New Tricks for Old Dogs
Using structured settlements to resolve the burden of legacy claims.
By Bill Wakelee
A report from the National Council on Compensation Insurance Inc. (NCCI) states that “it is likely that more than 10 percent of the cost of medical benefits for the workplace injuries that occur this year will be for services provided more than two decades into the future.” The percentage is based on the analysis of workers’ compensation claims payments covering the time period of Jan. 1, 2009, to April 1, 2011, with a minimum age of 20 years old but not exceeding 30 years old.
According to a second NCCI study conducted over the decade of 2001–2010, the average cost of the indemnity portion of workers’ compensation claims increased 47 percent, and the medical portion of these claims increased by an overwhelming 95 percent. Inflation in the cost of medical care has caused the original cost projections of long-term claims to be too low, resulting in the under-reserving of many legacy claims.
While claims adjusters refer to workers’ compensation claims that have been around for years as “old dogs,” NCCI and carrier management refer to these older files as legacy claims. The age at which a workers’ compensation claim reaches legacy status varies by insurer, with some considering any claim over three years old a legacy claim; others use five years. Probably the best approach is to consider any claim where the claimant has reached maximum medical improvement but continues to have indemnity payments or medical maintenance costs as a legacy claim.
Major Financial Burdens
The most common types of legacy claims over 20 years old are those involving:
- Injury/disease of the musculoskeletal system (43 percent female, 32 percent male).
- Traumatic complications (18 percent female, 15 percent male).
- Diseases not musculoskeletal or nervous system (seven percent female, 11 percent male).
- Disease of the nervous system (six percent female, 11 percent male).
One thing these claims have in common is a decision by the self-insured employer or workers’ compensation insurer to maintain the claims on their books as an ongoing liability. Very few claims have the appearance of being a legacy claim at the beginning. What frequently occurs is that the claims professional believes the claim will be resolved in an average amount of time and/or that the injured employee will not need lifetime medical maintenance. In most cases, the decision to continue to pay the medical costs for life (and in about 30 states to pay indemnity costs for life) is a slowly developing and complex decision. In some cases, this can be very costly.
Insurers and self-insured employers often are caught holding large, long-tail workers’ compensation claims that are greater than the original ultimate value forecast of the claim made years earlier. In addition to the actual cost of the claim, they have to pay the administrative expense of managing the claim for years. Therefore, these legacy claims have a major negative impact on an employer’s loss ratio. However, there are actions the insurer or self-insured can take to move legacy claims forward.
Claims that have been open for many years normally have had more than one adjuster assigned to them. The adjuster inheriting a legacy claim rarely reviews and reanalyzes what can be thousands of pages of medical and legal documents compiled by prior adjusters—but that is a mistake. Factors that affect the willingness of the injured employee to consider a final resolution of the claim may have changed over the years. By completing a thorough review, barriers or impediments to the final resolution of the claim can be identified and addressed—and frequently overcome.
Choosing Your Targets
An insurer or self-insured employer often falls into the trap of focusing exclusively on a single troublesome legacy claim or a few of the larger, more active legacy claims. This results in the quieter, larger long-term claims being overlooked. Also, smaller long-term claims are not reviewed or addressed, which can result in them later developing into larger claims. The decision to keep the medical component of the workers’ compensation claim open, as opposed to resolving it as part of a settlement, can be very costly. Insurers and carriers should consider taking the time to develop a process whereby these cases can be reviewed on a periodic basis to determine those that could be targeted for settlement consideration.
The insurer or self-insured employer saddled with the long-term exposure of legacy claims will frequently seek a way to freeze the exposure to the current reserves and transfer the risk of payments exceeding the current reserves in the future. A structured settlement is an excellent way to accomplish this.
When evaluating a potential settlement, the structured settlement broker will secure medical reports that give the history and current condition of the claimant and submit them to each of the carriers that provide structured annuities. Those highly rated life insurance carriers will then provide a rated age, or substandard rating, which will often allow significant savings when pricing out structured settlement plans. These savings can be used in addition to the time value of money to design the most relevant settlement proposals for consideration by all parties.
For example, a 45-year-old male suffered a traumatic work injury with comorbidity factors, such as high blood pressure, diabetes, and heart problems. After reviewing the medicals, a life carrier gives him a substandard rating of 66, which essentially reduces his life expectancy for annuity pricing. The original structured settlement proposal was designed at a cost of $523,000. Once the rated age was applied, the proposal cost dropped to $419,355, a savings of almost 20 percent for the same benefits.
The most common mistake that creates a legacy claim is not pursuing settlement of the claim when the claimant reaches maximum medical improvement (MMI) or a medical plateau in the recovery process. If the claims value is less than $50,000, a lump-sum payment should be pursued. When the claim value is $50,000 or higher, a structured settlement broker should be contacted to get updated rated ages, evaluate settlement costs and options, and discuss a strategy that makes both financial sense to the carrier and economic and emotional sense to the claimant. The broker, as an outside third party, also can contact the claimant directly, which can sometimes be more effective than a letter or call from the carrier.
There is a substantial cost benefit to using a structured settlement—a guaranteed tax-free annuity package from a highly rated life insurer—to pay the future claim cost rather than paying a lump sum to settle the claim. The time value of money coupled with the likely use of substandard ratings in these cases almost always leads to both a cost savings for the carrier and more flexible settlement options for the claimant.
The adjuster should review the claims file and establish the anticipated future cost of the indemnity exposure, if any, and the anticipated future cost of the medical care. A structured settlement of the indemnity claim and a separate structured settlement of the medical claim can be used when requested rather than a single structured settlement for both indemnity and medical. The time value of money and substandard ratings will positively affect both portions of the settlement discussions.
In addition to saving money with a structured settlement, the insurer or self-insured employer brings to conclusion its future exposure on the workers’ compensation claim. Often, a legacy claim does not develop and the long-term financial exposure of the claim is eliminated if a structured settlement is utilized early in the process. By preventing a claim from ever reaching the legacy designation through structured settlement discussions, the adjuster can close the case and take down the reserves.
Structured settlement brokers often are willing to review all legacy claims of an insurer or self-insured employer to identify those cases that have potential for structured settlement. The structured settlement broker, looking at the claim with a fresh set of eyes, often will identify those that have been overlooked. They also should be straightforward about cases that they do not think will benefit from settlement discussions, allowing the carrier to concentrate on the situations that have the most potential for resolution.
Using structured settlements at the onset to settle both the indemnity and medical portions of a claim should be part of any insurer’s or self-insured employer’s evaluation process. However, by using this same concept in a systematic and periodic review process, workers’ compensation claims that have reached the legacy stage still can be successfully resolved. Perhaps with this approach, carriers and self-insured employers can start to whittle away at that 10 percent of costs that continue to be spent for decades into the future.