By Tom Mastri, Chief Financial Officer & Chief Administration Officer, Paradigm Outcomes
Workers’ compensation cases deemed catastrophic generally include spinal cord injuries, acquired brain injuries, amputations, multiple trauma and severe burns. They represent a tiny fraction of the claim population but approximately 20% of ultimate liability. Establishing accurate lifetime reserves early in a case is often problematic if not supported using the right approach and tools.
Experience Has Its Privileges
The low frequency of catastrophic cases puts claim experts at a disadvantage as they lack familiarity with the injury types. The knowledge gained through recurrence of more common scenarios, such as low back injuries with surgical intervention, make it far easier to predict an end-point, determine medical utilization and apply unit costs. Even the largest carriers who have specialized catastrophic units still manage a proportionately small number of catastrophic losses.
Industry data suggests there are four catastrophic losses per every $100 million in written premium or roughly 2,400 catastrophic losses spread across the industry per year, excluding fatalities. Without beneficial experience, more resources and scrutiny will be required to calculate the probable ultimate liability and overcome a wide range of hurdles, including data integration, jurisdictional idiosyncrasies such as whether medical can be settled, availability of family support, recovery duration, adjuster and supervisory caseloads, advances in medical technology and medical inflation.
Rising Complications
As the Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or Obamacare, becomes entrenched and consolidation continues for healthcare providers and insurers, workers’ compensation will become an increasingly attractive service market—especially for high severity diagnoses like severe burn and ventilator-dependent spinal cord ICUs.
Paradigm Outcomes has recently seen rates upward of $84,000 per day at the top burn facility ICUs, and more $5-10 million medical reserves in the last several years than we’ve ever encountered before. It’s easy to see why: the average life expectancy (LE) for a 44 year-old vent-dependent tetraplegic is 6-8 years. If survival is greater than one year, LE may go as high as 10 years at $250,000 per year. The younger the patient is at time of injury, the greater the LE and higher the reserve.
An additional complication is how these case reserves, as well as the changes in case claim reserving methodology and philosophy over time, impact the actuarial loss development triangles developed from each insurers’ long term loss experience. A sudden change in how these high cost cases are reserved at the case level may drive an aggregate over-reserving or under-reserving result across the insurer’s entire claims book.
Getting Reserves Right
Claims management’s typical goal is to ensure the case reserve represents the ultimate liability at the time the reserve is set and modified, and reflects all known facts and the expertise gained from the most experienced claim professionals. The claim and actuarial functions must work closely to ensure the reserving philosophy and practice are dovetailed correctly so that the combined case and actuarial/loss development/IBNR reserves reflect the best estimate of an insurer’s loss exposure.
Be cautious when external pressures are applied to high level self-insured retention and high deductible situations. In such moments, the third party administrator (TPA) developing the reserve recommendations may not have the experience or wherewithal to make accurate high exposure loss predictions, or they may not have the authority to post the kind of reserve which reflects ultimate liability. When the policyholder has a million dollar plus retention, and control over that expense and cash flow, conflicts may arise on the timing and level of the reserve adjustment.
There are abundant specialty resources available today that weren’t in existence years ago to assist claim professionals in establishing and refining these reserves over time. A good place to start is to access an array of board-certified physician consultants who are experts in the specific injury category. They can offer a lifetime’s worth of diagnostic specific evaluations on lengths of stay in all facilities, from the ICU to outpatient rehabilitation hospitals and long-term-care. These physicians will often communicate with the treating providers to discuss treatment plans, future care and specific risks likely to emerge. These discussions help refine the breadth of likely cost drivers and allow the claims professional to select the most probable cost for each service.
The following resources may help when attempting to evaluate and predict future costs:
- Model Systems Knowledge Translation Center (MSKTC)
- National Spinal Cord Injury Statistical Center (NSCISC)
- National Data and Statistical Center for the Burn Model Systems (BMS NDSC)
- Traumatic Brain Injury Model Systems National Data and Statistical Center (TBINDSC)
- SCIRehab
A Call for a New Standard
Overall, the industry has improved over the past decade at establishing realistic lifetime case level medical reserves. However, significant progress can still be made by refining these techniques to create an appropriate industry standard. This new model must apply expert driven and data guided techniques.
A segmented reserving approach allows the claim professional to look at the stages of the catastrophic loss—from the acute stay to post-acute to home—and build the reserves accordingly to reflect maximum medical improvement, or its equivalent, and maintenance. Additionally, there is a need to understand and account for conditions that could manifest during the course of the case, including their probabilities and costs. Lastly, for a greater degree of accuracy, professionals should have insight into fee schedules, PPO application and billing practices.
Many factors contribute to the efficacy of the reserving process. Things such as the overall reserving philosophy of the organization, the speed of catastrophic injury reporting, the onset of expert hands-on nurse case management, and the manner and frequency in which these kinds of claims are audited all play a role. This is precisely why catastrophic claim medical reserving is a dynamic process, requiring a sensitive balance between a variety of insurer and stakeholder functions.
When done correctly and uniformly across an organization, everyone benefits from accurate reserving, not the least of which are the injured worker and his or her family. When the expected treatment and associated costs are pre-planned and reserved for, the approval and payment for the care continuum is often expedited. This helps ensure the right care is provided at the right time so the injured worker can make the best recovery possible. That’s certainly worthwhile motivation for getting the job done right.
About Tom Mastri
Tom Mastri is the Chief Financial Officer and Chief Administration Officer for Paradigm Outcomes, Tom Mastri brings more than 20 years of experience to his job overseeing the company’s corporate finance, risk management, legal, human resources, IT and analytics departments. Over the course of his career, he has managed all aspects of financial policy and planning, and led many strategic initiatives. Before joining Paradigm, Tom served as CFO, Treasurer and Vice President of Coventry Health Care, worked in auditing at Ernst & Young, and led the expansion of Achievo Corporation and Initiate Systems, Inc. Tom is a certified CPA and holds a bachelor’s degree in accounting from the University of Iowa.
About Paradigm Outcomes
Paradigm Outcomes is the nation’s leading provider of complex and catastrophic medical management, Paradigm achieves 5x better medical outcomes and lowers total costs by 40%. Paradigm accomplishes this by bringing together nationally recognized doctors, expert clinical staff, the best network of care facilities in the country, and more than 20 years of clinical data to guide decisions. Paradigm is the only company of this kind, designed and built specifically to address the needs of those with traumatic brain injuries, spinal cord injuries, amputations, burns and chronic pain, and is the only company to stand behind their promises with medical and financial guarantees. Visit www.paradigmcorp.com to learn more.