Where Workers’ Compensation Goes Wrong

Padded bills, murky disclosures, and controls gaps are among the possible perils when self-insured employers outsource the management of their workers' comp programs; ''I'm saving myself to death," says one manager.

On the surface, you might think a company that self-insures its workers’ compensation risks would be providing its executives with an excellent means of managing that liability and controlling the resulting cash flow.

After all, an employer that self-funds this insurance also holds on to money it might have paid out in premiums, and the company could pay less to cover its exposures if it manages them well. Insurance experts have long held that if a company puts its own dollars at risk, it has a powerful incentive to prevent injuries from happening in the first place, which also cuts down on medical costs and lost work hours.

In return for those benefits, however, self-insured employers take on a whole lot of risk. One major hazard: the possibility of being too optimistic about how much money to set aside to cover the treatment of back problems, slips and falls, and other workplace injuries. Understating such liabilities can lead to weighty financial-reporting problems. In 2004, for example, at least two companies, Goodyear Tire & Rubber and Interstate Bakeries Corp., had to restate their results because of problems related to workers’ comp reserves. Indeed, Interstate’s revision resulted in a charge to pre-tax income of about $40 million.

Less prominent, but certainly serious enough on its own, is the risk faced by many self-insured companies when they outsource the administration of their workers’ comp plans. The Sarbanes-Oxley requirement that corporate chieftains must sign off on financial statements suggests that the CFOs of heavily self-insured employers should have a firm grip on what their companies pay out in workers’ comp claims. Typically, finance chiefs rely on risk managers to handle those outlays. But risk managers, by some accounts, often hand over the management of claims and medical costs to third-party administrators (TPAs) without a clear idea of their relationships with medical and claims-services providers.

In some cases, such wholesale delegation can result in “the complete outsourcing of the risk manager’s fiduciary responsibility to the organization and its shareholders by allowing these service providers to control what should be viewed as a line of credit,” according to one senior sales executive for a managed care organization specializing in workers’ compensation. Potentially, a self-insured corporation’s lax management of its workers’ comp outlays could represent “a huge hole in internal controls,” said the executive, who asked not to be identified.

To be sure, it’s no easy task for a risk manager to track payments to and from the managed care companies, bill-review outfits, nursing clinics, and the host of other vendors that TPAs contract with on behalf of self-insured employers. But critics of the system say that not keeping track can result in substantially higher costs for self-insured employers. For example, certain questionable payouts from medical networks to administrators can lead to excessive bills for managed care services, according to Joseph Paduda, the principal of Health Strategy Associates, a Madison, Connecticut-based workers’ compensation and managed care consulting firm.

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