With lamp and gun, we explore the dark side of workers' compensation claims administration. We will follow, step by painful step, how a good claims operation can tumble into mediocrity. Take note: This happens more frequently than the industry would like to admit.

Just as no bank knowingly

The organization reacts by trying too zealously to contain expenses. It makes hiring and supervision mistakes. It depletes its internal capabilities to perform even the most routine of functions.

In sum, the operation heads into collapse. The conventional means for customers to check on performance, the claims audit, is unlikely to address these root problems if the auditor fails to go beyond symptoms such as documentation lapses.

The consequences of poor claims-handling include exasperating inconveniences for claimant and customer. The losses, of course, are much higher than need be. But of all this, I hardly need to tell you.

I know this because I've talked to a troika of industry professionals: Rick Sabetta, president of Risk Navigation Group in Massachusetts; Bob Titus, a Massachusetts insurance broker and P/C claims consultant; and Frank Pennachio, a Florida-based insurance broker and workers' comp consultant. They are in constant contact with claims organizations and their customers--some happy, some not.

High claims-handling expenses alone are not a mark of poor claims-handling. Poor claims-handling, in fact, often starts with excessive zeal to restrain expenses with no recognition of the consequences.

Cutting costs is never without a price, and management had better think twice before slashing the claims budget. Workers' comp claims have become more complex. Tortuous state rules on claims-handling take their toll. Claims operations deteriorate not from an inevitable scatter of errors but from the convergence of deficiencies.

AN OPERATION DECAYS

To understand how the structure of a claims organization falls apart, picture a claims operation's progressive deterioration: fixation on expenses, staff turnover, blind surrender to process over outcome, misuse of vendors and lawyers, and collapse of reserving.

The first of these stages involves succumbing to keeping the claims-handling budget below a calculated percentage of premium or losses. Sabetta says he has often seen artificial expense restrictions such as headcounts and workload ratios. Lost in the planning equation is thoughtful targeting of claims costs, which is what the customer has purchased with its insurance or third-party administrator contract.

Next is high turnover of adjusters or first-line supervisors. A turnover rate of more than 20 percent a year suggests problems with recruitment and supervision. When rates reach this kind of threshold, reactive claims-handling patterns set in, reinforced by further turnover. The downward spiral now has some momentum. Regression kicks into gear.

Supervisors and adjusters need to have skill and experience to prevail in high-turnover offices. The new hires or incumbent adjusters are suddenly handling established claims with which they are unfamiliar. Claims are reviewed less often. Medical bills and lost wages are paid out without much attention. At this point, no one really cares if the claim ever gets resolved.

Claims supervisors find that training and monitoring of their staffs take more time. Their formal span of supervision, however, is not reduced. Rather, it is increased. Is it then any surprise that their notations in claims files diminish?

Account executives may talk about, say, medical treatment strategies and return-to-work planning. However, adjusters themselves often do not know much about the behavior of their claimants, the employer's work-site practices and the treating doctor's style. At times, they can even be indifferent to medical provider networks.

If this downward trend is not stopped, and stopped quickly, this reactive claims-handling philosophy morphs into a third stage.

Here, supervisors and adjusters explicitly define their job bureaucratically and rigidly. Their mission is not to produce good endings. Rather, their mission is to enter notes in the file, comply with state regulations and close the claim.

Burdened and poorly supervised, the adjusters appear to treat the claim as a file to be stuffed. One sign that this has happened is the rote ordering of independent medical exams without a clear idea of what the examiner is supposed to do, or even how the IME report helps.

DEATH THROES

Hold this collapsing claims organization against one that is building its competence. Adjuster supervision and training are shrinking in the former, expanding in the latter. The adjusters in a rising organization display a professional knack for communicating and collaborating. Organizational decline is marked by palpable isolation.

The collapse only continues. In the next downward stage, the claims operation sends out key claims functions to vendors and defense counsel, without clear instructions or oversight. Pennachio calls it "vendor-contract mismanagement."

The customer is in the dark about who is accountable. A claims operation might delegate work to one firm, which then delegates work to other firms. The outsourcing merry-go-round is in full swing. A central control point for managing the claim has vanished.

A vendor, for example, may do the critical three-point contact at the outset of the claim. But corporate customers often feel abused over this. This is work that must remain with the adjuster if the claims operation is going to retain any integrity of the claims function.

Medical ease managers might take over completely the job of communicating with the claimant. Adjusters may ask defense counsel to manage all issues in litigated claims, including setting the claims strategy, evaluating the loss and negotiating the settlement.

And herein lies a big danger: vendors and lawyers taking over the actual work of adjusting the claims, reporting back to the claims handlers with recommendations that the adjuster may, or may not, accept. The point is that the adjuster stops being an attentive coordinator of a multidisciplinary team and turns instead into a recording secretary. The adjuster has been "adjusted" out of his or her original function.

If the corporate customer cares to probe deeply enough, it may even find that the adjuster is getting the claims information from medical case managers and defense lawyers. The adjuster, who should be serving as the managerial linchpin of the process, has instead been relegated to authoring few perfunctory notes in the claims file.

By this stage, the claims staff is most likely to be made up of adjusters with only rudimentary skills and few years in the field.

The information systems of the vendors may be superior to the system used by the claims adjusters. Before long, account executives begin peddling to customers' reports, which while appearing to come from the claims system, are actually generated by vendors.

The last stage involves a collapse of the integrity of ease reserves. Titus says that once adjusters lose control of the claims-adjustment process, they are no longer able to properly reserve, failing to detect mounting loss exposures. As a result, ease reserves are likely to be left unaltered regardless of changing circumstances as the claim evolves. The file contains scant documented analysis of exposures--for instance, future medication expenses. Diary entries needed to support reserve adjustments are missing.

The now dispirited and defensive claims executives have largely abandoned the idea that they are delivering a professional service. The rot has permeated the organization. This claims process is in shambles.

Can this organization be saved? Only with no-excuses candor at the top level and a commitment to restoring a professional level of communication and collaboration. This translates into a huge investment in supervision and training.

PETER ROUSMANIERE, a Vermont-based consultant and writer, is the workers' comp columnist for Risk & Insurance[R]. He can be reached at riskletters@lrp.com.