Integration of Managed Care in Workers Compensation Brian Z. Brown, FCAS, and Michael C. Schmitz, ACAS

Transcription

1 Integration of Managed Care in Workers Compensation Brian Z. Brown, FCAS, and Michae C. Schmitz, ACAS

2 Tite: INTEGRATION OF MANAGED CARE IN WORKERS COMPENSATION By: Mr. Brian Z. Brown, F.C.A.S., M.A.A.A. Mr. Michae C. Schmitz, A.C.A.S., M.A.A.A. Brian Z. Brown is a Feow of the Casuaty Actuaria Society, a Member of the American Academy of Actuaries and a Consuting Actuary in the Miwaukee office of Miiman & Robertson, Inc. Brian hods a bacheor of science degree in Economics from the Iinois State University. Mr. Brown has severa cients who are using managed care concepts. Michae C. Schmitz is an Associate of the Casuaty Actuaria Society, a Member of the American Academy of Actuaries and an Associate Actuary in the Miwaukee office of Miiman & Robertson, Inc. Michae hods a bacheor of business administration degree in Actuaria Science and Risk Management/Insurance from the University of Wisconsin. Mr. Schmitz has conducted studies for severa workers compensation cients with managed care programs. 2

3 INTEGRATION OF MANAGED CARE IN WORKERS COMPENSATION by Brian Z. Brown and Michae C. Schmitz I. INTRODUCTION The foowing tabe dispays countrywide medica cost trends over the past nine years for both workers compensation medica costs and a heathcare costs. Annua Trend in Medica Costs Caendar/Accident Workers Compensation Medica Year Medica Severity CPS 19% 0% St% As the above tabe dispays, medica cost increases since 1992 have been significanty ower than for the time period. This trend appears in both workers compensation and genera heathcare costs. However, the decreased trend is more significant for workers compensation medica costs. One factor affecting both trends is the increased use of managed care programs. This paper wi describe managed care and expain how managed care affects workers compensation rates. In the foowing sections of our paper, we wi define the term managed care and summarize some recent studies measuring the impact of managed care savings. We wi then describe approaches which heathcare providers and insurers use to price capitated products. Dividend programs between insurers and managed care organizations are aso discussed. In the ast two sections, we discuss data considerations invoved as heathcare providers begin to assume more risk, and we present some concuding remarks. I Based on a presentation at the 1995 CLRS by Ron Retterath of the Nationa Counci on Compensation Insurance. * U.S. Department of Labor Bureau of Labor Statistics, The CP Detaied Report Washington DC. 3

4 II. DESCRIPTION OF MANAGED CARE Managed care invoves combining medica cost containment with optima medica treatment in order to: provide medica services at a ower overa tota cost; increase the overa quaity of care; and expedite worker re-entry into the workforce. Managed care can be impemented to contain costs if unnecessary medica procedures are being performed, medica fees exceed competitive price eves, or if some necessary medica procedures are not currenty being used. Insurance companies have instituted various methods in recent years to reduce medica costs. These methods can be segregated into two broad categories: financia arrangements; and behavior modification methods. The financia arrangements incude discounted fee for service agreements, case rates, capitation contracts and dividend programs. The behavior modification methods incude utiization review, case management and second-opinion programs. These cost containment measures are discussed beow. If medica costs are perceived to be too high or if the insurer has significant bargaining power, pre-negotiated discounts are oftentimes impemented. Thus, a heath care provider wi agree to a discount from standard rates if injured workers are treated by a member of the heath care provider s network. The pre-negotiated discounts are often 15% to 25% beow the charges aowed by the egisated workers compensation fee schedue for certain states. For states that do not have fee schedues, the prenegotiated discounts are typicay ess than the usuu and cusfomaty charges. Case rates refer to a fat fee per caim for medica costs. Typicay, the fat fee wi vary by type of injury (e.g., broken anke). Thus the insurance carrier pays the heathcare provider a fat amount to compensate it for a medica costs for a specific injured worker. Thus the risk that actua costs exceed the average (or expected) costs is transferred from the insurance carrier to the heathcare provider. However, insurance carriers wi need to monitor the cost effectiveness of case rates since these arrangements may encourage providers to substitute bed rest as a treatment in pace

5 of more expensive treatments. Thus, case rates may resut in a rise in indemnity costs if not propery managed. In a capitated arrangement the heathcare provider receives a fat fee. In exchange, the heathcare provider agrees to provide appropriate medica services for a injured workers subject to the contract that it treats during a certain time period. Typicay caims occurring outside of the state are excuded and ony a predetermined doar imit of medica treatment costs are covered on catastrophic caims. Aso, the capitation agreement usuay appies ony to medica services during the first, second or third year subsequent to the injury date. As is discussed ater, under this arrangement, the workers compensation insurer has transferred much of the predictabe exposure to the Heathcare provider whie the insurer retains the ess certain (more variabe) exposure. Dividend pans essentiay return some of the projected workers compensation savings, due to the managed care program, to the Heathcare provider. These arrangements are discussed in section four. In utiization reviews, proposed medica procedures are evauated, to determine their appropriateness. The three utiization review techniques most frequenty used are concurrent reviews, retrospective reviews and pre-admission certification. Concurrent reviews are designed to immediatey recognize inappropriate treatment patterns and ater the heath care services being provided for a worker. Retrospective reviews are designed to detect errors in past treatment. These errors can then be brought to the attention of the provider in an effort to curb inappropriate or excess care. Preadmission certifications are used to direct patients away from costy inpatient care to outpatient services where appropriate. Case management invoves a quaified professiona (usuay a nurse) overseeing the progress of an injured empoyee to assure appropriate and timey care. Case managers wi typicay work cosey with a parties invoved (empoyees, empoyers and physicians) to get the injured empoyee back to work as quicky as possibe, even if the empoyee s job duties need to be redefined. The emphasis on returning an empoyee back to work as quicky as possibe is an attempt to keep a worker from becoming conditioned (or feeing entited) to workers compensation benefits. Generay, the onger the period of disabiity, the more difficut it becomes to bring a worker back into the work force. Second-opinion programs are designed to reduce the incidence of surgica procedures by requiring the authorization of such procedures by two physicians. These procedures Dividend compensation arrangements have been inroduced as an attempt IO offset this reduction in treatment incentive. These arrangements are discussed in section four. 5

6 I rey on the sentine effect (i.e., the impact that a peer review can have on a physician s recommendation). The effectiveness of these programs has been difficut to ascertain. Many beieve that they resut in no net reduction in surgica procedures since some patients, who otherwise woud not have had surgery, wi consent to surgery after the confirmed first opinion. Moreover, these programs carry reativey high administrative costs. III. POTENTIAL COST SAVINGS DUE TO MANAGED CARE INITIATIVES The foowing tabe dispays the estimated cost savings based on three studies: As the above tabe dispays, the cost savings estimates vary significanty from study to study. However, in a cases there is an indicated savings. There are severa reasons for the variation in estimated savings by study. The savings argey depend on the procedures and practices in pace prior to impementing a comprehensive managed care program. If the caim handing in the prior program simpy consisted of paying bis as they are submitted, then an aggressive managed care program can resut in arge savings. On the other hand, if the caim handing consisted of case management, review of physician s charges and some negotiated discounts, then the savings are ikey to be ess substantia. Therefore, in estimating future managed care savings, it is important to determine what baseine you are measuring against. Another reason for the variation of savings estimates is that the term managed care has been used rather genericay. There are different forms and different eves of managed care. Some pans may incude itte more than fee discounts and shoud not be considered comprehensive managed care programs. Other comprehensive programs, which incude a of the eements discussed in Section II, are ikey to produce much more significant savings. See Recenr Trends in Workers Compensation Coverage by Brian Z. Brown and Meodee J. Saunders. CAS Forum. Summer

7 Severa other factors wi affect the savings, incuding the foowing:. the degree to which injured workers buy-into the program;. the degree to which work-force managers buy-into the program. It is especiay important that they participate in creating ight duty jobs to expedite worker re-entry into the workpace; and. the abiity of empoyers to direct injured workers to certain providers. N. PRICINGCAPITATEDPRODUCTS During the ast few years, actuaries have begun to price capitated products. This section wi describe severa approaches which are used to price these products for workers compensation medica exposures. Pricing Based on Heath Insurer Data Heath actuaries have coected a significant amount of data reated to medica costs for non-occupationa injuries and diseases. This data incudes the benchmark costs for a particuar treatment (by geographica area) aong with the ikeihood of methods of treatment given a specific injury. This information is coected by ICD-9 and CPT codes, terms which are foreign to many casuaty actuaries. ICD-9 code refers to the 9* revision of the Internationa Cassification of Diseases. Statistics at the ICD-9 eve can be compied to determine a benchmark severity for an injury. In this presentation we wi use an exampe for anke injuries. CPT code is the code assigned to a medica procedure under the Physicians Current Procedure Terminoogy. ED-9 and CPT codes can be combined to define the injury and treatment (e.g.. fracture of anke. simpe; fracture of anke, cosed therapy; fracture of anke, surgery). Miiman & Robertson, Inc. has deveoped Heathcare Management Guideines (HMG) for workers compensation based on data from Managed Care pans and input from empoyed physicians. These guideines incude the range of time within which injured workers are expected to return to work by injury type (i.e., grouping of ICD-9 codes). The Heathcare Management Guideines aso incude frequency and cost statistics for the procedures used in the course of treatment of various injuries (i.e., by CPT code). 7

8 The Heathcare Management Guideines can be used to price capitated products.5 Exhibit 1 dispays treatment probabiities and the cost of services for the initia care for an anke fracture or disocation. The exhibit indicates that 80% of anke fractures and disocations are treated by an office visit and 20% are treated via an emergency room visit. The exhibit aso deineates the services which woud be used in an optimay treated case and the cost of the various services (based on the geographica area). Exhibits 2 through 4 dispay the treatment probabiities, procedures, cost of procedures and estimated tota cost for subsequent treatment. Methods of subsequent treatment are divided into: Subsequent Therapy by a primary care physician (Exhibit 2); Therapy by a Speciaist (Exhibit 3); or Surgery by a Speciaist (Exhibit 4). Based on optima treatment patterns and the heath insurance data outined above, the costs and treatment probabiities for an anke fracture and disocation are estimated as foows: *Incuding the cost of initia care This exampe resuts in the estimated medica costs for an optimay managed case.6 It is anticipated that care wi not aways be optimay managed, and some workers wi require more care than anticipated. This factor shoud be incuded into the pricing via a oading for additiona costs or procedures. s This is discussed in detai in Recenr Trends in Workers Compensation Coverage by Brian Z. Brown and Meodee Saunders, CAS Forum. Summer 1996 The above exampe is based on a presentation by Richard Minitie. ASA. MAAA of Miiman & Robertson, Inc. tited Deveoping Capitation Rates Consistent with Cinica Practice Guideines. 8

9 The fina eement which needs to be considered in deriving a capitated rate is the probabiity of a certain type of caim. Historica data wi provide estimates of the frequency of caims by injury per $100 of payro. The capitated rate is then equa to the product of the foowing (summed across a injury types): The probabiity by type of injury; and The cost of the injury. This procedure deveopes a capitated rate for a injuries occurring during a year regardess of when treatment is provided. A one year capitated rate woud invove atering the treatments and costs on Exhibits 1-4 to ony refect the treatments expected to be provided during the first year. Washington State Mode Starting in 1994, a managed care organization piot program was introduced in Washington through the Washington State Fund (the Fund). The program provided for a one year capitation between the Fund and two managed care organizations. The attached Exhibit S dispays some of the characteristics between the current system and the MC0 piot program. The fund studied data by date of service and date of injury in order to derive capitated rates for a one year period. After a one year period, financia arrangements revert back to fee for service. Furthermore, after the first $100,000 of treatment on a caim, fee for service charges appy for that caim. These provisions are buit into the capitation rates. The capitation payment is derived for each firm as the product of the foowing factors summed across a casses: Hours worked by risk cass;. Houry capitation rate by risk cass; and The firm s experience modification factor. The fund observed a strong correation between the medica premium base rates (in Washington, medica rates are dispayed separatey from indemnity) and the 12 month This section is based on a presentation by Bi Vasek tited Impemening Capiated Managed Care in Workers Compensation: The Washington State Mode. 9

10 capitated rate. The attached Exhibit 6 graphicay dispays the comparison by cass. As the exhibit dispays, the correction coefficient is 99.4%. The I2 month capitated rate is equa to roughy 34% of the normay cacuated occurrence medica premium base rate. If anayses of future states data dispay simiar resuts, one way to price capitated products may be as a function of the medica pure premium. Mutipe Year Capitation Arrangements Some MCO s are offering mutipe year (frequenty 3 year) capitation arrangements to insurance carriers and poo s. Typicay the carrier or poo wi pay a fat fee (sometimes a percentage of premium) and the MC0 wi agree to provide medica treatment to injured workers for 3 years subsequent to the injury date. Aso the MC0 wi usuay ony be responsibe for a fixed doar imit per caim (we wi use $100,000 in our exampe). One way to estimate the expected osses for the MC0 foowing: reies on estimating the The utimate osses for the carrier for workers compensation coverage on an occurrence year basis:. The portion of the tota osses which is attributabe to medica osses; s-. The portion of medica payments above $100,000 per caim; and 9 The payment patterns for medica osses. Severa methods can be used to estimate the utimate osses for the carrier (e.g., based on historica experience, tied pure premiums in the state, etc.). The portion of tota osses associated with medica osses can aso be estimated based on historica data or industry sources. Aternatey, medica osses may be estimated separatey. Whie the NCCI estimates the distribution of the combined sum of medica and indemnity osses we are not aware of industry data which estimates a separate size of oss distribution soey for medica osses. However, historica data can be used to estimate medica payments above $100,000. Based on a separate anaysis of medica caims, an empirica or theoretica size of oss distribution can be used to produce estimates of the $100,000 medica excess oss pure premium factors (i.e., the percentage of medica osses excess of $100,000 reative to tota medica osses). For 10

11 iustrative purposes, we wi use a medica excess oss pure premium factor of 28% at $ The next step is to estimate the proportion of medica doars which wi be spent within 3 years of the injury date. If we have historicay anayzed accident year data, this percentage shoud be roughy in between the osses paid three years and four years after the beginning of the accident year.g For exampe, if a caimant is injured on the first day of the accident year and begins receiving treatment immediatey, then the capitation agreement wi run out after 36 months (i.e., the end of the 3 year). If a caimant is injured on the ast day of the accident year and begins receiving treatment immediatey, then the capitation agreement on this caim wi run out after 48 months from the beginning of the accident year (i.e., the end of the 4 year). If data by accident year and date of injury is avaiabe, the percentage of medica costs paid within 3 years of injury date can be computed directy. The attached Exhibit 7 dispays a hypothetica exampe for pricing the 3 year capitation agreement. One important consideration which needs to be addressed when pricing workers compensation products with a capitation agreement is the risk oad. For exampe, using the numbers in Exhibit 7 we have the foowing: (A) Expected Losses = $11,250,000 (B) Capitation Price = $3,240, Losses Not Subject to Capitation (A) - (B) = $8,010,000 For iustrative purposes, we wi assume that the insurer typicay incudes a risk oad which wi resuts in the oss provision in the rates being adequate at the 75% confidence eve amount. The NCCI tabe of insurance charges can assist in determining the confidence eve associated with osses. The distribution of potentia oss outcomes depends on: The expected vaue of osses (arger oss amounts exhibit ess variabiity); The state (states with high average severities resut in a more disperse oss distribution); Hazard group (ow hazard group exposures have ower severities and the distribution of osses is ess voatie); and We have found that empirica medica excess oss pure premium factors have generay exceeded the factors for combined medica and indemnity osses at %100,ooO. Thus. the 28% factor seected for medica osses exceeds the 18.4% factor used beow in Exhibit IO for tota osses. This does not refect ate reported caims and reopened caims. 11

12 . Loss imit (if the insurer cedes osses above a certain doar imit, this resuts in a more condensed net oss distribution). Aso, if the insurance carrier is arge enough, its own oss experience can be used to mode the oss distribution. The attached Exhibit 8 graphicay dispays the projected distribution of osses associated with the insured with the risk characteristics on Exhibit 7. The oading at a 75% confidence eve is approximatey 17%. Therefore, the premium provision for osses incuding risk oading woud be: $11,250,000x I.17 = $13,163,000. This resuts in a risk margin of approximatey $1.9 miion (i.e., $ miion minus $11.25 miion). With a capitation arrangements as iustrated on Exhibit 7, $3,240,000 of expected osses is repaced with a guarantee from the MCO. Therefore, the carrier may not want to coect the entire $1.9 miion risk oad. If the carrier decides to incude a 17% oading appicabe to the expected osses ess the osses covered by the capitation agreement, the resuting risk oad provision woud be: ($11,250,000 - $3,240,000) x 0.17 = $1,362,000. However, the capitation agreement is eiminating the more predictabe medica osses, and eaving the more variabe medica osses to be covered by the insurer (after the three year period expires and the excess portion of the more serious caims). Modeing the capitation arrangement based on the projected size of oss distribution for osses excuding capitated medica costs resuts in the graph on Exhibit 9. The above approach using the same 17% risk oad generates a risk margin which is too ow. The 75% confidence eve risk margin based on modeing the osses excuding capitated medica costs is approximatey $1.8 miion (i.e., $8.01 miion x 0.22), or an amount which is in between the two above risk margins. The capitation risk transfer aso affects the company s oss reserves since: The carrier has transferred to the MC0 the more predictabe medica osses; and The carrier is eft with the ess predictabe medica osses (the payments in excess of $100,000 or arge caims and the payments made 3 years after the date of injury). 12

13 The above two points resut in the carrier s reserves being reativey more difticut to estimate. VII. DIVIDEND PROGRAMS Many carriers have entered into dividend programs with MCO s to: Create an incentive for MCO s to return injured workers back to work; Reward the MC0 for managing care efficienty and effectivey; and Have the MC0 guarantee payments to carriers if oss experience is adverse. An exampe of an incurred oss dividend pan is discussed on Exhibits 10 and I I,I0 This pan invoves comparing the actua reported osses to an expected oss provision two years after the end of the accident or poicy year. The dividend is equa to a portion of the amount by which actua osses are beow target osses. In other words, to the extent that the MC0 is abe to reduce costs, part of the savings wi be shared with the MCO. The above is ike participating dividend pans which have historicay been used in workers compensation. One factor which needs to be addressed in deveoping dividend pans is that oss experience can be favorabe simpy due to chance. For exampe, if the pan pays a dividend for a oss ratio beow 75%, we want to quantify dividends expected to be paid simpy as a resut of random variation in tota annua oss eves. When the expected oss ratio is 75%, some years wi have oss ratios above or beow 75 % due to chance. The possibe effect of random outcomes can be measured by using the aggregate oss ratio distribution in conjunction with the dividend pan terms to estimate the expected dividend. As the tabe beow dispays, the effects are greatest for the smaer subject premium eves. See Recent Trends in Workers Compensation Coverage Brian Z. Brown and Mecdee 1. Saunders. CAS Forum, Summer 1996 for a more compete discussion of dividend pans. 13

14 * As a percentage of subject premium. Additionay, to the extent that the MC0 is anticipated to reduce the expected oss ratio, the carrier can expect a arger dividend be paid. This shoud be factored into pricing the carrier s workers compensation products. Additionay, a dividend reserve shoud be estabished to the extent that such oss sensitive contracts are expected to resut in dividends. The expected dividend can be estimated using the aggregate oss ratio distribution in conjunction with the dividend pan terms based on the ower expected oss ratio (i.e., refecting projected managed care savings). The attached tabe dispays the dividend (based on the parameters in Exhibits 10 and 11) as a percentage of standard premium, based on various premium size and oss ratio combinations. The oss ratio distribution is based on our interpretation of the NCCI s tabe of insurance charges. Dividend Pan - Dividend As A Percentage of Subject Premium II *Based on dividend pan dispayed on Exhibits 10 and 1 I VIII. DATA CONSIDERATIONS Typicay, MC0 and Heath insurers rate heath services based on variabes incuding age, sex, marita status, geographica ocation, etc. Variabes such as occupation and saary are not used. Therefore, to fuy integrate workers compensation and heath insurance, additiona data wi need to be captured and stored in a centra database. For exampe, in order to know if doctors are over utiizing certain procedures, CPT codes woud need to be captured by workers compensation carriers. Therefore carriers which integrate workers compensation and heath data wi be at a competitive advantage. Some of the data items to be captured woud incude: 14

15 Date of injury; Date of medica services; ED-9 code; CPT code; Job cassification of injured worker; Injured worker s age and sex; State; Department name (for arge empoyers); and Date returned to work. Armed with this data the workers compensation carrier coud determine which treatment pans acceerate workers re-entry to the work-force. Aso, carriers coud determine which types of injuries resuted in onger durations off of work. This anaysis may aso shed some ight on what factors or injuries (e.g., ICD-9 code groupings) ead to inadequate case reserves. Such situations coud be investigated and possibe soutions to more effectivey manage care can be found. IX. CONCLUSION The changes in the heathcare market have had a significant infuence on workers compensation. Programs used for many years in the heath market are being used more and more frequenty in workers compensation. This paper has attempted to integrate workers compensation and heath insuranceconcepts, and iustrate some of the effects of the risk transfers inherent in recenty introduced workers compensation managed care contracts. 15

16 Exhibit 1 Tabe 3a Anke Injuria - Optimay Managed Fractures and Disocations Tota Cost. Sum~of(a) I Subtota

17 Exhibit 2 Tabe 3b Anke Injuries-Optimay IManaged Fractures and Disocatioas Subsequent Therapy by PCP hwr ~w-k : 4.23% of Lmt Work D.y Cn,a Cb.r,e DA. Fnctum and Dboudo~ : I I.JOK dhwe D, tic Eanmpe Fe Schedue Subwqum Thmpy by PCP : 71.00% of AnWc Fnnum.nd Dbocatora cenurnse. 7/I/% Tmtmcn, Prob.b a (I) W (C (4 (5) 0- TfCSJM RDccdun Procedure Number of price Per X +&QaJ course of Trcamncnt * -Servke IW.cG?+ L Tbmpy corhm I. OTi~Outpsdcnt Pt Expanded focusd ss1.57 9L.w% 2. Appy CUt Short LCS o.OmG 3. Cau htaurias. Shon Leg APC-58 IO s75.00 IO.OO% 4. Appy Short Leg Spint IO IOWN 5. Triamd Spint (Pactcrfiibcrpacr) APO32 IO SooW a0 00% 6 Pain Mcdicxion RXWI % 7. MAIDI Rx Subrora. Sum of(b) in I.6? I oo.oo?fa IL Foow-up Care 1w.w% I. O cc10utpodcnt BI Expanded Focutcd SJ1.57 IooWh 2. X-my Ernm. Anke-Compete o.coYe 3. Appy Cast Shon Leg. Waking I o.OOn 4. Cut Mauria% Short Leg. Waking AWJ9 1.0 SW % 5 Phys Ycd-Thcrsputic Exercisc I45 84 Subtota. Sum of(b) x tc, x (! To&4 Cost Sum of (a) x Sabtots J

18 Exhibit 3 Tabe 3c Anke Injuries - Optimay IManaged Fracrures and Disocations S btota. Sum of(b) 1( ic) x In: IL Inp.des nrrppy % I Corcd Rcducion oitr~macoar Frsaure? I0000% 2 Arrrm Surgeon IO JO.W% 3 Hmpim I Oav An&k Cosed fncmm SOO I.o 11.0X44 I OS00 I ,480 I ::I I. Foou4p Viw. Port.Opcnnrc SO.00 1 OicoO ~pa~cn~ Es ETpudcd Focused IS I.57 j S-n) Exam. Anke-Compco JO S58.07 J Cu Maeriair. Shari Lug. Wdkmg APO Anke aracr~ Aor cast APO02 10 s Pam.Med,cnon Rx00 I NSAIDS Rxoo: 12.0 S2.AO s Phvr Mcd-Thrrapcuuc Excrcircr IJS 54 Submu. Sum of(b) x CL) x cn S769.W Tota Cost. Sum of(n) 1. Subtota s 18

19 Exhibit 4 Tabe 3d Anke Injuries - Optimay Managed Fractures and Disocations Surgery by Speciaist 4 23% of Los, Work D.y Cua I I JOA OfAnWc jvrta 2S 00% o,ar,wc fnrtum ood Disocwioo, Cb.rw 8uir Exampe FCC Schedue Center 0,~ WA 40 00% I CQ 00% Suboa. Sum o!-(b) x (C) x tn IL Bim.m,r Fnc,ure IW.W% I Open Trentmcn~ of Bimaeoar Fracture S1.31J2 5 IWW% 2. Asfi3mm Surgeon IW.W% 3 Anexhaia~ open Lnwer Leg Bone Surgery s M).OO?A 4. OS Faciity. Anke Open Fracture OS $ % 5. Hospw.,. I Day-Anke Open Fmaure $ % 6. Cast Matenar. Shon Leg AF Suborn. S m of(b) x (e) I (0: $ IIL Trmarow Fncture I00.00% I. Open i-reamcm ortrimd,mv hcntc $ ,w.w% 2 Assismnt SuQcon $ ,W.W% 3 Anuhesia~ Open Lower Leg Bone Surgery, SJ SO.W% 4. Hospira. I Day. Anke Open Fracture ISco2 1.0 II % 5. OS Faciity. Anke Surgery. 23 hour OS $ Iomw. 6. Cut M.tend~. Shon Leg Ama 1.0 $ Subtota. Sum oitb) x Cc, x (n: 1X222.6 I IV. PortSuqr~ 0.. IOO.w% I. Foow-Up Visit. Post-Opemdvc % 2. Oficc/Ourpaient LI Expanded Focwcd MI.3 7 IOO.Oo% 1. X.my Emn. Anke-Compete $ % I. Cm Mawids. Shorn Leg. Wnkinp APO % 5 Anke Bmcc. Air Cast APO S40.0 0,WW% 6 Pain Medicaion RYW I W.W% 7. NSADs RXW? 15.0 $2.4 0,o 00% 8 Anubioucs RXWS IS W% 9. Hardwe Remova. Deep S420.8 (1,SWK IO. OS Factir,. Remova oikarduare OS040 IO I,O.W% II. AXSh.X~ $ % I?. Phys Med.Thhcmpcuic Exercises 971 IO ,OOO% 13. Thernpeutic Activities-Each IS Min $286 5 Subtota. Sum of(b) L,c, x if, I 3 Tota Cost, Sum of (a) I Subtota s

20 Current System vs. Piot Exhibit 5 Consumer Choice Provider Contracting Worker has tota freedom Do business with any icensed provider Care Team Design Varies by provider -- numerous approaches Narrow range diagnoses Case Management Disabiity Management Inconsistent approach, WW sometimes with mutipe manaoers Know/e&e of Worksite 1 Tends to be second hand 1 Restricted to network Contract with Occ Med Physicians and other needed providers Physicians & Nurses with Occ Med expertise Broader range diagnoses More consistent, systematic approach, directed by Occ Medsphysicians More emphasis on first hand network size MC0

21 Reationship between Cap Rate and Medica Premium Exhibit 6 $0.40 Q) $0.35 z cc $o.3o 6 $ $ $0.15 z $0.10 cv Correation Coefficient = 99.4% $ $ $0.30 $0.40 $0.50 $0.60 $0.70 $0.90 SO.90 $1.00 Medica Premium Base Rate 1

22 Exhibit 7 Expected 3 Year Cavitated MC0 Losses 1) Earned premium subject to MC0 program 2) Expected oss ratio 3) Expected osses (1) x (2) 4) Ground-up medica osses to tota oss ratio 5) Expected medica osses (3) x (4) 6) Medica excess oss pure premium factor at $100,000 7) Expected imited medica osses (5) x [ 1.O - (6) ] 8) Expected percentage of imited medica osses paid within 3 years of occurrence 9) Expected MC0 medica osses (7) x (8) $15,000,000 75% $11,250,000 50% $5,625,000 28% $4,050,000 80% $3,240,000 22

23 Exhibit 8 Cumuative Loss Distribution Expected Losses of $11,250,000, State/Hazard Group Differentia of 1.O 100% 90% - 90% - c.g 70% - 3 PC z aa.z m z 3 60% - 50% - 40% - 30% - 20% - 0% Ratio of Losses to Expected Losses (Entry Ratio)

24 Cumuative Loss Distribution Projected Losses Not Covered By Capitation 100% 90% 60% % 3 11 'C i7i 60% a a.z m 40% 7 E 3 30% 10% 0% Raio of Losses to Expected Losses (Entry Ratio)

25 1) Assumptions Projected oss ratio for prospective period based on trending and deveoping prior years caim costs and comparing to premium at current rate eve is: 15% Earned premium subject to MC0 program: $100,000,000 Caim costs above $100,000 are excuded from the dividend pan. Expected cost of osses above $OO.OOO!,184 Expected Reporting Pattern at 12 months: 24 months: 36 months: 48 months: Cacuations performed at 36 months and 30% of the savings returned to MC0 50% 75% 80% 90% Actua reported osses at 36 months = $45.ooo,ooo I) PCAS Voume LWVIII 1991; Retrospective Raring: Escess Loss Factors, Wiiam R. Giam, Pages

26 2) Dividend 1) Earned Premium 2) Target Loss Ratio 3) Expected Utimate Losses (1)x(2) 4) Excess Ratio 5) Expected Utimate Limited Losses (3)x(1-4) 6) Expected Percentage of Losses Reported 7) Expected Limited Losses Reported %1oo,ooo,ooo 75% 75,ooo.ooo.I ,OCO.80 48,960.OOO 36 months after the beginning of the accident year (5)x(6) 8) Actua Reponed Losses 9) MC0 Savings (7)-(8) 10) Dividend Sharing Percentage 11) Dividend Due MC0 45,000,000 3,960,OOO 30% 1,188.ooo 26