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Changing the game in workers compensation

Liberty Mutual's new predictive model takes claims management to the next level

By Elisabeth Boone, CPCU

Everyone knows the 80/20 rule. Formally titled the Pareto Principle, it states that, in many events, roughly 80% of the effects come from 20% of the causes.

As an independent agent or broker, for example, you may find that about 80% of your revenue comes from 20% of your clients—or, conversely, that you spend 80% of your time dealing with the bottom 20% of your clients.

For Liberty Mutual, the nation's leading workers compensation carrier, the Pareto Principle suggests that a small percentage of comp claims may drive the majority of total claim costs. Some high-cost claims are immediately obvious, such as a worker falling from a scaffold and becoming paralyzed. Most claims, however, tend to develop over time, making it difficult to identify and manage costs.

Since issuing the first workers compensation policy in 1912, Liberty Mutual has led the industry in efforts to obtain and analyze claims data, help injured workers return to the job, and assist employers in managing their workers compensation costs.

In 2004, in response to rising medical costs, Liberty Mutual introduced its first workers compensation predictive model to identify slow-emerging claims. In August of this year the insurer launched its next-generation predictive model, which uses sophisticated multivariate analysis to enhance decision-making throughout the duration of a claim.

"As early as claims intake, we now have the ability to identify claims with the potential to be high cost," says George Neale, executive vice president and claims general manager for Liberty Mutual Commercial Markets. "In addition, we continuously assess the risk of escalation of our entire claims inventory through several modeling stages. Arming our claim handlers with this information gives us a unique opportunity to apply strategies and resources at a point in time where they maximize our ability to achieve the best possible outcome for injured workers and our policyholders."

To enhance its predictive model, Liberty Mutual analyzed its large workers compensation claims and medical billing database to find highly predictable variables and to understand the interplay among them, with the aim of identifying claims whose costs were likely to escalate. The insurer evaluated more than 825,000 lost-time claims and 140 million individual medical billing transactions. To validate the accuracy of the updated model, the insurer ran more than 200,000 lost-time claims through it.

Beyond medical and billing data, the new model captures data on individual claimants, based in part on research from the Liberty Mutual Research Institute's Center for Disability Research that identified the psychological and social issues and co-morbid conditions that affect the duration and cost of a workers compensation claim. The new model looks at claims on a monthly basis to pick up changes in each claim's profile that can negatively affect the claim's development, such as emerging medical and non-medical factors.

The new predictive model supports VantageComp™, Liberty Mutual's integrated approach to workers compensation claims management. The insurer has been rolling out the new model to agents and policyholders by conducting symposia in key cities around the country.

Urgent need

Controlling workers compensation claim costs and improving outcomes for injured workers are not just desirable but essential, Neale explains, given that the average cost of a comp claim has been rising faster than inflation over the past several years.

"According to data from the National Council on Compensation Insurance, the average cost of a lost-time claim is approaching $50,000," Neale says. "This figure may be somewhat misleading because 50% of the claims actually close for $25,000 or less, and about 60% of those are less than $10,000. The less severe 50% of claims account for only about 10% of what insurers pay out. That means the more severe 50% of claims account for 90% of dollars paid out."

Catastrophic claims—brain and spinal cord injuries, burns, amputations—are familiar to all workers compensation carriers, Neale observes. In enhancing Liberty Mutual's predictive model, he says, "We're looking at the 25% of claims that drive a high percentage of our payouts. We call these claims 'outliers' because when they come in the door, they look as if they'll close for under $25,000, but as the result of complicating factors, the actual cost is much higher.

"For example, two workers have substantially similar knee injuries. One worker has a smooth course and is back at work in a couple of months and the claim closes for $10,000. The other worker experiences complicating factors that result in a one- or two-year disability claim that can be in six figures," Neale remarks.

"Our model seeks to identify those claims that are at risk of escalation and have the potential to become outliers," he explains. "That's really where the opportunity lies for reducing total cost of risk and improving outcomes for both our policyholders and the injured workers. Going back to the two workers with knee injuries, the one who has complications may be dealing with obesity and/or diabetes. Understanding how those risk factors affect the claim allows us to manage it more effectively and mitigate the impact of those factors," Neale says. "In essence, we're trying not only to identify such factors but also to help the treating physician and the injured worker take action to manage those issues."

Reducing the cost of "outlier" claims is important, Neale says, but it's not the only concern. "A lot of these claims not only have a bad financial result but also a bad quality of life result for the injured worker. In some cases, complications are so severe that the injured worker never returns to work. If you had known about these factors earlier and been able to manage them effectively in partnership with the treating physician, the outcome could have been much more favorable for both the worker and the insurer," Neale asserts.

New power tools

Built into the new predictive model, Neale says, are practical tools that give Liberty Mutual's claims professionals key insights into the development of a claim so they can act quickly to improve the outcome.

First is an Early Alert tool that flags potential high-cost claims. "When our model runs, it identifies claims that have a high risk of severity and/or escalation," Neale says. "The system generates an alert that goes to the claim handler in the form of a PDF that explains what's driving the alert—a complicating factor like diabetes or hypertension."

Second is a work management tool called the Dashboard. "A claim file has multiple variables, all interacting with each other in various ways depending on the status of that injured worker," Neale explains. "Our claims handlers need to synthesize all of this information to ascertain how diabetes might affect one worker but not another, or might affect the second worker in a different way. Take the numerous variables in one claim file and multiply that by 100, and it's clear that each claim handler must absorb and act on a massive amount of data. The Dashboard brings all that information together in a highly efficient way: the nature and severity of the injury, the escalation risk of the claim, whether the injury is being managed consistent with medical protocols and disability guidelines, what medications are being used, and other factors that help the claim handler understand and manage the claim for the best outcome," Neale says. "With the Dashboard, the claim handler can see everything he or she needs to know about a claim, all on one screen."

In addition to giving claim handlers quick access to vital information in an organized format, Neale says, the Dashboard is also a directional tool with built-in alerts. "We use a red-yellow-green concept to alert the claim handler of developments in a claim that require action," Neale says. "A red alert means something is going wrong that needs immediate attention."

As well as being used internally, the Dashboard will be incorporated into RISCTRAC®, a Web-based risk management information system that allows policyholders to capture, track, and report workplace incidents to ensure compliance with OSHA. As a result, Neale says, "Our policyholders and our agents will have access to the same information as our claim handlers with the exception of personal medical information, which we can't share because of HIPAA regulations."

Finally, a Medical Referral tool alerts the claim handler to situations where a Liberty Mutual medical director or nurse needs to become involved in a claim. "The Medical Alert improves claim handling efficiency and effectiveness by linking our medical resource capability to our predictive model," Neale explains. "This allows us to direct the appropriate medical resources to an injured worker at the right time. This means quicker engagement with the worker in cases where timely intervention can make a difference in the outcome. Instead of following a set of rigid protocols, we can deliver resources where we know they can add value."

Adding value, in fact, is at the heart of Liberty Mutual's highly integrated approach to managing workers compensation claims to achieve the best outcomes for injured workers and their employers. As the insurer approaches its 100th anniversary next year, it will continue to be a leader in changing the game in workers compensation.

For more information:

Liberty Mutual Group

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