Insurance Thought Leadership

Does a Safe Workplace Create Large Profits?

2013-05-24T15:06:25+00:00

Or do high profits create the opportunity for a safe workplace?

The success of Paul O'Neill as CEO of Alcoa Corporation has resurfaced in the book, The Power of Habit: Why We Do What We Do in Life and Business, by Charles Duhiggs.

Prior to becoming US Treasury Secretary in the Bush Administration, O'Neill took on the task of turning a "tired" and "floundering" company into a highly profitable and efficient organization. To simplify his formula for success, he created and led a new mindset of safety in the workplace no matter the cost. Employee safety became the main goal of Alcoa.

Critics emerged from everywhere questioning O'Neill's belief that a goal of zero workplace injuries would result in high corporate earnings. The facts proved the critics were wrong, and history continues to show continuous financial growth after O'Neill retired from the company.

From 1987 to 1991, the employee injury rate decreased 50%. Because of the culture O'Neill created, the injury rates continued to decrease even after he retired from Alcoa and continue to do so today.

During his leadership, company sales increased 15% each year, and the earnings per share increased seven times the level when he joined Alcoa.

Obviously, most employers are not the size and financial stature of Alcoa. But, what can all organizations gain from the "O'Neill Formula for Financial Success?"

No one can argue that making sure employees leave work for home as healthy as they arrive at work is a bad idea. Let's face it — creating a safe work environment should always be the top priority for any organization. Most employers believe safety is important, but they feel they don't have the time or resources to adequately address all issues. The solution to the employer's dilemma is to align themselves with a risk insurance advisor who can help an employer plan, implement and lead their organization through a consistent process to achieve measurable results of improvement.

If an employer's risk insurance advisor relationship does not have the interest, resources, knowledge and experience to be a coach and leader for a program like this, it should be time to find a new relationship. Keeping valuable assets safe, like employees, and helping to keep an organization financially sound are of the utmost importance.

Financial success can be achieved at different levels — the O'Neill approach will rally all stakeholders and result in outcomes that you could not have imagined. Certainly, O'Neill's detractors felt that way until they saw the results.

What has your risk insurance advisor done for you lately to help you achieve your financial goals?

What Do New Workers’ Compensation Reforms Sweeping the Country Have in Common?

2013-05-22T14:46:50+00:00

AOECOE - Not Just Another Acronym

California Senate Bill 863 was passed in the fall of 2012 and went into effect on January 1, 2013. Senate Bill 1062 was just signed into law by Governor Mary Fallin of Oklahoma and will take effect January 1, 2014. On April 30, 2013, Tennessee Governor, Bill Haslam, signed into effect Senate Bill 200. House Bill 154 is expected to go into effect in Georgia in July, 2013. What are these bills? The first of many sweeping Workers' Compensation reforms. A common theme in these bills and other pending reforms is to level the playing field for employers and accept only those claims that arise out of the course and scope of employment, AOECOE.

A well-known term of art in the Workers' Compensation arena, AOECOE is not just an acronym. It is transitioning from a term of art to a statement with teeth, as reforms are actually including such wording into bills. The purpose of doing this is to establish whether an employee's alleged injury is work-related and happened in the course and scope of employment, or whether the injury is non-industrial or affected by third parties.

Workers' Compensation is a no fault system and thus benefits the injured worker, as, in order to receive benefits, he or she does not need to prove that the employer was negligent. However, it is the injured party's burden to show that the injury did, in fact, occur while at work, while employed as an employee and while undertaking some activity for the benefit of the employer. The injury itself must have been caused by the accident or employment conditions, and not from some other non-industrial related factors or degenerative factors.

The determination of AOECOE has long been an OSHA policy. OSHA's Injury and Illness Recordkeeping Regulation Section 1904.5: Determination of work-relatedness contained under section (a) basic requirement states in order for an injury or illness to be work-related an event or exposure in the work environment is either caused or contributed to the resulting condition or significantly aggravated a pre-existing injury or illness. Work-relatedness is presumed for injuries and illnesses resulting from events or exposures occurring in the work environment.

California's SB 863 was signed into law by Governor Brown on September 18, 2012, for a January 1, 2013, effective date. While certainly not the first bill to consider AOECOE issues, it is one of the most significant Workers' Compensation reform bills to specify AOECOE language. SB 863 calls for an Independent Medical Review (IMR). While this process may be problematic for an employer, since an IMR can be requested only by an injured worker following a denial, modification, or delay of a treatment request through the utilization review (UR) process, the bill specifically states that this does not apply if the injury is in question for AOECOE reasons.

On May 8, 2013, Oklahoma Governor Fallin signed into law historic Workers' Compensation reform, Senate Bill 1062. The bill defines compensable injury as arising out of the course and scope of employment and does not include: any strain, degeneration damage or harm to disease or condition of the eye or musculoskeletal structure or other body part resulting from the natural result of aging, osteoarthritis, degenerative process or pre-existing, except if a treating physician clearly confirms an identifiable and significant aggravation arising out of AOECOE.

On April 29, 2013, Tennessee Governor Haslam signed a Workers' Compensation reform bill into law, SB 200. It specifies that injuries arise out of and in the course and scope of employment only if proven by a preponderance of evidence that employment contributed more than 50% to causing the injury, AOECOE.

In my experience, the majority of injuries are real, but they are not AOECOE. Injured parties may exaggerate the severity and extent of their injuries or may attempt to hide pre-existing conditions. So how do any employers determine if injuries are AOECOE? The answer is simple. They need to ascertain what the employees' statuses are pre-injury. This is effectively done with baseline testing.

Baseline testing is a bookend solution. To be effective, it should be objective, meet the criteria for evidenced-based medicine, be job related and consistent with medical necessity. It needs to be specific to the metrics being evaluated. A good example of a specific baseline test that is recognized in some jurisdictions by statute is audiometric testing. Hearing tests are routinely done in environments with high noise exposure to determine a baseline that is referenced once a claim is filed. This is commonly referred to as the lock box defense.

Audiometric testing is beneficial for documenting hearing loss but is not designed to address other conditions such as musculoskeletal disorders (MSD). MSDs are the most frequent and costly claims for an employer. In order for a baseline test to be utilized for MSD, it must not only be objective and reproducible, it must contain measurements to ascertain electromyography (EMG), range of motion (ROM) and function.

In addition, baseline testing must be legally defensible. In 1990, Congress enacted the Americans with Disabilities Act that outlines what makes a legally defensible test. To be legally defensible, the testing needs to be job-related and consistent with business necessity i.e. the employer must show that it "substantially promote[s]" the business' needs. It must be repeatable, objective and address functionality. Also, since baseline testing is considered to be a medical exam, it needs to evaluate some functions of the job.

Baseline testing is not a post-offer, pre-placement test, as it can not identify disability because the data is not read and no hiring decisions are made with baseline evaluations. When a work-related injury occurs, a post loss test is conducted, at which time the baseline test is read and compared to the post loss results, hence the bookends.

When compared, the results can determine if an injury exists and if it has arisen out of the course and scope of employment, thus determining an employer's true responsibility. Good baseline testing is non-discriminatory and prevents "false" claims. The sweeping Workers' Compensation reforms allow for a new definition of "false" claim: one that is not AOECOE. A false claim no longer means fraud! A proven example of an effective baseline test is the EFA-STM.

Workers' Compensation statutes are helping employers by allowing them to accept the claims that are only AOECOE. Employers need to see that they comply with legislation, and baseline testing now gives them an objective assessment to do just that.

Unintended Consequences Of Exchange Rate Filings

2013-05-21T14:30:38+00:00

For most states offering health care exchanges, rate filings were due by May 1, 2013. Each carrier hoping to operate within the exchange had to finalize their benefit offering and related rate filing. Some of the results are gradually emerging as regulators review the filings. Some have been rejected, some have been accepted and approved, some are going through various stages of review and revision. The interesting result of this process is finding out what rates will be and what costs carriers expect.

Prior to the actual submission process, multiple reports were issued prognosticating what rate levels might emerge. Some of these reports suggested that the anticipated morbidity levels (i.e., claim levels) for those enrolling in these programs would be higher than current individual benefit programs. This was logical to most — the hard part was the anticipation of what was a reasonable load in light of what other companies might assume and use in their pricing.

We learned of estimates ranging from a low of at or above 10% to a high approaching 45% - 50%. An important consideration is the nature of the current individual products offered in the marketplace (i.e., are they individually underwritten or were they guarantee issue). In those states where health plans and carriers were permitted to medically underwrite the product, the transition to a guarantee issue product will be greater than in those states where the product was already a guarantee issue product.

Early results from several states show that some major carriers assumed lower than expected morbidity factors, with other carriers attempting to withdraw their filings and resubmitting more competitive rates. We are not aware of any exchange where carriers decided to withdraw and raise rates.

The unintended consequence of this is very interesting. Rates will be lower than many experts predicted. The market pressures have been significant with companies trying to reduce their rates. Whether this is the result of competitive pressure or a knee-jerk reaction to stay in the market, it is unclear at this time what this will do to financial performance. Under health care reform, carriers are at risk to enroll individuals that have a higher health status and risk profile. These individuals were uninsured in the past and now are going to enroll in some program or be subject to financial penalties.

For those individuals who were skeptical about the cost effectiveness of health care reform, this will have an interesting impact on premium levels. For those who anticipated some cost reductions, it is unclear that they anticipated this type of response. It is our understanding that complete rate results will be released in the State of California later this week. It will be very interesting to see how different carriers developed their rates.

The bottom line is that carriers have responded in somewhat of an unexpected way, a rather bullish approach which will have a favorable impact on health premiums.

Choice In Health Care? A Hassle Worth The Effort

2013-05-17T19:38:25+00:00

It was almost a miracle, an immediate answer to my question about the cost of an ultrasound.

"$196 including the interpretation, and we price-match if you find a better price somewhere else."

In my eight years having a health savings account (HSA), clear, immediate information about cost has been extremely rare. Most often, "How much?" provokes the dismissive evasion of "It depends" or irritation, followed by "We have no way of knowing."

In other instances, office personnel launch into detailed explanations about how deductibles and insurance work in an effort to convince me I don't really need to know. Another tactic is to stall: "A representative can call you with an estimated price in 3-5 days, but it will only be an estimate." Or the sad response, accompanied by a look of pity, "So you can't afford insurance?"

When I asked a surgeon about the hospital-acquired infection rates in the hospital where he performs his operations, he had the audacity to give an annoyed don't-worry-yourself-about-such-things expression and report that "In my area of the hospital," patients don't get infections. This contradicted my knowledge that some of his own patients had, in fact, developed infections.

Asking questions about care is a hassle, an inconvenience, and sometimes a frustrating battle against a system unfamiliar with sharing information or control. By tradition, we can't get a test without a doctor's order, we can't receive our own test until the doctor gets it first, we can't know how much things cost, and we can't refill a drug for the 100th time without getting another prescription exactly the same as the first 99.

In an environment built on layers of permission — have the pharmacist call the doctor who can call the insurance company — do-it-yourself requests aren't welcomed. Some providers seem genuinely insulted by requests for information. "How could you question my ________ (fill in the blank with abilities, record, skill, safety, intentions)?"

Choices in health care can be overwhelming. Which treatment? Which doctor? Which hospital? How much should I spend? What metric should I trust? In some ways it was easier when we had strict gatekeepers and coverage that paid for everything. Relying on mother-may-I rules assigns responsibility for everything to someone else, including the bill.

So why make the effort?

First, because 25-30% of the care we receive is unnecessary or could be handled with a less-invasive alternative. When employees of GE are told they need a heart procedure, transplant or back surgery, they have the option of an all-expenses paid trip with a family member to the Cleveland Clinic for a second opinion. In about one-quarter of the cases referred so far, the experts at Cleveland Clinic have determined the procedure isn't their best choice of care¹. No matter how nice or qualified one doctor may be, he or she has a specific preference for how to treat a problem. That preference may not be the best option for every patient. Ask for a second opinion, you might get a very different answer.

Second, where we get care can drastically change the outcome. Check on sites like Leapfrog.org, healthgrades.com, or consumer reports and you will find huge differences between hospitals in the likelihood of being harmed by errors in care. As many as forty-thousand patients per day experience an error, such as infections, wrong medications, or falls, many of them life-threatening. At an estimated 180,000 fatal events per year, medical errors are the third-leading cause of death, behind heart disease and cancer².

What we know is that almost half of all medical errors are preventable through low-cost efforts and policies. Yet, fewer than one-in-five hospitals implements the safety procedures known to work. This is one area where the worst offenders resist transparency, and hope you don't ask. Plus, it seems doctors themselves recommend a hospital based on familiarity, not outcomes³.

The differences are meaningful: go to a top-ranked hospital and you reduce your risk of a mistake by almost half⁴. If it is not an emergency, do your homework and choose wisely.

Lastly, there are two reasons to be concerned about the cost of care. One is a societal concern: at over 18% of GDP⁵, health care costs threaten to cripple our economy. Insurers do not choose their networks based on price or quality of care. So, it will be up to payers and consumers to put constraints on spending growth.

If you aren't motivated by the national economy, the second reason is our personal budget. With ever-increasing deductibles, it matters to our own pocketbooks to push back on providers whose prices far exceed others of similar quality. As more and more of us ask about cost and choose based on the best value, more providers will respond.

Perhaps slowly, things are changing.

More of us are inserting ourselves: If I have to pay for this, and it is happening to my body, I should know what it costs and what the results will be. We see self-serve examples like AnyBloodtestNow.com offering blood tests at a known price without having to see the doctor first⁶. Here's a good idea: bring the cholesterol results to your check-up so you can talk about them without scheduling another follow-up visit.

Also, some facilities, such as the $196-priced group mentioned at the beginning of this blog, are responding to increased price sensitivity by offering an upfront, guaranteed price. At least it eliminates one of the many unknowns we face during a medical episode. As a comparison, another preeminent facility took five days to answer my cost question for a simple ultrasound. The price? $625 for the test, and another $650 for the mandatory visit with one of their doctors. "But," they said, "we can't be held to this price, it is only an estimate." As you might guess, I chose the former.

It's not easy getting involved in these choices. I totally empathize and understand those who give up and simply go with the easiest option. My compliments to fellow health care explorers trying to navigate a seemingly endless list of decisions. I admire those who stick with it. It can make a difference.

This article was first posted on Altarum.org.

¹ Lynch WD. Personal Communication. 2012.

² Levine B. The Hospital Harm Factor. Patient Safety, Natural Health Blog [Internet]. 2011; 2012. Available from: http://www.jonbarron.org/article/hospital-harm-factor.

³ Morsi E, Lindenauer PK, Rothberg MB. Primary care physicians' use of publicly reported quality data in hospital referral decisions. Journal of hospital medicine : an official publication of the Society of Hospital Medicine. 2012;7(5):370-5. Epub 29 FEB 2012.

⁴ HealthGrades. Patient Safety Excellence Award™ 2011 [cited 2012 October 31]; Available from: http://www.healthgrades.com/ratings-and-awards/2011-patient-safety-excellence-award-announcement.

⁵ Martin AB, Lassman D, Washington B, Catlin A. Growth in US health spending remained slow in 2010; health share of gross domestic product was unchanged from 2009. Health Aff (Millwood). 2012;31(1):208-19. Epub 2012/01/11.

⁶Any Lab Test Now! 2012 [cited 2012 October 31]; Available from: http://www.anylabtestnow.com.

Can Employers Ever Monitor Employees’ Personal Social Media?

2013-05-16T13:57:29+00:00

Yes, but be careful! There is no denying that the use of social media sites such as Facebook, Twitter and LinkedIn has exploded. The explosion includes both personal and business use of social media. It also includes use that is beneficial to employers and use that can be very damaging. Unfortunately, the influx of employment lawsuits that have followed the explosion have had limited practical value in guiding employees and employers on the permissible use and oversight of social media in the workplace. While many questions remain, the California State Legislature's recent enactment regulating employer use of social media does provide some guidance.

California Labor Code section 980 was enacted to prevent employers from (1) requesting an employee disclose usernames or passwords for personal social media accounts; (2) requiring an employee to access his or her personal social media in the presence of the employer; or (3) requiring an employee to divulge any personal social media to the employer. Applicants are protected in the same way as employees. The new statute, coupled with existing privacy laws, limits what employers may monitor when it comes to the personal social media of employees and applicants.

Definition Of Social Media
In what appears to be an effort to account for the ever increasing development of new social media, the new statute broadly defines social media as an "electronic service or account, or electronic content, including, but not limited to, videos, still photographs, blogs, video blogs, podcasts, instant and text messages, e-mail, online services or accounts, or internet web site profiles or locations."

Prohibitions On Employers Monitoring Social Media
Employers may not require, or even request, that an employee or applicant:

Disclose a username or password for the purpose of gaining access to the employee or applicant's personal social media;
Access their personal social media in the employer's presence; or
Divulge any personal social media.

Employers are also prohibited from retaliating or threatening to retaliate against an employee or applicant who refuses to comply with a request or demand that violates the statute.

Despite the statute's broad definition of social media and its restrictive prohibitions on employers, it does provide some exceptions under which employers may request and gain access to employees' personal social media. For each exception, however, pitfalls exist. Employers need to know them in order to avoid costly mistakes.

Accessing Social Media As Part Of An Investigation
The statute does not affect an employer's existing rights to obtain personal social media "reasonably believed to be relevant" to an investigation of employee misconduct. Under this exception, the employer may only access the employee's personal social media under the condition that it is used strictly for purposes of the investigation or a related proceeding. While the statute does not define what "reasonably believed to be relevant" means, California Courts evaluate employee privacy concerns utilizing a balancing test, weighing the employee's reasonable expectation of privacy against the employer's legitimate business needs for accessing the information. It is wise for employers to evaluate each instance carefully before requesting an employee to divulge his or her personal social media under this exception.

Employer-Issued Electronic Devices
The statute does not preclude an employer from requiring an employee to disclose a username and password for the purpose of accessing an employer-issued electronic device such as a computer, smartphone or e-mail account. Employers should exercise caution, however, before digging through an employee's use of personal social media on the employer-issued device.

It is a violation of the federal Stored Communications Act to access a restricted or password protected site without the owner's consent. So, while it is permissible for an employer to require an employee to provide his or her password for access to the employer-issued device, an employer may be violating the law by accessing social media information on the device. For instance, having the IT department look up the employee's Facebook password stored on the employer-issued device in order to gain access the employee's personal Facebook page.

Adverse Action Against Employees
The statute does not prohibit an employer from terminating or taking adverse action against an employee or applicant if otherwise permitted by law. For instance, an employer may discipline an employee for violating company policy and using personal social media during work time. Nor does the statute specifically prohibit employers from accessing publicly available social media. This means that employers may view the personal social media of its employees that is available to the general public on the internet, such as blogs and other websites that do not restrict user access.

But, before taking any adverse action against an employee based upon the content of his or her personal social media, employers must keep in mind that California law prohibits employers from discriminating against an employee based upon the employee's lawful conduct occurring away from the employer's premises during non-work hours. Moreover, the National Labor Relations Board has held that employees may use social media to voice concerns over working conditions. While an employee complaining about working conditions or an issue with a manager on his or her Facebook page may reflect negatively upon the organization, the employee's use of social media to criticize working conditions may qualify as protected speech for which an employee cannot be lawfully disciplined.

What Is An Employer To Do?
First, be patient. The law develops at a snail's pace compared to the development of new technology and cultural trends. More guidance will come. In the meantime, employers should approach social media issues with careful consideration and planning. This should start with the development of a written social media policy, and not a sample or template policy. The policy needs to be specifically tailored to the employer and should discusses the importance of social media, the impact that social media has on the workplace, and how employee's use of social media reflects upon the organization. The policy should also define the permitted use of technology owned by the organization and employee's expectations of privacy or lack thereof.

If an employer elects to have a policy restricting personal social media use during work hours, it should ensure that the policy is applied even-handedly to avoid claims of discrimination. Employers should also consider the pros, cons and legal issues that relate to restrictions on supervisors' social media interaction with subordinates. For most organizations, it would be advisable to inform employees that they are not required to interact with supervisors on personal social media and will not be retaliated against for refusing to interact with supervisors.

A carefully planned and well written social media policy that outlines the organization's goals and expectations of employees' use of personal social media can help ensure compliance with the new rules and prevent costly disputes with employees.

5-Year Analysis Of Pharmacy Burglary And Robbery Experience

2013-05-15T02:31:53+00:00

Background
Burglaries and robberies represent a significant expense to pharmacies in the United States. Beyond direct insurance costs, which are driven by loss experience, pharmacists experience financial, business interruption and psychological costs. Pharmacists are concerned about armed robberies, and even finding that a store has been burglarized overnight can be upsetting and cause the expenditure of thousands of dollars in an effort to prevent reoccurrence. Beyond what is covered by insurance, customers pay deductibles that can easily be exceeded as a result of criminal efforts to gain entrance. Pharmacists that are victimized face hours of dealing with police, the Drug Enforcement Administration, board of pharmacy, contractors and their insurance company. As state and national efforts increase to address the underlying problem of prescription drug diversion, pharmacists face increasing administrative and regulatory compliance costs.

When we seek methods to effectively combat the problem, it is important to understand the larger problem of prescription drug diversion and how it fuels pharmacy burglaries and robberies. Described by the Centers for Disease Control as having reached epidemic proportions in the United States, demand for prescription narcotics, coupled with a widely available supply, create an environment that is ripe for criminal activity.

While the U.S. represents only 4.6% of the world's population, we consume 80% of the global opioid supply.
Five million Americans use opioid painkillers for non-medical use.
We experience almost 17,000 deaths from prescription narcotic overdoses annually. In a 4 year period, that is more deaths than we experienced during the Vietnam War.
Morphine production was at 96 milligrams per person in 1997. By 2009, that number increased eight-fold.

The origins of the problem are complex, but are based on a cycle of over-prescribing that has occurred over the past two decades. While well intentioned, liberal prescribing coupled with aggressive marketing, incentives and even encouragement to physicians to relieve pain at all costs sparked the fire. Unchecked by adequate physician education on drug diversion and dependency, and a lack of appropriate chronic pain management protocols, demand and dependency increased. As demand increased, so did production levels, opportunities for profit and creative methods of diversion.

Pharmacy crime involves every part of the distribution chain from manufacture through wholesale, retail, and ultimately to the end user. Pharmacists have been victims of deceptive practices, prescription fraud, employee diversion, burglaries and robberies. According to the Centers for Disease Control, prescription drug diversion, measured by drug overdose deaths and pharmacy crime, is at epidemic proportions.

National And State Actions Taken To Address The Problem
Significant efforts continue to be taken at the national and state levels to combat the problem, with various degrees of success. Each of these has a direct impact on how customers conduct business. Unfortunately, most will have no short term impact on reducing the probability of pharmacy burglaries, robberies or employee diversion.

Prescription Drug Monitoring Programs — Inputting data on prescriptions written and prescriptions filled, particularly for opioid based narcotics is an effective measure for identifying doctor shoppers, abusers and other drug seekers. While the programs are in place in 49 states, most do not connect with each other. This allows a drug seeker to get a prescription in one state and have it filled in another. Use of the program varies significantly by state between being mandatory, voluntary or somewhere in between. In addition, many of the programs are set up on a "free trial" basis for 5 years. As the trial periods are expiring, funding is becoming difficult to continue the programs, notably in California and Florida. Most pharmacists support these programs; however, there has been some resistance by major chains and various state medical associations — in large part objections are based on the time it takes to enter data.

Drug Courts — Intended to allow persons committing crimes to recover, many of these courts eliminate or significantly reduce sentencing for burglars and, in some cases, robbers. This results in a significant level of resentment by pharmacists who are victims of crime.

Drug Enforcement Administration Strike Forces — In the past several years, the Drug Enforcement Administration has shifted a major portion of resources from illicit drug enforcement activity to prescription narcotics. One of the focal areas has been on monitoring the flow of narcotics to pharmacies. These efforts have resulted in sanctions and subpoenas against distributors such as Cardinal Health and Amerisource Bergen, as well as arrests of physicians and pharmacists. In some areas of the country, there are complaints of narcotic shortages as distributors restrict shipments. This pushes drug seekers to other states and areas where enforcement is not as aggressive.

Changing Prescription Patterns — Where states have increased penalties against prescribing physicians and pharmacists for filling prescriptions when they "should have known better," some physicians have decreased or stopped writing scripts for certain narcotics and some pharmacists have pulled them from the shelves. As chronic pain treatment guidelines are implemented and physician education on drug diversion and addiction increases, we can expect tighter controls on the management of prescription narcotics.

Treatment For Abuse And Addiction — A reality in the war against prescription narcotic diversion is that the demand exists and that the long term solution requires treatment programs that take time, cost money and are much more difficult to manage than writing and filling prescriptions. Until these programs become more available and acceptable, drug seekers will continue to find ways to obtain narcotics, including committing crimes against pharmacies.

Key Findings Presented In This Report
This report covers a 5-year analysis of burglaries and robberies occurring to Pharmacists Mutual customers.

These claims impact our bottom line. Data collected comes from claims department data as well as interviews with each customer victim by our claims department over the past two years. In many cases (where requested by the customer or due to the nature of the loss), follow-up investigation is also conducted by risk management. Information obtained has been used to educate customers, underwriters and field representatives about how the crimes are committed and preventive measures that can be employed to minimize the extent of loss.

What we've learned:

Frequency of pharmacy crimes (81% of PMC crimes are break-ins vs. armed robberies) has been relatively flat over the past 5 years compared to policy count. While we've seen an 18% increase in crimes over the past 5 years, policy count has grown by 21%. RxPatrol, the only other national pharmacy crime database, has seen a slight decrease over the past 2 years, however, 60% of RxPatrol reports are for armed robberies, primarily to national chains, and much of this decrease may have been as a result in aggressive measures to address the robbery problem in chain stores such as Walgreens and CVS.
Total incurred and average costs have increased steadily over the past 5 years.
Almost 70% of the crimes we see are under $5,000. 50% of costs come from the 9% of claims that are in excess of $25,000.
In 52% of cases, criminals enter through the front door or front window. One indication is that video surveillance, while at times helpful in identifying perpetrators, does not deter crime. Some of the most expensive burglaries have been those where criminals entered through the roof. Examination of these and side wall entries indicates the approach targets areas of the pharmacy that may not be adequately protected by alarm systems, or to circumvent motion detectors.
In 1/3 of cases, police respond within 5 minutes. When they do, arrests result in 21% of cases. Unfortunately, most crimes take less than 2 minutes. Bottom line, if they can get in, chances are they will be successful and will get away. In areas of the country where police response times exceed 30 minutes (rural and municipalities with budget constraints), pharmacies are effectively unprotected.
Most state boards of pharmacy require alarms, but situations remain where alarms are not present, are not functional or are ineffective. In many cases, maintenance and testing are non-existent, and there are suspicions that alarm codes may have been compromised.
If a criminal wants to try and burglarize or rob a pharmacy, the pharmacy will likely incur property damage. However, the size of the loss can vary from a few hundred dollars to tens or even hundreds of thousands of dollars depending on control measures that are in place.

What really makes a difference in keeping loss costs low?
- A well-designed, tested and reliable alarm system. Alarm codes need to be protected and police response needs to be adequate.
- Protecting doors and windows to slow down or eliminate the possibility of entry. If the crooks cannot gain entrance within a few minutes, they will usually leave.
- Installing a safe. The overwhelming majority of criminals are in and out in less than 2 minutes. Locking target drugs in a sound, well-secured safe can make a significant difference in the size of the loss.
- Having a plan and training employees on what to do if a robbery occurs. This can mean the difference between life and death.

What We've Done At Pharmacists Mutual And What We Will Be Doing In 2013

Over the past two years, we have met with over 15 pharmacy associations and buying groups, have published numerous white papers and articles in our semi-annual publication "Pharmacists Mutual Risk Management" and have spoken with hundreds of customers who have experienced pharmacy crime first hand.
We have identified vendors of security products based on our loss experience. Where possible, we have arranged discounts for PMC customers who use these services.
In the fourth quarter of 2012, we provided training to underwriters about pharmacy trends and tools to assist them in evaluating protection levels at pharmacies and to address specific deficiencies.
For 2013, we will be implementing a pharmacy security evaluation matrix. The matrix, based on probability and loss severity data, will be used to assist pharmacies in assessing risk and in underwriting evaluation.
We plan to continue publication and education efforts.

Tackling Underwriting Profitability Head On

2013-05-10T17:59:10+00:00

For many years, insurance companies built their reserves by focusing on investment strategies. The recent financial crisis changed that: insurers became incentivized to shift their focus as yields became more unpredictable than ever. As insurance carriers looked to the future, they know that running a profitable underwriting operation is critical to their long term stability.

Profitable underwriting is easier said than done. Insurers already have highly competent teams of underwriters, so the big question becomes, "How do I make my underwriting operation as efficient and profitable as possible without creating massive disruptions with my current processes?"

There are three core challenges that are standing in the way:

Lack of Visibility: First, the approach most companies take to data makes it hard to see what's really going on in the market and within your own portfolio. Although you may be familiar with a specific segment of the market, do you really know how well your portfolio is performing against the industry, or how volume and profit tradeoffs are impacting your overall performance? Without the combination of the right data, risk models, and tools, you can’t monitor your portfolio or the market at large, and can't see pockets of pricing inadequacy and redundancy.
Current Pricing Approach: You know the agents that underwriters engage with every day want you to give them the right price for the right risk, and it's not easy. In fact, it's nearly impossible. Underwriters are often asked to make decisions based on limited industry data and a limited set of risk characteristics that may or may not be properly weighted. As an underwriter reviews submission after submission, you need to make decisions such as, "How much weight do I assign to each of these risk characteristics (severity, frequency, historical loss ratio, governing class, premium size, etc.)?" Imagine how hard it is to do the mental math on each policy and fully understand how the importance of the class code relates to the importance of the historical loss ratio or any other of the most important variables.
Inertia: When executives talk about how to solve these challenges around visibility and pricing, most admit they're concerned about how to overcome corporate inertia and institutional bias. The last thing you want to do is lead a large change initiative and end up alienating your agents, your analysts, and your underwriters. What if you could discover pockets of pricing inadequacy and redundancy currently unknown to you? What if you could free your underwriters to do what they do best? And what if you could start in the way that makes the most sense for your organization?

There's a strong and growing desire to take advantage of new sources of information and modern tools to help underwriters make risk selection and pricing decisions. The implementation of predictive analytics, in particular, is becoming a necessity for carriers to succeed in today's marketplace. According to a recent study by analyst firm Strategy Meets Action, over one-third of insurers are currently investing in predictive analytics and models to mitigate against the problems in the market and equip their underwriters with the necessary predictive tools to ensure accuracy and consistency in pricing and risk selection. Dowling & Partners recently published an in-depth study on predictive analytics and said, "Use of predictive modeling is still in many cases a competitive advantage for insurers that use it, but it is beginning to be a disadvantage for those that don't." Predictive analytics uses statistical and analytical techniques to develop models that enable accurate predictions about future event outcomes. With the use of predictive analytics, underwriters gain visibility into their portfolio and a deeper understanding of their portfolio's risk quality. Plus, underwriters will get valuable context so they understand what is driving an individual predictive score.

Another crucial capability of predictive modeling is the mining of an abundance of data to identify trends, patterns and relationships. By allowing this technology to synthesize massive amounts of data into actionable information, underwriters can focus on what they do best: they can look at the management or safety program of an insured, anything they think is valuable. This is the artisan piece of underwriting. This is that critical human element that computers will never replace. As soon as executives see how seamless it can be for predictive analytics to be integrated into the underwriting process, the issue of overcoming corporate inertia is oftentimes solved.

Just as insurance leaders are exploring new methods to ensure profitability, underwriters are eager to adopt the analytical advancements that will solve the tough problems carriers are facing today. Expecting underwriters to take on today's challenges using yesterday's tools and yesterday's approach to pricing is no longer sustainable. Predictive analytics offers a better and faster method for underwriters to control their portfolio's performance, effectively managing risk and producing better results for an entire organization.

An Inside Perspective On Automobile Insurance Fraud, Part 2

2013-05-09T05:05:28+00:00

This is Part 2 in a two-part series on automobile insurance fraud. Part 1 in the series appears here.

Who Participates In This Type Of Insurance Fraud?

Just about anyone. You'd be surprised. Even people who consider themselves upstanding citizens will get drawn into the business, because they see it as a victimless crime. One of the first cases I investigated involved a college-educated, former Farmers Insurance adjuster from Ohio. One day, he just decided to go to the dark side of the earth and started staging collisions from Ohio to California. He got away with $11 million before we caught him and put him in prison. He had so much activity going on that he carried a briefcase with him, and in that briefcase were 13 valid licenses from Colorado, Ohio and Texas — all valid — along with lots of crib notes from all of his activity. In an unlucky turn of events for the fraudster, he was stopped for speeding one night. As he opened his briefcase to get out a driver's license, that sheaf of crib notes was visible to the highway patrol officer, who reached right over his head and grabbed it. Lesson learned. Keep your crib notes to yourself.

People don't necessarily set out to go into insurance fraud as a career, but it's easy to see the attraction, said Borloff. "When you're first introduced to the people in this business, they say, 'This guy, he's in the insurance business,' and everybody understands he doesn't have an insurance company, he's in a different side of the business. But he's a well-to-do guy, with a house in Beverly Hills, with a car, with everything. And you ask yourself, 'Why can he do it and I can't?' And then you start to learn."

It starts easily enough. The newcomer becomes the defendant in one staged accident, and voilà, $1,000 just falls into his lap. "It's a big deal for this guy," said Borloff. "He just calls the insurance company, and that's it, he's a rich man. He wants to do it again. Trust me, he wants to do it again and again." However, a savvy criminal enterprise will not use this guy again. They will use another guy, then another. So now our newcomer is intrigued to work it from the other side of the fence, to run his own business.

First he needs to recruit lawyers and doctors — and that's surprisingly easy, said Borloff. Where would you find an attorney willing to take such a risk? "Word of mouth or the Yellow Pages," Borloff quipped. "Any attorney wants more business." The business is so attractive that it is relatively easy to find professionals who want to be a part of it.

"Think about it. Who is this lawyer guy? He spent three years in law school, and he spent a lot of money. He is out of school now, and he has a lot of debt. What can he get? He can get a job for about $40,000 to $50,000 a year at the most, if he is lucky. So he opens his own office. He has just one secretary, and he's waiting for clients. But there are no clients, because there are a lot of lawyers around with the big names, big firms and so on. He is desperate.

"If you come to this guy and say, 'You know, I can give some business to you,' what will he say? As a lawyer, he is like an innocent girl — he wants seduction. You should not say to him, 'It's a staged accident.' No, you say, 'I can give you some business, but you will have to follow my instructions and pay me 50 percent.' He says, 'Of course,' and he agrees. If you teach him properly, he will properly do his business for you."

Is it really that easy? Are there attorneys willing to look the other way at the likelihood that their cases are fraudulent? Yes. In a separate case, when I had an attorney in an investigation room and got him to confess, I asked him, "What were you thinking?" This was an aha moment. He said, "It's quite simple — there aren't enough real accidents to go around." It's that simple.

Besides, real accident cases get complicated and messy, Borloff said. "Attorneys don't like real accidents because there are so many problems. There isn't a cooperative defendant — he says, 'No it didn't happen.' There are too many problems. It's easy for me to work with defendants who say, 'Yes, I hit him, I was not paying attention,' and with attorneys who want money."

Many of the people involved in these schemes don't quite see it as wrong but rather as a rightful Robin Hood redistribution of monies. "I had one good, white-bread American guy. He was the perfect defendant," said Borloff. "He did the accident, and then on the way home, he sees somebody not driving the proper way. He gets on the phone, calls the police, and gives them the license plate number. I said, 'You turned him in? You broke the law too.' He said, 'No, that was the insurance company.' Sometimes the insurance company is not seen as the good guys."

Fraud Ring Leader: "This Is A War That Will Never End"

"If you want to win this war, you can't do it," said Borloff. "It's like the Cold War between the USA and Soviet Union. There was intelligence and counterintelligence, and it went on for a long, long time." Insurance companies develop more sophisticated fraud detection and prevention tactics, but the criminal enterprises adapt and become more sophisticated too. An insurance company known to have strong defenses may repel fraudsters, but only for awhile. Pitted against the fraud rings, insurance companies are at a disadvantage, said Borloff.

They lack depth in claims adjusters. "A good, educated adjuster knows how to work — he has some police experience, maybe some counterintelligence experience," said Borloff. "I ask you, how many adjusters do you have with these credentials? I can tell you 1 percent is a generous calculation."

Even if you can recognize staged collisions, there's still generally a payout. "You can try to fight it, but it's probably just to reduce the amount you have to pay," said Borloff. Adjusters can try to bluff — say that the examination of the car indicates there weren't four passengers, or that damages are inconsistent with the accident description — but that doesn't work. The stager knows a lie when he hears it.

The legal system doesn't offer much redress. When a claim looks suspicious, a smart adjuster asks for a deposition and asks smart questions of the plaintiff in front of him. He may do his best, probing for details, hoping to ferret out inconsistencies. "But it's worthless," said Borloff. "It doesn't matter what the answers are. If the people said back pain the first time, and neck pain the second time, what does it prove? It proves nothing. You can't go to court with this stuff. After the deposition, the adjuster doesn't have a lot of choices. He has to negotiate the price."

The adjuster can make a lowball offer, but a good defender will push back, knowing the adjuster's supervisor will approve more, and the insurance company doesn't want to go to court. In court, the insurance company can only argue on the facts, but the facts are that the incident did happen, and the plaintiffs do report that they suffered pain and injury from it. Can you prove they didn't? You can't pressure defendants to recant, because they're in bed with the criminal enterprise. They've got the money and face jail time if they confess.

"In small claims court, insurance companies have no chance," said Borloff. "A claims adjuster can come and represent the company, but if it happened, it happened. If you say you have pain, I have pain, we have a medical bill, and you have to pay toward this. I have a limit of $5,000, and each defendant can ask about this amount of money. And what does this situation get insurance companies? Nothing but a lot of trouble, and more trouble. The adjuster doesn't want this problem. His supervisor doesn't want this problem." The fraud enterprise wins.

Let's have a reality check here. The insurance industry will never stop this. People are going to try to scheme our insurance system as long as the system we have in place today exists, and ours is one of the best in the world. It takes care of consumers when they get in trouble. But with that, you will always have people thinking of ways to scam the money. Change the system, and they come up with a new scheme. This is just what people do.

How One Investigative Team Won

The fight against insurance fraud may be a never-ending war, but there are still skirmishes to be won. I led a five-year undercover investigation of a large and sophisticated organized crime ring in Southern California — Borloff's, in fact — and won.

We started with 63 suspected fraudulent claims that were on file in the San Diego office of the Department of Insurance. There were quite a few interesting outliers in those claims. For one, everybody was of Russian descent. These were all rear-end collisions, sudden stops. Now, we all know that sudden stop rear-end collision is a quick pay. It's pretty easy to determine at-fault in these collisions — a couple hundred of them happen every day in Southern California. It's not that big a deal.

Then an individual in custody for an unrelated matter came forward and offered information that made these claims look particularly interesting — even named two primary players. A formal task force was established with the equivalent of a joint powers authority between federal, state and municipal law enforcement. An undercover officer was introduced into the San Diego community to try to identify the ring leaders and learn how they were recruiting others into the organization and conducting business.

I didn't want to chase stuffed passengers or street offenders at the lower level. I wanted to go deeper into the organization — to identify the stagers, attorneys and physicians who facilitated those claims. And it worked.

A Collaborative Effort
The undercover operation was a joint effort of the California Department of Insurance's Fraud Division, the FBI, the San Diego Police Department, the Immigration and Naturalization Service (INS), and the National Insurance Crime Bureau (NICB). Undercover agents came from the California Department of Insurance, the San Diego Police Department, the California Department of Health Services, and the Bureau of Narcotics Enforcement.

Seven major insurance companies cooperated by providing pretext policies set up solely for the purposes of the investigation. Only the companies' regional vice presidents of claims and Special Investigations Unit directors knew about the investigation. They agreed to have the claims legitimately paid, so the money could be tracked and there would be no suspicion of law enforcement involvement.

A lot of thought and effort went into this to backstop the identities of the undercover people. If a private investigator or lawyer ran these people, they would show up as true legitimate people with valid Social Security numbers, credit histories, houses, vehicles — it was backstopped to the hilt. You'd have no idea that it was law enforcement.

Working From The Inside
We successfully infiltrated this ring for more than 18 months and were staging collisions in San Diego, Los Angeles and San Francisco. Borloff was identified in the very first staged collision, and then the lead undercover detective partnered with Borloff to stage more collisions and car thefts. Borloff gave instructions to his new business partner about how to get involved in this game. For every car and policy he provided, the undercover officer received $2,500 – a total of $75,000 over the course of the investigation.

Little did Borloff know these cars were coming from the NICB salvage pool, and every move was being recorded. During the five-year period, Borloff was responsible for staging more than 100 automobile collisions, exposing the insurance industry to an estimated $2 million in fraud losses.

Five Years To Success
It was kind of dicey. The [cooperating] insurance companies paid out more than $230,000 in claims into this. However, everybody had the bigger picture in mind — the potential economic loss prevented (PELP), an FBI metric that forecasts the money that would have been lost if the criminals continued their activities unabated.

When it was time to strike, the United States Attorney's office in San Diego handled federal prosecution and the Los Angeles County District Attorney's office handled the state prosecution. This was a seminal case that eliminated the issue of double jeopardy. In the State of California, you can arrest and convict someone in federal court for mail and wire fraud with a scheme of insurance fraud, and then charge them at the state level with insurance fraud, and it's not double jeopardy.

I brought the investigation from cradle to grave. I started as the supervising agent in the San Diego Fraud Division of!ce, and by the time the investigation was over, I was captain of that office. The investigation netted attorneys, physicians and chiropractors along with their office staff, eight cappers and 44 claimants — and effectively shut down one of the largest such rings in Southern California.

The Information Imperative

"The main problem for insurance companies is they don't have enough information," said Borloff. "When the adjuster discusses the case, he knows nothing. He knows just this is the car, this is the car damage, these are the people. He can check the records — see these people didn't have an accident for two years, three years and think they sound like nice people. But he's still suspicious, he pursues it all the way, and still he gets nothing, because it's still trouble, still problems."

In order to detect suspicious claim activity, insurance companies need access to transaction information and supporting detail that typically resides in different systems. Transactions viewed in isolation could appear normal, but they might look quite different if you could correlate those transactions across related entities. However, a unified view based on multiple internal data sources is rare. Rarer still is the organization that has augmented that view with external data as well.

As part of an 18-month Command College program of graduate study, I designed a virtual office environment for a law enforcement environment. After graduation, that work led to an assignment to design a fusion center to promote information-sharing among federal, state and local entities. The fusion center I designed was the first in the nation to incorporate law enforcement data and financial data, which led to new discoveries. For example, we threw the system up for a test run, and investigators in the San Francisco Bay Area were playing with it. From working with the data and social networking analysis, we found two chop shops in Dallas that the local police department didn't know about.

Smarter integration and analysis of data will be a strong defense to the growing fraud problem, as well as a way to meet the pressures to achieve more with less. The data being gathered through the claims process is growing bigger and bigger, so you need to start looking at things differently and working smarter, and that means leveraging your data together. A number of statistical approaches can be created to build a solid predictive solution. For instance, when you combine business rules, anomaly detection (finding outliers), and social media analysis, you can identify suspicious claims even if there is no prior claim history.

Getting a handle on the fraud problem is not about processing more cases. It is all about working the right cases to make an impact to reduce fraud. If you do not identify the true cost drivers in fraud — the licensed professionals, administrators, cappers, stagers and other individuals controlling the criminal enterprises — you will never truly reduce the amount of insurance fraud in our communities. But when you apply best practices and analytics together, you create a powerful tool and business model to reduce fraud and provide great ROI for anti-fraud programs.

An Inside Perspective On Automobile Insurance Fraud, Part 1

2013-05-08T03:12:06+00:00

This is Part 1 in a two-part series on automobile insurance fraud. Part 2 in the series can be found here.

Introduction

Traffic engineers would love to unblock the clogged arteries of Southern California's freeway system, where rush hour is anything but "rush" — more like gridlock.

But in a land where one's car is one's empire, one's freedom and personal statement, carpooling is a tough sell. The high-occupancy vehicle (HOV) lanes have scant occupancy.

In fact, cars carrying multiple passengers are such a rarity that this scenario alone raises red flags for auto insurance claims adjusters.

Operating under the radar is a fast-growing segment of the so-called "underground economy" — organized criminal enterprises that stage automobile collisions with the intent to defraud insurance companies of medical payments. In some cases, the entire incident is created on paper, with fictitious vehicles and false identities. In other cases, the perpetrators take real vehicles with legitimate insurance policies out to vacant lots or remote fields to crash them and then fill out a counter report. The most compelling cases are the ones where participants intentionally ram vehicles together on city streets — often a rear-end collision in a left turn lane — then dial 911 and wait for police and emergency medical services (EMS) to arrive. This approach triggers a police report and EMS records, which lend an air of legitimacy to the event. It really happened.

Based on instructions from a stager, the driver and two or three passengers — who are known as "stuffed passengers" — report neck and back injuries. The passengers later visit a physician or chiropractor who is in collusion with the criminal ring. The patients sign in and leave without receiving any treatment. If the insurance company balks at paying the specious claim, the claimant enlists the help of an attorney who is also party to the scheme. The attorney is tenacious, willing to go to court, generally able to bluff until the insurance company backs down and settles.

In the process, everybody except the insurance company gets easy money. Property damage to the vehicle is paid to the owner of the vehicle, while multiple players split the proceeds of the settlement for medical payments. In a typical case where the insurance company settles for, say, $6,000, each vehicle occupant might get $1,000, the lawyers and doctors collect their fees, and the enterprise leader retains 50 percent of the professional services fees plus the balance of the claimants' settlement, if any. If the enterprise leader successfully stages dozens of such incidents a month, it's a lucrative business.

This practice exploded in Southern California in the mid-1990s. If you are a Special Investigations Unit investigator, you are dealing with this every day. The average caseload for an adjuster or claims representative might be 150 or 200 a day, depending on the size of the company. At least 25 percent of that is some flavor of fraud. It's either a false claim or an embellishment to it. People are doing it. Even people who think of themselves as law-abiding are doing it, because they don't think of insurance companies as victims. This type of activity is so prevalent that our undercover investigators would hear paramedics on the scene saying, "Okay, which one of you is going to the hospital this time?"

Automobile insurance fraud is such easy money that the business is even creating unlikely bedfellows. For example, in South Central Los Angeles, the Bloods and Crips — gangs that have had an intense and bitter rivalry — are now cooperating with one another in organized insurance fraud, because it's more powerful and profitable to join forces.

Six Steps to a Successful Insurance Scam

Constantin Borloff (not his real name), the former leader of a successful and sophisticated fraud enterprise that operated in San Diego, Los Angeles and San Francisco, shares his top tips for making fraud pay. Having paid his debt to society, the ring leader now tells insurance companies how he was able to steal so much money from them, who does it and why it's so easy.

Go For The Med Pay Money
Borloff would insist that vehicle insurance policies have med pay coverage — coverage for reasonable expenses to treat accident-related bodily injury. Since this coverage follows the vehicle, passengers in a vehicle that has med pay coverage will likely be covered as well. Borloff gave vehicle owners a list of insurance companies who would freely provide these policies.

In theory, claimants are supposed to repay med pay money if they receive a settlement, but that doesn't happen according to Borloff. "For all history, maybe two times the insurance company asked for money back. If you say you don't have money and can't pay it back, they say, 'Okay, don't pay back the money.'"

Find the Inattentive Insurance Companies
Borloff also selected insurance companies with a reputation for laxity, the ones whose claims representatives didn't take a stand and ask the hard questions. "Big companies like State Farm or Farmers have millions of policies, good special investigation units and more experienced adjusters, so that's where you would see more problems. It's better to go to the smaller company or where it's not their main business. These companies usually pay more, while the big companies usually pay a little less."

Insiders in the business share this information, so they know which companies to avoid and which ones would pay off like loose slot machines in Henderson, Nevada.

What would make an insurance company an unattractive target? "I don't know what will stop me," said Borloff. "All insurance companies are bound by law to pay. So for us, the system is working perfectly. The insurance company can fight, and they have a lot of resources to fight, but eventually they have to pay something. Maybe more, maybe less, but eventually they have to pay something."

Choose Participants Who Won't Raise Suspicion
In a perfect world, your participants are white American citizens with clean driving records and their own drivers' licenses. Judges and juries look most kindly upon this type of claimant, according to Borloff.

It is equally important that their behavior fits accepted patterns. For instance, policies would be active for four to eight months before the staged collision. Claims would be modest, usually no more than $5,000 or $6,000. Activities were choreographed to avoid triggering red flags. "I know insurance companies have about 25 red flags," Borloff says. "What the claims adjusters know, the criminal enterprise knows twice. I knew about all these red flags, and I tried to avoid them."

Distributing the cases is one way to avoid detection, said Borloff. "If the enterprise will do, say, 20 collisions a month, the claims will go to five different insurance companies, each to a different attorney — 10, 15 or 20 different attorneys — and any given adjuster will have at most two cases to a specific attorney. Will the adjuster be suspicious about it? I don't think so. It's very dif!cult for the insurance company to catch these people in this situation."

Borloff tells of a fringe case where a woman, working against the advice of her stager, staged four accidents in a single week. She submitted claims to four different insurance agencies. All four claims were paid, but this pattern of activity could have exposed everybody in the fraud enterprise to scrutiny and discovery.

Pay More Than Lip Service To The Medical Treatment
When private investigators were first sent to wait outside medical clinics to observe and videotape (the comings and goings of visitors), the first people they caught were the ones who walked in, signed in and left within a minute. People quickly learned to stay longer inside the clinic and have follow-up visits at intervals that would seem appropriate for their injuries and type of care.

Keep Your Stories Straight
Cappers and stagers write notes for people so they can remember their stories when talking to claims representatives, and later on, if they meet with an attorney and go into depositions. Somehow, somewhere, there is a record of all this. If the ring is dealing in volume, there must be good notes, or they won't remember the details of a case, and that's how they get tripped up. Some stagers get tripped up simply by having these notes in their possession — in their offices or briefcases, waiting to be found during a routine traffic stop or search.

Insulate The Players From Each Other
These groups tend to function as classic cell networks. In an effective cell network, the claimant may or may not be exposed to the other people involved, or may be only exposed to the doctor but not to the attorney. That's how these people are protected from one another. Participants may not have a knowledge of what else the group is doing. When we arrested 72 people on a state level and brought them into interrogation rooms for 72 hours, it was pretty clear that they only knew their own activities or those of friends they had brought into the group. They had no knowledge of the bigger scheme. That's how you protect your enterprise.

The parties in these fraud rings learn never to admit to anybody that the accident was staged. Everybody in the enterprise knows it, but if you tell even one person, there's a point of vulnerability. It is especially important to insulate the medical and legal providers, because their professional licenses are critical to facilitate these claims. They take it all the way and never back down.

How often would a criminal enterprise walk away from a case because an insurance company's Special Investigations Unit got involved? "I would not walk away, but I would accept lower settlement, for sure," said Borloff. "One time one of my colleagues made a terrible mistake, and sent 63 cases to Allstate — one attorney, same office. They came to me and said, 'What should we do now, SIU is after us?' I said, 'Don't give up, try to fight,' but they decided to give up. It was the biggest red flag. They lost money. It upset people." Giving up is tantamount to an admission of wrongdoing.

The Value Game: A New Class Of Business Methods For The Condominium Reconstruction Market

2013-05-06T15:45:38+00:00

Part 1: Correcting a Distorted Insurance Market

For many condominium associations, the maintenance, repair, and reconstruction industry has devolved into a minefield of distrust and dysfunction. Countless lawsuits have taken their toll on the industry to the point of near dysfunction where many contractors simply walk away from condominium projects. The worst form of "capitalism" ensues where everyone acting in their own best interest is in fact acting in the counter-interest of their community. The Value Game promises to reset this negative incentives condition while enhancing community resilience.

Here's How The Problems Start:
The board of directors of a homeowner's association is entrusted by the residents to hire a contractor to perform a complicated reconstruction project. Unfortunately, condominium board members are not very good at writing contracts or issuing requests for proposal or collecting bids. When a contractor is selected, the scope of work is often poorly established. The expectations between the community and the contractor begin to diverge. Soon, a law firm is engaged my some residents to sue the contractor for damages. After a long battle, a settlement is awarded, but it is not enough to fix the problem after expenses are paid.

A Chain Reaction:
Fortunately, the contractor in the suit was insured, but this does not cover the personal, professional, and opportunity hardship of defending against the suit. The insurance company also increases the premium for coverage for condo projects. Most good contractors say, "it's just not worth the trouble." As the pool of available contractors dries up and the price for reconstruction increases, many condos are forced into deferring maintenance in a distorted market.

Cascading Failures:
After a while, a condominium springs a few leaks in their piping system. Each leak results in a relatively small water damage claim. When the insurance company notices several claims in the same building, they begin to fear that a mainline is about to rupture next, and threaten the condominium with cancellation of their policy unless the community replaces the entire system immediately. Now the insurance industry is in a double jeopardy: they force the contractor out of the market and they force the condo out of the market to basically avoid suing themselves.

The Dysfunction Deepens:
Banks will not make construction loans to condominiums that are not insured. Likewise, they will not make mortgage loans to buildings that are not insured. The property values plummet and the owners are sent under water. Soon they begin to default on the mortgages that the banks already hold. More maintenance is deferred as owners move out and renters move in. Buildings fall apart and become unsafe. Banks pull out of the market to avoid defaulting on themselves. The wider community suffers.

The Value Game
The Ingenesist Project is currently deploying The Value Game to the condominium reconstruction market with remarkable success. The Value Game is a new class of business methods that alters the incentive structure of a distorted market such that everyone acting in their own best interest is in fact acting in the best interest of the community. Clearly the intention is to demonstrate that asset preservation is the domain of engineering and not the legal system.

Here Is How The Value Game Is Formed:
The first thing is to identify the "shared asset" in whose best interest it is for everyone to preserve. In this case, the shared asset is the physical condominium building where preservation is the context about which a community interacts.

If we look at each of the players individually, we see some consistent patterns.

It is obviously in the best interest of the residents to have a safe and well-maintained home.
It is in the best interest of the contractors to have a successful and profitable interaction with the building.
It is in the best interest for the Insurance industry to reduce the risks that they underwrite.
It is in the interest of the financial industry to loan money into a viable, organized, and disciplined community.
It is in the best interest of the real estate industry to represent strong values and complete insurability of assets.
Finally, the broader neighborhood benefits from the presence of a viable condominium community.

In short, it is actually in everyone's best interest that the others are successful.

About The Value Game Game Board
The first rendition of the Internet was populated by static websites built for a person, or to sell a product, or to deliver entertainment, or to provide information. The next level of the Internet included social media, where users actually create the content that populates a website such as Facebook and Twitter, etc.

The next level of the Internet is taking on a form consistent with the Value Game where a social network is built about an asset that communities share.

Part 2: Case Study — High Rise Condominium Re-piping Project

The current case study is a condominium re-piping project in Portland, Oregon. The actual community consists of 200 units (400 residents) who occupy a single high-rise tower that must undergo a major reconstruction project that will impact everyone. The total value of the project is about 3 million dollars. This is real money in a real Value game.

For this project, we built a website for the physical building with its own social network where all of the different (and willing) players can interact with each other to preserve each other's best interests.

The first thing to accomplish is to reduce the likelihood of diverting incentives that can result in litigation. This may be accomplished by introducing strong community management. In this particular case, a professional engineering firm was hired to represent the best interests of the asset. The engineers represent the needs of the homeowners association to selected construction technologies, defined project scope, wrote the RFP, wrote the contracts, selected the contractors, and managed the project.

The Social Network Dynamics
The website used in this case study is a common open source Wordpress platform with a Buddy Press backend to provide "Facebook-like" features (except with privacy). The engineering firm submits all reports, surveys, test results, assessments, photographs, schedules, products, accessories, and plans onto the website for members to see equally (there are some exceptions to protect financial data).

Individual residents are invited to form "groups" and start "threads" in topics for which they have an interest or a concern. People naturally migrate toward other people with similar interests and they build relationships.

Contractors are able to see all of the assessments, conditions, and work scopes directly from the website instead of paper submittals. They can ask questions and post ideas of their own for community review.

Engineering firm(s) can monitor discussions and collect frequently asked questions, which are posted in a FAQ. Everyone gets the same correct answer to their questions without rumors or speculation.

Communities: Community meetings are held. There is no bickering or infighting because everyone is educated and prepared to ask unique and relevant questions of the presenters. When a community is unified, they can easily come together to make important decisions that impact the quality, cost, and schedule of the project.

The insurance company is given limited access to the website which demonstrates that the community is acting to mitigate the risks that the insurance company underwrites — this keeps the policy in force.

With website access, the insurance industry can also see that licensed engineers professionally manage the project in a vibrant community. This reduces the likelihood of litigation against contractors. The insurance industry can now classify this project among "commercial" insurance pool instead of the litigious condominium insurance pool.

Contractors feel comfortable with this professional engineering management and insurability, which brings more contractors to market thereby increasing the talent pool and reducing costs. At the end of the project they may get 400 likes on Facebook, YELP!, and Angie's List.

The bankers will have access to the website to monitor progress. With insurance policies fully enforced, banks will lend favorably to the homeowner's association which needs to fund a major reconstruction project. Banks will also lend favorably to mortgages in this structure because it is well maintained.

It is in the best interest of the community to be civil and thoughtful in their discussions knowing that they are being observed by some of the other stakeholders. This eliminates the incentive to be disruptive and increases the incentive to be engaged and productive in the project.

Over time, the website becomes a forensic record of all matters associated with the project. Everyone knows who said what, when, where, and why with an electronic time stamp. There is little to be disputed.

Interaction With The Wider Community:
Real estate agents always describe property in poetic hyperbole — they rarely tout the improvements that a community works so hard for. The website could be a place where a real estate agent can advertise their services in exchange for a promise to mention the re-piping project. The market will respond to a well-maintained building by an engaged community, which will drive real estate valuations up.

Hotels, restaurants, theaters, art galleries, service groups and civic organizations benefit from prosperity and resilience in their community.

In the end, the shared asset is preserved and everyone is profitable.

Update: Important Observations

In deploying the Value Game, we need to be careful of how much collaborative innovation we are able to introduce to a system that is normally adversarial. A general distrust of new ideas and the technological platforms that they depend on is still fairly high. For this reason, we estimate a 40% adoption level of the principles discussed here.