Essentials for Managing Risk & Workers' Comp Fred O. Pachón WCCP, CPDM, ARM

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1 Essentials for Managing Risk & Workers' Comp Fred O. Pachón WCCP, CPDM, ARM Most companies in the U.S. and the world are facing challenging and, in many cases, serious financial hardships. The real estate meltdown, the Wall Street collapse, and the recent bankruptcies or government takeovers of financial giants such as AIG, General Motors, and Chrysler are perfect examples of poor risk management. In retrospect, it is clear that all these companies violated the basic essentials of sound risk management. It is evident that these companies had risk management programs and tools. However, their best practices were ignored. Why? When there is apparent surplus and profits are healthy, people tend take short-cuts and become distracted by record earnings (the proverbial good times). The final outcome, as we know it today, is that it was all just a "'mirage."' We found out quickly enough that our profits could not sustain the massive losses (caused by poor risk management). Buyers and investor confidence dropped, and the money stopped flowing. Suddenly, the world stopped. The question then becomes: "What to do?" Start by putting the right risk controls in place and build your risk financial pool, thus confidence, in your product. The logic is customers will follow, once things feel safe.

2 Successful Risk Management The practice of risk management will vary from organization to organization. However, there are 5 distinct elements practiced by companies that reach a high level of maturity in the area of risk management. They are: 1. Operational Goals. Understand that Risk Management is a dynamic element in helping the company reach its objectives and financial goals. 2. Risk and Uncertainty Assessment. Implement a systematic process of discovering an organization's risks and exposures to risk. This process will require risk analysis and measurable effect or impact on the organization. 3. Risk Control. Focus on avoiding, preventing, reducing, transferring, and neutralizing risks and uncertainties. 4. Risk Financing. Align proper insurance coverage or risk financing via letters of credit or bonds, in order to secure your company's viability position should adverse losses or catastrophic situation take place. 5. Program Administration. Support the success of the program, including safety programs, claims management, and risk control.. There's no denying that the cost of workers' compensation remains a top concern for virtually every employer. The problems have been so severe that 35 states have enacted reforms to their workers' comp laws. Despite the temporary relief in cost, most U.S employers continue to see their workers' compensation costs escalate. This is evidenced by the most recent suggested and enacted premium rate increases, which range from 10% to 26%. Take a close look as states such as California, where the WCRB has suggested a rate increase of 26%. This financial hit to employers combined with a sluggish economy, low profit margin, increased medical costs, and WC fraud has created a perfect storm of financial disaster.

3 To make matters worse, the recently enforced position of Medicare Set Aside (MSA) is already showing its ugly face. Clearly, the government does not want to pay for residual medical conditions and respective medical costs from workers' comp claims; however, no one planned for this additional expense. The carriers, and ultimately the employers, must now add this additional cost to past, present, and future claims. The additional cost is and will be staggering in many cases. Again, you ask yourself: "What to do?" The answer is prevent, control, and manage those workers' comp claims. What Is Workers' Comp? Workers' Comp is a no-fault system. Employees who are legitimately injured as a result of their work receive benefits as set by law, regardless of whose fault the injury is. Benefits include medical care, temporary disability, permanent disability, death benefits, and re-training in some states. Liberal construction of the law. Most states have included in their respective labor codes language charging the law administrators/judges to construe the law and available benefits in favor of the injured worker. Exclusive remedy/court system. The system is designed to avoid civil litigation and serve as the only vehicle to ascertain benefits needed as a result of a work-related injury or conditions unless a serious and willful act on the part of the employer is evident. Serious & Willful. If an employer is found guilty of willfully creating a hazardous condition that leads to a work-related injury, the law allows the injured worker to exit the workers' comp system and assert civil, criminal, and punitive damages against the employer (applicable in most states). Injuries/Accidents Covered. If they occur in the course and scope of employment, specific work-related injuries, cumulative injuries, and occupational injuries and occupational diseases are covered.

4 Employer Defenses. Exceptions to coverage include: Intoxication Self-inflicted injury Willful or deliberate act leading to injury Injury arising out of altercation in which the injured employee is the initial aggressor Injury caused by the commission of a felony Special doctrines or rules apply in most states. These include: The coming and going rule Commercial traveler rule Bunkhouse rule Personal comfort and convenience doctrine Psychiatric injury and post-termination claims Clearly, you are better off without workers' comp claims. So how do you avoid them? 1. Become OSHA compliant 2. Develop an IIPP (Injury and Illness Prevention Program) 3. Careful hiring and selection of employees 4. Match job to specific physical capabilities of employee 5. Conduct regular safety training 6. Develop operational best practices and safety rules 7. Develop a disciplinary system for noncompliance 8. Develop a system to gather and quantify data 9. Develop graphs and charts to keep everyone informed 10. Develop culture where safety belongs to the worker 11. Identify and advertise safety goals 12. Recognize and reward achieved safety goals. Or you can invite a proven expert in risk management to help manage these goals for you.

5 What Do I Do When an Injury Occurs? The first hours after an injury occurs are critical. It is during that time that the tone of the claim will be set. It is within that time that the employers have the best opportunity to gather the facts (unrehearsed or polluted) and the best time to make decisions. Clearly, it takes speed and a well-trained team of claim professionals to sort though the commotion, statements, pictures, backgrounds, etc and finally make the right decision. So what is the right decision? Pay benefits when they are due, and deny them when they are not. Either decision can be costly, but the odds are that in the end you will pay less and incur fewer unnecessary costs if the right decision is made. It is at this juncture that you should review your 5 statutory defenses (noted above) and determine if any of those defenses apply to the specific claim. For example, if intoxication is the probable cause of the accident, this can give you legal grounds to deny the claim. Obviously, this will require other steps such as a drug test to prove this defense. The Investigation Begin by learning all there is to know about the injured worker (or new claimant as he/she is now know). There are numerous background check tools that could unveil substantial and significant information about the claimant. Most of this information is available in minutes. Then, turn to the employment application and witnesses, co-workers, and friends for other leads, such as gaps of employment past employers, past conditions, etc. Lastly, conduct a root-cause investigation and determine what went wrong in the process and what led to the accident. A key question should always be posed: "Was the injury a negligent act or a willful act?" If it was indeed a willful act, you may have some legal defenses. Now, fully armed with pertinent information, proceed to interview the injured worker.

6 The Interview & Communication During the very beginning of the investigation/interview, the injured worker should be advised about what benefits to expect from the WC system and also what the law says about fraud and misrepresentation of claims. The injured worker should then be asked questions pertinent to the accident and past injuries and conditions. Once this phase of the investigation is completed, confront the injured worker with inconsistencies and expose the effects of his/her misrepresentation. If the injured workers has been truthful, move quickly to accept the claim and provide all due benefits. If the claim is denied If the claim is deemed non-work-related, quickly explain to the injured worker the reasons why. It is a known fact that many cases become litigated because the injured worker is not advised of the decision and logic behind it. Clear communication is key. If the claim becomes litigated An estimated 25% of the total claims filed become litigated. Typically, these claims are the most expensive ones. It is for this reason that each of these claims must be reviewed at least monthly and monitored by a company representative, insurance adjuster, and defense lawyer. Monitor claims using a diary system that contains a history of the case, a plan of action, and reserve status. Make efforts to ascertain/secure a settlement/resolution of the case within 3-6 months of the incident report. Every day the case remains open, it's incurring expenses and increasing in liability. If the claim is accepted There are many schools of thoughts. However, they all agree on one thing. The sooner a settlement and resolution is reached, the better everyone will be. In addition to this golden key, following is a list of best practices that will undoubtedly bring better outcome and savings to your organization:

7 Ascertain a diagnosis and prognosis of the injury ASAP. Discuss findings with the injured worker. Outline for the injured workers what the treatment plan will be. Outline for the injured worker how long he/she will be in treatment and when he/she can expect to be fully recovered. If surgery is recommended, try to educate the injured worker on the pros and cons of surgery. It is our experience that employers that move to resolve these types of cases quickly and avoid surgery end up saving more in the long run. Make sure the proper TTD/wage calculations are applied. Conduct surveillance or activity checks, should there be any indications of wellness contrary to the general belief. Make sure you assign the case to a defense attorney that is aggressive and understands the case must be settled within 6 months. Make sure that all past pertinent claim information is secured and reviewed. Review reserves regularly. Don't forget that employers can expect to pay more than they should if the reserves are overstated. In addition, actuaries will subject the open cases to development factors. These can have dramatic and adverse effect on the cost of your WC program. Other Considerations Managed Care - A nurse case manager must be placed on all back, neck, or CT claims and/or cases with serious potential exposure. Modified Duty/Early RTW - Institute a return to work and modified duty program. Limit this to no more than 90 days, as most cases/conditions should be resolved within 90 days. Litigation - Ensure your defense attorney is keeping you well informed of all case developments. Share your expectations of the case and measure their performance.

8 Subrogation - This is one area of the law that allows employers/wc carriers to recover moneys paid to an injured worker from others that might have caused the injury or loss. Any losses derived from machine/equipment malfunctions, slip, and falls or other parties involved should be fully explored for potential third-party liability. Reserves - Case reserves should reflect the best evaluation and estimate of the probability of payment or award. Reserves must be clearly identified and separated for medical, indemnity, and expense. Reserves should be reviewed every days to determine reserve adequacy. Reserves should be adjusted upward / downward within 10 days of knowledge of change of exposure. Measuring & Communicating Performance Develop a monthly report that includes negative or positive trends and how they compare to the previously set benchmarks and operational goals. Include financial information for paid, reserved, and incurred losses. Then, communicate your reports to Senior Management and other stakeholders. Quite often, Senior Management is not aware or does not fully understand how a risk/work comp program should or may be performing regularly. This type of communication allows healthy dialogue and action and ensures the continued success of your risk management program. Fred Pachón is Vice President, Risk Management and Insurance for The Select Family of Staffing Companies, helping the company save close to $200 million of what could have been a costly liability. Fred leads a Risk Management department with over 60 safety, claims, and underwriting professionals. His program is considered the most sophisticated and successful risk program in the risk & insurance industry, as evidenced by his recent receipt of the 2008 Risk Innovator, 2008 National Underwriter Award for Excellence in Workers' Comp & Risk Management, and 2009 Risk Manager of the Year. Some of Fred's most innovative initiatives include the development of a risk dashboard, attorney performance benchmark, investigators performance reports, TPA quarterbacks, etc. The programs have been extraordinarily successful, reducing injuries and dramatically decreasing the number of workers' compensation claims filed by the employees. In addition, the program has had exceptional results in the area of general liability and other insurance lines.