.

"You gotta problem with that?" Indeed, I do.

Because of their rarity, volcanic eruptions are a pretty interesting insurance topic, so on the "thigh bone's connected to the hip bone" principle, we thought we'd stray a bit afield today. Mother nature has reminded us who's boss in a truly spectacular display of muscle flexing that's brought travel and commerce to an unprecedented standstill for a huge part of the globe.

As an insurance event, it may not prove to be as costly as one might think, given the havoc that it is wreaking on business and travel - estimated at $2 billion and counting. Most airlines will be absorbing the cost of the delays since there is not actual physical damage to the fleet, and a volcano would be considered an 'act of God.' This prompts Vladimir Guevarra of the Wall St, Journal to ask if we might see volcano-related insurance as a new product for the airline industry.

European insurers don't expect a big hit, largely because business interruption claims are considered unlikely - claims would need to be triggered by actual physical damage. The property and casualty damage from volcanic ash is not expected to be extensive.

For at least one segment of the industry, this is being deemed a significant claims event: Insurance companies that provide trip coverage are being inundated with calls, and they expect to pay out millions in trip claims. For travelers who were insured before April 13, coverage is likely, depending on exclusions, but after April 13, travelers should not expect ash coverage.

Future scenarios
In the great scheme of things, as far as volcanic eruptions go, this is a modest affair. However, there are two scenarios that could raise the stakes. The first is what the effects would be if volcano disruption lasts weeks, months - many are speculating about how the European crisis could play out

The second rather troubling scenario would be if this is a dress rehearsal, which it could well be if history is any guide.

"Eyjafjallajokull has blown three times in the past thousand years," Dr McGarvie told The Times, "in 920AD, in 1612 and between 1821 and 1823. Each time it set off Katla." The likelihood of Katla blowing could become clear "in a few weeks or a few months", he said.

A quarter of the island's population died in the resulting famine and it transformed the world, creating Britain's notorious "sand summer", casting a toxic cloud over Prague, playing havoc with harvests in France -- sometimes seen as a contributory factor in the French Revolution -- and changing the climate so dramatically that New Jersey recorded its largest snowfall and Egypt one of its most enduring droughts.

More volcano resources
Lists of the most deadly and the most costly eruptions
Volcano World
Aerial photo gallery of the Iceland volcano
Another gallery of stunning images
How to pronounce Eyjafjallajokull (video)

Alan Schwarz of the New York Times has written a fascinating series on workers comp in California: specifically, a cottage industry that has sprung up securing comp benefits for retired National Football League (NFL) players. The interesting part is that the claims are not limited to players from teams based in California. In its effort to protect transient workers (e.g., truckers, flight attendants), California offers recourse to anyone who temporarily passes through the state. Thus, professional athletes on any teams that compete in California can file for benefits, even if years have past and even if it was just a single game. Needless to add, the carriers for these out-of-state teams are trying to get the California system ruled off-side.

There are currently about 700 former NFL players pursuing benefits. Most of the injuries are orthopedic - bad backs, shoulders, knees, ankles. (We will deal with a claim for dementia in a future blog.) Two points should be made about these orthopedic injuries: many are cumulative in nature, so there need not be an acute injury specific to the sporting event in California; and virtually anyone who played professional football is likely to have one or more injuries directly related to the game.

Attorneys Take the Field
Behind every loophole lurks an attorney. In this situation, two former NFL players, now attorneys, are leading the charge: Ron Mix, a lineman for the San Diego Chargers in the 1960s, and Mel Owens, a linebacker for the Los Angeles Rams in the 1980s. Mix and Owens help former players from teams across the country to file claims in California. There is some question, however, about the quality of help that they offer.

Once deemed eligible for benefits under California law, players could opt to receive lifetime medical benefits for any medical expenses related to their football years. Think about it. That might include shoulder and back surgeries, hip and knee replacements, not to mention treatment for dementia related to on-field concussions.

Would it surprise you to learn that over 90 percent of the players entering the California comp system decline the lifetime medical coverage and instead, settle for a lump sum payment? Most players have accepted an extra $60,000 to $100,000 to settle their claim for future medical coverage. That amount would pay for one, maybe two surgeries.

Why settle out the medicals? Settling avoids the necessity of a trial (in these instances, not by jury but by administrative law judge). It puts a significant amount of money in the players's pockets sooner rather than later. And, of course, it puts money in the pockets of the attorneys, which lifetime medical benefits do not.

Faulty Judgment?
Judge Norman Delaterre, who sits in Santa Ana, notes that judges must consider whether proposed settlements are fair. "These players are represented by experienced, competent attorneys - the players themselves, they're adults. Presumably they've discussed the ramifications of the various types of settlements with their attorneys and they've come to a decision to accept the lump sum. Even though the judge in the back of his mind is thinking, you know, if it were me, maybe I wouldn't do this."

Hey, it's all just a game, right? The players took their chances on the field. Now they roll the dice in the corridors of comp system. If they end up doing what's in the best interests of their attorneys, what harm is there in that? They get some cash, the attorney gets a nice fee, the insurer gets a settled claim with no future exposure. One door opens, another one closes. When and if the future medical issues arise or the dementia sets in, well, someone else will be on the hook for that.

There are a lot of people unhappy with California's wide open door, above all, team owners and insurance carriers outside of California. They are going to do their best to shut the Golden State's door - the only such door, we should add, that is available to the walking wounded veterans of the NFL wars. We will keep readers posted on any developments.

But enough with the old folks who can no longer play and whose names we barely remember. The NFL draft is just weeks away. Hope springs eternal for every team, even the Detroit Lions. I can't wait to see what happens.

Just how much of a toll has the poor economy taken on the workers comp system? Robert Hartwig looks back and looks ahead in his article for this year's NCCI Issues Report, The Great Recession and Workers Compensation: Assessing the Damage and the Road to Recovery (PDF). He notes that while the property casualty industry fared better than many industries - not a single property casualty insurer folded due to the economy vs the 170 banks that did - the industry still took some serious body blows. And of the damage to the industry, the workers comp line was hardest hit. With 7.1 million job losses, declining payrolls, and a continuing soft market, net written premium fell by a whopping $8.5 billion in 2008, with another steep decline anticipate for 2009.

With such a grim backdrop, what's in the cards for recovery? Hartwig notes that recovery will be largely contingent on job and wage growth over the next several years, and on that front, he is not overly optimistic. If job growth proceeds at a pace consistent with that of the most recent expansion suggests a painfully long recovery period, job losses won't be recouped until late 2016. That doesn't leave insurers a lot of room to move:

With a limited ability to grow exposures and greatly diminished investment earnings across all lines of insurance, especially especially longer-tailed lines such as workers compensation, the focus -- at least for the first half of the 2010s -- must be on underwriting profitability. Generating consistent underwriting profits is the only way to earn risk-appropriate rates of return in the current slow growth, low investment yield environment.

Last August we blogged the case of Adam Childers, a morbidly obese pizza maker in Indiana who suffered a back injury. Childers's weight was in itself a substantial obstacle to his getting better, so the court ordered the comp carrier to pay for gastric by-pass surgery. Now we find a similar case in New York, where the state supreme court requires the state fund to pay for by-pass surgery.

Salvatore Laezzo, an employee of the state Turnpike Authority, slipped and fell at work back in 2002. He suffered injuries to his head, neck, back and knees. While we might assume that Laezzo had some weight issues at the time of the injury, in the subsequent years of relative inactivity his weight increased dramatically. There was substantial evidence that Laezzo's weight gain was caused by his work injury. In effect, the New York court has set a somewhat narrower standard for compensability than the court in Indiana: had Laezzo been morbidly obese prior to the injury, the court might have ruled for the carrier.

Seeds of Compensability
New York has some interesting and rather expansive notions of compensability in workers comp. The current ruling cites a precedent involving Stephen Spyhalsky, a construction worker [Spyhalsky v. Cross Construction N.Y.S.2d 212). The court ordered the comp carrier to pay for artificial insemination of Spyhalsky's wife, after back surgery compromised the route taken by his sperm. This unusual definition of compensability leads directly to another intriguing issue: had Spyhalsky been permanently disabled, would the comp carrier be required to pay dependency benefits for the resulting child? In all likelihood, yes.
NOTE: We blogged a somewhat similar situation in Arkansas, where the wife of a deceased claimant was artificially inseminated with his frozen sperm. After a rather complex deliberation, the court rejected her claim for additional dependency benefits.)

When in Doubt, Leave Them Out?
While the logic for including gastric by-pass surgery under workers comp is certainly understandable, there is a strong potential for unintended consequences: obese job applicants, who already face myriad problems in finding employment, may encounter even more discrimination. These well-publicized court rulings place the burden of gastric by-pass surgery directly on comp insurers and employers. The latter may shy away from hiring qualified obese applicants. After all, the obese are at greater risk for injury and, once injured, their weight becomes a substantial obstacle to returning to productive employment.

It would be nice to think that the pending expansion of healthcare benefits to nearly all Americans might make this cost-shifting problem go away. Alas, the game of "pin the tail on the payer" has only just begun.

In Greek mythology, Daedalus built the Labyrinth for King Minos of Knossos to contain the awful half bull/half man Minotaur. Theseus eventually killed the Minotaur, but only found his way out of the Labyrinth because Ariadne had given him a magic thread to mark his way in and out of the maze. I'm beginning to think that American health care makes the Labyrinth look like an easy walk across Boston Common on a sunny day. And, so far at least, no one seems to have found the magic thread.

Workers' compensation medical care is now getting whipsawed by two powerful and unstoppable forces: the Medicare Secondary Payer Statute (MSP) and the inexorable aging of the baby boomer generation.

We've written about these two looming catastrophes in the past. Seventy-eight million baby boomers are hard to ignore, and the MSP issue is starting to remind me of the 1958 horror movie, The Blob , wherein a gelatinous creature grew gargantuan by eating everything in its path. Two things have already occurred in the new year that bode well for continued growth of the MSP Blob.

The insurance industry goes a-begging
Last week the American Insurance Association, the National Association of Mutual Insurance Companies and the Self-Insurance Institute of America wrote to the Department of Health and Human Services Secretary Kathleen Sibelius asking her to delay the 1 April 2010 implementation of MSP mandatory reporting requirements. You can find the reporting requirements here.

The new regs lay a heavy burden on the comp insurance industry, referred to in the regs as Responsible Reporting Entities (RREs). (Such unfortunate acronyms bring me back, alas, to my days in the military.) RREs must report to the Centers for Medicare and Medicaid Services (CMS) any workers' compensation claims that involve ongoing medical payments, with the exception of most medical only claims. In their letter, the organizations list five reasons they believe an implementation delay is necessary. The first items are all about process: security protection, a lack of guidance from the CMS and an insufficient period for testing the proposed reporting procedures. The fifth reason, which is really the first reason, is the economic big stick which, when deadlines are missed, will slap fines of up to $1,000 per day per claim upside the heads of RREs. Ouch!

There's a lot more to it, and we'll be writing more about it in the coming months, but for now it's enough to know that the insurance industry is on its collective knees asking for a delay in the implementation of reporting requirements that have already been delayed and extended once.

Inedible Maryland Crabcake?
The second thing affecting MSP that happened in the new year may or may not turn out to be a big deal. On 4 January 2010, the Maryland Workers' Compensation Commission issued emergency regulations that require CMS approval for all workers' compensation settlements, not just the ones that meet the review thresholds in the CMS User Guide, version 2.0. The commission is requiring CMS review of virtually every claim up for settlement.

The new procedures require that every settlement pass through CMS before the Commission will approve it. Here is an excerpt from Maryland's emergency regulations:

A settlement that falls within the Medicare thresholds must be approved by CMS before it will be approved by the Commission.

A settlement the falls outside the Medicare thresholds may be approved by the Commission provided that the settlement agreement:

1. Contains a statement confirming that the interests of Medicare have been considered in reaching the settlement; and

2. Identifies the amount of the proposed settlement:

a. Apportioned to future medical expenses;or

b. Set-aside for future medical expenses through a formal set-aside allocation

3. The apportionment of the amount of the settlement associated with future medical expenses shall be supported by medical evidence such as a medical opinion or evaluation.

While it remains to be seen if the Commission's action will significantly delay settlements or increase costs in Maryland, it's reasonable to assume that it will. As any workers' compensation professional knows, the longer a claim stays open, the more it costs. As a result, the Maryland approach to Medicare set asides is not a good candidate for replication in other states.

A Magic Thread
As I write this, I'm about to leave for San Antonio for the 2010 Health and Productivity Forum, sponsored by the Integrated Benefits Institute and the National Business Coalition on Health. I'll be participating in a panel discussion organized and led by Broadspire's Gary Anderberg, one of the smartest people I know. Our panel will be addressing workers' compensation medical care and costs and the effect health care reform may have on both. I sure hope that Gary has brought a few spools of Ariadne's thread. We're going to need some magic to guide us through this formidable labyrinth.

Back in June we blogged the failure of several self-insurance groups (SIGs) in New York, all run by Compensation Risk Managers (CRM). There was bad news all around: participants in CRM SIGs were suddenly without coverage; and participants in other (non-CRM) SIGs were hit with a huge surcharge to make up the deficits created by CRM's deficient management. Now the proverbial "other shoe" (presumably a Gucci) has dropped, directly on the heads of CRM managers: the company has been indicted by Attorney General Andrew Cuomo for fraud and sued by the state comp board. CRM is having what appears to be a well deserved, terrible, horrible, no good, very bad week.

In their own defense, CRM asserts that problems are industry wide:

According to the WCB's website, of the 65 self insurance workers compensation trusts authorized by the WCB and subject to its oversight and regulation, as of November 2009, 32 were either insolvent, being terminated or were underfunded, 13 had been voluntarily terminated and only 20 were operating with no fiscal issues and no regulatory restriction. Compensation Risk Managers managed 8 of these 65 trusts. The Company believes that an industry-wide problem exists and that the WCB has unfairly singled the Company out. The Company intends to defend the WCB litigation vigorously and prove that the WCB's unsubstantiated allegations are utterly without merit.

In other words: don't hold us accountable for something everyone is doing.

Well, maybe other SIGs are in bad shape, but CRM is under fire for operating the insurance equivalent of a Ponzi scheme: the indictment charges that they deliberately under-reserved claims, leading to under-stated losses. The resulting "healthy" loss ratios became the basis for under-pricing the rest of the market, which led to increased membership in their self-insurance groups. The new premiums helped CRM keep up with increasing payments. It all came crashing down when insufficient reserves ran out and payments exceeded available cash. Heck, the experts at Madoff Consulting guaranteed that it would work... right up until the moment it didn't.

Joint and Several Liability
Most people buy insurance with stand-alone policies. Each company is the master of its own fate. If the company performs well, they benefit from lower premiums. If losses are high, the experience rating process leads to higher premiums. As long as the carrier remains solvent (not a given these days), there are no big problems.

Self-insurance groups are different. They involve a much higher level of trust (and risk): not only are you accountable for your own losses; you are on the hook for the losses of other group members. A SIG is only as strong as its weakest member. Indeed, SIG participants in New York discovered that they were on the hook for losses in other SIGs, through a painful surcharge imposed by the comp board.

This brings to mind the response of the immortal Groucho Marx to an invitation to join an exclusive club: "I don't want to belong to any club that will accept me as a member." That's just the kind of thinking that might have helped the unfortunate companies who find themselves swinging in the wind at the end of CRM's tattered rope.

My blog post of last Thursday (19 November 2009) addressing why workers’ compensation costs in Massachusetts are the lowest in the nation, while benefits are among the highest drew a mild pushback from Mark Walls, who manages the excellent LinkedIn Workers’ Compensation Forum. Mark wrote:

"Working for an excess carrier, I would never have expected Massachusetts to be considered a "low cost" state. In Massachusetts you cannot settle medical, and there are COLA's on the lifetime benefits. In my world, it's a high cost state.

I guess it's all about your perspective."

And he’s right- it is all about perspective. Mark also wrote, “I’m a claims guy,” and the blog post in question was all about premium rates. Sometimes, what appears logical when looking at claims can appear illogical when viewed through the prism of premium rates.

I can certainly understand why claims professionals in Massachusetts might be a bit frustrated, because not being able to settle the medical portion of a claim, along with having to contend with annual Cost of Living Adjustments, tends to obliterate predictability.

The perspective Mark mentions changes, however, when one considers a workers’ compensation program unique to the Massachusetts voluntary market, a program that substantially increases premium collected in the state while not driving up premium rates: the All Risk Adjustment Program, or, as it’s better known, the ARAP Surcharge.

In all 38 NCCI states, the ARAP, a sort of second experience modification that penalizes severity more than frequency, exists as the Assigned Risk Adjustment Program and is found in the Residual, but not in the Voluntary, market. This is supposed to provide even more of an incentive for employers in the Pool to do the right things to get themselves into the voluntary market. It’s a debit mod only. In Massachusetts, however, the ARAP can be found in both the Residual and Voluntary markets. If an employer in the Voluntary market has a high experience modification, it will also most likely find itself with an ARAP surcharge, anywhere from 1% to 25%, which is applied to the standard modified premium.

For example, say a company in the Voluntary market has a manual premium of $100,000, an experience modification of 1.5 and an ARAP of 1.2. The resultant total premium will be $180,000. Think of the $30,000 ARAP charge as compound interest. This means that Massachusetts premiums are more sensitive to losses than premiums in other states, even “loss cost” states.

And why shouldn’t an employer with high claim severity pay more for workers’ compensation? Why should employers with low claim severity subsidize those with high claim severity? Although many in industry abhor the idea of the Voluntary market ARAP, it seems to me that Massachusetts is doing the fair and reasonable thing.

In 2007, ARAP surcharges in Massachusetts brought in additional premium of $60 million, or about 7% of total premium in the state. However, this should decline fairly significantly in 2008 and going forward for two reasons:

• First, until 2008, the maximum ARAP surcharge was 49%; in 2008, the maximum was lowered to 25%;
• Second, Massachusetts has been hard hit by the recession, causing payrolls to decrease substantially; lower payrolls result in lower premiums.

The Massachusetts Workers’ Compensation Rating and Inspection Bureau is now engaged in the monumental task of putting together a rate filing to be submitted in 2010. It will be interesting, indeed, to see to what extent lowering the maximum ARAP surcharge from 49% to 25% impacts the filing.

I'm guessing that you never thought of domestic violence as a pre-existing condition. Well, you haven't tried to file a claim in one of the seven states that permit health insurers to deny coverage for the battered. The seven are Idaho, Mississippi, North Dakota, Oklahoma, South Carolina, South Dakota and Wyoming, plus the District of Columbia.

The aptly named Ryan Grim at the Huffington Post has developed a thorough chronology on this bone rattling demonstration of insurance logic. This is simply one example among many that when it comes to determining what qualifies for coverage, private insurers should definitely not be left on their own. The phantom "death panels" be damned: we already have health care rationing and premature deaths due to carrier rescissions of coverage, routine denials of (expensive) treatment, and exorbitant tier 4 drug charges.

To be sure, there is a logic at work in the insurance thinking: "We do not have to cover pre-existing conditions. You were beaten up before coverage began. You were beaten after coverage went into effect. Therefore, we deny your claim." I wonder if the subsequent beating involves a new beater, does that create a new - as opposed to pre-existing - condition? Using the same logic, if I fell down and broke my arm prior to my current coverage and broke the same arm again in another fall, would that be a pre-existing condition?

State Farm used to be among the carriers that at least considered denying claims from battered women (and men, for that matter). Spokesperson K. C. Eynatten put it this way:

State Farm no longer rates or denies life or health insurance to battered women, even if there's a history of domestic violence.

We realized our position was based on gut feelings, not hard numbers. And we became aware that we were part of the reason a woman and her children might not leave an abuser. They were afraid they'd lose their insurance. And we wanted no part of that.

It's great that State Farm changed the policy, but you have to wonder how their "gut feelings" led them to deny coverage in the first place. Victims of domestic violence need prompt medical treatment, counseling (yes, adjusters, pay for the counseling!) and a little chat with the police. One would hope that insurance companies would figure this out for themselves. They don't really need new state and federal laws compelling them to do the right thing, do they?

The Insider just returned from a speaking engagement in Stillwater, Oklahoma. The occasion was the annual workers comp conference sponsored by the judiciary that manages comp in the state. I was invited by fellow blogger Judge Tom Leonard, whose blog provides valuable information to comp practitioners in the state.

As a relatively high-cost state, Oklahoma is experiencing rumblings in the state legislature to switch to an administrative - as opposed to judicial - system. In theory, this makes sense, as a formal judiciary with its due process rules can slow down the resolution of claims. But this is no simple problem, with no simple solutions. The first event at the conference featured a panel of legislators who were involved in crafting the systemic fix: in general, republicans were pushing for change, while democrats cautioned that the interests of injured workers may be compromised.

While the Insider does not take a formal position on the controversy, we did caution all parties to "beware the law of unintended consequences." Every "fix" contains the seeds of both success and failure. The prudent legislator would do well to examine the problem from all sides and fashion a dispassionate solution - much as the talented and compassionate judges currently operating the Oklahoma system approach every claim.

Six Humongous Problems
The insider was invited to provide a national perspective on workers comp to the conference's 400 participants. We focused on six looming crises facing comp across America. Here is a brief summary of our concerns:

1. The Original workers comp model is obsolete: Comp is nearing its 100th anniversary (New York 1911). The workplace at the beginning of the 20th century was very different from what confronts us today. Legislatures struggle to modify the initial legislation to keep pace with change.

2. The economic collapse is a game changer: The comfortable assumptions of financial planners (stocks rise inexorably over time) have disintegrated in the world-wide collapse that began just over a year ago. This collapse has implications for workers comp, with employment shakier than ever and the retirement plans of millions in tatters. Which leads to:

3. The Aging American workforce is going to get older: With baby boomers approaching retirement age, the workforce is already at its oldest. As retirement accounts sink with the economy, more and more workers are finding themselves in a bind. They do not have enough money to retire. These older workers bring skill and experience to the workplace, but their aging bodies are breaking down. The comp system is not built to handle workers in their late 60s and 70s who plan to keep on working. Will comp become the retirement plan of choice for workers with no other choices?

4. Undocumented workers are half in and half out: most states cover the medical costs and indemnity for injured, undocumented workers, but draw the line at vocational rehabilitation. By definition, these folks are not "available for work." Will Congress create some form of amnesty, thereby opening the door to complete workers comp coverage for foreign workers?

5. Insurers are in big trouble: There may be low hanging fruit in the insurance world, but not in workers comp. There is a nation-wide suppression of rates, which is compounded, of course, by the idiocy of carriers who drop steep discounts on top of inadequate rates. Carriers may dream of a hardening market, but it never seems to arrive. Meanwhile, the bottom line continues to erode.

6. The federal government might mess everything up: The Medicare Secondary Payer program has invaded the settlement process for comp claims, creating chaos and uncertainty and increasing the costs. [Check out Judge Leonard's blog for some excellent materials on the Secondary Payer program.] Now we have national health insurance on the immediate horizon. No, it's not "death panels" or alleged coverage for undocumented workers that concern us. It's the more basic issue of who will choose doctors, under what circumstances, and what impact this might have on workers comp.

We have covered all of these crises in the Insider and will continue to do so in the coming months. I'm not sure that the good folks in Oklahoma found much solace in the fact that their own little comp crisis is dwarfed by issues that transcend state lines. Meanwhile, I did learn a thing or two about Oklahoma. It all comes down to this: Sooners versus Cowboys. No, I'm not going to explain. You have to be there to really understand.

Serious workplace injuries often turn spouses into caregivers. So the question becomes, are their services compensable under workers comp? As is so often the case, it depends upon where you live.

The Supreme Court of Arizona recently decided a case in the spouse's favor (Sabino Carbajal v.Industrial Commission of Arizona). In 1999, Sabino, working for Phelps Dodge, suffered a serious injury, resulting in cognitive problems and partial paralysis on his right side. He required full-time supervision and intermittent attendant assistance. The carrier paid for nursing aides during daylight hours. At all other times, Sabino's wife took charge of his care: this included giving him his medication in the morning; specially preparing his food; cleaning him when he was returned from day care soiled; and moving him between his wheelchair and his bed, the toilet, or his recliner.

In their deliberations, the Arizona Supremes examined practices in two other states. They looked first at Virginia, where the courts have denied reimbursement to spouses for home health care services (Warren Trucking v. Chandler, 277 S.E.2d 488). In Warren, the claimant’s wife helped him bathe, shave, and put on braces, and she prepared his meals, drove the car, and maintained the household. When the claimant lost consciousness, his wife revived him.

The Virginia court concluded that under the statute, to qualify as compensable “medical attention,” the spouse’s care must, among other requirements, be “performed under the direction and control of a physician” and be “the type [of care] usually rendered only by trained attendants and beyond the scope of normal household duties.” The court rejected the spouse's claim because the care rendered by the wife was not prescribed by a doctor and was not “of the type usually rendered only by trained attendants.” I suppose that when the wife revived her husband, she was just acting as a good samaritan.

NOTE: Workers in Virginia may well wonder whom the comp statute is designed to protect. We recently blogged an absurd provision of the law which precludes payment to brain injured employees who have the misfortune of surviving catastrophic injuries. Virginia seems to go out of its way to construct "rigid frameworks" that preclude compensation for the families of seriously injured workers.

Empathy in Action
Arizona justices also looked at case law in Vermont, where a similar set of circumstances led to a very different conclusion. In Close v. Superior Excavating Co. (693 A.2d 729), the claimant received a severe head injury and required 24-hour supervision. The claimant’s wife cared for him at home, including “administer[ing] and monitor[ing] his medications[,] . . . alter[ing] the doses [of medication,] . . . log[ging] . . . her husband’s behavior[, and] monitoring her husband’s seizure activity and responding appropriately.”

In concluding that the wife’s services were compensable, the Vermont court rejected the “rigid framework” of Warren, noting that "it “would . . . conflict with [its] longstanding practice of construing the workers’ compensation statute liberally.”

The Arizona court restated the aim of workers comp: rather than pushing the notion of spousal duty deep into the area of custodial care, the court "places the burden of injury and death upon industry.” The Arizona court overturned rulings at the commission and Appeals court levels. They found that Mrs. Carbajal routinely performed work that others were paid to perform and that these duties were necessitated by workplace injury. Therefore, she is entitled to reimbursement. It will be interesting to see how the comp commission comes up with a dollar value for her services: will she be reimbursed for "time on task" or is she "on call" and working whenever other paid help is not available?

When workers suffer catastrophic injuries, their families suffer loss beyond measure. The quality of life changes for everyone, not just the injured worker. If the question is "to pay or not to pay" for the onerous burdens placed on spouses, the answer, in Arizona and Vermont at least, is to pay.

The Defense Base Act (DBA) was enacted in 1941, to cover the injuries to civilian employees - primarily a few hundred engineers - during the second world war. The act might have worked then, but it certainly is not working now, nearly 70 years later. As we have blogged in the past, the DBA is a boondoggle, generating huge profits for a small number of insurance carriers and routinely devastating both the civilian workers wounded or killed in war zones and their families. There are over 10,000 claims filed each year: the medical only claims are usually paid; the indemnity claims are dissected, inspected, detected, and ultimately, rejected. A handful of insurers (AIG, CNA among others) are making big bucks at the expense of the wounded and the dead.
NOTE: As bad as the situation is for U.S. citizens wounded and killed in Iraq, it is far worse for foreign nationals.

The Domestic Policy Subcommittee of the House Oversight and Government Reform Committee held a hearing last week on the DBA. The title of the hearing betrays an (understandable) prejudice: "After Injury, the Battle Begins: Evaluating Workers' Compensation for Civilian Contractors in War Zones." The hearing focused on the handling of workers' compensation insurance for federal contractors working overseas, specifically on the inordinate delays in compensation running parallel to the enormous profits for insurers. Among those testifying were Deputy Labor Secretary Seth Harris; Timothy Newman, Kevin Smith and John Woodson, former civilian contractors in Iraq; Kristian Moor, president of AIU Holdings, Inc., a division of AIG; George Fay, executive vice president for Worldwide P&C Claims, CNA Financial; and Gary Pitts of Pitts and Mills Attorneys at-Law.

Kristian Moore defended AIG's decisions and motives, pointing the finger at a lack of Labor Department oversight and a system overtaxed with cases. "We are doing everything we can do," suggested Charles Schader, senior vice president and chief claims officer for AIU Holdings. Yeah, everything you can do to make money.

At the conclusion of the hearing, Dennis Kucinich (D-Ohio) warned AIG executives that he plans to demand copies of internal memos and documents that will link claims denials to the company's profits. Most of us do not get terribly excited by the prospect of reading claim files, but these will undoubtedly provide some compelling reading. While I doubt that the subcommittee will find a direct, written link between denials and profits, the rationale for the individual claim denials - in the face of compelling evidence of compensability - should prove riveting. Was it incompetence or was it greed? Something cruel, heartless and cynical took place in the back rooms of carriers with responsibility for civilian claims. If you like Edgar Alan Poe, you'll love the claims files of AIG and CNA.

Risky Job, Risky Work
Seth Harris, the new deputy secretary at the U.S. Department of Labor, is in charge of this mess for the government. He's been on the job for 3½ weeks. Congratulations on the new job, Seth! (You might want to keep your resume circulating.) Seth has been working less than a month, but he has already figured out that the system is in need of fundamental change.

The work of insurers usually involves risk transfer. Under the perverse incentives of the DBA, the risk is absorbed by taxpayers, the pain falls on civilian workers and their families, and the profits - running from 37 to 50 percent of premiums - are pocketed by the carriers. Risk without transfer. It's amazing that AIG can generate this level of profit in one division and still only trade at $1.40 a share. I guess that they have been looking for risk in all the wrong places.

If health care reform is the proverbial 800 pound gorilla, then the medical portion of workers comp is a 15 pound Maine Coon cat: it might big for a cat, but compared to a giant gorilla, it is barely noticeable. Nonetheless, this cat is blessed with a very strong notion of what it needs. As the nation moves closer to universal health care, the implications for workers comp are both profound and troubling. Comp medical services comprise a mere 2% of total medical expenditures, so policy makers in Washington will be inclined to ignore its special needs. That could create profound problems for the employers, insurers, and state administrators who deal with comp issues.

There are a number of key reasons why reform of health care may undermine the ability of states to deliver a quality workers comp system. (We previously blogged these issues here, here and here.) In order to provide some focus for the pending debates, here is a brief summary of how comp fits into the overall medical universe:

The focus is similar but not identical
The general health care system focuses on the prevention of what can be prevented and the treatment of that which can be treated, up to limits of coveraged defined in specific health plans. The overall goal is to preserve the life and health of individuals and families. This system provides treatment from conception up to the moment of death.
The comp system has a much narrower focus: comp provides treatment only to workers who are in the course and scope of employment. Comp treats work-related injury and illness, with the specific goal of returning injured/ill workers to productive employment.

Eligibility is Radically Different
The general health system provides defined services to individuals and families. Virtually any illness or injury is covered, including many forms of mental illness.
Comp covers only what occurs during work and is proven to be work-related, with an almost phobic disregard for mental impairments.

The cost structures are very different
In general healthcare, the premiums for coverage are paid by individuals and their employers. Depending upon the plan, individuals and their family members assume at least some of the cost of treatment, through premiums, co-pays and deductibles. The trend has been to shift more and more of the costs onto the consumer (which, in turn, becomes an incentive to reduce utilization).
In comp, employees never pay comp premiums and are never charged co-pays or deductibles. Injured workers are covered from the first dollar. Thus, only the employer, self-insured or who purchases mandatory coverage, and the insurer have the incentive to control costs. No such incentive exists for injured workers.

There are Perverse Incentives in the Comp System
Under comp, injured workers are paid not to work (indemnity). They may not like their jobs. They may malinger, seeking treatment more often than medically necessary (no co-pays to discourage them), thus prolonging disability in order to avoid work. The incentives for returning injured/ill employees to work lie primarily with the employer (who pays the premiums or is self insured) and the carrier (who pays the bills, which may exceed the premiums collected).

For employees with minimal job skills and perhaps no job to return to, the incentive for remaining on comp as long as possible is powerful.

Comp is a State-Based Program
The new mandates for health insurance coverage will come from the federal government. Comp, by contrast, is strictly a state by state program. The new federal mandates (eg., employee choice of doctor) may well conflict with long-established systems.

Policy makers are trying to create a new paradigm for medical coverage in the twenty first century: truly, a daunting task. Ultimately, the new direction for health care will be driven by cost and coverage. Whether the providers are public, private or both, health care cost controls and rationing will lurk in the shadows: will there be a cap on total expenditures for any given individual and any given conditions? Will there be limits on end-of-life services? How much of the costs will be shifted to consumers? What incentives will be created to reduce utilization?

In stark contrast, comp is and will remain an early 20th century system, based upon an industrial world that no longer exists. It already provides virtually universal coverage for people who work. The costs belong exclusively to employers and carriers; there is no cost-shifting onto injured workers and there are no incentives for these workers to limit expenditures. The over-arching goals are returning injured workers to productive employment and providing lifetime benefits for the totally disabled.

So it all comes down to this: When and if the 800 pound gorilla that is universal health care actually sits down, will it be beside - or on top of - the comp coon cat? Will the federal mandates take into account the unique and idiosyncratic needs of the comp model, or will the new mandates inadvertantly crush the system, state by state by state?

There are often unintended consequences when well-intentioned humans try to solve gargantuan problems. Let's hope that the comp system does not fall victim to this fundamental law of human endeavor.

Take 78 million Baby Boomers and their retirement plans, mix with a woebegone social security system and the global economic meltdown of 2008/2009. Add in rising health care costs and the insurance industry’s natural propensity to avoid troubling issues, and you have a recipe for a looming catastrophe of the first order. That's the premise that Lynch Ryan CEO Tom Lynch puts forth in his article in the current issue of the IAIABC Journal, Aging America: The Iceberg Dead Ahead, which IAIABC has given us permission to make available to our readers.

Tom describes the massive problems that the aging workforce presents to workers compensation systems - problems that are compounded by funding problems with other social insurance programs. He makes the case that neither states, the federal government, or insurers are prepared for the claims and cost problems that will develop over the next decade, and offers recommendations to address these problems, including the creation of a special federal commission.

Admittedly, we are partial to the author, but we think the article is worth a read.

In addition to putting in a plug for the article, we'd like to call your attention to the publication that it appears in. The IAIABC Journal is published two times per year by the International Association of Industrial Accident Boards and Commissions (IAIABC), an association of government agencies that administer and regulate their jurisdiction’s workers' compensation acts. It's a peer-reviewed Journal, and one of a few remaining venues that publishes original research papers and in-depth treatment of workers compensation issues and opinions. Issues are substantial - the current issue weighs in at 158 pages. It is edited by Robert Aurbach. For a sampling of content, we've taken the liberty of printing this issue's article abstracts to give you a flavor - click to continue.

Part two of a three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach.

The last posting introduced Joe, the injured employee of a self-insured employer, and discussed the ways the workers' compensation system failed him when the employer filed for Federal Bankruptcy protection. It's important to understand the reasons why this happens to understand the current proposal for fixing the problem.

How the Law Victimizes Joe
First, it's important to understand that Federal Bankruptcy law pre-empts any state law that conflicts with it. This makes the power of state regulators attempting to preserve the benefits of injured workers under state law extremely limited. In this context, it is necessary to understand that the Bankruptcy Code treats workers' compensation claims as having fully accrued on the date of injury ― that is to say that the claim is treated as being fully defined the day it happens. Several things happen as a result. Workers' compensation claims are then separated into "pre-petition" and "post-petition" claims, and the two groups are handled completely differently. Pre-petition claims are thrown into the bankruptcy proceedings, frozen for an indefinite time and then, when the bankruptcy proceedings are over, completely "discharged" by whatever distribution the Bankruptcy Court approves. Joe's claim accrued before bankruptcy petition was filed and that's why his benefits were frozen, his medical dispute "stayed" and his case delayed while the rest of the complicated bankruptcy case played out in front of a court in a distant city.

On the other hand, workers' compensation claims that arise during the bankruptcy case do not face any of those disabilities. Thus, the date on which two similarly situated coworkers are disabled is critical to the determination of the way the current Bankruptcy Code will treat their claims, despite the fact that the states have promised all workers mandated to participate in the system that they will be treated the same, and the fact that both employees may be left with life-long injuries or illnesses.

Another factor affects Joe's claim. When a Petition for protection is filed in Bankruptcy Court, it issues an "automatic stay" that freezes every other court proceeding, no matter where located, in which the debtor company is involved. This means that Joe can't use state dispute resolution mechanisms, unless and until the Bankruptcy Court issues an order allowing it. This forces him to appear in front of a strange court, often in a distant city, with specialized rules and lawyer admission requirements, in front of a judge who is likely to be unfamiliar with state workers' compensation law.

A Surgical Solution
The solution for this grim, and plausible scenario is simple and causes minimal disruption of the overall bankruptcy scheme. The most important change is to redefine when the workers' compensation claim accrues. By making each wage or medical benefit accrue when it is due and payable in the normal course of workers' compensation claims administration, the claimant will only have those benefits that are already delinquent at the time the bankruptcy petition is filed be caught up in the bankruptcy system. As new medical and indemnity benefits become due, they will arise "post-petition" and avoid both the court's freeze and the wiping out of debts at the end of the case (assuming the debtor successfully reorganizes), because they will have the status of "new" debts, as they are accrued. This treatment is also consistent with the current treatment of medical and disability plan payments for ill, injured and disabled workers that were not hurt on the job.

In addition, explicit treatment of workers' compensation benefits accruing postpetition as "administrative" expenses of the debtor during bankruptcy will ensure that they are paid during the case.

Finally, adjudication of determinations relating to such benefits should be exempted from the "automatic stay" so that they can be adjudicated as usual, avoiding the economic burden for the employee to appear in the bankruptcy court, while allowing for the agency and court with the specialized expertise under applicable state law to do its job.

By these small, surgical changes, the harsh and inequitable effects of bankruptcy on these involuntary workers' compensation debtors can be avoided, and the need for more intrusive and burdensome regulatory oversight and security requirements to offset or forestall the effects of bankruptcy can be lessened.

The Effect of the Proposed Changes
Under the new proposed law, any of Joe's unpaid benefits at the time the bankruptcy is filed will be thrown into the bankruptcy proceedings. But as soon as the bankruptcy is filed, his benefits can start again. The local administrative authority will decide the medical dispute in his claim, and he will not need a lawyer admitted to bankruptcy court to get the treatment he needs to return to work. Assuming that the company successfully reorganizes, any long-term medical benefit eligibility that he may get from permanent injury will be preserved. The state's promise to Joe is fulfilled ― and the Company doesn't have the option of walking away from its injured workers as if they were standard commercial debts.

The final chapter: Security deposits, guaranty funds and what the proposed solution doesn't fix.

With the difficult economy, the issue of "what happens to a workers' comp claim in the event of a bankruptcy" is on the minds of many of our readers. We’ve addressed the issue of bankruptcy in the past. Today, we are pleased to introduce a more detailed three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach. Robert is former General Counsel for the N.M. Workers’ Compensation Administration and personally been involved in the evaluation and redesign of five separate workers' compensation programs. He has served as editor of the International Association of Industrial Accident Boards and Commissions (IAIABC) Journal since 2003. He is an expert on various issues that involve the intersection of workers' compensation and other programs, such as bankruptcy, tribal sovereignty and PEO-leasing arrangements.

Joe worked for Chryslord Moters, a large manufacturing concern with billions in assets and locations in many states. He never concerned himself with workers' compensation, and was unaware that his Company was self insured for workers' compensation in the state where he lived and worked. When he was injured on the assembly line, he set about the job of getting better and getting back to work, as his family could ill-afford the loss of his income in the midst of a full blown recession. When the Company sought Chapter 11 bankruptcy protection, Joe still wasn't particularly concerned, due to the assurances that had been provided to the active employees. But then the Company cut off his benefit payments, so he had no wage replacement income, and his minor dispute over the reasonableness and necessity of a medical treatment proposed by his doctor was taken off the administrative agency's hearing docket due to an "automatic stay" issued by the Bankruptcy Court. When he called to try to resolve these issues, he was told that he needed to file a claim in a Bankruptcy Court half way across the country, in front of a judge that had no idea what the law of workers' compensation was in his state. When he asked how long it would take to resolve the problems, he was told that it would likely be at least a year. Upon checking with a lawyer, he also was told that his claim would be paid only if there was money left after paying all the vendors, suppliers, utilities and others who had voluntarily entered into business relations with the company. If there was no money left, or only enough to pay pennies on the dollar, he had no other recourse against his employer. Moreover, his lawyer informed him, his claim would be considered resolved by the bankruptcy proceedings, and that no medical expenses after the bankruptcy case was done would be paid by the Company.

What About Recourse to a Guaranty Fund?
There are various forms of security used to prevent injury to employees of self-insured employers from being uncompensated. The state administrative agency usually demands a security deposit from the self-insurer, based on the size of the liability exposure. Unfortunately, these deposits are often inadequate, due to understated reserves, and may be tied up in court proceedings on their own, depending on the form of the security. State property/casualty insurance guaranty funds do not apply to the debts of self-insurers, but some states have separate guaranty funds for the self-insured employers. Unfortunately, those funds usually contain a small fraction of the total potential liability, and could be easily drained by prior calls on those resources. The promise of the workers' compensation system to Joe ― medical care and indemnity benefits to allow him to heal and return to work ― is more wishful thinking than a guaranty when his employer seeks bankruptcy protection.

Systems in Conflict
Bankruptcy is a system designed to give a "fresh start" to businesses and individuals who are in debt and cannot survive economically without intervention. Debts are collected and assets are divided and distributed at the end of the process in what is intended to be an equitable manner. The law freezes all claims during this process, to allow the presiding court an opportunity to get control and a global picture of the debtor's situation. At the end of the court administration period (which is of indefinite length), either the debtor ceases to exist, and its assets are distributed, or the emerging debtor, after negotiated resolution of past debts, is permanently absolved of all debts that arose before the process. The principals of equitable distribution are based on a commercial model where (presumably equally sophisticated) creditors have chosen to do business with the debtor before the bankruptcy and either have or have not availed themselves of certain legal protections for their transactions.

Workers' Compensation is based on an entirely different set of premises. The state demands that businesses and workers participate in the system, and in return guaranties that the worker will get certain benefits, and guaranties the employer that there will be no other kind of recovery against it for the injury.

Why Isn't the Worker Protected?
As demonstrated above, the interplay between the two systems can seriously compound the workers' injury. When the employer has a commercial insurance policy for workers' compensation, the policy pays independent of the policyholder's economic condition. But when the employer is illegally uninsured, or legally self-insured, the effect of bankruptcy can be devastating and unavoidable under current law. Medical treatment necessary for recovery is often withheld when the health care provider becomes informed that they will not be paid at all or will only be paid as a general unsecured creditor in a bankruptcy proceeding. Wage replacement for the worker during the period in which he or she is unable to work is cut off by automatic order of the bankruptcy court, causing immediate and substantial economic hardship. The delay in benefit provision can be years in length and can be adjudicated in a court in a remote state, where the worker is effectively cut off from representation by the very economic hardship that the court proceeding created. Moreover, when the bankruptcy court finally adjudicates the worker's claim, the distribution scheme places the injured worker in the lowest priority level for distribution of assets.

Joe never volunteered to be a creditor to the Company and he is the least able to protect himself in the process, yet the current Bankruptcy Code treats him as the least "worthy" creditor.

Next time: what can be done to fix this conflict between systems.

With the Big 3 automakers discussing potential fallout if the federal government doesn't come through with a bailout package, there is one aspect of the fallout that would likely be a mere footnote in the wake of such a massive failure, but that would be of interest to thousands of workers: the issue of what happens to workers compensation claims.

Maryland officials are considering and planning for such a scenario now in the case of GM. The state's Workers' Compensation Commission (WCC) is closely monitoring GM and other distressed, self-insured firms with operations in Maryland. Officials note that GM has 200 employees statewide that are covered for workers compensation under the company's self-insured plan. They note that even in the case of a bankruptcy (which GM states it is not considering), the funding for claims would not automatically be wiped out. R. Karl Aumann, chairman of WCC, said it's rare for a company to default on its workers' compensation program. The last time this happened, he said, was with Bethlehem Steel Corp., which declared bankruptcy in October 2001.

In the case of property and casualty insurer insolvencies, every state has a safety net for policyholders, usually in the form of a Guaranty Fund. However, these funds do not necessarily cover self-insured employers, according to an overview of the insolvency process and guaranty fund laws by the The National Conference of Insurance Guaranty Funds:

Q: Am I covered by a state property and casualty guaranty association if I purchased my policy from an unlicensed carrier or a managed care plan?

A: No. Guaranty associations cover only licensed insurers. Companies not licensed in the state, surplus lines carriers, managed care plans, preferred provider organizations (PPOs), Health Maintenance Organizations (HMOs) and self insured plans are not covered under the property and casualty guaranty association statutes. If you purchased coverage from one of these entities, and the company is now insolvent, you may file a claim with the Liquidator. There may also be other guaranty associations that may provide coverage for policies issued by these types of organizations. Your state Department of Insurance can provide you additional information.

Q: How can find out if my company was licensed in my state?

A: Check with your state Department of Insurance. They should have a listing of all admitted companies.

However, many states have some type of guaranty mechanism established that covers self-insured entities. Here are some resources to learn more about the protections that your state affords:
State Insurance Departments
Self-Insurance Guaranty Funds of America
State Guaranty Fund websites
State Guaranty Fund Directory (PDF)

In the case of bankruptcies, workers comp claims payments are often considered a priority - see this discussion of a recent court ruling in Pennsylvania. However, insurers may be out of luck when it comes to payment for workers comp premium in the case of bankruptcy. In the 2006 case of Delivery Service, Inc., et al v. Zurich American Insurance Co., The U.S. Supreme Court ruled that a workers compensation insurer does not have a priority claim against a bankrupt business for unpaid premiums under bankruptcy law.

For more information on State Guaranty Funds and insurer insolvencies, see the Bob Hartwig's excellent overview for the Insurance Information Institute, which includes a chart about the top 10 largest insurer insolvencies:

Year / Insolvent company / Payments / Recoveries / Net cost
- 2001 Reliance Insurance Co / $2,265,845,612 / $1,415,385,230 / $850,460,383
- 2002 Legion Insurance Co / 1,272,694,066 / 227,503,349 / 1,045,190,717
- 2000 California Compensation Insurance Co / 1,049,745,420 / 327,756,089 / 721,989,331
- 2000 Fremont Indemnity Insurance Co / 843,405,746 / 643,377,434 / 200,028,312
- 2001 PHICO Insurance Co / 699,420,144 / 205,770,569 / 493,649,574
- 1985 Transit Casualty Insurance Co / 566,549,902 / 379,499,906 / 187,049,996
- 2000 Superior National Insurance Co / 555,797,035 / 174,168,193 / 381,628,842
- 1988 American Mutual Liability Insurance Co / 543,085,140 / 238,199,539 / 304,885,602
- 1986 Midland Insurance Co / 531,641,477 / 50,648,348 / 480,993,129
- 2006 Southern Family Insurance Co / 516,844,804 / 246,101,399 / 270,743,405

Because AIG has been at the epicenter of the economic earthquake, many non-industry observers point to insurance as one of the villains and the industry is getting a black eye that may not be warranted. AIG's problems did not surface in its insurance operations, which remained sound, but with their dubious investment portfolio which rocked the entire organization.

Not that insurance companies mightn't have gotten in more trouble if left to their own devices, but the nature of the beast is that the industry operates in a highly regulated environment, both a blessing and a curse. In this case, more of the former.

In a recent gathering of its agency members, our partner and client Renaissance Alliance featured Robert Hartwig as a speaker. For those who don't know Bob, as president of the Insurance Information Institute, he is the foremost public spokesperson for our industry. In his detailed presentation, he outlined 6 reasons why property-casualty insurers are better risk managers than banks and should therefore better weather the storm - reasons that I paraphrase here:

• Risk management is based on underwriting discipline, pricing accuracy, and management of loss exposure
• Low leverage - insurers don't rely on borrowed money
• Conservative investment philosophy
• Strong relationship between underwriting and risk bearing
• Strict regulation by state and federal authorities - more so than banks
• More transparency to regulators and the public

That being said, just as a rising tide raises all boats, a lowering tide will affect all boats, too. One of the anticipated after-effects of the financial crisis will be an increase in regulation. Another is that the current economic downturn likely signals the bottom of a soft market. Buyers can expect a hardening of prices. Insurers depend on investment income. Currently, investment returns are going down as claim costs are going up due to inflationary pressure - that leaves only one place for prices to go.

Despite the fact that many brokers report that they see no end in sight to the current soft market, many industry insiders are predicting the onset of a hard market in the not-too-distant future. Here are a few opinions on the matter:

Market Scout: "The financial markets have experienced a meltdown, several major insurers are in serious trouble, underwriting results are slipping and investment income is anemic at best. As a result, the soft market is winding down." - see the accompanying charts.

Joe Paduda notes that although workers comp rates are still dropping, there are two major factors that presage a hardening: First: "Medical trend in the group world is approaching double digits. Historically the work comp medical trend rate has been somewhat higher than group trend." Second: "The investment market has imploded, likely driving down the value of the funds held for reserves and surplus. While most investments are in what used to be thought were 'safe' instruments, it may well be that regulators and rating agencies, newly sensitized to the potential problems with even 'safe' vehicles, will require carriers to take down the value of funds held in reserve."

During recent earnings conference calls, Evan Greenberg, chairman and CEO of ACE Limited and AXIS CEO John Charman both agreed that a hard market is in the making.

Reinsurers are predicting rising prices: "The world's No. 1 and No. 4 reinsurers, Munich Reinsurance Co. and Hannover Re Group, on Monday predicted some business lines would see price increases of 10% or more in talks over the coming weeks to renew reinsurance contracts for 2009."

Ken A. Crerar, Council of Insurance Agents & Brokers president: "We won't know until January 2008 renewals what toll the economic crisis has taken on the industry in general ... What we do know is that investment income is down dramatically, carrier profitability is being eroded, net underwriting losses are higher and combined ratios are inching up over 100. How long carriers can maintain price cuts without damage to their financial health is anybody's guess. These are very uncertain times."

OK, what can a buyer do when faced with likely price increases? Some of the same things that a homeowner does in anticipation of foul weather: Tighten things up and go back to the basics. Be aggressive about preventing all workplace injuries and about managing any injuries that do occur. Strengthen your provider relationships. Tighten up your return-to-work programs. It's our experience that when rates are low, workers comp can slip as a priority and get moved to the back burner. If it isn't there already, it's time to move workers comp back to the front burner.

Last month we blogged the emerging scandal involving the Long Island Railroad, where over 90 percent of employees (management included) retire on disability. Walt Bodanich and Duff Wilson of the New York Times have a follow up article that goes into some of the deails. It's not surprising to find that workers were coached in the best way to apply for disability, including a select list of doctors and paying for their disability exams in cash.

One detail of the new report caught the Insider's eye. Two private sector insurers wrote coverage for railroad workers: Transamerica and Aflac. Transamerica has walked away from the (unprofitable) business. Aflac, on the other hand, has approached the scandal in a rather circumspect and casual manner.

Wlliam Capps, manager of Aflac's special investigations unit, testified at a hearing convened by New York AG Andrew Cuomo that since 2003 his company had paid out $4.1 million to LIRR employees holding short-term disability policies. He says that Aflac did not realize anything was amiss until this year. (Perhaps they read about it in the papers while enjoying their morning commute?).

Capps's investigation focused on three areas: the close proximity betweeen retirement and the submission of claims; the similarity of ailments; and the use of the same three doctors by most of the employees. Under questioning, Capps said that about a quarter of LIRR policyholders had cashed in on the coverage.

Twenty five percent! In this era of data mining and performance management, you would think that such a high level of disability claims would raise a few red flags. Private insurers are accountable for results on a quarterly/annual basis. There is no way they could make money on a disability program with such a high percentage of those covered drawing down benefits. You have to wonder whether the Aflac sales department ever gets feedback from claims, or whether anyone actual reads the performance data.

I can just see Aflac's ubiquitous duck in a new ad campaign: the duck is strapped across a railroad tie, with the LIRR commuter train heading straight for it. The duck quacks in alarm and scatters feathers in a desparate effort to escape. That's more than can be said for Aflac itself, which lay down on the tracks, closed its eyes and took a nap, while the 5:02 hurtled down the track on its scheduled rounds.

When it comes to fraud in workers comp, we usually look to employers, doctors and lawyers. They go after the big bucks. While there are opportunities for ordinary workers to exploit the system, most decline to do it. Today we examine two claims, both involving real injuries and both involving fraud. Coincidentally, it's a bi-coastal story.

Let's begin in the east, in Gardner, Massachusetts, where Erik Teong managed a Shell Station. On October 28, 2006, Teong reported to Gardner police that he had been assaulted and robbed while taking cash receipts to the bank. He sported a bruised face and injured eye.

The police did not buy his story. He eventually confessed to stealing the $7,000 deposit. In February 2007 he was charged with larceny and making a false report of a crime. In April, he pled guilty to both charges and was sentenced to one year of probation. He also must pay the insurance company $7,900 (to repay the "stolen" payroll).

The injury to his eye? Teong told police that he had a friend give him a hard punch to the face, to make his story more credible. The hapless Teong has permanently damaged his vision. And because the injury appeared to occur in the course of employment, Teong filed a comp claim. AIG, the comp insurer (with a few problems of their own!), paid his $16,000 medical fees and $3,000 indemnity. Now AIG wants its money back. They referred the matter to the fraud bureau, which led to Teong's indictment by a Worcester County grand jury.

So Teong has earned himself a place in the Hall of Fame for Incompetent Criminals. He botched the fake robbery. His friend all-too-convincingly smashed him in the face. He has to repay the medical expenses and ill-gotten indemnity. And to top it off, given his permanently impaired vision, he may have trouble reading the charges against him.

California Scheming
Now let's hop across the continent to the Lake Tahoe, where Nicholas Jason Beaver resides. Nick worked for the Sierra-at-Tahoe resort, but busy as a Beaver he was not: the resort told him they would not rehire him for the following season. One night, after a few beers with his buddies, Nick decided to get even. He decided get himself injured on the job.

On April 9, 2004 Nick jumped up and down on a snow bridge that covered the top of percolation test hole. After three or four jumps, he broke through the bridge and fell into the 5 foot deep hole, injuring his knee. He collected comp (the injured knee required surgery) and then decided to sue the resort: he wanted to pierce comp's "exclusive remedy" shield due to the resort's "extreme negligence" in allowing an "unprotected" hole to exist on their grounds. (Nick's story belongs in the burgeoning archives defining the word "chutzpah.") The resort spent $40,000 defending itself and over $42,000 in medical bills on Nick's injured knee. They offered Nick $110,000 to make the case go away.

Nick refused to accept the chump change. He apparently told his buddies that he wanted really big bucks. At that point, one of the (disgusted) friends who witnessed the incident dropped a dime on him. His friends were given immunity from prosecution; while technically co-conspirators, they did not benefit financially from the fraud. Nick was convicted of stealing more than $65,000 and now faces up to four years in prison.

Benefit of the Doubt?
Erik and Nick were both injured on the job, but their injuries were part of a conscious effort to defraud the employer and insurer. Their stories demonstrate how the comp system defaults toward accepting a reported claim: Erik and Nick both were successful in accessing comp benefits for their injuries. The wheels of justice in these cases ground a bit slowly, but they did grind exceedingly fine. The pain of the actual injuries, with the exception of Erik's impaired vision, has already faded. But the pain of lives ruined by impulsive greed will linger for a long, long time.

Yesterday we blogged the New York Workers Comp Board's unusual solution to a cash flow problem: when a dozen trust funds collapsed, the Board decided to hit up the remaining, solvent funds with an assessment: they raised assessments from the routine total of $500,000 to a staggering $12 million. The Board is using the logic of notorious bank robber Willie Sutton, who famously said that he robbed banks because "that's where the money is." In this case, the Board is hammering the people who paid their full premiums and whose administrators abided by the rules, simply because they have the money. The board has transformed the "several liability" of independent trusts into a gerry-built "joint liability." While their motives are good - benefits to injured workers must be paid - their method is patently unfair.

In their press release, the Board pats itself on the back for forcing the third party administrator, CRM, out of business in New York. Here are the terms of the settlement:
- CRM surrenders its TPA license no later than September 8, 2008, and ceases representing self-insured employers and carriers before the Board;
- CRM transfers to the Board all claims, as well as the responsibility for the administration of all such claims, for all of the group self-insured trusts that it still administers; and
- CRM assists in the well-ordered and timely transfer to the Board of all claim files, documents, information, and funds associated with the trusts.

"The Board sought to revoke CRM's license and today's agreement accomplishes just that," said New York State Workers' Compensation Board Chair Zachary Weiss. "This result speaks volumes about both the strength and validity of the charges the Board brought against CRM. It also sends the strong message that we will vigorously safeguard the well-being of honest business and injured workers."

The results may speak volumes, but not necessarily in the manner Weiss intends: yes, the charges obviously had merit; yes, it's important to shut down CRM's operation. But what about accountability? According to an unidentified spokesman, CRM has admitted no violations and paid no fines or penalties. Despite the apparent deliberate misrepresentation of actual losses, despite paying their own executives inflated salaries, despite creating this entire mess, CRM just walks away. For the moment at least, they are off the hook, while the solvent trusts who played by the rules are required to dig deep into their own pockets.

Eventually, when the forensic audits have been completed, members of the failed trusts will probably receive retroactive bills for underpaid premiums. Then it will be their turn to howl. When and if that happens, the Board has promised to refund the humongous assessments placed (unfairly) on the solvent trusts. That is not very reassuring to innocent bystanders facing immediate bills for someone else's problem. My guess is that the Board will run up against the same problem as Willie Sutton: the money might be there (in the trusts), but that does not make it right to take it. Through attorney Richard Honen, the solvent trusts have filed suit to end this ill-conceived bailout. In the interests of fair play, here's hoping they find a sympathetic judge.

Compensation Risk Management (CRM) is a third party administrator for eight workers comp trusts in New York. These trusts offer comp coverage to affinity groups in the areas of health care, wholesale/retail and transportation. As we read in the New York Times in an article by Steven Greenhouse, there is good news and bad news about CRM: the good news is that CRM offered low cost premiums to members and high rates of reimbursement to its own executives. The bad news is that the reserves in the the trusts were woefully inadequate. In one of the trusts, reserves fell from 90 percent to 40 percent of liabilities in just a few months.

Trusts have long offered a major alternative to (expensive) conventional insurance for New York employers. About 35 percent of the state's businesses are self insured for comp, with one fifth of those participating in trusts. The really bad news in CRM's collapse is that other, healthy trusts may have to pick up at least part of the tab for CRM's poor management. The workers comp board has ordered that the state's 50 healthy trusts pay emergency assessments totaling tens of millions of dollars. As you might imagine, they are not thrilled to be doing this. In fact, they have sued the board, saying that it has no right to force them to contribute. At this point, they have been granted injunctive relief.

State officials believe that a $200 million emergency fund will be needed to finance the statutory benefits of thousands of injured workers covered by 12 failing trusts. So ultimately, the taxpayers will have to make up for CRM's management deficiencies.

The Company Line
Eric Egeland, a CRM VP, said that the problems were caused by an unexpected increase in workers comp liabilities and fast-rising medical costs. (Gee, Eric, that's why you have actuaries!) He said the eight trusts could not increase reserves fast enough in response to their increased liabilities because of recent state-ordered cuts in comp premiums. (I don't think so, Eric. If you set reserves properly, a cut in rates will not present any unusual problems.)

If you peruse the long list of executives at the company website, you begin with the CEO, Daniel Hickey, who is described this way: "At age 22, he attended the Aetna Institute, the nation’s top property and casualty training program, and received the coveted Gold Ribbon for excellence in sales presentation." Note that the gold ribbon is for sales. He might have been better off shooting for a gold ribbon in management.

CRM's management of their comp business is now under intense scrutiny. Too little, too late. The artificially low premiums pleased their participants, but these deflated premiums simply masked inadequate reserves. The risk managers took far too many risks. Now, as usual, those who played by the rules will have to pick up the tab.

Are we in or headed to a recession? Each of us might have our own opinions based on the industry we work in, the number of times we have to fill our gas tank during the week, and the area of the country where we live. According to the economic cognoscenti, the jury is still out - some industry insiders say yes while others disagree. At least some industries say they are in a recession and in a recent survey, nearly 80% of affluent Americans believe a recession has already hit the U.S.

What would a recession mean for workers compensation? A few weeks ago, Insurance Journal looked at the issue of recession and its impact on insurance as viewed by independent agents in various sections of the country, who offer commentary on both actual and anticipated effects. Some note that it is somewhat unusual to have a recession occurring in conjunction with a soft market. There isn't much mention in the way of workers comp, except in terms of noting that declining payrolls lead to lower workers comp premiums. Some agents note that significant business curtailment has been in evidence in the housing and construction industry.

The past may be the best predictor of the the future. The Minnesota Department of Labor & Industry compiled a 2002 report on the effects of recession on workers comp as evidenced by various state studies.

Conventional wisdom points to a preliminary spike in claim frequency as employers reduce ranks - there is some anecdotal discussion about an increase in fraud, although most data doesn't support that. Overall, during a recession the number of claims tends to decline - there are fewer workers, and those workers may be more timorous about filing claims, fearing job loss.

While frequency drops, severity tends to increase. Researchers in MA suggested this might be because businesses find it more difficult to provide light-duty work; also, due to the fact that because more experienced workers are retained, the average injury will be more severe. A California study also noted that recessions may add to claim severity by increasing the time it takes for a worker to find a job.

In a six-state study, researchers noted that "...recessions increase back-end cost drivers (i.e., increase the cost per claim) to a greater extent than they increase front-end cost drivers (i.e., increase the number of claims). They state that recessions are 'characterized by increased use of the system, longer duration claims, and more frequent and larger lump-sum settlements.'"

Minnesota also reported in some detail on their own state's experience with a workers comp during a recession, a report which our colleague Joe Paduda discussed at some length.

During a recession, employers should be doing what they should always be doing: preventing injuries from occurring, tightly managing any injuries that do occur, and helping injured workers to recover and return to work as expeditiously as possible. While there is always cause to keep an eye on things during any sudden shift in employment, the stories about an increase in fraud may be overblown. As the researchers in the Minnesota report note, boom times pose a greater risk for a rise in frequency as organizations experience a sudden influx of inexperienced workers.

Bill Thorness has written an interesting article for NCCI on the relationship of wellness programs to workers comp costs. In some respects, it involves a "duh" thesis: wellness programs can significantly lower comp costs, because healthy workers are less prone to injury and, once injured, recover more quickly than their out-of-shape co-workers. Conversely, obese and out-of-shape workers are more at risk for strains and sprains, because the additional weight they carry compounds the impact of day-to-day workplace functioning.

There is even an overlap between wellness and one of the Insider's favorite topics, the aging workforce. Older workers are more at risk for serious (and expensive) injuries such as rotator cuff tears. A relatively healthy, well conditioned, non-smoking older worker is more likely to avoid these injuries and again, once injured, more likely to shorten the normally extended recovery time.

With all of the compelling logic underscoring the benefits of a healthy workforce, it might be natural to assume that workers comp would jump at the opportunity to provide incentives for wellness programs - dare we say, even pay for them. Perhaps we could find examples among the national carriers, where workers comp safety programs include wellness training. Unfortunately, for the most part wellness remains an afterthought in the comp system. Aside from conventional safety programs, which focus on injury prevention, comp coverage tends to sleep like a hibernating bear, roaring into action only after injuries occur. Even then, wellness is a marginal issue: if, for example, obesity hinders recovery, carriers are unlikely to pick up the cost of a weight-reduction program, because the obesity is not work related.

Who Owns It?
The ultimate cost of most injuries is directly related to the health and conditioning of the injured worker. Logic says comp carriers should embrace wellness programs in both injury prevention and post-injury treatment. But as is often the case, it comes down to a question of who owns it, who benefits and who pays. Wellness is a proven concept, but comp carriers are unwilling to own it and very reluctant to pay. They are, nonetheless, more than happy to reap the substantial benefits.

A labor group in our neighbor to the North, New Brunswick, Canada, is seeking an end to the three day waiting period for workers comp benefits. "We really believe it is unfair," said Michel Boudreau, president of the New Brunswick Federation of Labour.

The federation has pitched the idea of scrapping the three-day waiting period, during which employees receive no benefits, to the independent panel commissioned by the government to review the Workplace Health, Safety and Compensation Commission.

Boudreau said the waiting period, which was first introduced in 1993 to stem financial losses within the system, violates the principles upon which workers compensation in New Brunswick was founded.

Labour, he said, entered into the system with industry and government with the understanding that it would provide for them if they were injured. In exchange for that insurance, workers agreed not to sue employers when they are hurt on the job.

The waiting period is universal among the state workers comp systems, ranging anywhere from three to seven days. There is usually a retroactive period, after which coverage reverts back to day one. In Massachusetts, for example, there is a five day waiting period, retroactive to day one after three weeks.

Why Wait?
Does the waiting period serve any purpose? Or is it an undue hardship for injured workers?

While a case can be made that indemnity benefits should begin immediately after an injury, such a "quick trigger" would likely create more problems than it would solve. It is difficult enough to manage a three day waiting period (the shortest duration available among the states); it would create formidable logistical problems for insurers to begin indemnity immediately following lost time from an injury. It's worth pointing out that many employees can use accrued sick time to fill in the gap between the first day lost due to injury and the beginning of indemnity benefits. A case can be made that the anxiety of not being paid is a positive incentive for an injured worker to return to full or modified duty as quickly as possible. Immediate indemnity removes that sense of urgency.

The waiting period may also serve a psychological function. The transition from wage earning to receipt of indemnity involves a major shift: one moment you are an employee, a worker, and the next you are "disabled." For most people, this shift is inconsequential, but for some, it involves crossing a profound border from which there may be no return. The moment you become eligible for indemnity, you are being paid not to work. If you are ambivalent about your job, or if the future of the job is uncertain, the comfort of indemnity can be very powerful. Some injured workers convince themselves that the injury and the pain are worse than they really are, because there is a financial incentive to do so. This is rarely a conscious choice. Rather, it involves a "perverse incentive": it's financially advantageous not to get better, not to go back to my (unsatisfactory) job.

The Insider recommends that New Brunswick leave the waiting period right where it is, at three days (the generous end of the waiting period spectrum). The gap in payments is not great enough to cause tremendous harm; conversely, the potential hazard of instantaneous benefits would not just increase costs of the system, it could also harm otherwise motivated employees.

Comp is never the best of all possible worlds. It is tempting to tinker with every aspect and every benefit. While I understand where labour is coming from, in this situation the advice of my late mother-in-law might be best: just leave well enough alone.

In conventional medicine, people are generally free to choose their care, up to the limits of their coverage. They can opt for certain procedures or decide to forego them. For the most part, adults are independent players in the medical system, acting in accord with their own wishes. In the final analysis, our health is an individual concern, factoring in, of course, the concerns of family members and "generally accepted" medical practices.

Workers comp is somewhat different. In addition to the preferences of the injured worker, his/her family and the treating physician, you have to take into account the interests of the employer, who is paying the bills (no co-pays or deductibles for the patient). Unhealthy behaviors or refusing treatment might be acceptable in conventional health care, but they raise compelling issues in workers comp. The case can and should be made that under comp, the injured worker has an obligation to get better.

Let's look at two cases: one involves an invasive diagnostic procedure, the other medically imprudent behavior.

Uncomfortable Diagnostics
Sewell Chan writes in the New York Times about Brian Persaud, a 33 year old construction worker. He was working at a Brooklyn construction project when he sustained a head injury. He was driven to New York Presbyterian hospital, where he received eight stitches for a head wound. As part of standard medical procedure, doctors wanted to perform a rectal exam, in order to rule out spinal injury. Persaud objected, a physical struggle ensued. While it's not clear whether the invasive procedure even took place, Persaud filed a civil suit, claiming that the exam comprised assault and battery at the hands of hospital workers.

Persaud’s lawyers turned to two experts, a neurologist-psychiatrist and a forensic psychologist, who testified that Persaud suffered from anxiety, depression and post-traumatic stress disorder as a result of the episode. The hospital put forward a doctor who testified that a rectal examination is an important part of advanced life support for trauma patients.

The case took eleven days to present, but the jury rejected Persaud's claim in less than an hour. In this case, the invasive procedure was deemed necessary to rule out more serious injuries. In general, patients may decline medical treatment if they are informed of the consequences of doing so and capable of making such a decision. But doctors have more leeway to perform a procedure if a patient has sustained a potentially life-threatening injury and if the doctor doubts the patient’s capacity to make informed decisions.

While the employer's interests were not directly represented in this confrontation, they were part of the mix: the employer would want to ensure that Persaud received a complete diagnostic work up, so that liability for this particular claim would be limited to the incident that occurred at work. Persaud's refusal of a necessary diagnostic test might lead directly to expensive medical complications.

Which leads us to our second example (from Lynch Ryan case files).

Incomplete Treatment
Maria M. worked as a maid for a home cleaning service. While approaching a job site, she slipped and fell on an icy sidewalk and broke her ankle. (It had recently snowed, so there was no negligence on the part of homeowner.) No question about compensability here. In order to repair the break, a temporary pin was inserted. Unfortunately, Maria was doctor-phobic. She refused to have the pin removed. As months went by, her condition worsened. She walked with a pronounced limp. The employer tried to accommodate her on light duty, but eventually they ran out of tasks. Maria was only getting worse. She was terminated due to her inability to perform the work.

The insurer was caught in the middle of a difficult situation. The injury was clearly compensable, but Maria's refusal to cooperate in her treatment involved "wilful intent" - a refusal to get better. The carrier had an opportunity to deny the claim within the six month "pay without prejudice" period, but they failed to do so. The claim dragged on. Even after an independent medical exam favorable to the employer, the carrier continued paying the claim. Eventually, the case settled for about $35,000, for the indemnity and loss of function exposures. Given the severity of Maria's condition, this is not a huge settlement. (The carrier feared an exposure of twice that amount.) However, the employer expressed frustration at the increase in his comp premiums. Maria's disability was the result of her own refusal to cooperate with recommended treatment, not the work-related incident itself.

Inconclusive Conclusions
All of which leads us to an inconclusive conclusion: do injured employees have an obligation to get better? Must they submit to medically necessary diagnostics? Are they required to do everything possible to return to productive employment? Is it necessary to take the employer's interests into account when determining diagnostic and treatment options? Well, maybe yes and maybe no. It all depends...

In the world of comp, the interests of employee, employer and medicine itself strive for an elusive balance. In the case by case, state by state approach, results vary dramatically. It's hard to find a consistent pattern. In the ideal world, injured workers do everything possible to get better and their employers do everything possible to facilitate a return to work. But in case you haven't noticed, we live in a world that falls way short of the ideal.

Gina Kolata writes in the New York Times that health insurance companies are adopting a new pricing system for some of the most expensive drugs, pushing more of the cost onto consumers. It goes by the innocent sounding name of "Tier 4." It might as well be called "bankruptcy for the seriously ill."

All insurers require a co-pay on prescriptions, generally running from $10 to $35 dollars, with incentives for choosing generics over brand names. Despite the fact that some drugs cost hundreds, even thousands of dollars per month, the total exposure for the consumer has been the co-pay ceiling. Not any more. Under Tier 4, insurers are charging patients a percentage of the cost of certain high-priced drugs, anywhere from 20 to 33 percent. For the most part, Tier 4 covers exotic new medications for serious illnesses, medications where there are no cheaper alternatives. Patients are in a box - and if they cannot come up with hundreds or even thousands of dollars per month, they may literally end up in a box.

Tier 4 drugs include those for treating multiple sclerosis, rheumatoid arthritis, hemophilia, hepatitis C and some cancers. Tier 4 targets "high cost drugs used to treat a relatively small number of people who suffer from complex conditions." Heck, if you don't have the common sense to avoid getting sick, we'll add to your misery by making you pay through the nose.

Take the case of Julie Bass, a 52 year old Florida resident suffering from metastatic breast cancer. She is disabled and covered by a Medicare HMO. Her doctor has prescribed Tykerb, which her insurer has designated as a Tier 4 drug. The monthly cost is $3,480 for 150 tablets - a 21 day supply. Given Bass's very limited financial resources, there is no way she can afford the co-pay. Tier 4 for her may be the equivalent of a death sentence.

As Dan Mendelson of Avalere Health notes, "This is an erosion of the traditional concept of insurance. Those beneficiaries who bear the burden of illness are also bearing the burden of cost."

Insurers are quick to point out that they are saving healthy people money: by pushing the cost of the drugs directly onto the patients, premiums for everyone else will remain (theoretically) lower. To which I say: no one is seeing lower premiums. At best, you have lowered the rate of the annual increase.

Rules of the Game
As Tom Lynch pointed out in the Insider's instructive five part series on health care in America, the administrative bureaucracy in American medicine runs over 30 percent of total costs (no other country exceeds 10 percent). Some portion of the boated admin is eaten up by the good folks who dream up things like Tier 4. This is clearly a situation where the affluent will be able to survive certain illnesses and the poor will not.

Call it what you will, Tier 4 is health care rationing and the American public is not going to embrace it. (It may even increase the momentum for a single payer system.) The talented bureaucrats who designed Tier 4 had best start working on a clever marketing scheme, to help the public swallow this bitter pill. For starters, they could bring back Smoky Robinson and the Miracles to sing "Tracks of my Tiers."

In Part One of this series, we began looking at some of the many cost disparities between group health and workers' compensation.

In Part Two, we compared US health care costs with costs in the other 29 member-countries of the Organization for Economic Cooperation and Development (OECD). OECD countries, all democracies, are considered the most economically advanced in the world. We saw that health care spending in the US is a breathtaking 250% greater than the average for all of these developed democracies. Moreover, as measured by Gross Domestic Product (GDP), health care made up 15.3% of the US economy in 2004 - up from 5.1% in 1960 - nearly double the rest of the OECD.

Today, it's time to examine what we're getting for all that money. It seems fair to ask a few questions relative to the other OECD countries:

1. Do we live longer?
2. Are we healthier?
3. What other factors could affect how the health of US citizens compares with OECD citizens?

Do we live longer than people in other OECD countries?
Simply put, we spend a lot more on healthcare than all other OECD countries, but don’t live any longer for the money. In fact, we live shorter lives than most.

As of 2004, average life expectancy at birth in the US was 77.5 years, which ranks 22nd out of the 30 OECD countries. While this is slightly below the OECD average, it is four and a half years less than top-ranked Japan. Also, it may surprise readers to learn that life expectancy is two and a half years longer among the people of our neighbor to the north, Canada. And, despite all the editorial bashing of the UK's National Health System, its citizens outlast us by a full year, while people in Spain, France, and Italy live, on average, more than two years longer than we do.

Are we healthier?
For all the money we spend on healthcare one would think we enjoy Olympian health, but this does not appear to be the case. Although it pains me to write this, I can find no peer-reviewed studies that conclude that we are a healthier people than our OECD neighbors.

The OECD provides specific disease incidence data in two areas: cancer (malignant neoplasms) and acquired immunodeficiency syndrome (AIDS). In both cases, the US has the highest rates in the OECD. The incidence of cancer in the United States is 34% higher than the average within the OECD (358 cases per 100,000 people versus 266). With respect to AIDS, the US incidence is an astonishing 675% higher than the rest of the OECD (147 cases per 100,000 people versus 19 in the OECD). Our mortality rate due to AIDS ranks second in the OECD (4.2 deaths per 100,000 people, well behind the staggering rate of 8.6 in Portugal). Yet our mortality rate for cancer ranks only 14th among OECD countries.

What about obesity, reputed by many to be epidemic in the US? With the exception of the UK and the US, which get their obesity statistics by actually measuring people, OECD countries get their results from surveys, so the only fair comparison is the US versus the UK. In 2004, while the UK's overweight population was 14% higher than that in the US, our obese population was 39% greater.

On the other hand, the US rate of alcohol consumption and incidence of daily smoking were both lower than the average for OECD countries (daily smoking in the US is the third lowest (17%) of all OECD members).

Unfortunately, obesity has been shown to be a greater driver of health care and health care spending than alcohol consumption or smoking – "the effects of obesity are similar to 20 years of aging (PDF)." According to Thorpe, et al, (The Impact of Obesity on Rising Medical Spending (PDF), Health Affairs, 20 October 2004), 27% of the per capita increase in US health care spending between 1987 and 2001 was attributable to obesity. There is a direct correlation between obesity and Type 2 diabetes and obesity and hypertension. Is it any wonder that in the last thirty years Type 2 diabetes and hypertension have seen explosive growth in the US?

What other factors could affect how the health of US citizens compares with OECD citizens?
There are many other factors that have been identified as influencing how the health of Americans compares with the rest of the OECD. Some of these are:

1. The age of our population – While this will be a concern in the immediate future as baby boomers grow older, currently 12% of the US population is older than 65, which is below the OECD average of 14%.

2. Income and insurance – The US is unique in the OECD, because it does not have a national insurance program. About 60% of us are covered by some form of employer-provided insurance. Another 26% are covered by Medicare or Medicaid. That leaves 14% who are uninsured in any way. Among this group, most of whom are poor and many of whom are sick, healthcare often goes a-begging, with harmful results. For example, hypertension is less controlled in this group, “sufficiently so that the annual likelihood of death in that group rose approximately 10%." (Newhouse et al, Free for All? Lessons from the RAND Health Insurance Experiment, Harvard University Press, 1993).

Twenty-two OECD countries provide more than 98% of their citizens with public health insurance covering at least hospital and in-patient care. Despite this, Americans spend less out-of-pocket than the people of most other OECD countries – 13.2%. The OECD average is nearly 20%. Studies have shown that when a people pay less out-of-pocket for healthcare, total spending rises.

3. Sophisticated medical procedures – In the movie Pat and Mike, Spencer Tracy famously said of Katherine Hepburn, "There's not much meat on her, but what there is is choice." The same can be said for hospitalizations in the US. Although hospital stays are fewer and shorter, a lot of high-powered activity goes on.

For example, the US ranks in the top five OECD countries for the rate of caesarean section childbirths as well as all forms of organ transplants with the exception of lung transplants. Moreover, we're in the top five for all four of the heart procedures on which the OECD collects data. We perform coronary bypass surgery and angioplasties at more than double the rate of the OECD average. Finally, we perform far more coronary revascularization procedures than any other OECD country. Despite performing substantially more invasive heart procedures than all other OECD countries, death rates for heart disease in the US are the 17th worst in the entire group.

4. Advertising – Between 1996 and 2003, pharmaceutical advertising quadrupled. Turn on the nightly news and count the ads for prescription drugs. Only two countries in the world allow this, the US and New Zealand. I find it amazing that more than 75% of the brands advertised had ROIs of more than 50%. Clearly, Americans respond to direct-to- consumer drug advertising, which is one reason why we spend double the OECD average on prescription drugs.

How does this all relate to workers’ compensation?
We've seen that, despite spending more on healthcare than any other country in the world, Americans don’t live longer or enjoy better health than citizens of any other OECD country. But every day, medicine practiced within workers' compensation depends entirely on the US healthcare "system," if we want to go so far as to call it that. It's certainly systemic, but perhaps systemic in a lot of the wrong ways.

Prior entries in this series:
Part Two - What does it cost?
Part One: The best Health Care Plan in America

In 1992 I became a Trustee of a major, tertiary care, teaching hospital in Massachusetts. For Trustee indoctrination, new Trustees spent a week in a classroom learning about every facet of hospital life. One morning we were briefed by the hospital's CFO. I was astonished to learn that the hospital had 27 different billing systems, one for each insurer and HMO with which it did business. To me, this was Kafkaesque. I mention it now, because in the intervening years, the situation has become worse, much worse.

At 31% of total US health care expenditures, the administrative costs of healthcare providers are double those in Canada (Woolhandler et al, New England Journal of Medicine, August 21, 2003, page 768), and, with the exception of tiny Luxembourg (population 425,000), America's health administration and insurance costs are the highest of any of the world's developed democracies.

We spend more, far more, than any other country in the world on health care. Do we get what we pay for? In Parts Two and Three of this series on health care, we examine that question. In Parts Four and Five we relate it all to workers' compensation, at 3% to 4%, a tiny room in the American health care house that Jack built.

The US compared with other developed countries: The cost explosion.

The United States has been a member of the Organization for Economic Cooperation and Development since the OECD's founding in 1961 (the forerunner of the OECD was the Organization for European Economic Cooperation, set up under the Marshall Plan in 1947). There are 30 member-countries of the OECD, all democracies, most of which are thought to be the most economically advanced nations in the world.

In September, 2007, the US Congressional Research Service, the best research group you've never heard of, published a report for Congress titled, "U.S. Health Care Spending: Comparison with Other OECD Countries." (Abstract , including downloadable full report in PDF.) This 60-page, well sourced report paints a grim, if occasionally confusing picture.

Until 1980, US spending on health care, as measured as a percentage of gross domestic product (GDP) ranked at the high end of OECD countries, but not excessively so. In 1980, US spending as a share of GDP was 8.8%, which compared favorably to Sweden's 9.0%, Denmark's 8.9%, Ireland's 8.3% and the Netherlands 7.2%. True, spending in the United Kingdom, at 5.6%, France and Norway, at 7.0%, each, and Canada, at 7.1%, was lower, but no one could claim that the US spending was out of control.

Then something happened. By 1990, our spending as a share of GDP had grown to 11.9%, while the rest of the OECD countries remained fairly static – Sweden's and Denmark's declined to 8.3%, the UK's rose to 6.0%, and so on. And by 2003, the US share had ballooned to 15.3%, nearly three percentage points higher than Switzerland, at the time our closest competitor. In fact, in 2004, the OECD average spending as a percentage share of GDP, excluding the US, was 8.6%, just over half of the US share.

In the average OECD country nearly 74% of healthcare costs are publicly financed; in the US, less than 45 %. Moreover, per capita health care spending in OECD countries, excluding the US is $2,438; in the US, per capita spending is 250% higher, at $6,102.

When analyzing why the US spends so much more on health care, one hardly knows where to begin, because in nearly every category we dwarf the field.

Take prescription drugs, for example. Average per capita spending on pharmaceuticals among all OECD countries, including the US is $383, but in the US it is $752, which is $153 dollars per person more than the second largest spender, France. Despite this, because the US spends so much on all of health care, pharmaceuticals account for only 12.3% of total spending, which is near the bottom of the pack among all OECD countries where average spending on pharmaceuticals is 17.8%.

One would think, perhaps, that spending is so much higher in the US because we have more hospitalization, or doctor visits per capita, but one would be wrong. Hospital discharges per 1,000 people in the US are 25% lower than the average for all OECD countries, and doctor visits are 42% lower.

Well, maybe people have significantly more intense and aggressive service while they are hospitalized in the US? One indicator of intensity is the average length of acute care hospital stay. In the US, the length of acute hospital stay is 5.6 days, which is less than all but eight of the other 29 OECD countries. But shorter stays could mean higher efficiency. A better way to look at it is to look at specific causes for hospital stays, like heart attacks, for instance. The US average hospital stay following acute myocardial infarction is 5.5 days, the lowest in the OECD.

Consider childbirth. Here the US has the third-lowest rate of stay, 1.9 days – much shorter than the OECD average of 3.6 days.

Another reason for high costs in the US is our aggressive testing. Only Japan has more CT scanners and MRI units per million people.

And, although doctors will roll their eyes when they read this, still another reason for our higher costs is physician compensation. At an average of $230,000 and $161,000 for specialist and general practitioner pay, respectively, each of these groups earns more than double their OECD counterparts.

Clearly then, there is no denying that, for whatever reasons, the US outspends its OECD partners by a long shot. The question that has to be asked is: Are we getting what we are paying for? All of us, taxpayers, employers, employees and individuals – the collective “we.”

That will be the subject of Part Three in this series.

Prior posts in this series:
Part 1: The best health care plan in America

In 1986, US workers' compensation medical costs were 44% of total incurred loss dollars. Ten years later, the percentage had grown to 48%. By 2006, medical costs amounted to 58% of total loss costs. And today, nearly a third of the way through 2008, they hover around 60%. The annual workers' comp medical cost rate of growth is nearly double the painfully steep rate of growth in the Group Health arena, and it has been so since 1996 (Source: NCCI and Insurance Information Institute).

And why not? Workers' compensation health care is the best health care plan in America, maybe even the world. Injured employees pay no premiums, co-pays, or deductibles. Prescription drugs are free, and tax-free indemnity payments cover most lost wages. No wonder acute and traumatic injuries cost nearly 50% more than similar injuries in the group health world, according to an NCCI Research Brief (Workers Compensation vs. Group Health: A Comparison of Utilization.)

No wonder chronic, soft tissue, musculoskeletal injuries cost more than double similar injuries in the group health world. And the disparity is probably even more than that, because NCCI could only examine and compare cost data for the first three months following injuries. Why? Because workers' compensation tracks injuries by claim numbers, but group health does not. Therefore, in group health, the further one gets from the date of injury, the harder it is to tie rendered medical services to a particular injury.

It’s no secret that over-utilization is the biggest reason that workers' comp medical costs are so much higher than costs in group health. True, on the whole and with some notable exceptions, workers' comp medical fee schedules have caused prices for individual medical services to be only slightly higher than individual services in group health, but in nearly every part of the country workers’ comp utilization dwarfs that of group health. Makes you wonder what the workers’ comp case management and utilization review companies are actually doing, doesn't it?

The difference here is stark. The group health plans put systemic fences around utilization. Workers' comp does not. If you twist your knee mowing the lawn out in the back forty on a Saturday morning and require arthroscopic knee surgery, your health plan will approve a certain number of visits to a rehab facility after surgery, normally six or seven. After that, you’ll need approval for any more. Of course, you can always choose to self-pay. But in the world of workers' compensation, that’s one decision you don’t have to make.

Because health care utilization and costs have become such large issues in workers' compensation, as well as group health, and because in this frenzied Presidential election season that seems to never end health care has become quite the political football, over the coming days I’m going to examine specific parts of it further. Next up – a bit of analysis of the current mantra all current presidential candidates seem to agree on (some might call it a "lie," but I couldn’t possibly go that far), namely, that here in America "we have the best health care in the world."

If only that were true.

Paul Lees-Haley, PhD, is a psychologist who has come up with a 43 question test to separate the truly disabled from malingerers. Lees-Haley is either a genius or a pompous fraud right out of Mark Twain. Read on and decide for yourself. (This posting is based upon an article by David Armstrong in the Wall Street Journal, which limits access to subscribers.)

Lees-Haley studied the Minnesota Multiphasic Personality Inventory (MMPI), a standard tool for determining personality characteristics. He isolated 43 questions that he believes, taken together, clearly separate the truly disabled from malingerers and frauds. Lees-Haley's brainchild, dubbed the "Fake Bad Scale" test, was developed in 1991 and is finding its way into courtrooms around the country. Lees-Haley is available to testify in person on behalf of insurance companies as an expert witness. He charges $3,500 to evaluate a claimant and $600 per hour for depositions and testimony. Worth every penny, I'm sure, if his testimony results in the denial of benefits to a claimant.

Testing the Test
Below you will find a sample of questions from the test, requiring a "True" or False" response. A "T" before the question indicates a "true" response is indicative of malingering. Likewise for "false."
F My sex life is satisfactory.
T I have nightmares every few nights.
F I have very few headaches.
F I have few or no pains.
T I have more trouble concentrating than others seem to have.
T I feel tired a good deal of the time.
F I am not feeling much pressure or stress these days.

You don't need a PhD in psychology to identify the ambiguity and unfairness in these questions, which are typical of the test as a whole. In the aftermath of an injury, someone might well feel stressed out, have difficulty concentrating, be tired much of the time and have frequent headaches. These responses do not necessarily indicate malingering. They can just as easily be valid indicators of post-traumatic response to injury. The "Fake Bad Scale" fails to account for anything that might have happened in the real world. Using this corrupt measure, every survivor of the 9/11 attacks would be deemed a "malingerer."

Fortunately, the validity of the test has come under fire. A number of courts have thrown it out. That's the good news. The bad news is that untold numbers of people who have answered these questions honestly have ended up being labeled (and libeled) as "malingerers." Shame on the attorneys who rely on this phony science, and shame on the insurance carriers who retain them. And double shame to the originators of the MMPI, who have formally given their stamp of approval to this inept tool. To be sure, we all know that there are malingerers out there: but the "Fake Bad Scale" is no help whatsoever in singling them out.

Revised March 10, 2008.

A few days ago we blogged insurance crime for amateurs: the saga of Regency Insurance, which was an insurance operation in name only. Today we deal with three big Kahunas: Marsh & McClennan, AIG and GenRe. When it comes to insurance crime, it just doesn't get any bigger than these folks.

Before we get to the particulars of the Marsh situation, we need to acknowledge the ambiguity that lies at the heart of the agent's role. In recommending the best insurance product for their clients, agents face a "perverse incentive." The lower the premiums for the client, the lower the agent's commission. The agent has a financial incentive to place the business either with a more expensive carrier, or with a carrier who pays higher commissions. The interests of the agent and the client are not always aligned.

Which leads us to the clever solution fashioned by some folks at Marsh. Bill Gilman and Ed McNemmy, former Marsh executives, solicited inflated bids from some (cooperating) carriers, so that the carrier they preferred would appear to be the lowest bidder. That's illegal, of course. Bill and Ed have been convicted of one count of bid rigging and face up to four years in prison.

Gilman's attorney, Robert Cleary, has not given up the fight. "Bill Gilman was really the client's best friend and the insurance carrier's worst enemy," he says. "We look at this as merely round one." That's an interesting statement, which goes right to the heart of the matter. Gilman was many things, but given his cosy relationship with the carriers who participated in the scheme, he certainly was not "an insurance carrier's worst enemy."

Big Names, Really Big Mistake
The second criminal act involved two insurance behemoths: AIG and GenRe. AIG has a justly deserved reputation for insuring anything that moves (and some things that don't), the bigger the better. Nothing wrong with a hearty underwriting appetite, but in embracing some pretty exotic risks, the company is vulnerable to big losses. So Christian Milton, AIG's VP for reinsurance, cooked up a deal with GenRe to hide half a billion in losses: GenRe wrote a policy to "cover" the losses, when in fact AIG was still on the hook for payment. In other words, this was risk transfer (insurance) without the risk or the transfer.

Why bother? By cooking the books, AIG artificially inflated its profitability - and the value of its stock. High losses magically disappeared from the books. Ingenious, yes, but illegal. By participating in this fraud, GenRe executives are facing serious fines and jail time. We're talking about people at the very top of the insurance food chain: Ron Ferguson, 63, former CEO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC, and mail fraud; Elizabeth Monrad, 51, CFO of Gen Re, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud; Robert Graham, 58, SVP and assistant general counsel, was found guilty on charges of conspiracy, securities fraud, false statements to the SEC and mail fraud.

These former executives were mostly "boomers" - nearing undoubtedly lucrative retirements. The one exception is Liz Monrad, whose financial skills helped her break through the glass ceiling for women - only to crash back through it by her willing participation in fraud. These highly trained professionals are facing substantial jail time and fines for their cozy deal with AIG - a deal that ironically held no risk for GenRe. Ultimately, there was plenty of risk, just not the type they included in their calculations.

Why did these very well paid executives stake their careers on these ill-advised schemes? The motivation is not much different from that of the losers who concocted the Regency Insurance scam: sheer greed. There was (and is) a heck of a lot of money on the table. They did it because they could, and because they assumed with the customary arrogance of the truly powerful that they would get away with it. Which serves as a reminder to the rest of us that we all participate in ethical risk assumption and risk transfer, every day of our lives. Let's hope we do a better job of it than these (former) captains of the industry.

Insurance companies handle a lot of cash: a lot of money flows in (insurance premiums); a lot of money flows out (insured losses, administrative expenses, the cost of reinsurance). For legitimate carriers, a good year results when the premium dollars collected exceed total losses combined with total expenses. By prudently investing premium dollars, you can even make money when total costs slightly exceed the premium income.

What if you could eliminate, or at least severely limit, the dollars flowing out? What if you set up a scheme where you collect premium dollars, but you eliminate the step of purchasing insurance? Perhaps you pay some small claims, to keep up appearances. But when the catastrophic losses hit, you ignore them.

As far as criminal schemes go, this one is pretty stupid. There is an inevitable - and I do mean inevitable - day of reckoning, when the unpaid claims finally catch up with you.

All of which serves as an introduction to Donald Touche, Richard Standridge and Robert Jennings, operators of a diverse group of Third Party Administrators: Don ran Stat-Care out of California; Rich ran Global Healthcare and EOSHealth out of Arizona; and Bob operated Interstate Administrative and TPAOne out of Illinois. Their primary clients were professional employer organizations (PEOs). For three years - 2000 to 2003 - they sold insurance through non-existent companies: Regency Insurance of the West Indies and TransPacific International Insurance. On February 13, 2008 the house of cards came tumbling down, when all three were convicted of mail fraud, wire fraud and money laundering by a federal jury in Jacksonville, Florida.

The boys are facing some pretty serious jail time: 100 years each plus millions of dollars in fines. Gosh, it seemed like a good idea at the time...

The owners of several PEOs testified for the government. They admitted to knowing that the insurance was fraudulant. They are also going to jail, but unlike Don, Rich, and Bob, they have a chance of getting out to enjoy their retirement years.

The most damning testimony was provided by workers with catastrophic injuries. One man had lost both legs, but was unable to obtain prosthetics. Many severely injured workers had not collected any workers comp benefits. Insurance fraud of this type is not a victimless crime.

This sorry saga comes to a formal end in May, when the sentences are handed down. We are unlikely to see these three entrepreneurs on the street ever again. Their money laundering days are over, but it's nice to imagine that their steamy days in the prison laundry have only just begun.

Chad Hennings spent nine years as a lineman for the Dallas Cowboys. He accounted for 28 sacks, 6 fumble recoveries, 4 return yards and 1 touchdown in 107 games before retiring after the 2000 season. He also suffered permanent damage to his back. The question is whether or not his work-related back injury is compensable under the Texas workers comp system.

The Texas workers' comp law treats pro athletes as a special class. Under Texas Labor Code §406.095(a), a pro athlete "employed under a contract for hire or a collective bargaining agreement who is entitled to benefits for medical care and weekly benefits that are equal to or greater than the benefits provided" by workers' comp must make an election between the two types of benefits. At first glance, it's a no-brainer. Henning's benefit package as a player dwarfs benefits under the comp system: he earned $1.4 million in salary and benefits in his final season with the Cowboys, including $225,000 under an "injury-protection clause," $38,921.98 from the Cowboys to cover his medical costs and $87,500 in severance pay.

Reversing Field
At first, the court system threw Hennings for a loss. The 10th Court's original July 23, 2007, opinion deemed Hennings' overall contractual package of salary and medical benefits during his pro football career to be higher than benefits available under workers' comp, thus rendering Hennings ineligible for such benefits under Texas law. But in its Jan. 30 opinion, the court reversed itself and upheld a jury finding that, in Hennings' case, workers' comp was a better deal for him because of its longer duration. After re-consideration, the court separated the indemnity benefit (where comp was insignificant) from the medical (where taken over a lifetime, comp might well exceed the deal offered by the Cowboys). In other words, Hennings's medical benefit of $38,921 might well prove less than the lifetime medical charges for treating his back problems. Heck, he could blow through that in a single surgery.

Based upon the Court's ruling, a Texas-size door has been opened for all professional athletes in the state to access the robust medical benefits of the workers comp system.

The decision may not help many retired pro athletes, because it may be too late for them to seek workers' compensation; the statute of limitations may have run on their potential claims. (Most states require that claims be filed within 2 years or less of the occurrence.) Going forward, I would not be surprised to see players routinely file comp claims immediately after injuries, knowing that they will not qualify for benefits in the short run, but protecting their interests once they quit the game.

Rate Setting Dilemma
If professional athletes are increasingly successful in their efforts to win workers comp benefits, insurance carriers and regulators will face an interesting dilemma: determining an actuarially defensible rate for coverage. Right now, the Scopes classification manual offers just two classes for professional athletes:

Class code 9178 Athletic Team or Park: Non-Contact sports. Applies to players, coaches, managers or umpires and includes all players on the salary list of the insured, whether regularly played or not. Non-contact sports include baseball and basketball.

Class code 9179 Athletic Team or Park: Contact Sports. Applies to players, coaches, managers or umpires...Contact sports include football, hockey and roller derbies.

As a point of reference, the current rate for class 9178 in Massachusetts is $23.11. Oddly enough, the rate for 9179 (contact sports) is slightly lower at $22.55. That is well below the rates for roofers and steel erectors.

NCCI might want to consider some serious revisions to the Scopes Manual. To begin with, separate classes are needed for coaches (relatively modest exposures) and players (huge exposures). They might even want to approach it in a manner similar to the construction industry, where the payroll is broken out by activity: field goal kickers, for example, are lower risks than lineman. Running backs are always at risk for knee injuries. And after the most recent SuperBowl, it appears that quarterbacks take their lives in their hands with every snap of the ball.

A Parallel Universe?
Professional athletes and workers comp are an odd mix. Where comp offers a combinatin of indemnity and medical benefits, for athletes the only issue is medical. With their enormous salaries, athletes will rarely have a need for indemnity benefits, which top out around $50,000 a year in even the more generous states. Medical benefits are a different matter entirely. When it comes to work-related injuries, comp provides lifetime coverage, with no co-pays, no deductibles and no time limits. Comp offers the best medical coverage of any kind, anywhere in the world. Just what a disabled athlete needs...

The permanent partial and permanent total exposures for football players are humongous: concussions, back injuries, blown out knees, torn rotator cuffs, torn biceps, nerve damage. Feed the injury data from pro football and pro baseball to an actuary and you'll generate a rate that exceeds the current top ticket professions of structural steel erectors and lumberjacks. The rate would soar well above $100 per one hundred dollars of payroll.

The optimum solution lies outside of the comp system. Workers comp indemnity is simply not crafted to protect the interests of (wildly overpaid) athletes. The players associations of the various professional sports need to sit down with management and craft a parallel universe: not the conventional workers comp system, but a combination of income protection and lifetime medical benefits that contemplate the real risks inherent in professional sports.

The Tennessee Restaurant Association (TRA), as you might expect, is a lobbying group for restaurants. One of the benefits of membership is access to special insurance programs. Around 500 members participated in a workers comp program run since its 1993 inception by the TRA's charismatic director, Ronnie Hart. Unfortunately, as we read in the Tennessean, Mr. Hart had no experience in insurance - he was a lobbyist by trade. So he learned "on the job" for the first few years and then hired a company called Hospitality Management Plus to administer the program. The "plus" was apparently the routine doubling of management fees and unauthorized dipping into the reserves. The minus, alas, is that neither Hart nor Hospitality Management knew how to run an insurance operation. Both are now bankrupt.

The state's Department of Commerce & Insurance took over the fund in 2005. They originally estimated the shortfall at $1.5 million. The revised number is $4.8 million, which has upset the stomachs - and wallets - of the 500 or so members on the hook for payment.

Randy Rayburn, owner of the renowned Sunset Grill and Midtown Cafe, is very angry. He is also a bit circumspect: "In hindsight, what does a lobbyist know about running an insurance company?"

Frank Grisanti, a restaurant owner and trustee of the fund, says he knew that Hart was making a profit running the trust, but he did not see it as a conflict at the time. "I guess it turns out that it was poor judgment..." Grisanti is facing a $60,000 assessment as his part of the trust's liability. That's a lot of surf and turf.

I'm sure the restaurant owners now appreciate the need for a little due diligence in the insurance area. Just as they would not hire a plumber to be a lead chef, they might think twice about asking a lobbyist to run an insurance company. It looks simple enough, but on-the-job training is not the way to go. Now the owners are stuck with the bill. They'll need more than extra strength Tums for this severe case of "Hart-burn" in Tennessee.

The Insider has often speculated about the thought process of medical providers, so we are very interested in case of Dr. Patrick Chan, a neurosurgeon working out of Searcy, Arkansas. The Canadian trained doctor has pleaded guilty to charges of demanding and accepting kickbacks from surgical implant maker Blackstone Medical of Springfield MA, a subsidiary of Orthofix International. Dr. Chan used the (expensive) devices in back surgeries. He was a very busy fellow, billing about $200,000 a month. He has amassed a $10 million nest egg (minus the court-assessed penalty of $1.5 million plus substantial legal fees).

The kickback scheme initiated by the doctor raises two compelling issues: one involves how a doctor determines which medical device to use. Dr. Chan reduced that decision tree to its barest branches. "I use the device that pays me the most money."

The second dimension of Dr. Chan's thought process involves utilization: when should a specific device be used? Apparently, Dr. Chan went out of his way to find opportunities to use his preferred surgical implants. His work is being reviewed to determine whether the surgical procedures were in fact needed. One suit, filed in Arizona, alleges that in 2005 Dr. Chan told his patient, a young trucker, that if he did not agree to implantation of a spinal device, he was at risk of becoming a quadriplegic. After the surgery, a worker's compensation evaluation of the MRI done prior to the procedure showed that it was medically unnecessary. [NOTE to insurer: Speed up the utilization review process!]

Breakthroughs, Innovations...and Scams
Blackstone Medical touts itself as the home of "Breakthrough Thinking." Parent company Orthofix is "always innovating." Unfortunately, high level thinking and innovation, along with overly ambitious marketing goals, have led the companies into an ethical morass.

Dr. Chan is currently under house arrest and awaiting sentencing. He faces up to five years in prison. We can assume that he is under considerable pressure to testify against his former suppliers. It's ironic, of course, that Dr. Chan and the people at Blackstone began with the same goal in mind: helping people in pain. They intended no harm, but, alas, much harm has apparently been done.

Thanks to fellow blogger Joe Paduda at Managed Care Matters for the heads up on this interesting story.

My favorite retailer is in the news again. (The source is an article in the Wall Street Journal by Vanessa Fuhrmans, so you need a paid subscription to read it, at least until Rupert Murdoch decides otherwise.) The story concerns Deborah Shank, a 52 year old woman who stocked shelves in the Cape Girardieu, Missouri store. She worked the night shift, so she could be home during the day with her three sons. Seven years ago, she was perusing yard sales with a friend when a tractor trailer plowed into her van. She was left with permanent brain damage. Walmart paid about $470,000 in medical expenses. The Shanks sued the trucking company and collected about $1 million, the limit of liability under the company's policy.

Jim Shank, Deborah's husband, used his portion of the settlement to buy an accessible home for his disabled wife. After paying legal fees, his wife was left with $417,000 to help supplement her care. End of sad story? Not quite.

When she signed onto the Walmart health plan, Deborah agreed that her employer would be first in line for payment out of any subrogation. [This type of language in employer health insurance policies is becoming increasingly popular.] Walmart sued Deborah for $470,000 plus legal expenses - in other words, they are suing for more than the balance of her settlement funds. They rejected the Shank's offer to settle for a portion of their costs. And of course, Walmart being Walmart, they have won the suit.

Life Isn't Fair
Our many readers in the insurance industry certainly understand the logic of Walmart's position. Administrators of the company plan have a "fiduciary obligation" to be impartial. In the interests of the group itself, they must pursue every available dollar, regardless of the consequences for one isolated (and devastated) family. The courts may feel some sympathy for Deborah Shank and her long-suffering husband, but the language of the policy is clear and unambiguous. The settlement dollars - and then some - belong to Walmart.

Less than a week after the Shanks lost their appeal, their son Jeremy was killed in Iraq. At that point, Jim Shank wanted to give up, but his lawyer wants to continue with the appeal (which heads for the Supreme Court, if the Court deigns to accept the case. I have no idea why the Shank's lawyer expects a different result at that level.)

In the meantime, Jim Shank has, on the advice of consultants, divorced his wife, to make her eligible for public aid as a single and totally disabled person. Deborah has not been informed of the divorce, but even if she were, she might not understand what it means. After attending her son's funeral, she still could not figure out why he was missing from the family circle.

There is, of course, nothing wrong with this story. The language of an insurance policy has been enforced. The fiduciary obligation of Walmart's health plan administrator has been fulfilled. One family is ruined, but that's just bad luck on their part. Surely they do not expect Walmart to show any compassion!

I hope Jim Shank can put together a nice turkey dinner on Thursday for his two remaining sons. Despite his many losses, he has much to be thankful for. It might just take a few extra moments to put those thoughts into words. When he does finally bow his head to say grace, there is at least one word that will not cross his lips: Walmart.

There is a bill pending in the US Congress to require parity between mental and physical health benefits. The bill is a follow up to similar legislation passed in 1996, which was severely limited in scope: Employers did not have to provide any mental-health benefits. Copays and deductibles could be higher for mental-health expenses. Visits could be limited. And small businesses and self-insured employers which cover healthcare costs directly were entirely exempt. Not exactly my understanding of the word "parity."

Full Parity for Mental Illnesses expands the Mental Health Parity Act of 1996 (MHPA) to prohibit a group health plan from imposing treatment limitations or financial requirements on the coverage of mental health benefits unless comparable limitations are imposed on medical and surgical benefits.

Here is a summary of the pending bill prepared by the National Alliance for the Mentally Ill:
[The proposed legislation] provides full parity for all categories of mental disorders, including schizophrenia, bipolar disorder, major depression, obsessive-compulsive disorder, and severe anxiety disorders. Coverage is also contingent on the mental illness being included in an authorized treatment plan, the treatment plan is in accordance with standard protocols and the treatment plan meets medical necessity determination criteria.
Defines "treatment limitations" as limits on the frequency of treatment, the number of visits, the number of covered hospital days, or other limits on the scope and duration of treatment and defines "financial requirements" to include deductibles, coinsurance, co-payments, and catastrophic maximums.
Eliminates the September30, 2001 sunset provision in the MHPA. Like the MHPA, the bill does not require plans to provide coverage for benefits relating to alcohol and drug abuse. There is a small business exemption for companies with 25 or fewer employees.

No Parity in Comp
Parity is an important concept, but one that simply does not exist in the workers comp system. Comp carriers habitually reject any claims for benefits based upon work-related mental disability (post traumatic stress syndrome, stress in general, depression, etc.). The insurer strategy is usually "Deny, Deny, Deny" until a judge orders otherwise.

There are a number of reasons for this virtually universal aversion to accepting mental disability claims:
: The standards for eligibility in most states are very high: work must be the predominant cause of the disability. Most of us have plenty of stress in our lives away from work.
NOTE: Long gone are the days when in order for a claim to be compensable under comp, California required a mere 10 percent of the stress to be work related!
: Comp benefits tend to be very open ended. Once the carrier accepts a (mental health-based) claim, they are likely to own it forever. As a result, they usually start by rejecting the claim.
: Unlike physical injuries, where objective criteria for treatment and recovery are often (but not always) straight-forward, the end-point for a mental disability can be very elusive.
: managed care can limit treatment for open-ended physical problems (requiring, for example, limited physical therapy, chiropractic visits, etc). Similar limits on mental health treatment (up to and including hospitalization) are more difficult - but not necessarily impossible - to impose.

It's unfortunate that comp turns its back on the mental aspects of injury. Over the years we have seen many claims where a little counseling after the injury could significantly speed recovery. Well-structured groups could provide support to workers recovering from injuries at a very modest cost. As a culture, we have no problem treating physical disabilities, but when it comes to issues of mental health, we balk. Ironically, as often as not the mental barriers to recovery trump the physical. Out-of-work employees often succomb to depression - and once that happens, full recovery and return to productive employment are much less likely to occur.

Ultimately, it's a matter of who pays, how much and when. The enormous cost of losing a productive worker is seldom factored into the equation. While Congress is about to force the parity issue on employers and insurers for conventional health coverage, no such pressure is pending - or is even foreseeable - for the workers comp system.

Jordan's Furniture is a legendary Boston area retailer of furniture. They generate a carnival atmosphere in their theme-based stores. One involves a replication of Bourbon Street in New Orleans, complete with piped in Jazz. They will do anything - anything! - to get you to buy furniture.

Back in March, they tantalized Red Sox fans with a unique proposition: buy furniture between March 7 and April 16, and if the Red Sox win the World Series, you get all your money back. Well, there are thousands of fans in the Boston area with two reasons to celebrate the recent success of the Sox.

Eliot Tatelman, co-founder of the company with his brother Barry, will not disclose the amount of money being refunded to customers. He teases us with averages: there were about 30,000 purchases made during the promotion period. If they averaged $1,000 each, the total is somewhere around $30 million. Heck, that's enough to pay one year of Yankee third baseman Alex Rodriguez's salary!

Tatelman, shrewd businessman that he is, has insurance to cover the losses. I would love to see that policy. I wonder how the underwriters calculated the premium. Knowing Tatelman, he chose a carrier with a New York based underwriting team, full of Yankee fans. They undoubtedly scoffed at the notion that any payouts would be needed. Tatelman probably secured very favorable terms.

Oh well, it was a great marketing ploy. It's still not clear whether the rebates will be taxable (they likely will be) or whether the entire scheme was an illegal lottery. Meanwhile, Tatelman might have to shop around a little harder if he wants to repeat the gimick next year. I suspect that the underwriters - Yankee fans or not - might not be inclined to bet against the Sox again.

Sox rule! (And tomorrow the Insider will return to its customary objectivity.)

We have a fight brewing over the Terrorism Risk Insurance Revision and Extension Act (TRIEA), which the House just voted to extend for 15 years. We live in unusual times when the white knight for the insurance industry is Barney Frank and the opponent is George Bush.

The House measure not only extended the bill, but also strengthened it:

"It would add group life insurance to the lines of insurance covered by the program, and it would cover terrorist attacks by Americans as well as by foreigners. It would also require commercial property and casualty insurance policies to cover losses from terrorist attacks involving nuclear, biological, chemical or radiological attacks. Typically such policies now exclude that coverage."

According to other news reports, it would also kick in at $50 million, rather than the current $100 million.

Many in the insurance industry think that such a measure is vital to ensure industry solvency in the event of large-scale terror, particularly in workers comp. In other lines of insurance, carriers can price for the coverage or can simply refuse to extend coverage, but because workers compensation is statutory, these mechanisms aren't available.

This is likely to produce pushback from the White House - it's anticipated that the president will veto the measure, viewing it as an unacceptable expansion to a program that was intended as temporary. The White House issued a statement saying that the most efficient method for providing terrorism coverage will come from the private sector. In response, bill sponsor Barney Frank said, “There are in our midst people who believe in the free market so firmly that they believe in it the way other people believe in unicorns.”

Get out the popcorn, this could be an interesting contest. It may be a nail-biter, too, since the current law is set to expire at the end of the year and workers comp is heading into its heavy renewal season.

When you have a problem, you pass a law to fix it. That's the theory, anyway. Sometimes, the legislative solution creates big, new problems. Take New York - please! In trying to solve the very real issue of rampant under-insurance and premium avoidance in the construction industry, the state has crafted an innovative solution. But the solution creates very big problems, indeed.

Under the revised comp statute, all out of state employers doing work in New York are required to carry a full, statutory NY state workers comp policy. New York must be listed specifically on the information page of the policy. The standard "other states" coverage (item C) is not considered adequate proof of coverage.

This may sound innocuous, but it's not. First, consider the problem in defining what "working in New York" means. The term is not defined by statute, but has evolved under case law. Coverage may be required for anyone coming into the state while "in the course and scope" of employment: this would include sales and delivery people, construction workers in for a day or a week, possibly even business travelers attending a trade show.

Once you figure out who's working, you're stuck with the issue of proving coverage. For carriers licensed to write insurance in New York, it's a bureaucratic nightmare, but feasible. You re-issue the policy, naming New York on the information page. But when do you do this? When is the proof of coverage required? Do you have to document coverage even when the New York exposure is miniscule or can you retrofit coverage after an injury occurs?

And what about insurance carriers who are not licensed in New York? These carriers cannot list New York on the information page, because they cannot write policies in the Empire state. So they are either forced to secure a license (how long will it take and how much will it cost?) or decline covering out-of-state employees working in New York. If they forego the licensing process, they may have to cut a check to the NY State Fund to cover payrolls for work performed in New York, at the current NY rates. Yikes! (Given the fear and uncertainty that this new requirement has already raised, there are agents for NY licensed carriers visiting neighboring states, trying to poach business from agents who lack a NY licensed carrier.)

By now you're probably thinking that NY will work out the kinks before the new law goes into effect. Technically, the law already is in effect - it began on September 9, 2007. Of course, no one can figure out how to go about implementing it. Last week the Workers Comp Board held a conference call for interested parties. Boy, where there ever interested parties - from as far away as California. Unlicensed carriers raised the specter of a lengthy and expensive licensing process in NY. Agents asked about their own exposure in trying to keep insureds informed of their obligations under the new law. To all the many valid questions, the Board responded with a resounding "We have no idea what to tell you...We have to work it out with the governor's staff and the Division of Insurance."

According to the Independent Insurance Agents of NY (IIABNY), the Board is "reviewing" the requirements. Implementation of the new law is "on hold." The Insider humbly suggests that the Board and the Governor kick this one back to the legislature. The new requirements are fatally flawed and no amount of tinkering can fix the situation. The problem of premium avoidance in construction is legitimate. This particular remedy, however, creates chaos within the insurance industry. After all, you don't cure a headache with Actiq or Oxycontin, do you? (Then again, this is workers comp ...)

As we approach the fourth anniversary of the Workers Comp Insider (September 17, 2003), it's a good time to step back and ask a fundamental question: Why are we doing this? Four years ago Tom, Julie and I observed that there were a lot of bloggers tackling a lot of issues, but they mostly involved isolated individuals pursuing a particular passion. Businesses in general seemed disinterested and our particular focus, the insurance industry, was totally missing in action from the blogsphere.

As a company specializing in designing and fine tuning loss control and risk management programs for employers and insurers, Lynch Ryan saw an opportunity. With its infinite, instantaneous reach, the web offered a virtual forum for exploring the many ramifications of workers comp. As consultants, we wanted to create a meaningful and objective means of communicating issues related to the key comp constituencies:
- helping employers minimize the cost of risk, while still managing their injured employees
- supporting insurance companies in risk selection and in the education of policy holders
- guiding injured employees back to gainful employment
- facilitating medical provider interaction with injured employees, their employers and insurers (and helping them survive increasingly stingy payment schemes)
- guiding states through the complex task of legislative reform, where they must balance the needs of injured employees, employers, insurers and medical providers, without allowing the cost of insurance to drive business out of state
- alerting workers' comp professionals and risk managers to issues of compelling interest which they might not otherwise encounter

Fertile Ground
Over our four years as bloggers, we have examined managed care, coverage for independent contractors, the practices (good, bad and indifferent) of insurance carriers, the impact of designer drugs on the cost of insurance. We have discussed fraud in Ohio, legislative reform in dozens of states, the use (and abuse) of temporary modified duty, myriad safety issues - cell phone use while driving, heat in the summer, cold in the winter. We have highlighted the aging American workforce and the implications for workers comp in the years ahead. We have explored the profound implications for the comp system of the millions of workers lacking health insurance, along with the nation's dilemma dealing with 12 million undocumented workers. And that's just a hint of the fertile ground we have plowed, up to five times a week, for over 200 weeks. Dull it isn't!

We also have created and refined a website that makes accessing web resources as easy as possible, linking our readers to business, risk management and health-related resources. In addition, you can use our robust search engine to explore nearly 800 blog entries by content area. All modesty aside, we think that the Insider has become the best workers comp reference library on the net.

How are We Doing?
We think it's working pretty well. We have as many as 20,000 hits a month, with several thousands of loyal readers and hundreds of casual visitors seeking inforation on a specific issue. Readership has increased steadily from month to month. We are approaching our goal of becoming the "go to" site for workers comp issues.

And, although Google and others call several times a month, we don't allow advertising, except for a small banner that links to LynchRyan, our parent company.

All of which leads to a very fundamental question for any business: is it worth the effort? Is this free service in any way profitable? That's not an easy question to answer - and in some respects, it's the wrong question. But in the interests of full disclosure and the candor to which we are committed, yes, we have established long term and meaningful relationships with a number of insurance companies and employers who found us through the blog. The considerable effort easily pays for itself.

But even if the blog were a "loss leader" we would probably continue the effort. We are filling a definite need on the web, providing a balanced and objective view of risk management and risk transfer issues, with a special focus on workers comp. Our goal is to provide our readers with a reliable, well written and entertaining news source that reflects our abiding passion and our many years in the field. And whatever you think of the Insider, you'll have to agree on one thing: the price is right.

Your comments are always welcome.

That reverberant thud we hear coming out of Albany, NY, is the sound of the other shoe landing. And it's dropped straight on top of the New York Compensation Insurance Rating Board (CIRB).

In early March of this year, New York Governor Eliot Spitzer signed into law a major and much needed workers' compensation legislative reform. In February we had discussed New York's urgent need for reform, and, immediately following the Governor’s signing, we analyzed New York's reform measure.

There's no need to rehash the reform here, except to say that the Insider was generally quite supportive of it. We were happy that a number of our suggestions wound up in the reform. However, two sections of the new law carried huge implications and consequences for the Property and Casualty (P & C) insurance industry in New York, and each took dead aim at the future of the CIRB. A reading of these sections suggested that the CIRB's future may actually be behind it.

The first of the two sections required that the Superintendent of Insurance report on the performance of the CIRB to the Governor, the Speaker of the Assembly and the Majority Leader of the Senate by 1 September 2007.

"Such report shall address, among other matters the Superintendent may deem relevant to the compensation insurance rating board including: (1) the manner in which the insurance compensation rating board has performed those tasks delegated to it by statute or regulation; (2) whether any of those tasks would more appropriately be performed by any other entity, including any governmental agency; and (3) the rate-making process for workers' compensation."

"The workers' compensation rating board of New York… shall mean the compensation insurance rating board until February first, 2008, and thereafter such entity as is designated by law."

"…no rate service organization may file rates, rating plans or other statistical information for workers’ compensation insurance after February first, 2008."

Well, here we are in September and Superintendent Eric Dinallo has issued a whomping, 56-page report (PDF) that, while not killing the CIRB, certainly eviscerates it.

The Current System – Nearly Everywhere
In 39 states, the National Council on Compensation Insurance (NCCI) gathers loss and premium data, calculates experience modifications, and files rate proposals on behalf of the P & C industry. A few states, such as Massachusetts, Michigan, Pennsylvania and New York, have independent Bureaus that do the same thing. These Bureaus are funded by the insurance carriers doing business in the states and are governed by committees elected by those insurers. The Bureaus gather and analyze loss data, both current and historic, and file rate proposals with their respective insurance commissioners. Actuaries from both sides testify at public hearings, after which insurance commissioners render decisions about the appropriateness of what the insurers want and establish new rates, which can be higher, lower or, occasionally, exactly what was proposed. Theoretically, this is a system with built in checks and balances where math and science should rule, and it is the way New York’s workers' compensation system operated until the recent reform.

The Dinallo Report
Superintendent Dinallo proposes scrapping this concept in New York in two ways, one of which we think is fine, the other we find fraught with danger.

First, the Superintendent proposes, quite rightly, we believe, to move to a loss cost system, where insurers, based on their own experience, would file loss cost multipliers that would be applied to the classification rates established by the Superintendent. This would introduce a competitive system already in place in all NCCI states. He proposes that the CIRB continue to gather loss data and calculate mods, because, first, it’s been doing it for more than 90 years and he thinks by now they have the hang of it; and, second, because between now and the sunset date of February 1, 2008 (just a little more than 4 months), there isn’t enough time to bring a new Rate Service Organization (RSO) on line. In short, Dinallo says New York's stuck with the CIRB at least, in his words, "for the short term."

Second, Superintendent Dinallo wants to take over the CIRB's governing committee. This, in my view, is the biggie. Dinallo recommends that the governing committee be reconstituted to include representatives from labor, employers, the State Insurance Fund, and the Insurance Department. Yes, insurers would be on the committee, too, but they would be in the minority. Further, the Superintendent would require that the carriers continue to fund the CIRB, even though they would have little or no control over it. Sort of like the Russian model of requiring the condemned man to pay for the bullets.

Potential Adverse Consequences
This second proposal would eliminate the checks and balances from the system. Further, it could also eliminate actuarial science. New York could wind up with rates being determined by committee, and a politically charged one, at that. Finally, one last elimination might occur: insurers, themselves, who, after attending (in small numbers) that first committee meeting may decide to hop the next train out of town. After all, what member of the reconstituted committee, except for insurers, would ever want to see a rate increase?

In this affair the CIRB has not covered itself with glory. It has shown itself to be politically deficient, and its public relations efforts have been woeful. It has allowed itself and, by extension, the insurance industry, to be maneuvered into playing the role of the villain in this melodrama, and it is now squarely in the cross hairs. Nonetheless, even Superintendent Dinallo grudgingly admits that his every-three-year reviews show that the Board is performing satisfactorily. We believe that the prudent course is for New York to let insurers govern their own Board and to require the Superintendent of Insurance to continue to oversee performance.

We urge that Governor Spitzer and Superintendent Dinallo assure that the New York workers' compensation playing field remains level and the goalposts where they are.

What better way to herald the end of summer by returning to the issue that just won't go away: workers comp coverage for sole proprietors and independent contractors. Massachusetts has just taken an extraordinary step that provides a strong incentive for sole proprietors to "opt in" to the comp system.

Under the old rules, any sole proprietor seeking comp coverage was assumed to make the state average weekly wage (SAWW). In MA, that is a whopping $52,000 per year. While MA enjoys some of the lowest rates for comp coverage in the nation, that high wage base drives up the cost of comp:
- for a $5.00 rate, the annual premium would be $2,600
- for a $10.00 rate, the annual premium would be $5,200

Those can be tough numbers for a lone craftsman trying to operate his/her own business. Especially when you consider that the weighted average median wage of all sole proprietors in the state is only $35,843. The result, of course, was that most sole proprietors gave up the notion of participating in the comp system. The coverage was way too expensive. They opted out in droves.

Recognizing the powerful disincentives to select coverage, the MA Workers Compensation Rating and Inspection Bureau decided to make the coverage more affordable. They have dropped the wage base by 30 per cent, to 70 per cent of the state AWW, effective August 1, 2007. Now, when a sole proprietor chooses to be covered, the premium is based upon an annual wage of just $36,400. This means that the cost of coverage is suddenly pretty reasonable:
- for a $5.00 rate, the comp coverage costs $1,820
- for a $10.00 rate, the coverage costs $3,640

A Comp Bargain
For marginal sole proprietors, with annual billings below the $36,400 level, there is still a strong incentive to opt out of the system. However, for the many skilled tradesmen who routinely bill well above the $36,400 level, workers comp has suddenly become a bargain. A skilled mason or carpenter might bill upwards of $75,000 or more per year. Nonetheless, the cost of comp coverage will be based upon a much lower wage level. In effect, well established sole proprietors now enjoy comp rates that might be 50 per cent or more lower than the rate for competitors with employees working in the same trade.

Which leads to one more very important consideration for general contractors in MA: in the construction field, sole proprietors are a common sight. We have blogged about the MA crack down to push coverage deep into the subcontractor and sub-subcontractor levels. (See just a couple of our prior blogs here & here.) At premium audit, if a GC shows a certificate of insurance from a sole proprietor sub who has "opted out" of coverage, the cost of that coverage is added to the GC's payroll for premium calculation. Now GCs have a very compelling argument to encourage their sole proprietor contractors to opt in for coverage: "Don't wait for me to charge back the cost of comp. Take advantage of the suppressed rates and choose coverage on your own. You benefit from a lower rate and you have the advantage of knowing the cost of coverage up front." For sole proprietors who routinely have billings above the $36,400 level, this is truly a no brainer.

It will be interesting to see if other states follow the MA lead in this important policy area. Surrounding states use a very high wage standard for calculating sole proprietor premiums: in Connecticut, $56,200. In New Hampshire, $58,100. When you factor in the very high rates for comp in these states, the cost of insurance for sole proprietors is truly prohibitive. That's no welcome mat. It's a kick in the butt toward the door.

Jay Fishman, CEO of The Travelers, offers an interesting perspective on the current state of hurricane risk. (As the piece appears in the Wall Street Journal, availability is limited to subscribers.) The article is entitled, "Before the Next "Big One" Hits." That's ironic, of course, because nothing meaningful will be done until well after the next big one hits. Nonetheless, Fishman's perspective is worth examining.

Fishman looks at the current chaos governing state regulated coastal property insurance from Maine to Texas. Not surprisingly, he sees a lot of problems. With over half the American population living within 50 miles of the coast, with coastal development continuing at an alarming pace, and with the prospect of bigger and more powerful storms developing in our oceans, many carriers are running for higher ground. Fishman believes that they might be more inclined to stay if the rules governing property insurance had some federal oversight. That's an unusual perspective, coming from a CEO.

Bring in the Feds
Fishman would like to see a federally regulated "Coastal Hurricane Zone" running from Texas to Maine. The feds would regulate and oversee wind underwriting by private insurers, including pricing. A federal role would increase consistency from state to state and offer a more stable set of rules - rules that might provide insurers with the confidence to make long-term commitments and investments of capital. Premiums would be subject to regulation: if they exceed the payouts over a period of time, property owners would receive a rebate. If the rates prove inadequate, they would be allowed to rise. A federal presence might pre-empt the current absurd situation in Florida, where tax payers enjoy depressed rates for coastal coverage, with the prospect of mortgaging the future when the next big storm hits (see our "Risk Management for Dummies" posting here). A federal role would benefit consumers by providing more transparent pricing and standardized "rights and responsibilities."

Fishman recognizes that some coastal risks exceed reasonable rate making. In these situations, he recommends temporary, transitional subsidies, extending 10 or 15 years. Here, those unable to pay the rates associated with the risk would receive a tax credit; on the other hand, those able to pay might face a surcharge to help balance the books. This is Robin Hood in a rain slicker, perhaps, but it's an idea worth further scrutiny.

Wind and Water
Risk mitigation under global warming's unprecedented and poorly understood circumstances must go beyond the pricing and wording of insurance policies. Fishman would like to see a proactive approach with some serious traction in two key areas:
- establishment and enforcement of credible building codes
- improved land management, with the preservation of coastal wetlands a major priority

Fishman is careful to call all of this "wind underwriting." He clearly is not contemplating an expansion of standard policies to include water damage. (Did someone say Dickie Scruggs?) From his CEO perspective, risk transfer must be both reasonable and profitable. The fact that he welcomes a federal role in developing the rules is a clear indication that the current situation is untenable. The free market for coastal property insurance is floundering on the rocks. Fishman is not alone in looking to the federal government to build the needed lighthouse.

For unadulterated audacity and out and out gall, Michael Joyce, a Pennsylvania Superior Court Judge, may currently hold the lead in this year's gold medal competition.

Scanning Insurance Journal Online today, we learned that last Wednesday, federal prosecutors indicted Judge Joyce for mail fraud and money laundering, claiming that he cheated the Erie Insurance Group and State Farm Insurance out of $440,000, a charge the judge denies as he protests his innocence.

Judge Joyce came to our attention not for what he is accused of doing, but for how he is alleged to have done it. According to the indictment, Judge Joyce, while parked in his Mercedes-Benz sedan in 2001, was rear-ended by an SUV traveling about 5 mph. That's right, five miles per hour – I’ve crested middle age and I still can run that fast.

Following this horrendoma of a crash, no police or medics were called to the scene, yet the Judge asserted that the impact rendered him unable to exercise or play golf for more than a year. He was paid $390,000 by his insurer, the Erie Group, and $50,000 by State Farm, which insured the poor SUV driver.

Unfortunately for Judge Joyce, the indictment alleges that, not only was he playing 18- hole rounds of golf shortly after the "accident," but he was doing it on vacation in Jamaica. It also claims that he was scuba diving, inline skating (I’ve never gotten the hang of that) and working out in his local Gym. The man must be a medical and physical marvel.

At any rate, Judge Joyce has announced that, infirmities and indictments notwithstanding, he will continue his run for a second ten-year term in this fall's coming election.

The state's Supreme Court last Friday suspended Judge Joyce, with pay, "to protect and preserve the integrity of the Unified Judicial System, etc…"

And what, you may ask, did Judge Joyce do with his new-found wealth? Well, according to the indictment, he used it to buy a motorcycle and make down payments on a house and an airplane, which, of course, he intended to fly. We know that, because on the application for his pilot's license he asserted that he had no injuries or physical problems that would preclude his flying up, up and away, which he then did about 50 times.

There is terrible injustice here. We’ll let the courts decide whether it has been done to the Judge, or by him.

Felicia Dunn-Jones was a civil rights lawyer who worked one block away from the World Trade Center. She fled the office on 9/11, inhaling dust from the falling towers. She was covered with ash laced with asbestos and other hazardous material as she ran for safety. Now, nearly six years later, over five years after her death, New York City Medical Examiner Dr. Charles Hirsch has determined that Dunn-Jones's death was related to the 9/11 attack. In the days and months following the attact, Dunn-Jones developed a serious cough and had trouble breathing. She died five months later.

Dr. Hirsch has amended Dunn-Jones's death certificate to indicate that exposure to trade center dust "was contributory to her death." The manner of death thus changes from natural causes to homicide.

The medical examiner still has some doubts as to whether the trade center dust caused the sarcoidosis that killed Ms. Dunn-Jones. He suspects it was a pre-existing condition, nonetheless clearly and significantly aggravated by the exposure on 9/11.

Who Pays?
The issue for Dunn-Jones's family is not one of payment. They have already received $2.6 million from the Victim Compensation Fund. But it does raise an interesting question relative to workers compensation: was Dunn-Jones's illness work-related?

In the moments following the attack, Dunn-Jones fled her office. Technically, once she reached the streets, she was no longer at work...She was commuting, heading away from work. She eventually made her way home to Staten Island.

An administrative law judge could reasonably conclude that this is not a work-related illness. Dunn-Jones happened to be at work, which happened to be near the World Trade Center, which happened to be attacked. Once she fled the building, she was a commuter (a commuter suffering from terror, but a commuter nonetheless). On the other hand, an equally reasonable judge might lean toward compensability, based upon the fact that Dunn-Jones was at work when the attack took place - and it was physically impossible for her to remain there. She was not engaged in an ordinary commute, but a horrific flight from immanent danger.

Perhaps these are morbid distinctions that most of us would prefer to ignore. But the center attack is certainly not the last incident of its kind. Millions of employers are paying for workers comp policies, under the assumption that employees are covered for work-related injury and illness. If and when the next attack comes, the issue of compensability will quickly become paramount. It is no exaggeration to state that the future of the insurance industry as a whole might be at stake.

In the meantime, we would do well to return to the Book of Common Prayer for consolation. Sure, we are inclined in this country to translate tragedy into dollars. Someone must pay for all the pain, suffering and loss. But beyond the issue of jackpot settlements lies the simple fact of our mortality. "Earth to earth, ashes to ashes, dust to dust."

NCCI has recently released its its annual State of the Line workers compensation market analysis which is really what all the numbers geeks in our industry wait for with some anticipation. You can read the summary in the press release - NCCI Reiterates “Optimistic but Cautious” Outlook for Workers Compensation Insurance Market - or read the full report (PDF). There's also a PDF of the PowerPoint and a video version of the presentation if you you're a true insurance nerd.

Here's the long and the short of things: the market looks good, better than it has in a number of years. Thirty years, to be exact.

At 96.5%, the combined ratio, which is one of the industry's primary barometers for assessing market health, is the lowest that it has been in three decades and incredible drop since its 2001 peak of 122%. The combined ratio reflects an insurer's loss experience plus expenses. In non-jargony terms, the combined ratio essentially reflects how much an insurer pays out for each dollar it takes in. In most business scenarios, the cost of goods or services would tally under 100% with the remainder being the profit margin. Insurance presents an unusual scenario because investment income allows carriers to realize a profit up to about the 110% range, or even higher. So anything under 100 is quite good.

There are other positives, too. The frequency of injuries continues to drop, reserves have been strengthened significantly, and the residual market (or "markets of last resort") continue to shrink.

But put away the champagne, confetti. and noise makers because there are a few mitigating factors. One is that California's improved scenario is responsible for about 10 percentage points in those results, so if you take that away, things aren't quite so rosy. Throw in pallid investment returns, and while still a good year, you essentially have what the actuaries have termed "cautious optimism." Whee.

See - you can never really relax when you work in a business with actuaries because they are always raining on today's parade by warning you about the future. Here are a few things that could bedevil us going forward, according to the the experts:

• Medical costs continue to escalate. The medical portion of the claims dollar is now topping 59%. Fifteen years ago when I got in this business, it was about 48%, with more than half going to wage replacement. That's a seismic shift, and it doesn't look like there are any brakes on escalating medical costs in the future.
• The market may have crested. Workers comp premiums are decreasing and in competitive or buyer's markets, insurers have historically been their own worst enemies by being too aggressive in discounting price to gain market share. So far so good, but we may be at a point where the rubber meets the road. Joe Paduda has more on the dynamics of pricing and hard and soft markets.
• The Terrorism Risk Insurance Extension Act - the federal backstop - is scheduled to expire at the end of the year and it's uncertain if it will be renewed. While some other lines of insurance can exclude coverage or price to include the risk, the regulatory nature of workers comp precludes this, leaving insurers rather exposed.
• Bad things in other lines could have a spillover impact. Again, I turn to my colleague Joe Paduda for his view of scary things that could affect the property casualty industry performance as a whole.
• The work force is getting older and fatter. And it isn't just the older people who are getting fatter, diabetes is reaching what some health care observers have characterized as epidemic. Both these factors - age and weight - increase the risk for new injuries and could add to the severity (read: medical costs) of any injuries that occur.

When you talk to insurers doing business in New York, they are quick to point to New York Labor Law as a very big problem. The law, going back to 1885, holds employers absolutely and completely liable for any injuries resulting from a fall. This liability is over and above workers compensation. Injured workers can (and often do) sue for damages that go far beyond the wage replacement and medical bills paid by comp. I imagine that the building of skyscrapers was a big factor in the law's original passing. But it applies to every form of building, from Trump's glitziest tower to a strip mall in Poughkeepsie.

Any law that's been around for 120 years has an extraordinary pedigree, and this one is no exception. Attorney Andrew Siracuse - a proponent of the statute - has made a lot of useful history and case law available here. The original statute (S.18) required proof that the owner "knowingly and negligently" caused the injury by fall. That was was soon amended (in 1897) to remove any mitigating circumstances for employers. In other words, the law does not take into account prior safety training, the availability of personal protective equipment or other attempts to reduce job site risk. Nor does the law care if the employee acted negligently, was stoned, or failed to use available safety equipment. Employee falls, employer pays. Employers are absolutely liable. It's that simple.

The law holds employers to perhaps the highest standard for safety in the world. Here's the language of an amendment from 1921:

A person employing or directing another to perform labor of any kind in the erection, repairing, altering, painting, cleaning or pointing of a building or structure shall furnish or erect, or cause to be furnished or erected for the performance of such labor, scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces, irons, ropes and other mechanical contrivances which shall be so constructed, placed and operated as to give proper protection to a person so employed or directed.

Any fall is presumed to be the result of a failure on the part of the general contractor/employer. In New York, there is no such thing as a free fall.

Impact of Workers Comp Reforms
The arguments, pro and con, continue to this day. Attempts to modify the law have repeatedly failed. To be sure, the law provides an important safety net for seriously injured construction workers. (It also pays the painter, standing on a bucket in a closet, who injures himself in a fall totalling 24 inches.) Given the historically paltry benefits available under the state's workers comp law (see our prior blog here), some form of additional benefits was probably necessary. Try living in New York on $400 a week indemnity. The new reforms up the maximum indemnity to $600, but that will still not support a well-paid construction worker and his/her family. If New York really wants to make the Labor Law obsolete, they need to mirror Massachusetts in offering a maximum weekly benefit of $1,000+.

There is one part of this situation that puzzles me. Every state builds tall buildings. Every construction project involves the risk of falling. But only New York has chosen to move beyond comp's "exclusive remedy" benefits to offer tort liability to workers in construction. Only New York has held contractors to the highest possible standard - and has done so for 120 years. Has this unique standard actually reduced the number of falls in New York? Has New York succeeded in creating safer workplaces, by hammering employers and their insurers with higher costs? I doubt it.

On the other hand, there are times when I am happy that workers carry the extra protection. One only need glance at a recent fatal fall in Buffalo, involving Jonathan Fundalinski, a 24 year old worker. We read in the Insurance Journal that the construction crew began erecting a safety railing minutes after Fundalinski plunged 30 feet to his death. According to police, the crew ignored repeated orders to stop as paramedics battled to revive the victim. The irony is that even if the crew was able to convince authorities that the railing had been in place before the fall, it wouldn't make any difference. It might support their case in some other state, but not in New York. Railing or no railing, the contractor is liable for the fatal fall of a young worker. They are going to pay, big time. And in this particular case, that's a good thing.

Restless modern minds have developed some new approaches to risk. These examples of thinking "out of the box" will eventually end up back in the box - as case studies in business schools across the country: "Risk Management For Dummies - and we really mean dummies!"

NINJA Mortgages
Let's begin at the micro level: the collapse of the sub-prime home lending businesses, one bad mortgage at a time. This once hot market gave rise to some interesting schemes, none more absurd than what Steve Pearlstein of the Washington Post dubs "the NINJA mortgage" - no income verification; no job verification; no asset verification. You walk in with empty pockets, you walk out with a mortgage. Why didn't I think of that?

Of course, the mortgage starts out at a very low rate, one that even the NINJA householder can handle. After a year or two, however, the rates go up - way up. The homeowner (and I use that term advisedly) defaults, so the bank kicks them out and takes over the loan. Unfortunately, the value of the mortgage (issued at the peak of the market) exceeds the value of the house. As any good accountant will tell you, these numbers simply don't work. The once proud homeowner is forced to become a tenant; and the once proud lender (did someone say "New Century"?) skips the first ten chapters of the morbid story and heads straight for Chapter 11.

Florida's Insurance Shingle
Which brings us to some foolish thinking on a much larger scale, a scale as big as the state of Florida. Water views - the state's greatest asset - have become, with global warming, something of a liability. We are less than two years removed from the worst hurricane season in history, with three of the most destructive storms on record hammering the state's extensive coastline. Property insurers have gotten skittish. They want more premium for the risk of writing coastal property. But higher premiums make homeowners and politicians unhappy. While there's not much a homeowner can do, politicians could do a lot: they could tighten coastal zoning regulations. They could severely limit coastal development. They could establish barriers between the open ocean and development. They could raise construction standards. They could, but of course, they won't.

No. The first thing the politicians did was roll back the insurance rates. They put a couple of hundred bucks in the pockets of voters -- oops, I mean homeowners. Take that, Property Casualty Insurers! Then in its infinite wisdom, the legislature jumped head first into the property risk business. With a mere $1.9 trillion in coastal property exposure, the state has decided, essentially, to self-insure. That is, the state is underwriting future losses through future bonds. If another big one hits, the state will finance recovery by borrowing. How will they pay for the loan? Simple: by adding a surcharge to every business, auto and homeowner policy written in the state. It might cost the average homeowner $14,000 or more over the life of the bond, but at least they have a couple hundred in their pockets right now.

Unlike conventional insurers, who try to set aside adequate reserves to cover future losses, Florida has entered the gray zone of post-event funding. I suppose it might even work for a modest storm. But what about another major hit like Katrina - or, dare we think, two or three major hits? (I know. I'm a Nervous Nelly. With this country's pro-active, can-do approach to global warming, these hypothetical risks will remain...hypothetical!)

If you're interested in exploring the implications of Florida's Brave New Risk Retention program, Towers Perrin has a nice study here. They are careful to avoid any value judgments. They call their paper "a study of recent legislative changes to Florida property insurance mechanisms." I'm inclined to give it another title: Blowin' In the Wind: Florida Stakes its Future on Loaded Dice.

Employers and insurers in NY take note: if you have claims with potential for second injury fund reimbursement, your window of opportunity for recouping recovery dollars has narrowed significantly. New York just passed legislation which includes provisions to phase out their fund. Also in the works, South Carolina legislators are discussing a schedule to close their fund as well, bringing a plan that has been under discussion for years one giant step closer to enactment.

New York Special Disability Fund - phasing out by 2010
The New York workers compensation reform bill, which was recently signed into law by Governor Eliot Spitzer, lays out a schedule for shutting the Special Disability Fund (aka Second Injury Fund) to new claims on or after July 1 of this year, and closing the fund down for all new reimbursement claims by July 1, 2010, regardless of date of injury. These are the major legislative provisions, but as the saying goes, the devil is in the details, which the folks at Insurance Recovery Group have explained in greater detail: NY Workers' Compensation Reform Impact on Second Injury Fund.

South Carolina Second Injury Fund - next up?
After years of debate around workers compensation reforms, the South Carolina Senate and executives of the Second Injury Fund are looking at possible schedules for closing the fund. Some proposals under discussion have this happening by 2013.

More information: For a primer on second injury funds, see our April 2005 post Maximizing recovery: Second injury funds.

Well, that didn't take long. Only 19 days ago we wrote about the profound need for top to bottom reform of New York's worker' compensation statute, arguing that the election of Governor Eliot Spitzer provided the best opportunity in more than a decade to accomplish meaningful reform in the state that needed it the most.

Lo and behold, if a legislative bullet train didn't roar through Albany almost immediately. On March 6, the New York Assembly and Senate unanimously passed identical bills, whisked them through conference, beamed them up through first, second and third readings, and delivered them to Governor Spitzer for signature on March 8. If anyone can tell me of a piece of serious legislation that moved faster and with a better result through a legislature anywhere in America, I’d love to hear of it. It's as if the Governor waved some Harry Potter wand and dragons died and mountains moved. We should credit Speaker of the Assembly Sheldon Silver and Senate Majority Leader Joseph Bruno for bringing News York's Business Council and AFL-CIO to the table for a lesson in the fine art of political compromise.

The reform is broad-based and deep. It ratchets up the penalties for employer premium fraud, an allegedly humongous problem, the scope of which has only recently been exposed, and with which the insurance industry takes great issue. (PDF) For the first time, it establishes medical, as well as pharmaceutical, fee schedules that should be very helpful in the future.

What the reform adds to New York's workers' compensation statute is worthy and needed, but even more impressive is what the reform kicks to the side of the road.

Gone is New York's "till the day you die" permanent partial disability, replaced by a disability ranking system that, depending on the level of disability, can last up to ten years. However, there's a section that allows for conversion to "total industrial disability" in "extreme hardship" when an injured worker is more than 80% disabled. Not exactly what labor and claimants' attorneys wanted, but certainly as good as they were going to get.

Gone is the paltry maximum weekly temporary total disability payment of $400, replaced by a maximum rate to be phased in over three years, which will equal two-thirds of the average weekly wage in the state, indexed annually. This is still relatively low; I would have argued for the maximum rate to be exactly equal to the average weekly wage in the state. The result achieved, nonetheless, demonstrates the power of the compromise.

Gone is the Special Disability Fund (which, everywhere else in America is called the second injury fund), as of July 1, 2007, just three and a half months from now. Workers may not submit claims for injuries that happen after that date and cannot submit claims for any injuries that happened prior to that date after July 1, 2010. These funds are considered anachronisms by many policy makers, having come into being to assist wounded World War II veterans whose wounds might have made them prone to re-injury when they returned to the work force. Subsequently, they were viewed as employer incentives to hire previously injured workers.

Gone also, if I read the legislation correctly, appears to be the New York Compensation Insurance Rating Board (NYCIRB). Acting as Bureaus do in other states, such as Michigan, Pennsylvania, Massachusetts, etc., the NYCIRB is the insurer-funded organization that collects data, files for rate changes, and represents the insurance industry in workers' compensation matters in New York. Someone very powerful seems to have it in for Monty Almer, president of the board, and his actuaries and data collectors. The legislation mentions the NYCIRB in two key places, among others. First, the new law gives this charge to the Superintendent of Insurance:

"The Superintendent shall report to the governor, the speaker of the assembly and the majority leader of the senate on or before September first, 2007, on the compensation insurance rating board on matters related to the compensation insurance rating board. Such report shall address, among other matters the Superintendent may deem relevant to the compensation insurance rating board including: (1) the manner in which the insurance compensation rating board has performed those tasks delegated to it by statute or regulation; (2) whether any of those tasks would more appropriately be performed by any other entity, including any governmental agency; and (3) the rate-making process for workers' compensation."

Second, in Section 2313, a new subparagraph(s) is added, a poison pill if ever there was one. Apparently regardless of whatever the Superintendent's "report" says, the new subparagraph(s) clearly states that the NYCIRB can no longer file rates after February 1, 2008, five months after what can only be considered its performance report is delivered:

"The workers’ compensation rating board of New York… shall mean the compensation insurance rating board until February first, 2008, and thereafter such entity as is designated by law."

"…no rate service organization may file rates, rating plans or other statistical information for workers’ compensation insurance after February first, 2008."

Ouch! When these passages first appeared in the draft legislation on March 2, 2007, Mr. Almer and the NYCIRB issued a "bulletin" (PDF) reminding insurers, legislators and anyone else who might be listening that the NYCIRB is "a non-profit, unincorporated association of insurance carriers" funded by those carriers to represent their interests in the rate-making process. Neither Mr. Almer nor his bulletin appears to have had the necessary mojo to persuade the legislators to remove the offending passages. One has to wonder how New York's P&C industry is going to file its rates with the Superintendent of Insurance if the new law says it's illegal for it to do so. Just who does the governor and legislature think is going to represent the insurance industry? Some "governmental agency," as is hinted by the legislation?

We should congratulate the groups that came together so quickly to create and put in place this reform legislation. In most cases, it seems an admirable compromise. Folks at the NYCIRB might be excused for thinking otherwise, of course, but you have to hand it to New York politicians. When they take out the long knives, they're not afraid to use them.

This all bears continued scrutiny.

In what continues to be perhaps the nation's biggest workers' compensation turnaround success story, the Massachusetts Workers' Compensation Rating and Inspection Bureau (WCRIB) on Friday filed a proposed average rate decrease of 13.4% to become effective 1 September 2007. If the state's newly appointed insurance Commissioner, former Superior Court Justice Nonnie Burns, approves the filing, rates in Massachusetts would be 64% lower than they were in 1991, when the Massachusetts workers' comp law was reformed, and nearly 70% lower than the high water mark of 1994.

Many other states have reformed their laws and achieved lower rates, but what is remarkable about Massachusetts is that while it has become one of the lowest cost states in America for employers, it continues to rank among the top 5 in terms of benefits awarded to injured workers. A very neat trick, indeed. (See our prior discussion of the rankings).

There are a number of reasons for this success; four stand out.

• The 1991 reform lowered the temporary total disability payout from 66 2/3% of the injured worker’s wage to 60%. Concomitantly, the law tied the maximum weekly payment to the annual inflationary growth rate of wages in the state. Now, in 2007, that maximum is more than $1 thousand. This was a monumental compromise by business and labor.
• The reform law established a medical fee schedule that was the lowest in the nation. Initially tied to Medicaid rates, the schedule now is about 80% of what Medicare reimburses, which many health care providers claim is ridiculously low. While surgeons and other Massachusetts medical specialists no longer accept these rates and will only ply their trades after negotiating higher payments with insurers and employers, primary care, as well as emergency care, physicians continue to work under the depressed rates. While this has been profitable for employers and insurers, it is a pressure cooker on the workers’ compensation stove, and the pressure is building.
• The reform law significantly updated the state's antediluvian Department of Industrial Accidents (DIA). Process was streamlined, the administrative law judge corps expanded, attorney involvement and fees reduced, staff professionalism augmented and a fraud unit created. It has taken time, and many still complain that things take too long to get done, but it seems indisputable that the DIA's performance is considerably improved.
• Employers got religion. At the time of reform and on a per capita basis, Massachusetts had the largest assigned risk pool in the nation. Fully 65% of all premium and 85% of all employers were pool-bound. The state's premium was just about $2 billion. In a leap of faith, the WCRIB, on behalf of the insurance industry and with the approval of the Commissioner of Insurance, created the Qualified Loss Management Program. The QLMP functioned as a kind of tuition reimbursement program for employers by which they received premium credits of up to 15% in return for engaging qualified consultants to help them prevent, minimize and manage worker injuries. The program was a Lynch Ryan proposal and, if you'll pardon an immodest moment, a huge success. Loss ratios declined precipitously, the pool drained, employers saw steep declines in rates and the P&C industry became profitable once again in Massachusetts.

First, there is the little matter of AIG, which, at 30% market share, is the state's largest workers' compensation insurer. That would be fine if only AIG's statistical data were reliable. But it wasn't in the 2005 rate filing and, consequently had to be excluded from the filing. Now, history repeats itself and, once again, AIG's data has been deemed unreliable and is excluded from the present filing. This is a large embarrassment for the WCRIB. Bureau leadership would have much preferred to delay the filing to devote more time to the AIG problem, but by law there must be a filing every two years. But I know for a fact that the Bureau did all in its power to work with AIG to get reliable data. It didn’t happen, and more's the pity, because this opens the door to disputes in the rate hearing process. One would be pardoned for asking at this point, "What in the world’s going on with AIG?"

As if that weren't enough, during the rate filing of 2003, Massachusetts Attorney General, Tom Reilly, decided to enter the fray. At that time, the WCRIB filed for an increase in rates of 8.6%, the Division of Insurance's State Rating Bureau countered by filing for a decrease of nearly 10%. For Reilly, that wasn’t good enough. His office filed for a decrease of a whopping 21.4% (see my analysis of that rate dispute). Now, AIG's exclusion provides the springboard for similar dueling filings. We shall wait to see if Massachusetts' newly elected AG, Martha Coakley, is more temperate than her predecessor.

Notwithstanding the clouds, the workers' compensation picture in the bay state is pretty rosy. As we enter the rate hearing process, it will be interesting to see if it stays that way.

We read in the New York Times that State Farm has suddenly agreed to accept liability for many of the claims it had previously denied in Katrina-ravaged Mississippi. The giant insurer has set aside a minimum of $80 million to settle 640 lawsuits. They have also agreed to re-open 35,000 denied claims. In most cases, home owners will collect half of the policy value. In a few cases, they will cash out at full value.

This is a dramatic turnaround from the insurer's prior position: they based their initial denials on the premise that most, if not all, the damage from Katrina was caused by storm surge (flooding is not covered by conventional homeowner's insurance) and not by wind (wind damage would be compensable). In the final analysis, I doubt that they are backing away from the scientific premise of their denials. They still probably believe that they are on solid legal ground for denying the claims. No, in the end, State Farm has agreed to pay claims it really feels are not compensable for one simple reason. They are still in the insurance business. They still want to sell policies. And the negative fallout from their routine denial of Katrina claims threatened their core reputation, the brand name they have so carefully cultivated over the years.

The Times article quotes Randy Maniloff, a lawyer at White & Williams in Philadelphia who represents insurance companies. He said yesterday that it was clear that the bad publicity had been a big factor in State Farm’s decision to settle. “They spent 80 years building up a brand,” he said, “and the adverse publicity from these lawsuits has been clearly doing damage to the brand. It just flies in the face of their portrayal of themselves as good neighbors.”

When we first blogged this issue, we raised the irony of State Farm's "good neighbor" tag line. Real neighbors help out regardless of the circumstances. In contrast, corporate "good neighbors" might well use the small print of an insurance policy to serve stock holders and maximize profits. If that means boarding up entire communities, so be it. There is at least some legitimacy to State Farm's original position. The case can be made that this capitulation is wrong and sets a dangerous precedent for the industry. Other carriers now have to scramble to recalculate their earnings statements. In addition, all purveyers of home owners insurance are revising policies to clearly and explicitly exclude storm surges from future coverage. But they are all going to help pay for Katrina.

Business and The Public Good
The scale of this disaster was so great, it transcends the insurance industry itself. While insurers are extremely reluctant to compromise the sacred language of the policy, they are involved here in something much greater than corporate bottom lines. Entire communities have been wiped out. The scale of displacement caused by Katrina is unprecedented in American history. State Farm's settlement is a small part of a great public good. As a result of this agreement, desperately needed cash will begin flowing at long last into the devastated communities. The rebuilding will finally gather some momentum. At the same time, State Farm can credibly tout itself again as a "good neighbor." Not the most willing, perhaps, and not entirely convinced they want to be doing it. Nonetheless, for the people of Mississippi, State Farm, like a good neighbor, is finally there.

In his recent article, Contractors in Iraq are a taxpayers' nightmare, Joseph Neff of The (Raleigh) News Observer presents the most detailed accounting of workers compensation as it relates to Iraqi contractors as I've managed to find. We've discussed the issue of Iraq contractors and their workers compensation coverage before, but Neff's investigative journalism kicks things up to the next level.

Everyone knows that private contractors are being employed in Iraq - any who were ignorant of that fact certainly became aware when the grisly details of the deaths of four contractors in Fallujah became public. Private contractors aren't anything new. The military has relied on contractors to provide support and logistics services in prior wars. But in Iraq, the difference is that contractors are being employed in unprecedented numbers. According to Neff, there are currently 100,000 contractors in Iraq, a number that many might find surprising. As a point of reference, in the 1991 Gulf War, 9,200 contractors were employed to support approximately 1.2 million ground troops.

Because the contracting firms are private, public reckonings can be hard to come by. I would doubt that most Americans are aware that at least 646 private contractors have been killed in Iraq - I certainly wasn't, despite occasionally searching for this information. Details about fatalities, injuries, rates, and costs have been scarce. Neff's article explains why - essentially, there is no oversight.

"It is impossible to say how much the insurance costs. No agency regulates the premiums, and no one tracks the overall costs."

Going to work every day in war zone is pretty risky business and insurers would be loath to provide insurance in such dicey circumstances. The federal government recognized this, and since WW II, has provided a federal backstop in the Defense Based Act (DBA). All military contractors are insured under the provisions of this act, but the insurance is supplied by private insurance firms. The insurer is on the hook for everyday work-related injuries and illnesses, but when an injury or death is war-related, tax dollars pick up the tab.

As Neff notes, when the DBA was enacted, nobody ever contemplated that the number of private contractors might rival the number of deployed forces. That's one problem. Another problem is this pesky business of oversight.

"These insurance policies differ from conventional workers’ comp in one major way: Domestic workers’ comp is heavily regulated and analyzed, but the contractors’ insurance is not. The U.S. Department of Labor monitors the number of claims and resolves disputes over benefits, but it has no authority over pricing or availability."

"We are not an insurance commission operation," said Shelby Hallmark, director of the department’s Office of Workers Compensation. "We are not in the business of controlling or even monitoring prices."

"The Government Accountability Office, Congress’ watchdog agency, examined contractors’ insurance in 2005 and could not calculate its cost to taxpayers. The auditors couldn’t estimate what impact the insurance costs had on reconstruction activities in Iraq. The GAO found that Department of Defense contractors were being charged premiums between $10 and $21 for every $100 of salary."

That means taxpayers were paying up to $21,000 a year to insure a worker with an annual salary of $100,000, which is not unusual pay for a private contractor."

So this is mandated insurance, but there is no regulatory body keeping an eye on things? OK, do this math: $21,000 x 100,000 contractors. That would certainly seem substantial enough for someone somewhere to be paying attention, particularly when tax dollars figure into the equation.

Neff points to at least one official in the Army Corps of Engineers who is paying attention and who has cut some rates by as much as half through a competitive bid process.

"The Corps is only a part of the Defense Department contracting budget, Greenhouse said. Huge savings could be gained in the Army’s huge logistical supply contract, she said.

Houston-based Halliburton holds that contract, which is managed by the U.S. Army Material Command. Since 2003, the Army says, it has spent at least $284 million on contractors’ insurance under the Halliburton contract.

The insurance industry opposes putting the insurance contracts up for bid."

We recently blogged the beginning of a national dialogue on universal healthcare. Because we focus our attention on the workers comp perspective, we pointed out that any national health plan will come up against - and in some ways run contrary to - the long-established, state-based workers compensation systems.

The National Council on Compensation Insurance (NCCI) recently published a study (PDF) that compares the costs of similar injuries under conventional health insurance and workers comp. Not surprisingly, the costs under comp are higher: higher not just for some injuries, but in literally each of the dozen injury-types examined. The study compares data only for the first three months after the injury. We can assume that the further out you go from the date of the injury, the greater the differential between the two systems. If anything, the three month time frame of this study significantly understates the higher costs of health care in the comp system.

NCCI studied a number of "chronic and complex" injuries (herniated disc, carpal tunnel, bursitis) and "acute and trauma-related" injuries (fractures and cuts). The cost differentials tended to be much higher in the "chronic and complex" injuries, with one exception: the cost of treating broken ankles was 50% higher in the comp system, comparable to the higher costs for the chronic and complex injuries. The costs of treating bursitis, carpal tunnel and herniated discs under workers comp were more than double those of conventional health plans.

Why The Difference?
While details can be found in the full study, we can boil down the higher costs of comp to a few fundamental issues:
: people treated under the comp system go to doctors and physical therapists much more often than those injured away from work.
: People treated under the comp system have many more diagnostic tests run - at higher cost - than those in the general health system
: The prices paid for medical services under comp tend to be higher than those paid under general health insurance (except in states where there are effective fee schedules)

Why do people treat more often in the comp system? Here we move beyond the limited scope of NCCI's study and draw upon our 20+ years in the comp business. When dealing with comp, you need to Keep in mind the underlying condundrum: people injured and out of work are being paid (indemnity) for not working. To be sure, injured workers all want to get better and most look forward to a speedy return to work.

The road back to work may be paved with good intentions, but, alas, it's also full of potholes. If you are at all ambivalent about your job (and many people are), if your injury gives rise to second thoughts about your safety at work, if being inactive while out of work leads to depression (it often does), you might find yourself focusing on the pain and the things you no longer can do. You might succomb to a "disability syndrome," where you no longer think of yourself as a worker, but as a person with a disability. Thinking of yourself as "disabled" is usually not a conscious decision, but more of a sublimal thought process. Perhaps equally important, you might have an employer who sends mixed messages about your returning to the job. Maybe underneath it all, they blame the you for the injury and they don't want you back.

Work-related and Non Work-related Treatment
Here are the key cost drivers that make medical care in the comp system more expensive:
: People out of work have lots of free time to visit doctors and have tests run.
: Because there are never any co-pays or deductibles in the comp system, there are no disincentives for seeking additional treatment. (Even a $15 co-pay begins to hurt after the 5th or 10th visit)
: Physical therapy feels good, so the end point keeps receding into the future. Where health plans arbitrarily cap the number of visits allowed per body part, comp has a harder time imposing any such limits.

Co-pays in the conventional health system serve as a brake on over-utilization. In addition, unless people with non-work-related injuries have disability insurance, they are not being paid during their recovery. They have a lot of incentive for getting back to work as quickly as possible. The incentives in the comp system are not so readily aligned with return to work. Injured workers can "root in" on comp benefits. It can be addicting to keep going back to your doctor and your physical therapist. Especially in "chronic and complex" injuries, the search for permanent solutions can be endless.

Thus comp involves a convergance of potentially contradictory forces: virtually unlimited medical care for your injury with no disincentives to the worker for seeking additional treatment; and the paradoxical position of being paid not to work, which may discourage a quick return to productive employment.

Forever Different
There is a way to align indemnity benefits for workers comp and non-work-related injuries: implement 24 hour coverage. Under this approach, every worker is covered by a disability policy that mirrors the benefits under comp. Lynch Ryan experimented with programs of this type in the mid-1990s. We aligned the indemnity benefits of the disability insurance with those of a given state's workers comp benefits. It was a great concept, but employers were reluctant to buy it. Comp, after all, is a statutory requirement, while disability coverage is optional. And even under a 24 hour program, the co-pays and treatment limits under conventional health insurance will always be less attractive to the consumer than the more open-ended benefits under comp.

Because comp is such a small part of the overall health system (about 3%), planners trying to craft a national health program are unlikely to take into account the comp system's idiosyncrasies. If we as a nation ever figure out how to provide universal health coverage, we might well end up solving one problem and creating a myriad of new problems in the comp system. That would be bad news for employers (and perhaps good news for the consultants who serve them).

Judge Stanwood R. Duval Jr of the Federal District Court in New Orleans has opened the door to payments for homeowners whose homes were destroyed by Katrina. Or has he? We read in the New York Times that some insurers must pay for damage because the flooding in New Orleans was due to human error - specifically, the failure of man-made levees to hold back the water. Because most insurance policies do not specifically exclude "man-made" flood disasters, the judge has determined that the insurers must pay. On the other hand, he says that State Farm and the Hartford are off the hook because their policies do not provide coverage for flooding "regardless of cause."

While lawyers for the homeowners are calling this a major breakthrough, defense lawyers see it as a temporary set back. They are confident that the judge's parsing of the policy language will be overturned at the appeals court level.

"The judge reached the wrong conclusion," said Robert Hartwig, chief economist at the Insurance Information Institute. "The policies clearly exclude flood-related damage under any and all circumstances. We do not believe the decision will be upheld."

With over 200,000 homes and thousands of businesses damaged or destroyed by the flooding in New Orleans, there are billions at stake. Beyond that, the future of the city itself is uncertain, as billions in promised federal aid has failed to reach the people who need it.

Comp is Really Different
All of this litigation, the months and years of uncertainty for all parties involved, stand in stark contrast to the workers comp system. For those of us who deal with comp every day, we are reminded that comp is a no fault system that operates with generous parameters of compensability. If you are "in the course and scope of employment," if you are in fact someone's employee, your injury is likely to be compensable. Once a claim is reported to the carrier, the insurer usually has just a couple of weeks to determine compensability and start making payments. This standard can be difficult to meet and creates headaches for claims adjusters. But the great benefit is that it takes uncertainty off the table for injured workers and their families. They don't have to scrounge for food and shelter while their case wends its way through the courts.

We will follow the fate of New Orleans property owners with great interest. It will be fascinating to see if Judge Duval's ruling opens the floodgates to significant payments to home owners or just ends up being another judicial "distinction without a difference." The future of a city - and possibly that of the insurance industry - may well hang in the balance.

Peter Gosselin, a staff writer for the LA Times, has written a provocative piece on the future of insurance. It's a must read for anyone interested in risk.

We all know that insurers want to sell insurance to people who are not likely to use it. In the rapidly disappearing "old days" of risk transfer, insurer actions were premised on the law of large numbers: if you sell relatively similar insurance policies to a large enough pool of insureds, the losses will be spread out. In effect, those less likely to file claims subsidize those more likely. Because rates up until recently have been pretty much the same for all, the coastal homeowner pays relatively less for insurance; the secure inland homeowner, less at risk, pays a relatively higher rate for insurance.

This is no longer the case. Insurers are backing away from coastal exposures. The price of insuring coastal homes goes up and up, limited only by the intervention of state regulators. Often, the state itself has to create a risk-bearing mechanism so that coastal homeowners can be covered. Meanwhile, property insurers, having identified what their actuaries have determined to be low risk prospects, go into their death spiral of cutting rates (and paying higher commissions to agents) to secure the business. They're no longer interested in big pools. They want to limit their writings to prime risks only. In effect, they are easing their way out of the risk transfer business.

The Hazards of Mining
We are already deep into the brave new world of data mining. Insurers can develop a much more specific and detailed profile of each risk. Armed with geographic, climactic, economic/credit history, education and other data, they isolate the factors that might indicate a direction toward filing a claim (bad risk) or never filing a claim (good risk). In the predatory world of insurance, this translates, of course, into highly favorable (discounted) rates for the good risks; and higher and higher costs for those identified as bad risks. State regulators look upon the increasingly sophisticated pricing models with alarm, because they know that lower and middle income people often bear the brunt of higher costs.

Not-So-Fine Print
Katrina opened the eyes of its victims to the fine print in insurance policies: water damage simply wasn't covered. Now property owners whose homes have been totally destroyed by any cause (fire, tornado, etc.) are confronting not-so-subtle changes in the wording of their insurance policies. No longer providing "guaranteed replacement cost" - ie., rebuilding the home as it was - insurers now offer "extended replacement cost" - which limits payments to a specific dollar amount. Homeowners who built in the 80's and 90's might assume that there is a built-in escalater clause to cover the higher cost of rebuilding in 2006. They are dead wrong. And I'd be very surprised if anyone has bothered to tell them about the changes.

The End of Insurance?
We may be seeing a fundamental change in the nature of insurance. Insurers have always been risk averse, but now they have the tools to limit their risks dramatically. As the concept of pooling evaporates, as insurers begin to slice and dice prospects into dozens, even hundreds, of categories, the number of losers is likely to exceed the winners. For one reason or another, a very large number of people who have been identified as "bad risks" will be faced with exponential hikes in the cost of insurance. (If health insurers try to base their pricing on genetics and family history, all hell will break lose!) Meanwhile, those identified as good risks will be able to choose among highly discounted products. Brand loyalty will disappear in the proverbial New York minute.

Peter Bernstein, author of the highly readable and entertaining Against the Gods: The Remarkable Story of Risk, thinks the new insurance strategies are doomed: "Insurers who look at each risk individually at the expense of broadly diversified pools are going to end up in the soup. Diversification, not flyspecking one risk at a time, is the insurers' optimal form of risk management."

We'll see. The insurance industry is undergoing a paradigm shift of enormous importance. The new model will probably generate some hefty profits, but the party may not last very long. There will be howls of protest from the millions who, for one reason or another, have been deemed to be "bad risks." Then the rhetoric will explode: "Bad risks of the world, Unite! You have nothing to lose but your (coverage) chains!"

Here’s a question for you: If you were to ask any employer in America how his or her workers’ compensation costs compare to similar employers in other states, what do you think the answer would be? Well, I’ve been doing that with employers I meet for a long time, and I have yet to meet one who thinks his or her costs are lower than those of employers in other states.

Moreover, if you expand the question to inquire about employee benefits, most employers will venture that indemnity benefits paid in other states are most likely lower than what’s doled out in theirs.

It’s the old, “The grass is always greener” thing. But is it really, and how would you know? And here’s one last question: Suppose those employers really wanted to know the comparative cost and benefit data for their state and decided to ask a room full of insurance professionals about it. What do you think the insurance professionals would say?

For many years, we at Lynch Ryan have tracked research reports from three highly credible organizations that produce state rankings of workers’ compensation costs and benefits, one a private actuarial firm, another an Oregonian governmental entity and the third a non-profit, Washington, DC, foundation.

Actuarial & Technical Solutions, Inc, an actuarial consulting firm located in Ronkonkoma, NY, has been publishing state cost and benefit data annually since 1992. Its 2006 report, Workers’ Compensation State Rankings – Manufacturing Industry Costs and Statutory Benefit Provisions, has been released within the last month.

The Oregon Department of Consumer & Business Services publishes comparative cost data every two even-numbered years. Oregon’s 2006 Workers’ Compensation Premium Rate Ranking Summary Report was released this past Friday, 4 November 2006 (the complete report won’t be published for another two to three months).

And the National Foundation for Unemployment Compensation and Workers’ Compensation (UWC), headquartered in Washington, DC, has, since 1984, published annual, and class specific, comparative state data in a report titled, Fiscal Data for State Workers’ Compensation Systems. In this report. you’ll find annual data and total indemnity and medical benefit payments over the last 12 years.

The UWC has also published a Research Bulletin called, State Workers’ Compensation Legislation and Related Changes Adopted in 2005. Perusing that somewhat eye-glazing, 77 page report offers up such tidbits as Maryland’s House Bill 461, which “Applies workers’ compensation occupational disease presumptions to Montgomery County correctional officers who suffer from heart disease or hypertension (my italics) resulting in partial or total disability or death,” effective 1 October 2005. Wow!

The Oregon reports are free; Actuarial & Technical Solutions charges $105 for a single report, and the UWC reports costs $25 for those who are not members of the Foundation ($20 for those who are).

The first thing you need to know about the three comparative cost reports is that, while they use different methodologies, they all pretty much arrive at the same place. For the most part their rankings are in general agreement. One state may be ranked #5 in one report and #7 in another. Personally, that’s close enough for me.

All three reports contain some rankings that appear predictable, but there are surprises and paradoxes, too. For example, notwithstanding changes to its law, most workers’ compensation professionals would expect California to be at or near the top of the cost rankings, and they’d be right. But who knew that my home state, Massachusetts, which so many of my conservative friends continue to call Taxachusetts, would rank way down at the bottom, either 43rd or 47th, depending on whose report you read? That’s a surprise, and here’s a paradox: Despite ranking as the least costly of the major industrial states in which to buy workers’ compensation, Massachusetts provides higher benefits than any other state except Nevada, which ranks in the middle of the pack in terms of cost.

We have found the data mined from these reports, as well as others, invaluable as we consult to employers and insurers around America. Searching out and understanding this research, and doing our own, as well, allows us to put costs and benefits in perspective and is very helpful in designing reasonable and achievable cost reduction targets for our clients.

I urge the workers’ compensation professionals among our readers to get and read the reports. It’s time well spent. If you’d rather not do that, but have some questions about them, you can email us at communicationsATworkerscompinsiderDOTcom (insert the @ and "." where indicated - we avoid spelling it out to foil the spam bots). Or, if you’d prefer, call anyone at Lynch Ryan (my direct line is 781-431-0458, Ext 1). We’d love to hear from you.

By the way, if you do get in touch, let us know what you think of the Insider and if there’s anything you‘d like to see us do to make it even better.

Judge L. T. Senter Jr. of the Federal District Court in Gulfport has ruled on the first of thousands of claims by Gulf Coast homeowners against their insurers. The judge addressed several issues related to the catastrophe: did the home owner's policy cover flooding? He ruled it did not. Did the policy cover a combination of wind and water damage? He ruled that it might. And of interest to our many insurance agent readers, was the agent liable for failing to recommend federal flood coverage to the Leonards? The judge ruled that the agent was in the clear. (What's that I hear - a collective sigh of relief, like air rushing from a punctured tire?)

Judge Senter said Nationwide’s home insurance policy was clear in its refusal to cover flood damage. (This type of exclusion is found in virtually all homeowner policies.) But he said the section of the policy that asserted that Nationwide had no liability for either wind or water damage when they occurred in combination or within a few hours of each other was ambiguous. The judge opened the door to claimants who could prove that the damage was both wind and water driven. (Given the nature of hurricanes, the ruling opened a very large number of doors, indeed.)

The judge said that the wind damage was covered “even if the wind damage occurred concurrently or in sequence with the excluded water damage.” He determined that most of the damage to the Leonards’ home in Pascagoula was the result of flooding, and thus Nationwide was not required to pay the full amount the Leonards were demanding.

Nationwide had paid the Leonards $1,661.17 for wind damage. Judge Senter said that, because of what he determined to be additional wind damage, they were entitled to another $1,228.16. Whoopdeedo for the Leonards. The extra bucks will buy them a couple of appliances (assuming, of course, that have a home to put them in).

Famed attorney Dickie Scruggs was disappointed, but he was able to find a silver lining in the ruling: “We didn’t bring home the full measure of damages for the Leonard family,” he said. “But they cleared a big path for all the other homeowners on the Gulf Coast.”

By the way, Dickie Scrugg's brother in law, Trent Lott (R- MISS), lost a $600K manse in the storm and is more than a little upset with State Farm for denying his claim. He's taking on the entire industry in a personal, and potentially far-reaching vendetta.

Agent of Destruction?
Jay Fletcher was Nationwide’s agent in the case. He had been selling insurance to the Leonards since 1989. The Leonards contended that Fletcher misled them by implying that their home-owners policy would cover water damage caused by storm surge. Paul Leonard claimed he got that impression during a conversation with Fletcher in 1999. The two met to discuss various matters, and the conversation got around to flood insurance. Leonard said the topic was on his mind because of public discussions concerning the lack of such coverage in homeowners policies, following Hurricane Georges in 1998.

The judge examined the nature of the agent's advice: "Fletcher sometimes discouraged his clients from purchasing flood insurance policies. That much is clear from the testimony of a variety of witnesses …. There was enough evidence on this point to warrant the conclusion that Fletcher, as a matter of habit and routine, expressed his opinion, when asked, that customers should not purchase flood insurance unless they lived in a flood-prone area (Flood Zone A) …. But between 2001 and the time of Hurricane Katrina, Fletcher sold approximately 187 flood insurance policies in the Pascagoula area. Fletcher sold 12 policies in the neighborhood in which the Leonards lived."

The agent's inconsistency puzzled the judge, who couldn’t figure out why Fletcher discouraged some clients from buying flood insurance but went ahead and sold it to others—some quite near to the Leonards. But inconsistency is not necessarily negligence.

"There was no discussion of the reason Fletcher did not believe Leonard needed to buy a flood insurance policy. Leonard apparently inferred that Fletcher’s reason for advising him that he did not need a flood policy was that his home-owners policy would cover any and all water damage that might occur during a hurricane," Judge Senter wrote. "This was an erroneous inference, and one that might have been avoided had either party to the conversation been more articulate in his inquiry or in his reply."
NOTE to homeowners: push your agent for clarity. Write down the response.
NOTE to agents: Be as clear as possible with your clients. If you're not sure what to recommend, be clear in your uncertainty.

Standard of Care
While Fletcher could have said more and could have been more explicit in his reasoning, Judge Senter did not find that he was legally obligated to do so: "This is no evidence in the record to establish the standard of care applicable to an insurance agent who is asked about the advisability of purchasing flood insurance. Absent proof of this standard of care, there is insufficient evidence to support a finding that Fletcher’s statements to Paul Leonard indicating that he … did not need to purchase a flood insurance policy breached a standard of care that governed Fletcher’s conduct as an insurance agent in these particular circumstances. Fletcher’s statement was advisory in nature, and the statement was made in circumstances in which it was reasonably foreseeable that Leonard would rely on it. But there is no evidence to support the conclusion that this statement was made negligently."

In the post-Katrina era, we wonder whether the "standard of care" has changed - whether agents must now at least put the flood insurance option on the table, where appropriate.

Advice to Agents
This close call in federal court should serve as a wake up call to agents. No, agents don't need to recommend flood insurance to everyone. But you do need to be clear about what you recommend and why. If coverage is a borderline call, help your clients sort out the options. Throw in a few disclaimers. And unless you are supremely confident in your ability to sort through the ever-widening exposures confronting your clients, you might look into an errors and omissions policy. Consider that some friendly advice from the Insider (with our own disclaimer, of course, that we do not sell insurance, we do not endorse any insurance products and we are not responsible for the advice provided).

The Insider is partial to actuary jokes. Perhaps it's because so much depends upon the actuarial viewpoint. These are the people who drive the insurance bus. Those of us seated in the bus often feel a bit queasy, as the driver has the vehicle pointed backwards and attempts to drive while looking through the rear view mirror. They drive in this hazardous manner, because historical losses are the primary predictor of future losses. Well, sort of.

One joke says that actuaries are accountants who couldn't stand the excitement. But when you look at the big picture in workers comp today, there is plenty of excitement and a lot of uncertainty. You have to admire anyone trying to make sense of current trends by predicting future losses in the comp field. In a word, you have to admire the actuaries. (Check out our links to a number of admirable actuarial blogs.)

Retirement Receding
The comp industry is confronted with many issues relating to an aging workforce - including the fundamental fact that many people are postponing retirement: some won't retire because they like working, while many more plan to keep working because they have to. As people work longer, we will begin to see more claims activity in the higher age groups: people in their 60's, 70's and even 80's will suffer work-related injuries and, despite their ages, will file comp claims. Comp administrators in each state will be confronted with new issues as these claims wend their way through the system.

Here are a few of the condundrums that we assume might lead the actuaries to lose a bit of sleep:
: aging employees with no retirement options (except, perhaps, retiring on comp)
: People in manufacturing and construction in their 50's and 60's, their bodies breaking down, with work a significant contributing factor in the breakdown
: Aging, over-weight and poorly conditioned workers performing physically demanding jobs
: Aging workers whose ability to perform the job safely erodes a little each year
: Older workers returning to work after knee surgery, at risk for further surgeries
: Older workers with little education, broken bodies and no transferable skills
: Illegal immigrant workers, working hard, growing older and suffering from permanent partial disabilities

Casting No Aspersions
I have no idea how actuaries will go about factoring in the new and largely unprecedented risks of an aging workforce into the calculation of premiums. We can only wish them luck - and perhaps, have a little fun at their expense. While the Insider would never cast aspersions toward the work of actuaries, we think it appropriate to let them make fun of themselves. Here's a little sample of their self-deprecating humor, compiled by Jerry Tuttle. Based on these examples, actuaries may be having a better time than the rest of us have been led to believe.

"Old actuaries never die - they just get broken down by age and sex."

How do you get an actuary to laugh on a Thursday? Tell him or her a joke on a Monday.

How do you tell the difference between an actuary and the deceased person at a funeral? The deceased
has a new tie.

Workers compensation fatality benefits are generally payable to the surviving spouse until death or remarriage, so remarriage is the actuarial equivalent of death.

An actuary is someone who expects everyone to be dead on time.

Two actuaries are duck hunting. They see a duck in the air and they both shoot. The first actuary's shot is 20 feet wide to the left. The second actuary's shot is 20 feet wide to the right. The actuaries give each other high fives, because on average they shot the duck.

What does an actuary's wife do when she has insomnia? She rolls over and says, "Tell me again, darling. Just what is it you do for a living?" [NOTE: this works just as well for insurance consultants.]

"I once told an actuary to go to the end of the line. He came back five minutes later and said he couldn't because someone else was already there."

Here's wishing the best of luck (and solid projecting) to the actuaries in their rear-view oriented look toward the future. And good luck to the rest of us, who must live with the consequences of their work!

When it comes to workers comp reform, it's always a good idea to follow the money. Too often, reforms focus on dollars saved, as opposed to measuring the quality of services provided. Too often, reform comes at someone's expense: often conscientious medical providers, and almost always, injured workers. Here are a couple of recent examples:

Ohio: Managing Care or Managing Cash?
As part of the mid-1990 reforms, Ohio requires all employers to sign up with a managed care organization (MCO). This was supposed to privatize the handling of claims and lower costs. They did indeed privatize managed care, but as an article in the Cleveland Plain Dealer makes all too clear, they did not lower the costs. The paper estimates the cost of reform at $1.6 billion. In fact, since the MCO system began, the overall number of claims in Ohio fell 48 percent, but the annual cost to manage the system, including the MCO component, increased by $167 million. Even when you account for inflation, this is an increase of 30 percent. The costs per active claim increased from $442 to $914 in constant dollars.

This being Ohio, land of the infamous Thomas Noe (an Insider Frequent Flyer - just enter his name in the search engine to the right), don't blame us for jumping to certain conclusions: we suspect that the increase in costs have a direct relationship to increases in political contributions. The Ohio Bureau cut a sweetheart deal with CareWorks, the major MCO player in the state. CareWorks was given exclusive access to substantial discounts for inpatient hospital stays - discounts not available to the other MCO players. So CareWorks could squeeze the hospitals, offer discounts to their employer-clients, and still have enough left over to keep the politicians happy. The best of all possible worlds, unless you're a medical provider or an injured worker...

Our colleague Joe Paduda, who blogs at managed care matters, is quoted in the article. In typical Joe fashion, he sums up the Ohio system in one word: "unconscionable."

California Dreaming...or Nightmare?
The land of Arnold underwent some radical reforms a couple of years ago. The preliminary results look good. Costs to employers are down substantially (although nowhere near levels in neighboring states) and insurers are actually making money. Is it party time in tinsel town?

Not quite. We read in the LA Times that reforms have come at the expense of specific benefits. While California was never known for its generous payments to injured workers, the reforms drastically reduced permanent disability benefits. When you have Stanley Zax, President of Zenith National Insurance, the state's biggest private comp carrier, calling for a restoration of the benefits, you know you have a problem.

The article cites the example of a former star athlete who lost a leg in a construction accident. Under the old law, he would have received $122,812. Under the reforms, his benefit is less than $30,000, and the insurer has turned down his request for a prosthetic leg, rehabilitation training and physical therapy (all of which would increase the likelihood of his returning to productive work).

In the days prior to reform, the prime beneficiaries of California's whacked out system were unscrupulous doctors and attorneys. The crack down on their injury mills was long overdue. However, it's neither fair not prudent to make genuinely injured employees bear the brunt of reforms. In this particular case, the reforms appear to meet the Paduda standard: "unconscionable."

Benefits are Not the Problem
Over the past 15 years of comp reform, as you review the changing statutes from one state to the next, there is one common denominator: a reduction in benefits paid to injured workers. In Massachusetts, perhaps the most successful of all the reform projects, the state dropped from being the 3rd most expensive to an overall ranking around 45th. However, the average weekly wage benefit was reduced from two thirds to 60 percent. In retrospect, the reduction seems a bit gratuitous. The reforms would have been just as effective without this indemnity cut.

We're all for reform. But let's not balance the books on the backs of injured workers, who bear little, if any, responsibility for the comp crisis of the late 1980s. The best reforms create a fair and responsive system, with as little "friction" as possible. Reforms need to focus not just on medical rate schedules and insurer protocols, but on employers themselves, because without educated employers, the system cannot work effectively. Employers must respond to the injured employee in a supportive manner, document the incident, secure prompt treatment and speed recovery through the use of temporary modified duty. Employers are in a unique position to manage the recovery process. If they blow it, the tools of managed care, utilization review and good claims adjusting will not achieve the goal of reducing costs.

When the talk turns to workers comp fraud, the default assumption is that the employee is the culprit. In reality, employer fraud is a huge problem, of a scope that many in the industry would say dwarfs claimant fraud. According to Loretta Worters of the Insurance Information Institute in a recent article in the San Antonio Business Journal, premium fraud may cost the insurance industry as much as $30 billion a year.

In the same article, Dennis Jay of the Coalition Against Insurance Fraud suggests that premium fraud might be committed frequently because there is little enforcement. In describing the nature of the fraud, he states:

Workers' compensation rates ... are based primarily on three areas: 1) the amount of payroll; 2) the degree of risk -- construction work is riskier than secretarial work; and 3) the claims experience of the company.

"It's basically done by businesses that fail to disclose the true character of the risk they present," Jay says. "A company can lie about these three areas to try to reduce their overall premium."

Prevalence: an ongoing problem
On any given week, a cursory search of the news turns up multiple instance of employer fraud:

• After the recent electrocution death of a worker in Florida, the owner of the landscaping company is facing felony charges for failure to carry workers comp. If he is found guilty, penalties could include up to 30 years in prison and a $10,000 fine.
• California's State Compensation Insurance Fund has received $566,480 in restitution from a roofing company owner convicted of workers' compensation fraud for three felony charges: worker's compensation insurance premium fraud; furnishing a false payroll deduction statement and filing a false tax return.
• In New York, three employers faced charges and restitution for defrauding the New York Workers Compensation Fund. The wrongdoing included forging an insurance certificate, submitting a false application, and making false statements.

The nature of the beast
Workers compensation is compulsory insurance in every state but Texas. With some few exceptions, all employers are mandated by law to carry workers compensation insurance. Employers commit fraud when they fail to secure or maintain workers compensation coverage for their employees, or try to reduce their obligations by intentionally misclassifying employees or under reporting payroll.

Fraud schemes hurt us all. First and most importantly, injured workers are often left without recourse or forced to bring suit to pay for medical care. Honest employers also pay for the misdeeds of fraudulent employers through higher premiums as insurer costs "trickle down." In some industries, such as general contracting, honest employers may also suffer a competitive disadvantage since fraud perpetrators have a lower cost of doing business and can offer lower prices in competitive or bidding situations.

Spotting employer fraud
Employer fraud often surfaces after an injury occurs when investigations reveal that an employer lacks coverage entirely or lacks coverage for a portion of the work force, such as workers wrongly categorized as independent contractors. One infamous case of this nature involved the owners of the Station nightclub in Rhode Island who faced a million dollar fine for failure to carry workers compensation insurance. This failure was revealed when the families of four deceased employees were left without benefits.

Certain industries – such as businesses that employ a high number of contract, temporary, or seasonal workers - are rife with potential for fraud. In Florida last year, a sweep of construction sites resulted in more than 90 stop work orders. Some potential fraud indicators that companies may be trying to avoid regulatory compliance include businesses that pay people in cash or that have complex organizational structures and multiple business names. For a more comprehensive list of potential indicators, see Ohio's list of red flags for workers compensation.

Is my employer compliant?
If you suspect that your employer doesn't have workers comp coverage, what can you do? Most states have mandatory posting requirements so you can look on bulletin boards to see if these and other employee right-to-know postings and licenses are current. In many states, employees or job candidates can check on whether an employer is insured by calling the state workers compensation authority. Many states also have fraud hot lines where workers can anonymously report suspected fraud. A Google search of workers compensation fraud hot lines turns up many numbers, or you can check with your specific state insurance bureau.

Prior postings on this topic:
Employer Fraud: In Search of a Level Playing Field
Proliferation of premium fraud

Maybe it's because we've seen so little sun this summer, or maybe because Josh, my lawyer friend, was stuck in upstate New York when 100 miles of interstate near Syracuse was closed due to flooding, or more likely it's because I saw Al Gore's compelling lecture/movie "An Inconvenient Truth." But as I prepare with everyone else to celebrate this July 4th, I'm feeling a little pessimistic about the weather. Call it "global warming" or just the usual climate cycles, the consequences for risk managers and property insurers are profound.

For a primer on the insurance aspects of the crisis, check out Doug Simpson's excellent blog, unintended consequences (great title for a blog!). He'll link you to some startling information about coastal property insurance. He also links to the Environmental Protection Agency (EPA), which is one government agency that at least acknowledges the possibility of global warming, rising oceans and changing weather patterns. However, the EPA posts have not been updated since 2000. Perhaps we haven't learned anything new in the past six years.

Actuarial Weatherpeople
These are difficult times for insurance actuaries. Even if you predicted last year's record-breaking hurricane season, how could you have foreseen the amazing rain this spring and summer, inundating the northeast and Atlantic central states. Property damage has been nothing less than astounding. And the Gulf Coast is nowhere near fully recovered from Katrina, last year's "storm of the century."

Ah, there's the rub. Was Katrina truly an outlyer, a once in a lifetime event, or a portent of things to come? How would you price property and business disruption insurance along the gulf coast? I'm not sure whether academic programs are combining actuarial studies with climatology, but that's surely where the action is going to be for the foreseeable future. Wanted: actuarial climatologists. The only problem is that actuaries tend to predict the future by looking backwards and the scale of recent weather events appears unprecedented.

I suspect that the alarming graphs and charts in the Gore movie are still flashing in my head. Or maybe it's just the relentless cloud cover that hangs over the weekend. It brings to mind a quote from Mark Twain: "Climate is what we expect; weather is what we get." With all the recent turmoil in the weather, our expectations for climate are turned inside out. These days, climate and weather are the same: equally unpredictable. We no longer have any idea what to expect.

When is an employee benefit not a benefit? When it's workers comp.

Andrew Simpson, Jr outlines in the Insurance Journal a recent case before the US Supreme Court, which ruled in June that premiums for workers comp insurance, unlike those for health insurance, are not bargained benefits and therefore, comp insurers are out of luck when a company goes bankrupt. While health insurers have priority for payment out of bankruptcy filings, comp insurers do not.

The case is Howard Delivery Service, Inc., et al v. Zurich American Insurance Co. Howard contracted with Zurich to provide workers' compensation coverage for its operations in 10 states. After Howard filed a Chapter 11 bankruptcy petition, Zurich filed an unsecured creditor's claim for some $400,000 in premiums.

The high court reversed the Court of Appeals for the Fourth Circuit, which had held that payments for workers' compensation coverage were "contributions to an employee benefit plan ... arising from services rendered" and thus subject to the bankruptcy priority provision. The high court ruled instead that workers compensation premiums are more like liability premiums than employee benefit costs and as such do not fall under the section of bankruptcy code (11 U.S.C. section 507(a)(5)), which assigns priorities to unsecured creditors' claims for unpaid contributions to an employee benefit plan. In other words, comp is the benefit that is not really a benefit.

The court found it significant that comp is mandatory while other fringe benefits are not. But this distiction itself is changing, with some states moving aggressively toward mandating that employers provide health coverage for their employees (MA recently passed just such a law). I wonder if the court's thinking will change when health insurance is no longer optional.

Strange Bedfellows
Justice Ginsburg was joined in her majority opinion by Chief Justice John Roberts and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas and Stephen Breyer. This has to be one of the more bizarre aggregations of concurring justices in recent court history, bringing together bits and pieces of the left and the far right wings. Similarly, the dissenters are an unlikely grouping of right, left and center, encompassing Justices Anthony Kennedy, David Souter and Samuel Alito.

Unrequited Claims
I hardly need add that the insurance industry is not happy with this ruling. In this particular case, Zurich American must cover all the Howard comp claims, even though they will not collect all the premium. Bruce Wood, an industry spokesman, says: "The court simply got it wrong. The majority's narrow focus on the priority provisions of the bankruptcy code overlooked that workers' compensation coverage is mandatory." [Actually, they didn't overlook the mandatory aspect - they concluded that because comp is mandatory, it's not a bargained benefit.]

"This decision means that an employer trying to reorganize its business will no longer be required to pay its workers' compensation premiums. This result will jeopardize continued coverage, because an insurer now has no legal authority to compel payment of premiums and doubtful incentive to continue coverage." [They may lack incentive to continue coverage, but they will have to provide it anyway.]

Wood also warns that self-insured employers will face similar problems. "Even though a self-insured employer is paying an on-going claim for a past injury, after a bankruptcy filing, ongoing medical treatment and cash benefits may stop because the lack of explicit priority for workers' compensation dumps injured workers into the same category as other unsecured creditors." [I would be surprised if a bankruptcy court allows a self-insured company to stop paying these benefits.]

Change that Law!
This court ruling places comp carriers at the end of the line for payment, not exactly where they are used to standing. The Court's goal is "equal distribution" - they see the need to severely limit the list of priority creditors and they have explicitly dropped comp carriers from this select list. As soon as the ruling hit the streets, the phones of industry lobbyists started ringing, the Gucci shoes were polished and the reservations were made at the finest restaurants in Washington. It will take a change in the bankruptcy law to re-arrange the creditor priorities established by this ruling of the Court. By any reasonable measure, that's a long shot, but I wouldn't underestimate the ability of the insurance lobby to mobilize Congress. The public might not have much sympathy for insurers, but your local Congressman knows a chunk of change when he or she sees it.

New York's workers' compensation system is expensive, adversarial, administratively cumbersome and, in many ways, harmful to the very people it is supposed to serve, employers and injured employees. Now, the Professional Insurance Agents of New York State (PIANY) have authored an insightful, forward-thinking and very intelligent Legislative Position paper that addresses the state's serious workers' compensation problems. It should be widely read and discussed.

To quote from the document:

"The present workers' compensation system acts as a detriment to New York's economic development and fails to function well for the benefit of workers. PIANY supports a comprehensive reform of the workers' compensation system in New York to preserve and enhance worker benefits, prevent work-related disability and reduce inefficiency and fraud."

Perhaps the most employer-helpful recommendation is the first one the agents make. Straight from the top they focus on workplace safety, pointing out that two major credit programs were approved by the legislature in its reform of the statute in 1996, but never implemented. The agents ask, "Why?" Pretty good question.

The PIANY has issued a clarion call for reform. Good for them.

One of the ironies of modern life is that we can go anywhere in the world, but we often find ourselves immobilized in the process. There are a number of circumstances that render us immobile: long haul air travel - 4 plus hours (on a bad day, that might be just runway time!). Sitting in a traffic jam or driving to a distant destination. Long hours in front of the computer or TV. Any prolonged period of inactivity places us at risk for Deep Vein Thrombosis - a blood clot that can lead to health complications, even death.

The Insider is not sure why people in Great Britain are much more focused on DVT risk than Americans. In England you even can buy specific insurance for DVT. Airlines based in England are contemplating changes in seat design to reduce the risks. The threat of lawsuits might soon result in posted warnings for airline passengers.

Some people are more at risk for DVT than others. Here's a listing of risk factors, a broad net that encompasses most of us. (For more detail on these factors, check out the website).

: age - as people over 40 are at greater risk of DVT
: a past history of DVT
: a family history of DVT
: an inherited condition that makes the blood more likely to clot than usual
: immobility
: obesity
: recent surgery or an injury, especially to the hips or knees
: pregnancy
: having recently had a baby
: having cancer and its treatments
: taking a contraceptive pill that contains oestrogen - but most modern pills contain a low-dose, which increases the risk by an amount that is acceptable for most women
: hormone replacement therapy (HRT) - but for many women, the other benefits outweigh the increase in risk of DVT
: treatment for other circulation or heart problems

Risk Transfer and Risk Mitigation
As with any risk, there are a number of ways to respond. Some people move immediately to risk transfer: get someone else to cover the potential loss. That's where the new insurance policies come in. If you die of DVT within 10 days of air travel, you collect 10,000 pounds. Congratulations!? This insurance is odd for several reasons: the risks are strongest after the 10 day eligibility period ends, so you might succomb from DVT but not collect anything. (Chaulk one up for the insurance actuaries!) In addition, because the insurance only pays for your death, it's really life insurance. Why bother insuring for just one potential source of your demise when a simple life policy covers you under virtually any circumstances? It's hard to imagine that DVT insurance is going to be a hot seller.

A more attractive alternative to insurance, we think, is the practical advice offered to people locked into a sedentary position: just get your blood circulating. On an airline, get up and move around. If you're driving in a car, or if you have a window seat on the plane, you can perform "traffic jam aerobics." If you are adverse to any suggestions of exercise, just make sure you stop and get out of the car for a stretch every two hours. It also helps to drink plenty of water and limit the consumption of alcoholic beverages and caffeine.

Here are some specific exercises, many of which will not be appropriate for the driver, unless the traffic is at a complete standstill:

Downward Foot Press: Press the balls of your feet down hard against the floor and raise your heels to increase the blood flow in your legs. Hold for five seconds and repeat 10 times. (Needless to add, avoid downward pressure on the accelerator!)

Shoulder Rolls: To ease the tension of sitting in one position for too long, lift the shoulders up towards the ears, roll the shoulders backwards and then down in as big a circle as you can manage. This will help to release tension in the upper back and neck, so is especially good if driving for long distances in stressful traffic.

Shoulder Press: Lift the arms to touch the car roof, take the arms outwards and back down, and repeat.

Elbow Circles: Place your fingertips on your shoulders and draw circles in the air with your elbows. Another great move to help release tension in the neck and upper back. (You might also get some interesting responses from other drivers.)

The bottom line is relatively simple. If you find yourself in a situation which severely limits your ability to move around, do something to engage the muscles of your arms and feet. A few simple risk mitigation steps will do the trick. As for the insurance, buy a lottery ticket instead. The likelihood of a payout is about the same.

All major businesses carefully construct a public image. Sometimes reality bumps up against the image with gale force winds. Insurance giant State Farm likes to present itself as a "good neighbor, someone you can count on." For nearly 700 homeowners whose homes were destroyed by hurricane Katrina, the good neighbor is beginning to look a bit like Jack Nicholson in The Shining. Picture a family huddled in the ruins of their home. A hatchet blasts through what's left of the front door and a grinning Nicholson says, "State Farm is here!"

State Farm has categorically denied insurance coverage for hundreds of homeowners in the wake of Katrina. The denials are based upon an engineering report developed by Haag Engineering, a Texas company founded in 1924 that specializes in failure and damage assessments. Famed attorney Dickie Scruggs says that the engineering report produced by Haag is "patently biased" because it concludes that Katrina's storm surge arrived before the wind could do any damage to policy holder homes. Because State Farm policies exclude flood damage, the claims of these 669 homeowners have been denied.

Scruggs has already lost one lawsuit when a court found that State Farm's policy of excluding damage from Katrina's flood waters are "valid and enforceable." So if the storm surge indeed destroyed the homes, these homeowners are simply out of luck. If, on the other hand, they can prove that at least some of the damage was caused by the winds that preceded the storm surge, they may be able to collect something. How much they collect will ultimately be determined by the courts.

Scruggs also claims in the lawsuit that many of the State Farm adjusters who inspected homes in Katrina's immediate aftermath told homeowners that wind damaged their houses hours before any water from the Mississippi Sound surged onto land. But State Farm apparently rejected their findings and fired, transferred or reassigned many of the adjusters. Exit Gregory Peck, enter Jack Nicholson. Depositions from current and former claims adjusters will make for interesting reading.

Good Neighbors versus Good Insurers
A good neighbor helps out, no matter what the circumstances. But that's not the way insurance works. Any help from an insurance company is contingent upon the language of a specific document. For hundreds of Gulf Coast residents, one thing is clear: their homes have been destroyed. Whether they will be reimbursed for their losses depends on whether the destruction came from wind or water. Good neighbors don't give a hoot about such distinctions, but insurers certainly do.

Let's say you run a large insurance company. You sell through your own agents, one of whom has been a marginal performer for many years. You place the employee on probation several times, but he seems to be trying hard, so you continue his employment. This individual suffers from bi-polar disorder. Over the course of a decade, he goes out on FMLA leave a couple of times for treatment of his mental illness. When his doctors release him for full duty with no restrictions, he returns to work, but the poor performance continues. Finally, you give up. In accordance with company policy, you ask him to pack up his personal belongings and you escort him to the door.

He sues. You lose.

An article in the Boston Globe by Diane Lewis provides the details. A federal jury has awarded $1.3 million to a veteran insurance agent with bipolar disorder who alleged he was fired as a result of his disability.

The 11-member jury awarded Kevin W. Tobin, 60, $500,000 in emotional distress damages, $439,315 in lost wages, and $416,664 in lost pension and retirement benefits caused by his termination by Liberty Mutual Insurance Co. in January 2001.

In court papers, the company argued that from 1992 to 2001, Tobin failed to meet minimum standards and was placed on probation several times. The company also claimed that he rarely ''prospected" for new business.

Tobin's attorney, Frank Frisoli, argued during the trial that the insurance company did not adequately accommodate Tobin's disability as required by the Americans with Disability Act. During the trial, Frisoli said, Liberty Mutual argued that Tobin did not have a disability even though it had approved two prior disability leaves and created a reentry program to help the insurance agent improve his job performance.

Frisoli maintained yesterday that his client would have been able to perform the essential functions of his job if he had received the same amount of help as others in his office, including a top performer who was given three assistants. By contrast, Frisoli said, his client received sporadic assistance from a service representative who supervised other representatives and was not always available.

''He had difficulty going from task to task," said Frisoli. ''But he was willing to work long hours and he did it regularly to make up the work."

A Warning for Employers
It's premature to draw extensive conclusions from the limited information in this article, but here's the part that might truly alarm employers: by approving FMLA leave, Liberty appears to have undermined its contention that Tobin did not have a disability. (On the other hand, if they tried to deny his leave to seek treatment, they surely would have violated the ADA.) More important, once an employer approves FMLA leave (for an employee's physical or mental disability), you may be on the hook for a wide range of "reasonable accommodations," even if none are requested and even though eligibility for FMLA leave does not necessarily mean that the employee meets the ADA definition.

Liberty had a marginal employee. While they did try to provide some re-entry support to Tobin when he returned from his disability-related leave, they allocated most of their resources where they had the optimum effect on the bottom line: high achievers got extra administrative support. The low achiever, Mr. Tobin, got little help. Tobin's attorney was apparently able to transform this "business as usual" scenario into a "failure to accommodate." In other words, because of Mr. Tobin's disability, Liberty had an obligation to dedicate additional resources to bring him up to minimal standards. Liberty's lawyers failed to convince the jury that Tobin was simply unable to perform the essential functions of the job.

This case embodies a very tricky human resource issue that could confront almost any employer. From this distance, the jury award appears to blur the line between an employee's ability to perform the essential functions of the job and the employer's obligation to accommodate. It remains to be seen whether this is an important precedent, or something that will disappear in the course of Liberty's appeal. In the meantime, employers might want to begin to make a connection between FMLA leave and the obligation to reasonably accommodate.