The workers’ compensation claims settlement philosophy has a significant financial impact on injured workers and their employers.
In addition to the economic issues, the nature of the workers’ compensation settlement with an injured worker can also significantly impact the worker’s success in moving beyond the injury and productively returning to work.
For the past four decades, employers have been subject to a de facto settlement philosophy without fully understanding all the potential financial, operational, and social consequences.
Employers and claims administrators should be asking the following questions:
- What is the best claims settlement for the injured worker, a full and final settlement or an agreement to provide lifetime medical care?
- Is the injured worker capable of administrating their “future medical” benefits?
- Which is economically the best settlement philosophy for the employer?
- Which is the best for the claims administrator?
The “correct” answer may differ by injured worker, injury type, employer, occupation, and jurisdiction.
Lately, there has been a new focus on analytics and financial results. This focus has driven the issue of a “claims settlement philosophy.” Employers should make an educated decision about their settlement philosophy as it is applied to their workers’ compensation program and not leave the process to “this is how we have always done it.”
Settlement Philosophy: History and Process
Since the 1950s, workers’ compensation industry claims examiners have been trained to settle claims using the following settlement philosophy:
If the employee was still working at the employer (and if the employer was still “on risk” with the insurance company), they should settle the claim at the agreed-upon rating of the permanent disability and agree to provide lifetime “future medical” care necessary to “cure or relieve” the injured worker from the effects of the injury. In most jurisdictions, this type of settlement is called a “Stipulation.”
Alternatively, if the employee was no longer at the employer and or if the employer was no longer “on risk” with the insurance company, the resolution of the claim was supposed to be a “full and final” settlement. In most jurisdictions, this is called a “Compromise and Release.”(C&R) If the employee was still employed, it was common for the claims examiner or the employer to ask for a resignation as one of the conditions for the compromise and release. A complete and final settlement in NY is called a Section 32 Settlement. Some jurisdictions do not allow a C&R of the claim unless a dispute could result in the denial of the claim (such as a dispute of AOE/COE). Some jurisdictions do not allow the settlement of “future medical care.”
The claims administrator would eventually attempt a “compromise and release” after the employee left the company and continued to use the “future medical care” provision of the settlement.
If the injured worker did not use the “Future Medical Award” after a prescribed number of years of inactivity, the claims administrator could “administratively” close the file. However, the responsibility for providing “future medical care” was not abrogated through an administrative closure. Theoretically, the claims administrator is not supposed to destroy or delete the file from their database until the employee has died.
Due to their training and reluctance to question the settlement philosophy, settlement practices were applied to both insurance companies and self-insured employers. This claims approach resulted in many “open future medical” claims being added to the open inventory of claims for both insurance companies and self-insured companies. Due to this process, the collateral needed to cover these claims has grown.
In the 1990s, Medicare added a twist: Any final settlement of medical benefits should consider Medicare’s interest and ensure that no cost was shifted to Medicare.
Employers were not consulted about the settlement philosophy because it was considered a “best claims practice” in the industry.
Cognitive and administrative biases and assumptions which drive the “status quo”:
Apportionment – By agreeing to the extent of permanent disability, it was easier for the claims examiner to get Permanent Disability Apportionment if a subsequent workers’ compensation claim was filed. The laws concerning apportionment throughout the United States vary between jurisdictions and can be problematic. A Full and final settlement does not always accurately define the extent of the permanent disability in the settlement. Therefore, taking credit for prior settlements through apportioning permanent disability may be problematic. With the passage of SB-899, there was additional clarity concerning the apportionment questions, and the need to have stipulated to obtain apportionment in California was reduced.
“Me Too” Claims -The employer and the insurance company did not want employees who had received a lump sum bragging about their settlement to other employees. The common belief was that such activity would result in “Me Too” injuries from other employees. This was mainly a concern in State jurisdictions with a “low threshold” of compensability. Surprisingly, during my tenure with two different insurance companies and one sizeable self-insured company, I saw zero such claims filed. This is partly due to the intensive initial investigation process and ubiquitous cameras, which helped mitigate this exposure.
Medical savings on administratively closed claims—In many jurisdictions, if the “Future Medical” provision of the claim is not used for two years, the file is then “administratively closed” without the employer having “over-paid” for future medical care. Though the exposure remains as long as the employee is alive, many stipulated cases were administratively closed due to medical inactivity. My experience over the years is that due to the lack of medical treatment activity, the actual reserves on those files that were administratively closed were de minimus compared to the actual expenses on those files requiring active future medical care.
Paying multiple times for the same body part—The concern is that a full and final settlement is not a final settlement. In some jurisdictions, the problem was that the employee could be paid multiple times for the same diagnosis or body part injury if the injured worker filed subsequent injuries. While at Safeway/Albertsons for 15 years, these claims were fewer than my number of fingers and toes. Additionally, those claims that were filed were quickly challenged.
The lump sum settlement process resulted in “the frequent flyers” (employees who had filed multiple claims) not filing new claims once they had settled their old claims. I believe this is because they no longer considered themselves “injured workers.”
Financial incentive for TPAs or insurance Companies to keep files open—In some jurisdictions, stipulating the claims kept them open and on the books longer, which resulted in experience modifications and modifications (X Mods) and higher annual premiums for the insurance companies or additional claims service fees for the TPA.
Avoiding cost shifting—By stipulating the claim, the employer would avoid “Cost shifting.” A complete and final settlement might result in double paying the medical costs when the injured worker used the group health insurance to pay for medical treatment covered in the lump sum settlement with the injured worker. It is commonly believed that if employees receive a lump sum settlement, they will purchase a car, a boat, or a house and use their grout health insurance for their industrial injury. I have never seen an independent study on cost-shifting from or to the workers’ compensation system. This is an opportunity for the CWCI, WCRI, or a rating bureau.
State restrictions against full and final settlements to avoid cost shifting—Some State jurisdictions did not want the expense of workers’ compensation transferred to them, so they forbade any permanent and final settlement of future medical care.
Higher settlement costs due to Medicare set-aside programs—When Medicare Set-Aside Programs were implemented, many claims administrators assumed that a full and final settlement was more expensive than agreeing to provide lifetime medical care for the injury.
Lack of access for the injured worker to workers’ compensation medical cost containment programs—It is assumed that if a claim is settled via a lump sum, the injured employee would not have the same access to the cost containment programs (such as bill review and UR utilizing evidence-based medicine) that claims administrators use to control the medical costs. Most doctors bill their “usual and customary” and do not bill in accordance with the local fee schedule. There are vendors that, for a nominal fee, will provide such claims administration. I highly recommend offering this service to all injured workers as part of the settlement. If the injured worker does not want to avail themselves of this service, it is their decision.
Path of least resistance: It is administratively more accessible and far less work to stipulate a settlement than to negotiate a compromise and release a settlement. To stipulate the claim, the examiner only needs to split the differences of the Permanent Disability between the applicant and defense medical and agree to provide lifetime care for the medical costs. If an organization wants to have all claims settled via C&R, it needs to create a process that will encourage all claims examiners and defense council to follow the desired settlement philosophy.
All of the above premises have a basis of truth. However, as the system has evolved over the years, the underlying premises may not be as valid as they once were.
Further Challenging the Biases, Assumptions, and Status Quo
There are several problems with the established settlement philosophy and the associated assumptions:
No analyses have been done to determine which settlement process is the best outcome for the injured workers.
It skirts the legality and claims ethics question for claims administrators to discriminate when handling claims based on whether the insured is a current or former policyholder or if the employee is still employed with the same employer.
Only some examiners, insurance executives, or employers fully understand the cost of collateral (or limitations on the investment of the collateral at insurance companies), which is required by the insurance companies or the state oversight bodies. Therefore, they do not include these costs when analyzing the costs of settlements.
The exposure to future medical costs has changed as the definition of injury expanded to include cumulative trauma and compensable consequences from the injury. In the 1990s and 2000s, there was an explosion of “Sisterhood of the traveling body part injuries.” Fewer claims are administratively closed after two years of no activity, and those that remain open are significantly more expensive due to medical inflation.
Applicant attorneys routinely cull through their future medical files to determine if any “Future Medical claims” are potentially subject to a filing of “a new and further claim.”
There is no definitive study on the claims administration expense costs (C&R vs. Agree to provide lifetime medical care for the injuries) when determining which is more cost-effective to administer. These expenses are usually excluded from the settlement calculation. For insurance companies, because there is a differentiation in the calculation of expense vs. loss in the X mod, calculating the cost of claims administration was omitted when determining the amount of a C&R. This practice extended to the self-insured companies.
Claims examiners do not know the workers’ compensation medical inflation rate (which has not always mirrored the group health medical inflation rate). Medical inflation is usually not a required number to be included in the valuation of a lump sum settlement.
Analysis of a settlement philosophy
- Ensure that the proper benefits are provided to the injured workers.
- Determining what is in the best interest of the long-term health and success of the injured workers.
- Avoid creating a significant financial burden for the injured workers.
- Avoid cost shifting to other social welfare benefit systems as well as within the benefit structure of the employer.
- They are not discriminating against current or former insureds or employees in current employment versus employees no longer working for their employer.
- Including collateral and administrative expenses in an analysis of the settlement, which had historically not been included in the study of the costs of a settlement.
- The ability to achieve finality for the claim.
- Align incentives to obtain the optimum outcomes.
It is essential to have a consistent and fair claim-handling practice. The old settlement philosophy only sometimes benefited the injured worker, the insured, or the insurance carrier.
A full and final settlement (C&R) is good for the injured worker because it severs the artificial ties that bind them to the system.
Though a settlement philosophy may be in place, every claim should be carefully analyzed in light of the unique file facts.
There are always exceptions to any workers’ compensation process. For instance, I do not believe that it is wise to do a lump sum settlement with a worker whom you know is addicted to opioids. Or if there are legitimate questions concerning the worker’s ability to administer the claims. However, a lump sum settlement allows the injured worker to put the workers’ compensation system behind them and get on with their lives. They no longer think of themselves as injured workers. That settlement philosophy also frees up collateral and other company assets.
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