Knowing what’s driving a client’s Workers’ Compensation costs is a time-consuming task. It requires:
- Examining the indemnity, medical, and expense costs at a high level;
- Dissecting each one of these areas ;
- Looking for trends;
- Determining the cause and effect (correlation) to those trends and;
- Through analytics – developing a solution to address adverse trends.
One of the cost areas I like to focus on is our client’s allocated loss adjustment expense (ALAE). Over my 25+ years in the industry, I’ve noticed that the ALAE compared to ULAE (unallocated loss adjustment expenses) is growing astronomically. Why is this happening? Why do we see carriers and third party administrators (TPAs) expending more in the area of ALAE?
ALAE vs. ULAE
To make sure we’re all clear on ALAE vs. ULAE, ALAE expenses are charges related to the adjusting of the claim. ULAE is the cost to the insurance company of managing its claims department to adjust and resolve claims, including such expenses as overhead and staff, all external, internal, and administrative claims handling expenses, including determination of coverage. These costs are not allocated to any individual claim, but are a general expense to the insurance company as part of their operations.
When I started handling claims for a regional carrier back in 1988, the process and tools required to do the job were pretty basic: pen, paper, phone. We did have one computer terminal in our six-person claim unit, where we could look up basic information and make reserves changes. You had to wait for your turn to use the computer.
We didn’t have any of the following current ALAE services/expenses to manage, and here’s how I, as an adjuster, handled the various activities that are now, in 2014, treated as an ALAE:
|Today’s ALAE||How we handled it in 1990|
|Preferred Provider Organization||We picked doctors that got best results.|
|State Specific Networks||Didn’t exist|
|Bill Review||If it looked related, we paid it.|
|Physical Therapy Specialty Networks||Didn’t exist|
|Diagnostic Testing Specialty Network||Didn’t exist|
|Pharmacy Benefit Management||PMSI set up claims on automated fills.|
|Prescription First Fill||Didn’t exist|
|Independent/Defense Medical Exam||We picked doctors that did IMEs.|
|Utilization Review||Rarely, done. I would assign it.|
|Telephonic Case Management (TCM)||We didn’t have TCM, adjusters did this.|
|Field Case Management||We had two field case managers for office of 50 adjusters, more often our field adjuster did face to face visits.|
|Peer Review||Didn’t exist|
|Drug Testing (determine if IE is taking meds)||Didn’t exist|
|Bio Testing (determine potential influence of meds on IE)||Didn’t exist|
|Voc. Rehab.||Used regularly, assigned by adjuster.|
|Return to work||Didn’t exist|
|Indexing Fees||We never charged the insured.|
|Medicare Set Aside Agreements (MSAs)Mandatory Insurer Reporting (MIR)||Didn’t exist|
|24/7 Triage||Didn’t exist|
|Attorney Fees||Same as today|
|Legal Bill Audit||I tried to negotiate bills.|
|Translation Services||Didn’t exist|
|Surveillance Fees||Same as today|
|Transportation Services||We negotiated with taxi company.|
When I started in claims, I was trained on the different types of policies available at the time:
- Guaranteed cost
- Sliding scale
- Retrospective rating plans, etc.
In the early 1990’s, the industry and the company I worked for started shifting to large deductibles programs, large self-insured retention programs, and we saw more clients opting for self-insurance. It was evident that in the early ‘90s, employers were taking on more risk than in previous decades.
At the same time this risk retention shift was occurring, we began to see carriers/third party administrators shifting more of the ULAE to ALAE and/or carriers/TPAs/the industry creating new services—which attributed to the growth in ALAE.
Is it that carriers and TPAs are purposely pushing ULAE items into the ALAE category to put more of a cost burden on clients? Are services payable as ALAE being created merely to add increased revenue to carriers/TPAs?
Why the Shift?
I think we need to ask ourselves, “Why have the last 25 years shown a continual shift/new allocation of moving seemingly ULAE activities/expenses into ALAE (telephonic nurse case management, bill review, legal bill audit, etc.)? Is it for pure profit for the carriers/TPAs? Are they trying to take advantage of the insured/clients?” These are great questions and the focus of my recent research into this area.
What are the main concerns that insureds/clients have had about carrier/TPA performance over the last two decades? Here are some of the concerns I’ve heard (and still hear today!):
- WC claim pendings and new assignments are too high
- We need a “state of the art” risk management information system (RMIS)
- We need more analytics
- We need better trained, more experienced adjusters on my claims
Guess what? All of these needs come with a price tag. When I was a claim adjuster my multi-line pending was about 275 claims. Today, most clients want a pending of around 130 or less for their WC claim adjusters. Therefore, because the carriers/TPAs met the client’s request, this doubled the carrier/TPA’s costs for their claim adjusters: this would be ULAE.
Looking at RMIS systems, they just didn’t exist in 1990. Carriers/TPAs have spent millions on RMIS since 1990:
- First putting desktop computers on adjusters’ desks
- Imaging claim files
- Going to a Windows-based system
- Adding increased functionality to their RMIS system
- Enabling clients to access their claim files electronically
Lately, carriers/TPAs are spending a large part of their budget on cyber security, a topic of importance to any organization electronically storing and transmitting employee health data.
In fact, TPAs range on spending 6% to 10% of their revenue each year on budgeted technology systems/resources. Once again, clients/insureds asked for it and the carriers/TPAs delivered. While the RMIS costs aren’t generally considered ULAE or ALAE, they certainly came at a cost to the carriers/TPAs.
Next, clients/insureds wanted analytics, reports, and dashboards to monitor trends, calculate liabilities, and share information on losses within their organizations. Carriers/TPAs spent millions again on extensive, user-friendly RMIS systems that users can access today on desktops, iPads, mobile apps, and other electronic devices. Once again, clients/insureds asked for it and the carriers/TPAs delivered—with another added cost to carriers/TPAs.
Most carriers/TPAs in the 1980s and ‘90s had elaborate recruitment efforts targeting young college graduates to the claim industry. Personally, my first training class had 33 college grads, of which 22 ended up in claims (of special note is that no colleges offered degrees in risk management back in 1988!).
Clients/insureds, didn’t necessarily want to hand their “checkbook” over to 21- or 22-year-olds fresh out of college. Clients/insureds demanded and still demand seasoned, well trained, WC claim experts. As a result, carriers/TPAs have built elaborate training centers, constructed extensive training programs, and have increased their salary structures to ensure they are attracting the claim adjusters that clients/insureds have demanded.
You know the story, clients/insureds asked for it and the carriers/TPAs delivered—with another added cost to ULAE. As these ULAE costs have been incurred, we’ve seen more transfer of ULAE to ALAE.
I’m not condemning the shift from ULAE to ALAE by any means, nor am I supporting carriers/TPAs in their justification of this shift.
Other Reasons for the Shift
There are other major reasons I see for the shift that goes beyond client/insured demands: it’s the increasingly complex world of WC and the revenue-seeking providers that attempt to profit from WC (insured/client funded) and the increased regulatory requirements put upon carriers/TPAs.
In the late 1980’s and early 1990s no one ever heard about MSAs, opioid abuse, physician dispensed meds, etc. Generally, when I was handling claims, I knew that certain physicians and physical therapy centers were abusing the system, but I had minimal tools to address these issues. Carriers/TPAs have realized that in a complex WC world, the adjuster can’t be an expert in medical, pharmaceuticals, reviewing medical bills for pricing; the claim adjuster needs experts just like clients/insureds do.
Most carrier/TPAs are addressing the growingly complex WC process by hiring assistance for claim adjusters:
- In-house nurses
- In-house medical bill review
- Pharmaceutical nurses
Many vendors have filled the void by becoming specialized in one of the many areas of managed care and claim management.
The regulatory pressures also have added to carrier/TPA costs and cost shifting.
- Mandatory insurance reporting requirements under Section 111 to Centers for Medicaid/Medicare Services
- Sarbanes Oxley
- SSAE 16 (formerly SAS 70) requirements
- ICD10 requirements
- Specific reforms have all added complexity and cost to the WC process.
Let’s face it, carriers/TPAs have margins. They need to maintain their margins or suffer the wrath of stakeholder and shareholders alike. When there’s a client/insured service need, a new crisis (i.e. opioids), or regulatory change; someone is going to pay the price.
What’s a Client/Insured to do With Their Rising Responsibility Under ALAE?
Clients should analyze their ALAE. A major WC carrier, on a company-wide basis, notes that their ALAE is running about 12.4% of their losses. That’s a good benchmark to determine if you have an ALAE issue.
I want to make particular note that the Workers Compensation Insurance Rating Bureau of California states that the ALAE in California is over 25%. It’s not reasonable to make an assumption that if your WC program has overall ALAE of 18% of total incurred that something is wrong.
You need to determine if the ALAE is reasonable by looking at claim outcomes, and the return on investment (ROI) on specific areas of ALAE (when possible).
You should ask your carrier to give you a three-year history of your ALAE expenditures broken out by category. If you see a particular category—i.e. nurse case management, escalating year over year—you should question the ROI this is providing to your claim outcomes. Too often, insureds/clients are focused on the ULAE when picking a carrier/TPA when in reality they should give equal consideration to all of the ALAE expenses.
In conclusion, I want to put one more intriguing thought for you to ponder. National Council of Compensation Insurers in their “2014 State of the Line Report” stated that loss adjustment expenses (ULAE + ALAE) have been increasing fairly steadily since 1990. This clearly shows the impact of all the changes carriers/TPAs have made to their claim process.
What is odd is what we see in later in the report. With all the added Loss Adjustment Expense (LAE), medical costs have gone up by 316% (not adjusted for inflation) since 1995. This clearly shows the need to question the value we are getting from all of the LAE in a WC program. Have the LAE expenditures mitigated the outcomes? Without the increase would the 316% increase since 1995 been 500% or 600%?
Please, take ALAE seriously. Question the charges, question the ROI, don’t roll over and accept ALAE as a normal cost of business.
Please realize as the claim process becomes more complex each year, the solutions to meet this complexity comes with a price tag.
Challenge your carrier/TPA on the ALAE and make them prove that you’re getting a positive ROI on all of the services they are using to mitigate your claims.
I’ll be doing more research in this area over the next few weeks and sharing my findings at the National Workers’ Compensation and Disability Conference on November 19, 2014 with my presentation entitled, “Managing the Costs of Medical Containment and Cost Control Services”. Hope to see you there!
This post was originally published October 2, 2014.