Risk Management

A Refresher Course in Workers’ Comp

A scathing audit of the workers' compensation system in a Florida school district spotlights the need for tighter employer scrutiny of outsourcers.
David KatzJuly 14, 2005

Finance executives wondering what’s wrong with the economics of health care at their organizations — not to mention the nation at large — might learn some lessons from the recently released audit report of the school district of Broward County, Florida. The report spells out the failures of the district’s $34 million (in annual operating costs) self-insured workers’ compensation system.

The Broward district’s brand of workers’ comp, while typical of many big employers, is only one piece of the health-benefits puzzle. Yet such programs share with group health insurance two related problems that arguably boost the overall costs of the employer-provided benefit system: an over-reliance on “go-betweens,” coupled with a lack of transparency in reports of how company dollars are being spent by intermediaries and services vendors.

In both self-insured workers’ comp and group-health benefits, an employer often depends on convoluted payment systems run by a third-party administrator (TPA), which contracts with managed-care vendors and administrative-services providers. If the company’s risk and benefits managers aren’t keeping close tabs on the TPA, obscure reporting of the voluminous and often confusing data can provide the administrators and other services vendors with ample opportunity to bill too freely. And even when risk managers have the best of intentions, getting their hands on meaningful data can be a tall order.

Indeed, the 200-page Broward report provides vivid documentation of the cost leakage and bungling that can follow when a self-insured employer lacks adequate control of its vendors. There you can find, for instance, an indictment of how Gallagher Bassett Services Inc., the TPA the district has used for 17 years, looked into the causes of workers’ comp claims. (Gallagher Bassett did not respond to requests for an interview for this article.)

In one case, the auditors charge, because Gallagher failed to pursue matters vigorously enough, the district paid out about $75,000 for a hysterectomy recommended for an employee who had been hit in the stomach with a doorknob. Workers’ comp payments also were made to one employee who was hurt while exercising and to another injured in a fistfight with a co-worker. The district even bought a spa for an employee’s medical needs and will pay its upkeep and electric bills for the employee’s lifetime.

The report also takes the company’s managed-care and case-management provider, CorVel Inc., to task for “obtaining a large quantity of discounted medical services, rather than facilitating quality care and superior results through a concentrated collection of high quality clinicians who are properly paid.” In particular, the auditors criticized CorVel’s use of non-specialists, claiming that that can make injuries worse and boost medical costs.

Despite shortcomings in the school district’s workers’ comp system that added costs of as much as $600,000 a year, payments to services providers and lawyers were on the rise, according to the report. In a criticism often heard in insurance circles, during the past four years an increasing percentage of the workers’ comp program’s funds — from 14 percent in 2001-2002 to 22 percent in 2004-2005 — were going “outside the system” into attorney’s fees and payouts to Gallagher and CorVel rather than to injured workers or to doctors caring for them, according to the auditors. In CorVel’s case, the number of payments to the company for services provided to the district rose by 18 percent since 2002-2003; the total dollar value of the payments rose by 38 percent.

The auditors also assert that Gallagher, which is under contract with the district from July 1, 2001 through July 1, 2006, gave unauthorized raises to CorVel and caused the district to be charged by both companies for the same administrative services. Gordon Clemons, CorVel’s president, chairman, and chief executive officer, disputes the latter charge. “We believe that the case management services CorVel provides Broward County do not duplicate services that fall in the responsibility of Gallagher Bassett,” he says.

Although harsh with the managed-care vendor — and especially harsh with the TPA — the auditors’ strongest criticism is leveled at the district’s own risk management department. They charge the department with “ineffective and inefficient oversight” of the workers’ comp program and with taking only a “casual interest” in the program’s operations.

Peering into the Woodwork

In particular, the auditors assert that the risk management department didn’t establish goals for the program and didn’t offer metrics to rate the performance of Gallagher and CorVel. In essence, they lay responsibility for several years of double-digit increases in workers’ compensation costs squarely at the door of the risk manager. (The district’s director of risk management, Jeffrey Moquin, did not return phone calls requesting an interview.)

The report also acknowledges how tough it can be for a risk manager to manage cost and quality when the TPA refuses to provide details of its relationship with a key service provider. Gallagher’s refusal to supply the auditors with its contract with CorVel has hindered district officials from being able to understand how referrals for case management and medical services are made, according to the auditors.

The report states that the TPA “cited corporate policy” for not showing the contract to auditors. “They told me point-blank I wasn’t getting it,” says Ken Shaw, a director in the office of the school district’s chief auditor, about his in-person request for the CorVel contract at Gallagher’s offices in Itasca, Illinois. “Their argument was that it had nothing to do with [Broward’s] contractual relationship” with Gallagher. Moquin, the risk manager, expects to receive a legal opinion by the end of this month about whether the district is, in fact, entitled to see the contract, according to Shaw.

For their part, the auditors write that the contract is “paramount to understanding the relationship between these two parties,” and the inability to see it might hinder the district’s staff from authorizing and accounting for “how our people are treated or our money is to be spent.”

That understanding is essential to proper oversight, say workers’ comp experts, because the TPA is in a position to steer employer business to a managed-care vendor. If the vendor buttresses that relationship by doling out fees or commissions to the TPA, the employer could end up paying dearly. Despite claims of working solely on the employer’s behalf, for instance, the TPA might choose vendors based on the fees or commissions they pay, or look the other way if vendors overbill. In fact, the TPA could stand to gain from the overbilling, since vendor-to-TPA fee arrangements are commonly based on a percentage of the managed-care company’s revenue.

Without commenting on the Broward situation specifically, CorVel’s Clemons says that the company has “paid sales commissions to TPAs.” He also says that CorVel pays Gallagher for scanning incoming medical bills involving Broward workers, pointing out that Gallagher has “strong and effective systems in place.”

To be fair, the existence of sales commissions might well stem from the excessive price pressure that employers have put on TPAs. Employers “have been to a certain extent complicit” in vendor-to-TPA payouts by trying to “beat [TPAs] up for lowest possible administrative costs,” observes Joseph Paduda, the principal of Health Strategy Associates, a Madison, Connecticut-based workers’ compensation and managed-care consulting firm. “It’s difficult for TPAs to get a profit, and they seek it in other places,” says Paduda.

Citing “employer involvement and oversight” as “the most critical component” in a workers’ comp system, the Broward auditors hold the risk manager, rather than the TPA, ultimately accountable. The auditors, who also find the handling of the program “woefully inadequate,”
recommend that the district restructure its operations so that workers’ comp is a department unto itself, rather than a fiefdom under the sway of risk management.

As for finance chiefs of other self-insured organizations, the message of the Broward audit is readily apparent: Keep close watch on how your risk manager handles vendor relationships. To be sure, the workers’ comp system “is a complex environment not well understood by those not working in it,” says CorVel’s Clemons. But CFOs need to be confident that the risk managers who report to them are among those who do.