Kofax White Paper. Achieving Measurable Gains by Automating Claims Processing. Executive Summary

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1 Kofax White Paper Achieving Measurable Gains by Automating Claims Processing By Jonathan Casher, Senior Consultant IOMA Advisory Services About the Institute of Management and Administration (IOMA) Since 1984, IOMA has provided authoritative guidance to corporate managers across a wide range of disciplines. In the Accounts Payable space, IOMA has become the leader in promoting and explaining the AP function; in educating AP professionals; in supporting the AP function and its practitioners through AP certification; and in linking key accounts payable vendors and services to the markets they serve. Executive Summary For nearly all lines of personal and commercial insurance, reducing the cost of claims processing is key to profitability. Reducing cycle time, the elapsed time from opening a claim to its settlement, is key to customer satisfaction. Moving to a fully automated process is a goal for claims processing of nearly all insurance executives. Companies are at various levels of automation and often do not have an appropriate strategy to achieve higher levels of automation. This white paper identifies seven levels of claims automation and provides a roadmap that can be followed to enhance claims processing. This straightforward approach can be used to increase the likelihood of successful automation. Background According to International Financial Services Research s ( December 2009 Insurance Report, global insurance premiums were $4.3 trillion in 2008, with the US, Japan, UK, France and Germany accounting for 63 percent of the market. Life insurance accounted for $2.5 trillion and non-life insurance accounted for $1.8 trillion. For life insurance, claims processing is fairly straightforward and costs are relatively low. However, claims processing costs are

2 White Paper Achieving Measurable Gains by Automating Claims Processing Page 2 significant for other lines such as health, property & casualty, accident, automobile and workers compensation. Loss ratios, the percentage of premiums paid out in claims, are estimated to be between 60% and 110% of premiums for health insurance, and are typically lower for other forms of non-life insurance. Combined ratios, which include losses, underwriting and claims processing, are higher and typically over 99% of premiums. It is estimated that claims processing costs range from about 3% to 12% of premiums. Health insurance, which typically has a large number of claims per dollar of premium, often has higher claims processing costs than other non-life insurance lines. Property and casualty claims typically have a longer cycle time than other non-life insurance lines. Three key goals of insurance industry executives for claims processing are: 1. Reduce costs. 2. Reduce headcount. 3. Improve cycle time. There have been significant technological breakthroughs that can help dramatically reduce claims processing costs, reduce headcount and improve cycle times. However, many organizations have been slow to adopt them. Faster deployment and more effective use of technology are critical to achieving these three key goals. Claims Automation Every claims processing organization has some claims automation. At a minimum, organizations have automated systems that are used to post transactions, feed information to the General Ledger and disburse funds to claimants. This type of automation is universally in place. Companies with only this type of automation typically have high processing costs and long cycle times, which have negative impact on operational efficiency and customer service quality. As a company moves from this low level of automation, its costs and cycle times decrease. However, moving to a higher level of automation is sometimes blocked or delayed due to various barriers. The higher the level of automation, the greater the need for cooperation from and coordination with other internal and external organizations. Many research and consulting firms have extensively examined and documented approaches to claims automation. Based on that research, supplemented with interviews with companies that have successfully achieved very high levels of automation, a framework of 7 levels of automation has been identified. Each level bears specific benefits. Moving from one level to the next is a critical success factor to achieving operational efficiency, reducing cycle time and cost, accelerating data input and information access, and providing transparency and visibility into processes and information flow. Level 0 Automated Claims Transaction Processing System All insurance companies have automated systems that allow the posting of claims transactions and making payments. In addition to high costs and long processing cycles, there is often little appreciation by outsiders for the work that has to be done. Level 1 Back End Scanning There are many documents associated with the processing of claims. These vary widely based on the type of insurance and the nature of the claim. Many documents are paper based. Some may be photographs. Scanning these documents while or after they are processed and storing them in a document management system (often referred to as an electronic file cabinet ) can dramatically reduce storage costs. Back end scanning can

3 White Paper Achieving Measurable Gains by Automating Claims Processing Page 3 also reduce the risk of lost documents and the time required to retrieve documents when they are requested. employees. However, productivity improvements quickly offset the relatively low costs of training. Implementing back end scanning and manual indexing is inexpensive but not without risk. Documents that are not sent to the claims department may still be lost. While it improves overall productivity, it does not shorten cycle time. An advantage of back end scanning is that it has little impact on most processes within the claims department and no impact on processes in organizations that interface with the claims. Few people in the claims department are impacted when back end scanning is implemented. Manual indexing of the scanned documents should not duplicate data that is entered into the basic claims processing system. Tight integration between the claims processing system and the document management system is key to an effective solution that links scanned document images to transaction data. For some types of claims, the amount of documentation can be significant. In addition to images of text documents, photographs, audios and videos may need to be stored. Level 2 Front End Scanning By scanning documents before they are processed, the movement of paper within the claims processing operation can be eliminated. The people processing the claims can work directly from document images. In claims processing departments, there are often two screens on each processor s computer, one for displaying document images and one for transaction processing. Level 3 Optical Character Recognition and Intelligent Character Recognition Optical character recognition (OCR) can be used to automatically extract information from images. The manual keying of information from paper documents is costly and subject to transcription errors. Incorporating OCR can significantly increase productivity. For many types of claims, there are standard forms that may be used. With standard forms, it is easier to determine the data elements that are being captured. Intelligent character recognition (ICR) uses algorithms to learn from the documents that are scanned so it can recognize and extract more information with greater accuracy than OCR. It is particularly useful when documents are free form, unstructured or not standard forms. ICR increases productivity even more than OCR alone. OCR usage in claims processing is increasing rapidly. OCR dramatically improves productivity, often cutting the transcription process in half. ICR improves it further and also increases accuracy. The functionality provided by OCR and ICR has broad implications for other types of claims automation. Using OCR changes more processes than back end or front end scanning, but it can be done so that there is no impact on other organizations that interface with claims processing. Level 4 Automated Workflow While front end scanning can be performed in the claims department, it is significantly more effective when it is performed in a company s mail room. Front end scanning does change how work is done in the claims department and requires training for nearly all claims department Every claims organization has rules and procedures for routing paper documents within the department. By automating the process and working with images rather than paper, documents no longer get lost. In addition,

4 White Paper Achieving Measurable Gains by Automating Claims Processing Page 4 details about the status and backlog of claims to be processed and bottlenecks are instantly available. One key to automating workflow is a detailed understanding of the rules and procedures. While most organizations know their normal process flows, the exception processing is often undocumented or not fully understood. Preparing data flow diagrams showing the decisions and alternate paths that documents take when there are exceptions is key to defining the rules for automated workflow. If the current process is ineffective or inefficient, automating it won t help to achieve the expected benefits. Implementing automated workflow offers a great opportunity to upgrade old processes and incorporate proven best practices. When automated workflow is implemented, it is also important to have tools that allow managers and supervisors to check the status of work that is in process or on hold. Dashboards that provide real time access to transaction status are invaluable. Additionally, the ability to reroute and reprioritize work is a central component of an automated workflow solution. As with using OCR and ICR, automated workflow can be implemented in a claims department with little or no impact on external organizations. In some companies, special mailing addresses or PO boxes are set up so that all claims related documents are sent directly to the claims department. However, some documents will initially be received by a company s mail room. In such cases, front end scanning in the mail room and automated workflow between the mail room and the claims department should be implemented. Level 5 Automated Workflow with Intra-Company Routing, Approval and Dispute Resolution After automated workflow is implemented in a claims department, it should be expanded to other departments. Many believe that the centralized capture of documents with routing to other departments for review and approval is a best practice. However, there are instances where the remote capture and submission of images is more easily implemented. An automated workflow solution can and should be able to support both centralized and remote capture. This level of automation impacts most departments in a company. However, it also has significant benefits. Visibility is increased and workload can be managed more efficiently and effectively. Many companies try to shorten the overall timeframe by combining Levels 4 and 5. By implementing Level 4 first, many potential issues can be addressed and resolved before exposing a solution to the broader audience associated with Level 5. By phasing these two steps, the overall elapsed implementation time is often shorter. In addition, phasing usually costs less and achieves better results. When workflow is expanded to include organizations outside the claims processing department, automated tools are needed to provide visibility into the status of items awaiting actions by external people. Automated follow ups and reminders as well as the ability to escalate are functions that should be included when an organization takes its automation to Level 5. When automated workflow is expanded, these tools also allow for more effective monitoring and managing of compliance. Stakeholders such as approvers should have a simple and intuitive user interface. This is critical for user adoption and buy in. Forcing these stakeholders to interact directly with the claims processing system is counterproductive, as the user interfaces for these systems are usually complex. Furthermore, direct access into these systems by external users often requires

5 White Paper Achieving Measurable Gains by Automating Claims Processing Page 5 substantial enhancements to security and access controls. A well designed automation solution will feature web based workflow approvals that require minimal field user training. Level 6 Self Service There are many approaches to getting claims in an electronic form directly from the policy holder or claimant. Despite predictions of widespread adoption, with the exception of medical claims, few companies currently receive a significant percentage of their claims electronically. The electronic submission of health insurance claims is more highly automated than the electronic submission of most other types of claims. In the United States, the adoption of electronic claims submission has been driven largely by standards adopted by Medicare and requirements that Medicare has placed on the service providers who submit claims. Relatively high levels of electronic claims submission have been achieved in other countries. Companies have tried the electronic submission of claims for other types of insurance but have had limited success, primarily because companies have tried to implement this level of automation without first going through the prior levels. Self service can be thought of as a set of tools to submit claims electronically, obtain the status of submitted claims and resolve problems. The proper implementation of self service typically achieves a fivefold improvement in productivity. Medicare s claims processing costs are much lower than those for most types of insurance claims are due to Medicare s use of electronic claims submission. For some lines of business, claims adjusters are one of the types of parties that should be encouraged to use self service portals. The rapid growth of smart phones lends itself to developing claims submission software applications specifically for claims adjusters. A robust self service approach supports the submission of claims in many different structured and unstructured formats. Unstructured formats such as PDF or fax images of pages, and word processed documents can be processed using OCR to turn documents into standard structured files. Structured documents provided as spreadsheets, EDI, XML or other agreed upon formats can also be put into standardized files. All standardized files can them be routed, matched, approved and processed with minimal human intervention. Achieving Level 6 frees up resources and opens new opportunities for claims departments to focus on more analysis. By being able to draw on detailed data, claims departments can achieve even more operational efficiencies as well as provide valuable insights into ways to further enhance the claims process. When companies skip, combine or change the order in which these levels are implemented, their projects are often delayed or do not achieve the expected benefits. A well phased plan can typically move a company from Level 0 to Level 5 in two years or less. Moving to Level 6 can then be accomplished in less than one more year. Changing the sequence or skipping levels often results in cancelled projects or ineffective solutions with insufficient controls and excessive exception processing. Barriers For an organization to make appropriate changes to successfully move to the next level, it must understand the barriers and how to overcome them. Excessive Implementation Time Some automation projects take too long to implement. As a result, once the final results are achieved, it might be found that the needed results have changed or that

6 White Paper Achieving Measurable Gains by Automating Claims Processing Page 6 the original reason for the project is no longer valid. Even worse, subsequent changes in available technology, staff or regulatory issues might have made the original solution ineffective, obsolete or incomplete. In a similar manner, some projects do not achieve the expected or promised benefits and payoffs. One Size Does Not Fit All A solution that is very effective for a large organization may be too costly for a small organization. Conversely, a small organization often can more easily make dramatic changes to processes and procures, since few people are affected and need to be trained. Companies doing business in a single local market are not subject to many of the regulatory issues that affect companies operating in multiple countries. Solutions that work well for some types of claims do not work well for other types. However, technologies like scanning and OCR scale very well and can be equally effective in both large and small organizations. Integration With Legacy Software One of the major barriers to adopting a new technology is integrating it with existing systems. The more complex and encompassing the technology, the more difficult the integration. Both back end and front end scanning require relatively little integration. Insufficient Resources for New Technology Investments Funding for a new solution may be limited and is often withheld if the return on investment is too low or the payback period is too long. Similarly, critical skills and resources needed to implement a solution may not be available. Solutions requiring small investments that can pay for themselves in a short period of time and that do not require significant resources are more likely to be funded. Difficulty with Standards and Guidelines For over 40 years, there have been standards and guidelines for electronic data interchange (EDI). HL7 standards have been in place for health insurance and related record keeping for 10 or more years. The current HL7 version 3 standards for claims processing have been available since ACORD (the Association for Cooperative Operations Research and Development) is a global, nonprofit, standards development organization serving the insurance industry. ACORD has developed standards for most insurance lines of business. Originally, they developed standardized forms and created AL3, an EDI standard, for property and casualty insurance products in the 1980s. More recently, they have developed Extensible Markup Language (XML) standards. The majority of these standards are associated with policy management, and only a few are associated with claims processing. ACORD s standards for electronic claims processing have not been widely adopted. Despite having well documented internal rules, most insurance companies have found that they need their information technology staff to come up with and agree upon specific rules for each party with whom they do business. Such costs may be justified for high volume claimants, but for most lines of business, most claimants do not have sufficient claim volumes to justify the costs of using EDI or XML for claims submissions. Promised Benefits and Payoffs Can t Be Achieved Similar to some automation solutions taking too long, others suffer from not being able to achieve the benefits and payoffs that were expected. This may be due to

7 White Paper Achieving Measurable Gains by Automating Claims Processing Page 7 misunderstanding how systems actually work or insufficient tools and processes to respond to specific situations. A clear understanding of existing processes and procedures along with good metrics to measure interim results are needed. Good metrics for the goals of each project and the performance of each solution provide insights so that corrective actions can be taken and the desired results can be achieved. Perceptions and Reality Are Not the Same There is sometimes a lack of understanding of the actual requirements. This is often due to insufficient up front analysis of the current situation or understanding of the changes that will be required. Sometimes a project team is missing important skills or expertise and does not realize it. Sometimes assumptions are made about what various technologies can do and the assumptions prove to be incorrect. Once a solution is in place, there are often misperceptions as to how well it is working or if the solution is achieving its intended goals. Reluctance to Change and Risk Aversion encountered. By using the approach of moving from level to level, it is usually relatively easy to overcome barriers or to implement solutions that minimize the impact of barriers. In addition to using the level framework, the following are some other techniques that can be used when dealing with barriers. Quick Hits To avoid excessive implementation time, introduce technologies that can be implemented quickly, have low cost and impact few people. Scanning provides a big payoff in a short period of time with little effort. Level 1, back end scanning, is the simplest and most straightforward step. It does not significantly improve productivity but has other benefits such as saving space and reducing the risk of lost files. Level 2, front end scanning, is slightly more complex. It requires all claims related documents to go directly to the claims department or procedural alignment with the mail room. In addition, procedural changes in the claims department and staff training are needed. However, front end scanning significantly increases productivity and eliminates the risk of lost documents. Two barriers to implementing new ideas are reluctance to change and risk aversion. In many instances, these barriers are simply putting off the inevitable. Eventually, someone will take a hard look and decide that the risks are overstated or that external pressures make it necessary to overcome resistance or reluctance to change. When change is avoided for too long, there is sometimes cataclysmic change such as replacing many of the team members or outsourcing. Overcoming Barriers Some of these barriers apply to all levels of automation, but the higher the level, the more barriers that are typically Level 3, OCR and ICR, is also very effective, low cost and low risk. According to several surveys, OCR is the fastest growing technology being deployed, with nearly three times as many companies using it today than three years ago. Incorporation of ICR has helped increase adoption, as it also improves accuracy. Back end scanning, front end scanning and OCR/ICR require no procedural changes or training for anyone outside the claims department or mail room. Other internal and external organizations such as claimants do not have to change their processes but do see an improvement in cycle time.

8 White Paper Achieving Measurable Gains by Automating Claims Processing Page 8 Make a Better Business Case Identify and Measure Benefits and Payoffs Claims processing is a function that presents many opportunities for reducing costs. In addition, once a company puts the appropriate tools in place, there are even greater benefits by improving compliance with company policies, improving customer satisfaction and reducing errors. However, to accomplish these goals, a claims department must make the case and monitor results to show that the strategies achieve the intended results. A business case should clearly identify the benefits, both tangible and intangible. Surveys and case studies can help identify where to focus. Benchmarking against other firms can help to identify overlooked opportunities and benefits that can help to make the case. Quantitative benchmarking, such as comparing costs and cycle time, is often difficult to do as different companies use different measurements. Qualitative benchmarking, comparing processes, can be extremely effective. Visiting companies that are at high levels of claims automation and observing what they do can provide insights into process improvements as well as a better understanding of how to deploy and use technology. Use Metrics to Get Convergence Between Perceptions and Reality When moving from one level to another, it is key to review existing metrics to see if they are still relevant and to add new metrics to help assess whether there are improvements in quality, timelines, throughput and productivity. When Level 3 and Level 4 automated workflow are implemented, it is critical to have an integrated set of metrics to help manage the process. Identify and Reduce Risks to Ensure Success When implementing a new solution, it is necessary to apply the right resources. The project team should include people who have the complete set of skills needed for a successful implementation. While not everyone on the team is likely to have all of the skills, the team in total should have the complete set of skills. Ideally, some of the people on the team will have had past experience working together. Some of the team members should be familiar with both the functionality and the underlying technology of the new solution. Team members should also understand how the changes will have to fit into the company s culture and the way internal and external organizations outside the claims department will be impacted. By carefully managing and reducing risks, moving to the next level can be a successful endeavor. Conclusion Take a critical look at your claims department structure and your claims process. Assess where you are and where you want to be in terms of automation. Find your current level of automation and understand the strengths and weaknesses of your current processes. Identify metrics to address key pressures and key challenges as well as metrics to measure the efficiency and effectiveness of your processes. Set clear goals and time frames for moving to each of the next levels. Identify metrics to monitor progress towards achieving objectives and moving to each new level. Keep up to date on new and emerging technologies, as you will want to move up to additional levels in the future.

9 White Paper Achieving Measurable Gains by Automating Claims Processing Page 9 Kofax Enterprise Capture: Your Onramp to Automating Claims Processing There is a great opportunity for insurers to significantly reduce costs, increase operational and sales efficiency, and attain the necessary data transparency for compliance by treating document driven business process automation as a strategic initiative. Documents paper, fax, (including attachments), electronic forms are the medium of exchange in the insurance industry. They are the engine that drives virtually all back office business processes such as applications, claims adjustments, approvals, exception management and payments. By automatically capturing, classifying and extracting information from documents and forms as soon as they are received in the organization, and then introducing the information into workflows and business applications for straight-through processing, insurers not only reduce processing costs but also improve customer service levels. By providing customer facing employees, brokers, field agents, service organizations and suppliers with an integrated solution that initiates back office business processes directly from familiar front office equipment such as desktop scanners and multifunction peripherals (MFPs), insurers can: Implement an automated document process that streamlines the capture of content in any paper or electronic format, from any device; Use learn by example techniques to automatically extract the appropriate information from any form, claim or supporting document; Initiate the straight-through processing of data and business decisions based on insurance specific rules and knowledge bases; Increase customer satisfaction by providing accurate information when required, regardless of how that information was captured; Reduce errors by eliminating manual, error prone processes; Increase efficiency by implementing automated, information driven business processes; and Implement transaction based capture, distribution, routing, classification and validation. Kofax offers a specific solution for US health insurers, enabling them to: Automate and accelerate the capture of CMS-1500 and UB-04 paper claim forms and supporting documents, and the delivery of that information to business systems and content repositories, replacing expensive manual processes for managing high volumes of documents from a wide variety of sources. Enhance any scanned claim form or supporting document, irrespective of color, size, weight, contrast, condition or content; produce consistent, high quality images with minimal user training; and increase the efficiency and accuracy of downstream classification and recognition processes. Automate the classification and information extraction of CMS-1500 and UB-04 claim forms and supporting documents using self-learning OCR technologies that provide the highest accuracy levels with the most rapid payback, replacing error prone manual processes for extracting and validating information. Automate the validation of extracted information according to American Medical Association (AMA) specifications for data format and field content, verify information relating to medical treatments against AMA Current Procedural Terminology (CPT) code databases, and verify patient data against the insurer s own customer database. Kofax has prebuilt configurations for CMS-1500 and UB-04 forms both red drop out and black and white versions including the extraction and validation of information according to AMA specifications, image preprocessing, database lookups against the AMA defined CPT codes for treatments, and screen layouts for the manual keying of additional data. The benefits include a short deployment timescale, high accuracy and an 80% or more reduction in payment errors.

10 White Paper Achieving Measurable Gains by Automating Claims Processing Page 10 About Kofax Kofax plc (LSE: KFX) is the leading provider of document driven business process automation solutions. For more than 20 years, Kofax has provided award winning solutions that streamline the flow of information throughout an organization by managing the capture, transformation and exchange of business critical information arising in paper, fax and electronic formats in a more accurate, timely and cost effective manner. These solutions provide a rapid return on investment to thousands of customers in financial services, government, business process outsourcing, healthcare, supply chain and other markets. Kofax offers scalability from departmental to enterprise systems, from local to global deployments, from front office to back office applications. Our market leading technology provides a strong enterprise-wide platform on which to standardize all of an organization s document and forms capture processes. About the Author Jonathan Casher is the President of Casher Associates and a Senior Consultant with IOMA Advisory Services. Jon has worked with hundreds of organizations in the public and private sectors providing guidance and assistance on a broad range of financial operations, procure-to-pay, and process automation topics. He speaks at many conferences and leads training classes and workshops. From 1988 through 2007, Jon was the co-founder and Chairman of RECAP, where he was responsible for strategic planning and overall direction. He has been head of the audit committee of the Board of Directors of a public company and is an advisor to several firms. Kofax delivers these solutions through its own sales and service organizations, and a global network of more than 1000 authorized partners in more than 60 countries throughout the Americas, EMEA and Asia Pacific. For more information, visit Kofax, Inc. All rights reserved. Kofax, and the Kofax logo, are trademarks or registered trademarks of Kofax, Inc. in the U.S. and other countries. ( )