Surge in Work Comp Services Is Ending

The workers’ compensation insurer is for many the centerpiece of a mature industry. Injury frequency almost constantly declines. Insurers earn modest but fairly steady returns on equity, with little risk of insolvency. Market shares generally do not change much. Careers are largely very predictable. Within this industry, however, specialized services as an extension of claims management grew since 1990 from about $4 billion in total costs to about $18 billion today. This service universe expanded dramatically and changed repeatedly in products, organization and leadership. Let’s review this evolution and ask if two decades-plus of growth is coming toward an end. Medical bill review, case management, subrogation services, transportation, investigation, pharmacy management – the list of services is long. With annual growth of all specialized services at the 15%-plus level, successful entrepreneurs have been highly rewarded. Like matryoshka dolls, spending on a direct benefit (such as surgeries) requires bill review; inside that, a more specialized review for implants; and then more specialized responses to new state regulation and court decisions. Claims payers account for these services as “loss adjustment expenses,” which divide into “unallocated” and “allocated” categories. Rick Sabetta, a managing principal with Risk Navigation, a claims consultancy, says that as specialized services grew, insurers and third-party administrators began to reposition some costs as “allocated.” As a result, they, but more likely vendors, could charge the services to the claims file. Sabetta told me that some insurers sought to improve the bottom line by reducing or completely removing the unallocated factor, even to the point of insurers' outsourcing their entire claims operation to TPAs. He said, “It is far less expensive to farm the claims out to the TPA than it is to attract, hire, train and manage a claim staff.” To an investment banker, the outsourcing universe is an engagingly complex version of a supply chain management exercise given to MBA students. The entrepreneurs compete through superior information technology, superior management talent and guiding more volume through a scalable structure. Since the 1980s, the supply chain challenge always has reinvented itself into something larger. That’s why the bankers come back often, confident of liquidating their investments in a few years at a profit by selling them to other bankers. The 1980s saw the rise of case management, and national expansion by vendors such as Intracorp, CRA, Genex and Corvel. The 1990s saw the introduction of bill review firms, with their complicated coding systems. State-mandated closed networks started to emerge. So did utilization review. Major state reforms, in Florida in the 1990s and Texas and California in 2004-2005, effectively educated the payer community that it could – and legally had to – commit to using specialized services. In the 2000s, pharmacy benefit management arrived. Regulators rarely demand transparency in the outsourcing universe. For example,  physical therapy is today heavily influenced by proprietary physical rehab networks, but these networks do not share their experience publicly. Pharmacy benefit managers publish about their experience, but only voluntarily. This universe of firms that arrange on behalf of claims payers for physical therapy, dental care, translation, Social Security disability awards, etc., arose from a choice claims payers made to outsource. But would Walmart or Home Depot have outsourced management of their supply chain to vendors to anywhere near this extent? Prospects of double-digit growth in the outsourcing universe may be declining. Frequency of claims continues to decrease. There may not be a new major class of claims operations for payers to outsource. Some large states could lay down mandates that create demand, such as new utilization review or preferred provider organization rules, but the bigger states have mostly done that already. I think we are going to see more of a Walmart culture in how the supply chain is controlled. This article was first published in workcompcentral.