Self-insuring workers compensation

A case study of a county transportation unit

By Michael J. Moody, ARM, MBA

There are few lines of insurance coverage that are common to most businesses. One of them—workers compensation—represents the largest insurance expenditure to businesses. With rare exception, all employers are required to provide workers compensation coverage for their employees. It is little wonder, then, that employers search for a cost-effective method of providing this coverage.

Many employers self-insure their workers compensation exposure and, historically, that method has proven to be one of the most cost-effective approaches for satisfying a firm’s workers compensation obligation.

Case in point

One organization that availed itself of the self-insurance option was the Orange County Transportation Authority (OCTA), which was granted approval to self-insure by the state of California in 1977. OCTA has been self-insured since that time. However, their loss experience began to deteriorate in early 2000. They saw significant increases in both the cost of their claims as well as the cost of their excess workers compensation coverage.

For example, 2003-04 losses increased to $6,678,372 from the prior year’s $5,594,706. A similar comparison for excess workers comp coverage showed a $770,878 premium in 2003-04, up sharply from the 2002-03 premium of $334,931. Additionally, the SIR on the excess policy increased from a 2002-03 level of $300,000 to $500,000 for 2003-04.

OCTA recognized that program changes were needed. One of the first changes instituted was that the responsibility for the administration of the workers comp program was transferred from the employee benefits section of the human resources department to the risk management department. This represented a significant philosophical shift, notes Al Gorski, OCTA’s chief risk officer. Historically, since the workers comp function reported to the HR department, “many people believed that it was a ‘benefit,’ rather than a liability,” he says. He believed that it was important for the organization to begin to realize it was not an “employee benefit,” and, as a result, the organization’s whole approach to workers compensation needed to be changed.

Cultural change

Moving the administration of the program from HR to risk manage­ment was a pretty easy task. However, “it was the cultural changes that took some time to complete,” Gorski notes. “But this is a governmental agency and we have to be good stewards of public funds.” Recognizing the need to begin to better control work comp costs, OCTA executive management also realized that an important aspect to changing the culture was “getting the buy-in of the union involved with OCTA’s bus operation, Gorski notes. “But, it was not enough to get the union’s buy-in; the union must also actively participate in our common goal.”

In order to gain the union’s active participation, OCTA has found that by partnering with the union they are better able to control their cost, so they devised a unique plan that allowed union members to share in the actual cost savings. Each of the 1,200 coach operators could be eligible to receive $150 to $430 per year, “depending upon the organization’s claim experience,” Gorski points out. “Now we have 1,200 people to help promote a safe working environment.”

Participating in the program savings has proven to be an effective “carrot” for the workers compensation program area. A change in the “stick” has gotten the employee’s attention. Gorski indicates that, “OCTA is now aggressively pursuing fraud cases.” This aggressive prosecution includes both restitution and jail time. “News of a fraud conviction goes through the organization quickly.” And he says, “Now, the employees all know that we are serious about the fraud side of this issue.”

In addition to the union, another important key relationship was forged with ACE USA, the U.S.-based retail operating division of ACE Group. Gorski notes that the cost for OCTA’s excess workers compensation coverage was on track to increase 15% and “something had to be done.” Along with his broker, Marsh, he approached ACE in 2004 with the plan of attack to begin controlling OCTA’s workers comp costs. “I made a lot of promises to them, and I said we were going to do a lot of work,” he remembers. “ACE was there for us at that time and they believed in what I could do.”

Since those early days, OCTA and ACE have developed a mutual alliance. “It was important to me,” Gorski says, “to establish a good relationship with ACE. Even though I felt I had little credibility with ACE, Deborah Alleyne, SVP of ACE Excess Workers Compensation, was willing to sit down and listen to our strategies and believed in what I was proposing.”

Alleyne points out, “The changes that Al proposed when ACE was initially approached to provide excess coverage for OCTA were substantial. I was confident that if the changes were successfully implemented, OCTA’s loss experience would significantly improve; and that certainly turned out to be the case.”

Since that time, Gorski states, “ACE has been a valuable asset throughout this process and they have given me the opportunity to provide input and suggestions with regards to the workers comp program. While there have been many important changes in the program, this was one of the most important.”

Other important aspects

Gorski identifies several key elements for developing and maintaining a successful self-insured workers compensation program. The first important step was to obtain approval from executive management to hire a very technically sound claims manager. In addition, he says, other stakeholders, including OCTA’s excess work comp insurer and contract team members, needed to have a full understanding of OCTA’s operation.

To make this happen, the claims manager, Edwin Byrne, invites all participants who have a vested interest in the success of the program to visit the bus bays. Here, Gorski says, “Edwin demonstrates how our drivers do their jobs.” For example, “We show them how our drivers deal with disabled customers. It’s important to show them how the whole thing works.” He notes that everyone from employees who work in OCTA’s office to claims assistants and paralegals from our law firms “get to see the operation firsthand.” Even the clinic doctors get an opportunity to see what the drivers do, “even sitting in the driver’s seats, to gain a better understanding of the process and procedures.

“It’s important to let the employees know that they are valuable to us as well,” Gorski says. “We make certain that every employee knows we want them to have the best possible care. To do this,” he says, “we continue to survey our employees to make certain that our industrial clinics are giving the best possible care.” This is important feedback, he notes.

An additional area of change occurred when OCTA unbundled its claims management process and moved to a variety of specialized service providers. Gorski says: “The entire workers compensation program received a complete and comprehensive review, once risk management took over. We did this by returning to the basics; every program element was reviewed.” All key cost drivers and individual program vendors received a review from OCTA’s internal audit staff. As a result of the review, “it appeared that the bundled claims administration was subject to a great deal of scrutiny of this integrated approach.”

Today, the TPA has just a claims adjusting contract, and everyone else is unbundled on a 30-day, opt-out agreement, “so we can better control and manage the entire claims process,” says Gorski. He holds quarterly strategy meetings with all the various vendors, many of whom are competitors, to discuss the progress of the program. He believes this gives him “the ability to provide proper oversight to continue to achieve the goals of the program.”

Lessons learned

Despite the fact that Gorski only picked up the responsibility for OCTA’s workers comp program in June 2004, it has already shown remarkable success. He says one of the hard lessons OCTA has had to learn is that “if you let a program get out of hand, the cost will also get out of control and can quickly become insurmountable.” When he took over the program, “it was headed in the wrong direction,” Gorski says.

However, the top to bottom review revealed what needed to be done. This process began by engaging key stakeholders and recommending changes in every process and approach the firm used, resulting in a good roadmap for success.

What kind of success has OCTA been able to accomplish in just five short years? The work comp benefits paid by OCTA have been reduced by 53% from the ’03-’04 policy year to the ’07-’08 policy year. Even more impressive was the excess workers compensation premium for the same period, which decreased by 63%.