Insight, analysis & opinion from Joe Paduda


workers comp and uninsurance

Workers’ Comp Insider is published by LynchRyan Associates, a company with a long-standing, and well-deserved, reputation for excellence in injury prevention and return to work. Disclaimer – the folks at LynchRyan are also friends, and we follow each others’ blogs religiously.
At the risk of appearing incredibly incestuous, there is an excellent posting on their blog of a real life example of the impact of the lack of health insurance on an employee, employer, and the financial situation of both. I tend to be somewhat abstract in my posts about the impact of uninsurance on other lines of coverage; their posting makes this problem real.


Cheating docs

One of the more distasteful practices in the medical profession is the subject of an article in today’s Wall Street Journal. The practice is so-called self-referral of patients by a physician to an imaging facility where they stand to gain financially. Yes, there are laws against this. Yes, physicians and business folks make lots of money thinking up creative ways to circumvent these practices.
This is one of the more creative I have heard of. To quote the Journal;
Imaging centers “structure referral deals as leases, under which physicians, each time they send over a patient, are renting the scan center’s facilities and employees.” The physician then bills the insurance company whatever rate they deem appropriate, and receives payment directly.
Imagine what they could accomplish if they worked to create value and better health, instead of thinking up ethically-challenged ways to generate even more physician income.
What does this mean for you?
If you are contracting with physicians, be very careful about the language re self-referrals; although many tend to turn up their noses at the mention of contract law, this is a great example of why the details are critical.
If you are evaluating an upsurge in diagnostic imaging, tie the referrals back to referring physicians, and look for any sudden increases. Then, have a talk with the doc.


Cover the Uninsured Week

This is Cover the Uninsured Week, a national program to bring awareness of and discussion of solutions to the US’ 45 million non-elderly without health insurance. While this elicits a big yawn from many with health insurance, that is a very naive response.
As a good friend put it, these are not the uninsured, they are the self-insured. Unfortunately, their self-insurance policy limits tend to be in the hundreds of dollars, therefore any claims in excess of that “retention” are not covered by the “claimant”. Instead, the funds required are paid via overt (federal and tax dollars go to health systems to cover uncompensated care) and covert (cost-shifting due to providers seeking to recoup lost income, claiming injuries are suffered at work, and therefore subject to workers’ compensation) taxation.
There is no question we are paying for the uninsured’s health care through subsidies and lost productivity (those without health insurance tend to miss work more, operate at a lower functional level, and suffer from more serious chronic conditions). What is also apparent is there is little political will to challenge this status quo.
However, rising premiums are forcing employers to drop health insurance and employees to stop purchasing it due to the high premium contributions. This will undoubtedly lead to more uninsureds. Large employers such as GM are suffering due to their high health care costs, as is the federal government. Sooner rather than later a Fortune 500 employer will declare bankruptcy, dragged down by the cost of retiree health care costs and union plans. And it will attract more attention than the demise of the coal miners’ union plans that went bust in the nineties
Perhaps when GM or a sister company goes under our politicians will get the backbone injection needed to tackle this issue. But since their health care coverage, paid for by the taxpayers, is one of the richest plans in the country, they’ll have little personal appreciation for the reality faced by the uninsureds.
The insurance industry has mostly ignored the problems of the uninsured, instead choosing to pass increased costs on to customers, negotiate better deals with providers, and hold forth at the occasional conference. Given the lack of any significant organic growth potential at any of the largest health plans, this is surprising. After all, their universe of potential policyholders is shrinking while the industry has rapidly consolidated, leaving little opportunity for the significant growth needed to please the equity markets.
The Week is sponsored by the Robert Wood Johnson Foundation.
What does this mean for you?
Health insurers are missing out on a big opportunity here. There are 45 million potential customers, many of whom have jobs and are earning decent money, money that could be used to buy some form of health insurance. Whether by lobbying, thru industry consortia, or innovative product development insurers would be well-advised to pursue this market.


AIG’s problems continue

AIG is still in trouble. The latest announcement indicates the firm is still unable to unravel the complex financial transactions that are causing distress in Mr. Spitzer’s offices, and thus will be unable to report their audited results (as previously promised) on Monday.
Instead, AIG will report unaudited results and indicate where they have found potential problems. So far, those problems “only” amount to $2.7 billion in overstated reserves, a figure that is a mere fraction of the company’s total assets. I do wonder why they would run the risk of publishing unaudited results, as they may well be wrong, and perhaps significantly so. If the unaudited results are in fact significantly different from the final, audited results, this premature disclosure will cast further doubt on management’s grasp on the fundamentals. A pretty scary thought.
On another, seemingly-unrelated topic, the burgeoning issue of AIG’s apparent willful decision to mis-report WC premium as liability premium in several states has led to possible investigations in NY and California. Simply put, AIG knew they were mis-representing some portion of their WC premiums as liability as far back as 1992, yet by 1997 they had not completely resolved the issue.
This is not just a meaningless accounting error. In many states, WC insurers pay a percentage of their earned premium into a guarantee fund that sets aside reserves to cover potential losses from insurers that go bankrupt. Thus, mis-representing WC premiums as liability saved AIG a lot of money.
I find it hard to believe that a company like AIG that is so numbers-oriented, that constantly measures and monitors its’ financial results, and that is so creative and innovative in all things financial, could take five years to resolve what is really nothing more than an accounting problem. Yes, it is possible, it just strains credibility.
As noted before, AIG is a very well run company with a lot of innovative, hard-working, extremely intelligent people. There is nothing more damaging to their productivity than constantly waiting for the next bad news.


Property and Casualty 2004 results

The property and casualty industry had a banner year in 2004, making money on an underwriting basis for the first time since 1978. The combined ratio of 97.9, combined with investment profits produced a return on equity of 10.4%, a significant improvement over historical results.
Explanation for non-insurance folks. The combined ratio is the sum of claims and administrative expenses, and represents all of the claims, underwriting, sales, and other expenses. Typically the P&C industry loses money on an underwriting basis (producing combined ratios of over 100%) and makes money on investing the premiums customers have paid. As many P&C insurance lines have long “tails”, claims may not come in for several years, and may not be paid in full for decades, allowing the insurer to reap the investment returns.
While all looks rosy, the underlying picture is somewhat troubling. The returns were driven by both increased prices for insurance and decreases in claims expenses. However, the growth in premiums is rapidly tailing off, with AM Best predicting growth in 2005 to be well below 2004’s 4.7%.
To quote Best,
“As a sign of things to come, net premium growth was only a little better than half the percentage increase for 2003. A.M. Best data show that increases in net premiums written have been reduced for the second straight year, from a peak increase of 14.7% in 2002 to 9.5% in 2003 and 4.7% in 2004. With the deceleration of rate increases giving way to price decrements in the latter half of 2004 in most major commercial and reinsurance lines, and with the expectation that this will be the norm in 2005, A.M. Best expects written premium growth will slow to 1.2% in 2005.”
This is happening because more insurers are seeking to cash in on the profitability boom, equity markets are poor alternatives for capital investment, the bond market returns are marginal at best, and real estate appears to be in or headed for a bubble. Why does this matter? For the simple reason that large investors are always looking for places to invest their money, and with other alternatives appearing strikingly unattractive, many are considering “parking” their funds in what is today a profitable vehicle, insurance capital.
The more that happens, the more price competition occurs. Thus the cycle begins anew, with price pressure leading to price cuts, leading to declining margins.
What does this mean for you?
P&C rates are likely to decline in the near future, especially for short-tail lines such as property and fire. Workers’ comp will not be far behind, with liability following soon after.


Consumer Directed Health Plans – unintended consequences

Consumer Directed Health Plans, or CDHPs, are the new thing in health insurance – and may have a significant impact on liability and workers comp claims. For those who may not follow the latest trends, these are simply very high deductible health insurance programs, with tax-favored accounts set up to cover most of all of the deductible. Sounds pretty basic, and underneath the marketing hype, that is all there is to CDHP.
Nonetheless, they are getting a good deal of press, are generating high valuations for companies selling them, and are creating a flurry of mergers and acquisitions as companies such as UnitedHealthGroup jump into the fray.
If you are suppressing a yawn, hold on for a moment.
Tom Barrett of Choice Medical Management (a Health Strategy Associates client) has an interesting perspective on CDHPs. His take is they will actually cause an increase in liability and workers comp claims, as participants, faced with high medical bills, seek to have others cover the costs.
Here’s an example. An individual with a $3000 deductible slips on a neighbor’s sidewalk, sprains their ankle, and goes to the ER. After an MRI and soft cast put on by the orthopod, the bill comes to $2200. The individual looks at their CDHP “account” and sees they have only accumulated $300, but the various medical providers want their money now. Like many Americans, the individual does not have an extra $1900 laying around.
Concerned, he talks to his neighbor, finds out they have liability coverage, and tells the neighbor they will have to file a liability claim. It’s nothing personal, just business.
The liability carrier sends a field adjuster out to the site, interviews the individual and the neighbor, prepares a report, and either accepts or rejects the claim. The injured individual either gets paid, gets an attorney, or ponies up the extra $1900 himself.
Far-fetched? I don’t think so. There are plenty of attorneys looking for work, lots of liability, auto, and workers comp coverage out there, and CDHPs are exploding in popularity (despite their rather limited utility).
What does this mean for you?
If you are a property and casualty writer, watch your new claims carefully. You likely won’t see a sudden leap, but rather a steady increase as people figure out to “go where the money is”.
The law of unintended consequences strikes again. Or, more cynically, perhaps the CDHP developers actually considered this potential outcome


Most of the uninsured are employed…

A new study on the uninsured provides a clearer picture of who they are, their employment status, and where they live. Minnesota has the lowest uninsured rate at 8.3%, followed by Hawaii at 9.8% and Delaware at 10.2%. At the other end of the scale, Texas once again claims the top spot for the highest percentage of people without health insurance at 30.7%, with Louisiana at 26.4% and New Mexico at 26%.
The study, released by the Robert Wood Johnson Foundation, also has some interesting statistics on the number of individuals who are employed yet lack coverage. According to Newsday,
“The study found that the states with the lowest rates of uninsured adults with jobs were Minnesota at 6.9% and Hawaii at 8.5%. The states with the highest rates of uninsured adults with jobs were Texas at 26.6%, Louisiana at 22.6% and New Mexico at 22.6%, according to the study


Zenith’s strong results

In another sign that the Workers Comp world has gotten much better as of late, Zenith Insurance announced yesterday that it’s earnings had jumped from $26 million from Q1 2004 to $39 million in Q1 2005. Zenith is primarily a workers comp writer, with both primary and reinsurance lines, both of which showed improvement.
Most striking was the combined ratio, a measure of the ratio of total claims and administrative costs to premium. The latest quarter showed a combined ratio of 84.9% for the primary workers comp line, a stellar result by any measure.
Also notable was the increase in premium written of 29%.
Zenith has long been noted as a carrier that refuses to cut prices to build share, and the results of that intelligent approach are now apparent. Their one gap has been a lack of focus on the managed care side, a situation that appears to be on the mend. If Zenith can bring the same discipline and focus to managing medical expenses that it exemplifies in underwriting, results should improve even more.
What does this mean for you?
While all looks rosy, now is the time to watch warily for signs of cost-cutting and lax underwriting, harbingers of a decline in profitability and potentially a return to a softer market. While Zenith is one of the few carriers to avoid this type of suicidal behavior, do not be surprised if other carriers decide they want more volume, and start cutting prices. Unfortunately, workers comp writers seem quite unable to make a good time last


Why the uninsured are important to you

There has been some publicity recently regarding the possibility that there are fewer uninsured people in the US than the usual estimate of 45 million uninsureds. While this may be true, like many other arguments about statistics, if you get caught up in the statistical debate, you can easily forget that the real issue is there are tens of millions of uninsureds.
The argument partially stems from a definitional issue – one survey asks if you were uninsured during the previous twelve months, another asks if individuals were uninsured for the entire previous year. Obviously, there are meaningful differences in the question which will elicit different responses. The problem occurs when we focus on the academic issues rather than the overall problem. To quote Uwe Reinhardt of Princeton University (source LA TIMES); “Instead of addressing the problem, we say we must count the uninsured. It is literally, in my view, like making sure we know how many deck chairs we have on the Titanic”.
Experts questioned about the reasons for the discrepancy alluded to the possibility of undercounting Medicaid recipients, a reluctance on the part of respondents to respond to detailed questions if they answered “yes” to the “did you have insurance


Medicaid Reform, round 4

A number of Governors are considering working together on Medicaid reform in an effort to present a united front to the Bush Administration and Congress. As we have been reporting here, Medicaid reform, a major goal of Bush et al, has been stymied by the refusal of Governors to make major concessions, a refusal backed by their allies in the Senate.
This has led to a stalemate, as States are seeking to preserve the Federal dollars that fund a large part of their Medicaid programs in a time when their own budgets are under pressure. On the other end of the seesaw is the Bush Administration, which has made cutting the Federal deficit a primary goal of the second term.
The Governors in question are evidently circulating a “straw man” memorandum in an effort to gain consenseus and present a united front to the Administration. While the contents of the memorandum are closely held, the following details about the memo have been reported:
–it includes a proposal that would make it more difficult for seniors seeking to qualify for nursing home benefits to transfer their assets to family members or others.
–Another proposal would allow the state to investigate more thoroughly a beneficiary’s finances and seek repayment for government-provided care
— one section floats a “trial balloon” re the establishment or increase of deductibles and copayments for beneficiaries. The idea is this would require beneficiaries to contribute to the cost of the program and discourage overuse and abuse.
–“The proposals also would try to discourage businesses from eliminating retiree health benefits or otherwise shifting employees to Medicaid, by establishing incentives such as tax credits” (Tanner, AP/Long Island Newsday, 4/25).
The good news here is this represents a serious attempt on the part of state legislators to address the Medicaid crisis. It also reflects their power and influence, a strength that the Bush Administration appears to have seriously discounted in their early calculus.
Reforming Medicaid is a critical component of national health reform, and some of these measures make a lot of sense. However, as most states have frozen physician reimbursement levels, and there have been no reports re any increases in their compensation, it is highly likely that there will be fewer docs who will accept Medicaid, thereby reducing access and therefore quality of care.
What does this mean for you?
Freezing MD reimbursement is a blunt instrument, which will have serious consequences not only for the health of Medicaid and Medicaid recipients, but also lead those docs to seek higher reimbursement from commercial payers.
Cost shifting will increase, and so will pressure on commercial loss ratios.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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