Hidden costs that arise from poorly managed Workers’ Compensation claims can have a dramatic impact on a company’s insurance program, its losses, and eventually its experience modification (MOD) factor. The primary goal for good claims management is to keep the length of time that an injured employee needs care to a minimum. The longer a person is out of work, the higher the likelihood a claim will result in litigation.
An often hidden and overlooked consideration when structuring your worker compensation program are Allocated Loss Adjustment Expenses (ALAE). In its simplest form, ALAE relates to expenses that are allocable to specific claims. This would include
- fees paid to outside attorneys
- subject matter experts
- certain medical costs, and investigators in the defense of any claim.
Simply stated, it is any part of a claim that isn’t directly tied to the injured employee’s medical care.
To help manage costs as insurance prices continue to fluctuate, business owners are electing for a program structure that may unknowingly exacerbate ALAE charges. A larger retention allows the company to benefit from reduced rates and improve their overall program ‘fixed cost.’ However, in this type of structure the ‘variable cost’ of claims could arise in a given policy year.
Potential Costs in Large-Deductible Plans
Many companies choose large-deductible plans for their projected Workers’ Compensation program hoping their performance will allow them to retain the underwriting profits. For this to hold true, companies must have quality loss-control and risk-management practices in place to reduce the number of job-related injuries and accidents.
Understanding the program costs associated with a deductible program (either mid-range or large deductible) goes beyond comparing numbers and rates on a guaranteed cost policy. The insured will also bear the burden of the medical costs, indemnity claims, and the ALAE that falls within their selected layer. In addition to attorneys’ fees, ALAE may include nurse case management fees and medical bill review services.
Unfortunately, these expected costs are not typically disclosed on insurance carrier quotes nor insurance broker proposals to you, the insured. These charges can result in tens or hundreds of thousands of dollars in undisclosed costs for your insurance program.
It is important to know how your carrier and/or Third-Party Administrator’s (TPA) will handle expenses or the overall program cost can become more than what would have been paid under a lower or more conservative retention. These costs are harder to nail down and the decision to go with a higher retention may be a slippery slope.
Medical Bill Review
Perhaps the most important area of ALAE, as it relates to claims management, is medical bill review. Each state establishes its fee schedule and mandates how much a provider is allowed to charge for office visits, procedures, etc. Each bill submitted will be reviewed by a medical bill review vendor. This will determine the maximum allowable charge for procedures and determines what the carrier or TPA is obligated to pay to the provider. Additionally, PPO discounts may be applied to the bill after the bill is reduced to the fee scheduled amount.
You will want to understand whether the carrier or TPA takes a percentage of either of these savings, and if so, how much. This pricing has a significant impact on the claim’s totals and as the employer should confirm they are receiving the maximum value for this benefit.
If you have a large deductible program in place, it is paramount to know if claims are managed by a TPA or in house as well as your participations in composing Special Handling Instructions. ALAE can vary greatly from one program to the next so make sure the program you are choosing is the best option for your company.
To learn more about ALAE and claims management savings, contact a Marsh McLennan Agency (MMA) advisor today.