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Peer Dialogues: Improving the claims settlement calculation process

To those unfamiliar with the process, calculating claims’ settlements may appear to be a mysterious and complicated endeavor. However, when done right, the process can and should be transparent, fair and beneficial to all parties.

Risk managers play an essential role in the process by ensuring that those who grant settlement authority understand the mission-critical yet often subtle nuances of the process. The task of risk managers is to convey the known facts supporting the calculation so that they may obtain the appropriate settlement authority within the organization. Risk managers can gain the insights and data needed to provide this guidance through their trusted and experienced claims administrator. With the right partner, they aren’t alone when it comes to this critical phase in the settlement process.

In our newest Peer Dialogue blog, I’ll look at the settlement calculation process and ways to ensure that it meets the needs and goals of all parties.

Based on law

The workers’ compensation settlement calculation process is based on established state laws and regulations concerning how much to pay for an injury. The process was developed to:

  • Realistically calculate exposures;
  • Determine the projected settlement range;
  • Obtain settlement authority;
  • Communicate the authority (and the merits of the case) to the person who will negotiate the settlement; and
  • Hold all parties accountable for their actions.

While these goals seem apparent to those who work in the industry, company leadership and others within an organization often possess minimal experience or knowledge about the goals or mechanics, making it difficult to embark on process improvement initiatives. Therefore, a crucial step is to ensure that all relevant parties in an organization understand the benefits of a strong settlement calculation process, including:

  • Avoiding the ongoing expense of litigation;
  • Minimizing the vagrancies of litigation; and
  • Managing future costs in both administration and benefits.

It is also important to be realistic when analyzing the cost of a settlement and to examine the merits (strengths and weaknesses) of the settlement. Unfortunately, that’s a process that is not always clear. For example, there might be solid medical data and reports to identify the cause of an injury and likely duration. On the other hand, there may be conflicting reports on the scope and duration of injury, leaving some uncertainty in the calculating process. See why the process can be so complex?!

To litigate or not to litigate (that is the question)

Of course, at some point, there’s a fundamental question that must be answered when it comes to calculating settlements: What are the likely outcomes of going to trial versus settlement?

In reality, very few cases today go to trial. It’s usually the step taken only if there are issues that call into question the compensability of the injury, or if there are extreme differences in medical reports outlining the projected disability.

The question of trial or no trial needs to also consider the cost of the attorney and extra costs for witnesses and trial expenses. It’s also useful to ask:

  • If we don’t go to trial, will we save in claims administration costs?
  • How long will it take to go to trial? If it is an extended period of time, will the exposure for benefits increase during that time?
  • What is the credibility of our medical report as compared to the applicant’s report?
  • Are there other outstanding issues which may impact the decision of the court?
  • What is best for the injured worker?

Once again, risk managers should rely on their claims administrator to provide the data needed to answer those questions based upon their experience over thousands of claims and decades of experience.

Five additional issues to consider

Here is a summary of additional information to weigh as you seek to improve the claims’ settlement calculation process and communicate the value of the process to company leadership.

  • Medical care today is costly – and that’s going to affect your settlement.  We all recognize that healthcare is expensive, it’s estimated to reach $5.5 trillion by 2025. However, many employers don’t know the cost of individual services incurred by injured workers, including prescriptions, surgeries, PT and OT, and that they add up quickly. 
  • An employer should only pay for the workplace injury – not pre-existing conditions or underlying conditions. “Well, of course not!” you may say.  However, in the world of work comp, what’s attributable to a workplace injury and what is a pre-existing condition can become difficult to determine and subject to debate. The good news is today’s medical science enables us to get close to injury causality. Research, experienced work comp providers, and your claims administrator, can help determine which disability is related to injury, and which ones to natural aging. This is a process known as apportionment, and it’s critical to accurately determine the cost of the settlement.
  • Attorney involvement is the top cost-driver in workers’ compensation. It’s a well-known fact in our industry that when attorneys are involved in a settlement, costs escalate. However, attorney involvement doesn’t always mean the settlement is best for the injured worker. In virtually every state, settlements are reviewed by judges to ensure fairness for all parties. While it’s concerning, it should also be noted that since most attorneys are paid when the claim is settled, there is an incentive for prompt settlements. Early and transparent dialogue from your claims administrator/partner with the attorney of record can help to ensure prompt and fair claims resolution.
  • Don’t forget about the settlement’s impact on collateral exposure. All employers who retain any exposure to workers’ compensation losses are required to provide some form of collateral to meet their ultimate obligations. The collateral may be in the forms of cash, surety bonds, or financial instruments. Collateral costs for employers can vary significantly depending on the financial rating of the company. The total amount of collateral required is usually determined by an actuary who calculates the projected ultimate outstanding liabilities. Remember that permanently closing large (and older) claims can have a direct and positive impact on reducing the outstanding liabilities and reducing the collateral costs of the employer.
  • Don’t worry about today, worry about tomorrow. Usually, the biggest exposure for employers is future medical treatment expense – not the indemnity, or temporary, or even permanent disability payouts. An accurate calculation of exposure for the cost of future medical care can be difficult. This is because we do not always know if the employee will:
    • Need an additional surgery;
    • Respond to treatments as they get older;
    • If there will be new (and more expensive) medical treatments developed to deal with the diagnosis; and
    • If the employee will stop needing any treatment altogether.

The treating doctor’s report will usually outline the known treatment to date and the projected need for treatment in the future. Rely on it for guidance.

Getting to the “Aha” moment

Improving the claims settlement calculation process, and communicating its benefits to leadership, provides value throughout an entire organization.

Working with trusted claims administrators, risk managers can help provide feedback and provide necessary insights into positive results achieved. This means going beyond simply communicating, “this claim is closed.” The goal is to provide the “aha moment” that helps examiners, leadership and other relevant parties within the organization gain the insights that help them understand the importance of every step in the claims’ settlement calculation process.

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