Stop The Bleeding! Control Workers' Comp Leakage

Self-insured employers and insurers understand that workers' comp leakage costs money.  The overpayment of medical cost, indemnity benefits and claim expenses is a waste of money and weakens the overall financial stability of the employer or the insurer.  What to do about workers' comp leakage is a frequent topic of discussion.

When there is no doubt that a payment should not have been made (example:  a non-recovered duplicate payment), it is referred to as hard leakage.  When a payment is made that is questionable and is subjective (example: a higher than normal settlement), it is referred to as soft leakage.

Employers and insurers frequently attempt to mitigate both hard and soft workers' comp leakage by providing additional training to the claims staff. Additional training definitely has benefits and will reduce leakage, but additional training normally addresses only the issues the work comp supervisor or claims manager has identified.  This approach will often continue to overlook different types of leakage that is not on the company’s radar.

Independent Claims Auditors Bring Perspective

To identify leakage that is being overlooked, companies have been turning to independent claims auditors who bring in an outside perspective when reviewing claim files.  Senior management often recognizes adjusters, supervisors and even claims managers have a built-in conflict of interest in identifying every source of leakage – the more leakage they identify, the lower their level of competency appears to be.

The independent claims auditor can be completely objective, as the independent claims auditor does not have to worry about the impression the results of a workers' comp leakage audit will create. The outside auditor is looking for the financial mistakes (leakage) in an effort to assist the insurer or self-insured employer to lower its overall claims costs without the worry that senior management may be critical of the adjuster’s/ supervisor’s/claims manager’s performance.

Hard Workers' Comp Leakage

The independent claims auditor will identify types of hard workers' comp leakage including: 

• Payment of non-compensable claims
• Payment of claims occurring outside of the insurance policy period
• Failure to utilize the medical bill fee schedule for all medical bills covered by the schedule
• Payment of the same medical bill, including overlapping medical bills, more than once
• Incorrect calculation of the employee’s average weekly wage
• Incorrect calculation of the employee’s indemnity benefit
• Incorrect calculation of the number of days or weeks of indemnity benefits owed
• Incorrect handling of the waiting period and the retroactive period
• Erroneous payment of indemnity benefits after the employee has return to work
• Failure to properly calculate the impairment rating value
• Failure to utilize the pharmacy benefit management program
• Failure to apply offsets including unemployment benefits, social security benefits, over governmental programs
• Failure to identify and pursue subrogation
• Failure to obtain Second Injury Fund recoveries
• Failure to obtain reinsurance company recoveries
• Failure to arrange for modified duty work when approved by the medical provider
• Payment of temporary total disability benefits when temporary partial disability benefits are owed
• Overpayment of medical mileage
• Over reserving of the long-term claim resulting in a higher than appropriate experience modification factor with Underwriting

Soft Workers' Comp Leakage:

The independent claims auditor will identify possible soft workers' comp leakage including: 

• Failure to thoroughly investigate the claim prior to acceptance of compensability
• Failure to complete the Insurance Services Office inquiry
• Failure to properly evaluate future medical benefits when settling a claim
• Poor settlement negotiations
• Failure to properly manage defense counsel
• Failure to properly utilize medical case management, either overutilization or underutilization
• Failure to utilize medical triage
• Failure to settle dispute claims at the optimum cost point

Controlling Workers' Comp Leakage Can Mean Large Savings

Controlling leakage is frequently the difference between an insurer or self-insured employer making or losing money.  While no claims operation will eliminate all leakage, a five percent (5%) leakage factor on a small self-insured program with $20 million in paid claims each year is an extra $1 million dollars spent, and 3% leakage on a $100 million a year paid out by an insurer is an extra $3 million dollars spent.

The above lists of how leakage occurs in workers’ compensation are not complete.  There are various other ways leakage can occur.  For a workers' comp leakage audit to provide the maximum benefit to the insurer or self-insured employer, an auditor with a high level of expertise in workers’ compensation is needed.

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