research note reducing exposure … allocation is a relatively simple concept that can improve...

RESEARCH NOTE REDUCING EXPOSURE THROUGH COST ALLOCATION

Programs improve risk management results by changing behaviors

Nothing gets an executive’s attention like adding a cost line item to her or his P&L -- the reaction is sure to be swift. That’s the idea behind cost allocation programs – they shift costs of injuries and losses to operating units to motivate behaviors that would mitigate or eliminate risks or injuries in the future.

Cost allocation is a relatively simple concept that can improve workplace safety and strengthen the partnership between risk management professionals and Safety, Operations and Finance customers by allocating or charging back losses to the business unit best positioned to reduce them. Cost allocation is grounded in basic principles of psychology and finance: business unit leaders who have ‘skin in the game’ for the cost of a workers’ compensation or liability claim will act to mitigate those risks to protect their bottom lines.

Yet, despite their effectiveness, cost allocation strategies can be surprisingly difficult to execute in practice, so risk managers need a strategy to gain organizational buy-in to make implementation a reality.

RESEARCH NOTE: REDUCING EXPOSURE THROUGH COST ALLOCATION

Hypothesis and Research Summary

Our hypothesis, formed by surveying clients across industries, was that cost allocation programs are effective levers to promote safer work environments and practices by imposing accountability for risk management lapses. To test this, Gallagher Bassett reviewed 250 client programs (see sidebar, About the Research) to determine how prevalent cost allocation programs were, as well as identify the types of models used, program results and metrics used to support the allocations. We also identified barriers in imple-menting and maintaining cost allocation strategies. Our overall goal was to identify best in class cost allocation models that can be implemented at the organizational level.

Primary Findings

Prevalence. We found that over half (55%) of the 250 clients surveyed had some kind of cost allocation program. Some programs have been in use for years while others are relatively new.

Types of Cost Models. The programs evaluated used a number of models to allocate costs, with the most popular charging back actual claim costs (41%) or charging a fixed rate for every claim reported (27%) (Figure 1).

As Figure 1 indicates, there are various cost allocation methods available, and they have different advantages. The most prominent trade-off is simplici-ty of assessment vs. specificity or accuracy. Using a Fixed Charge alloca-tion method has the benefit of simplicity (e.g., an employee’s business unit will always be assessed 90% of a workers’ comp-injury claim cost) but also

© 2016 GALLAGHER BASSETT, INC., ALL RIGHTS RESERVED.

About GB’s Continuous Pursuit Research

Many factors affect the performance of a claims management program as well as the outcome of an individual claim. Our appreciation of claim complexity led Gallagher Bassett to launch original research to explore and quantify which factors actually move the needle on outcomes. The research initiative is called the Continuous Pursuit project because it is undertaken as part of our promise to go beyond what’s expected in continuous pursuit of a better way. The first three research topics are:

1. The impact of better claimant engagement on outcomes

2. How structure and organization of risk departments impact claims program performance, and

3. The effect cost allocation strategies have on risk management performance.

To explore these issues we surveyed 250 Gallagher Bassett client service teams. The findings and implications of that survey, and proposals for future action, are summarized here. Claims outcomes analysis for this research was provided by Gallagher Bassett Analytics which uses benchmarking, trending, and other analyses to identify opportunities to improve client claims programs and our operations.

Figure 1: Types of Cost Models Deployed

Types of Cost Models Deployed(based upon 250 programs)

27% 41%

15%

Actual Claim Cost

Fixed Charge

Lost Time/RTW Cost

Loss Prevention & Saftety Charge

Report Timeliness

Other

7%9%

3%



will motivate appeals if assessments are viewed as onerous or do not account accurately for shared, cross-BU causal factors. Conversely, if the fixed charge is too small it will not encourage any change in behavior. To ensure the fixed charge amount is appropriate companies should use a three- or five year actuarial analysis by claim type to set the charge at a reasonable level.

Using an Actual Dollar Cost method has the advantage of being more accu-rate, but can also lead to manipulation of costs to try to minimize them, which in turn could result in inadequate care for injured employees or a failure to address root causes of losses. For that reason, a cap on the chargeback amount by claim type is often used so that accurate claim costs are captured but individual locations or units do not have to absorb the onerous costs of catastrophic events or injuries.

Goals and Key Success Factors. Our research explored the rationale for and key success factors related to designing and implementing cost alloca-tion programs. Cost allocation programs are undertaken for a variety of reasons, and to be successful they must have clear, measurable goals. We found that programs are typically used to achieve four key goals:

1 Improve loss prevention. The focus is on increasing safety (e.g., preventing injuries or losses) vs. improving claims management/oversight. A unit/location’s loss prevention efforts are rewarded in both a fixed charge and actual dollar cost system (no claim, no charge).

2 Reduce loss reporting lag. To ensure all claims are reported and booked / accounted for appropriately, these programs impose a chargeback for late claim / loss reporting.

3 Encourage modified duty program. Units/locations that develop innovative modified return to work programs (that reduce overall claim costs/duration) are rewarded with smaller chargebacks.

4 Increase accuracy of risk forecasting. Implementing a fixed charge per classification of claim (e.g. indemnity v. medical only, bodily injury v. property damage) allows the organization to forecast annual allocation/chargeback costs based upon historical data.

Programs that meet these goals have common foundational elements in place. Although not exhaustive, our research indicates that the following factors are prerequisites to enabling and reaping the expected benefits of cost allocation.

• A performance- and data-driven culture • Strong, vocal leadership support for cost allocation efforts • Adequate resources for program design, pilot and implementation, including change management resources to

Figure 2: Comparing Cost Allocation Program Methods and Results

identify and overcome barriers • Specific, consistent metrics to quantify ongoing program impact that allow evaluation, intervention and evolution of the program if necessary • A documented and equitable approach to calculating and aligning costs to goals and expected behaviors as well as a formal appeals process in place.

Beyond these key success factors, companies will want to ensure a balanced menu of incentives or rewards and penalties. The flip side of the ‘carrot’ of earning a reduction in chargebacks for meeting these goals is the ‘stick’ – the imposition of additional penalties if goals are not met or certain thresholds (for example, reporting lag times, litigation rates) exceeded.

Comparing Results of Cost Allocation Programs

Our overall finding is that each model of cost allocation program can improve risk management performance. Figure 2 summarizes the programs and results from a trio of Gallagher Bassett clients that implemented cost allocation programs to support organizational needs.



Client A: Fortune 100 company; 50,000+ employees

Improve budgeting, forecasting, proper accrual and prevention behaviors. Reduce current costs and volatility by eliminating prior year claim charges

Financial • Distribute/share costs of expensive claims Operational • Shift local focus from managing claim to managing employee • Track timely claim reporting and use of modified/transitional duty

• 8% decrease in Indemnity claims • 14% decrease in Lost Work Days on current year claims • 50%+ reduction in average lag time (client to call center) • 200% + increase in electronic Incidents/Record Only claims

Client B: Fortune 200 company; operations in 22 states

Use incentives to reward sound Safety, Loss Prevention and RTW programs

Assess annual premiums by the location’s prior year performance • Lag Time • Number of Lost Time Claims • Paid Lost Work Days • Total Dollars IncurredIncentive: Year-End Credit for meeting/exceeding goals • Lost Time Frequency • Severity • Lag Time • Lower Total Paid

• Lost-Time Frequency: 96% of locations earned a premium credit for meeting company goals • Severity: 72% of locations earned premium credit for meeting goals

Overall CA Objectives

Specific Goals or Methods

Results

Client C: Fortune 100 company; 80,000+ employees in US/int’l locations

Create awareness at the local level of the cost of risk and produce divisional accountability

Chargebacks assessed on Average Cost Per Claim (using actuarial 3-5 year forecasts of ultimate costs)

Transparent Methodology • Operations have access to real-time data to assess performance year over year • Back-up data provided to support/justify the charges

• Eliminated volatility in monthly costs/charges • Simplistic (Avg. Cost) approach increases predictability and data resolves confusion to all stakeholders.

Figure 3: Barriers to implementing a Cost Allocation Program


Each of these clients achieved its goals by identifying and tracking a range of specific performance metrics, the accuracy of which was constantly verified. Sample metrics captured ran the gamut, and included lag time from the date of loss to local client to report to GB; conversion dates from medical only to indemnity claims; frequency reporting to improve forecasting of allocation costs and to redirect safety improvement initiatives when appropri-ate; and custom claim coding to track key data relative to the allocation model. The key was that each company had a clear vision of what the risk team was trying to accomplish with cost allocation, and built the program and metrics accordingly. It is also important to note that these companies evolved the metrics used as preliminary results were analyzed to capture the information that most clearly targeted causal factors and behaviors.

Understanding and Overcoming Barriers to Implementing a Cost Allocation Program

Despite the results and laudable intentions of cost allocation programs, implementing them can be challenging. Resistance to change was the most frequent barrier encountered by risk management teams in adopting cost allocation program -- cited by respondents (26%), with both competing priorities and insufficient resources cited by ~20% (Figure 3). Risk manag-ers can overcome these barriers, and some see that cost allocation programs inject a level of healthy competition to improve workplace safety. “Incorporating a work comp premium incentive within our cost allocation program has provided useful tracking/trending models that our locations now depend on. It motivates teams to strive to make improvements in each and every quarter," observed a health care system executive. "It is a win/win for everyone. Claims are reported timely, we have great return to work programs and claims are resolved much faster.”


30%

25%

20%

15%

10%

5%

0%Lack of

perceived keystakeholder

support

Competingpriorities

Insufficientresources

Lack ofperceived

value

Managementresistanceto change

Other

CLIENT SPOTLIGHT

“Incorporating a work comp premium incentive within our cost allocation program has provided useful tracking/trend-ing models that our locations now depend on. It motivates teams to strive to make improvements in each and every quarter, and is a win/win for everyone. Claims are reported timely, we have great return to work programs and claims are resolved much faster.”

Bruce Jones – Sr. DirectorInsurance & Texas Plan Administrator/

Community Health SystemsPlease indicate any barriers encountered during the design and implementation of the Cost Allocation Program. (Select all that apply).

| | | | | | |

Building processes to obtain upward feedback about the cost allocation program is invaluable because employees closest to the action have a better line of sight to the range of behaviors and causes of accidents.

WHO TO CONTACT AT GB


Communicating openly and engaging all parties throughout the design, rollout and scaling of a cost allocation program are critical to overcoming the barriers identified in Figure 3. In addition, training and education about the cost of risk as well as the ability and necessity of managing it at the oper-ating unit level are important to reducing resistance. For example, demon-strating that cost allocation should (eventually) eliminate root causes of accidents and reduce the number and severity of claims can be compelling. Finally, building processes to obtain upward feedback about the cost alloca-tion program is invaluable because employees closest to the action have a better line of sight to the range of behaviors and causes of accidents – it’s hard to fix what’s going on in a machining shop from a corner office!

Conclusion

The phrase “what gets measured gets done” may seem like a cliché, but it is never more true than when discussing cost allocation programs. Gallagh-er Bassett’s Continuous Pursuit research demonstrated that cost allocation is an effective risk management tool because it captures managers’ attention and motivates behaviors that result in a safer work environment and fewer or less severe accidents. As a flexible, customizable approach, cost alloca-tion can help managers achieve targeted risk management goals.

Companies can also rely on external parties with expertise in claims such as an actuarial firm, broker or Gallagher Bassett account manager to help assess, design, and pilot a cost allocation model. External parties can provide insights and benchmarks gained from other cost allocation programs, shortening the development time to get a cost allocation pilot up and running. As with any change, getting started is the hardest part. Gallagher Bassett can assist companies in taking the initial steps of designing and implement-ing a program. Our data analysis of company claims can help organiza-tions set the right goals, for the right reasons and work with your risk team to pilot and refine programs.


We invite you to connect with us about our Continuous Pursuit research and the Cost Allocation project. For more information please contact: • [email protected], SVP - Account Management • [email protected], VP - Account Management

For more information about GB Analytics, contact [email protected].

We GUIDE those suffering a loss to the best outcomes for their health and financial wellbeing.

We GUARD our clients’ assets as the trusted stewards of their claims and risk management programs.

We GO BEYOND expectations in the continuous pursuit of a better way.

2 Pierce Pl, Itasca, IL 60143 | (630) 773-3800 | gallagherbassett.com

Gallagher Bassett is the premier provider of global claims services, dedicated to exceptional customer service and demonstrably superior outcomes. GB helps people, teams and businesses overcome adversity and loss through the guiding expertise of over 5,000 claims professionals, all committed

to going beyond expectations in the continuous pursuit of a better way.

The analysis and views in this Research Note are the property of Gallagher Bassett. Copyright © 2016. Gallagher Bassett, Inc. All rights reserved.

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