This document discusses captive insurance programs as a way for companies with large workers' compensation deductibles to effectively manage risk. It explains that captive insurance allows the company to take a tax deduction for premiums paid to the captive insurer, which can then set aside the premiums as tax-deductible reserves. The captive's reserves can be held as collateral by the primary insurance carrier above the deductible amount. The document also discusses measuring PEO performance, including analyzing medical cost savings from the insurance carrier's claims handling practices. Finally, it outlines best practices for loss prevention management, such as complying with safety requirements and conducting needs assessments for new clients.

1. PEO ADVISOR
RISK MANAGEMENT
March 2011
Features
Captive Funded Deductible Programs for WC
Kris Delano, Esq.
Companies with large deductible workers compensation insurance are, in a very real sense, insurance
companies. They are not licensed or regulated as insurance companies, but they bear significant risk
traditionally born by insurance companies. Substantial reserves must be established against these risks
– reserves that are generally held by the insurance companies that provide the workers comp insurance
required by state statutes and which will insure the excess over the deductible (the “Primary Carrier”).
Unlike a licensed insurance company, the Insured Companies are unable to take a tax deduction for
their reserves, and must create the reserves with after tax dollars. Assuming the Company is an S cor-
poration or a limited liability company, it must earn roughly $1.5 Million, and the owner(s) must pay
roughly $500 Thousand in federal income tax for every $1 Million in reserves/collateral it needs to
establish. This is a serious capital constraint on the Company’s ability to grow its business.
Captive insurance can provide a cost effective way for an Insured Company to solve the problem:
Click image or here to expand
The Company can take a deduction for premium paid to the captive insurance company;
The Captive can set aside the premium as tax deductible reserves; and
The Primary Carrier can hold the captive’s reserve as “collateral”.
Continue Reading...
Ask the Advisor…
The latest question we’ve been asked is:
Who is required to register with the Centers for
What's Medical Bill Review Got to Do with MSA Administration? Medicare and Medicaid Services (CMS) for the MSP
Christie Luke and Hany Abdelsayed Section 111 reporting requirements that began Janu-
We often get questions about the value of medical bill review expertise as it pertains to MSA Ad- ary 1, 2011?
ministration: Why is it important? What does it have to do with managing MSA funds? Isn’t MSA
Administration just about proper record keeping and reporting to CMS? So we’re dedicating this The answer?
newsletter to addressing your questions.
Under the Medicare, Medicaid, and SCHIP Extension
It’s no secret that medical bill review is considered a significant managed care service throughout Act of 2007 (MMSEA) Responsible Reporting Entities
the life of a claim, it’s used: (RRE), including workers’ compensation plans, no
fault insurance plans and self-insureds, will be re-
1. As a cost savings tool during claim handling and claim payments;
quired to directly report potentially eligible claimants
2. In settlement negotiations to determine the potential value of medical benefits owed; and
3. To determine post-settlement provider payments in the case of MSA funds administration to the CMS.
If a PEO is reporting all of it’s WC claims to the insur-
The reason why medical bill review expertise is used in MSA funds administration is because, sim-
ply put, it is a critical component of complying with CMS’ post-settlement guidelines. Here’s why… ance carrier, then the carrier is the RRE and should
report to CMS. However, if the PEO is “self-insuring”
State Fee Schedule Repricing: When state fee schedules are involved, proper MSA Administration any claims, then the PEO is also required to be set up
– whether self-administered or professionally administered – will involve repricing medical bills.
Specifically, Medicare-covered services rendered post settlement, and related to the initial injury, as an RRE and report potentially eligible claimants.
should be paid from MSA funds based upon the proper fee schedule amount for states with such
schedules. MSA Administrators with bill review technology, up-to-date fee schedule rules and the
For more on Medicare Secondary Payer (MSP) Section
professional expertise to accurately reprice medical bills in accordance to fee schedule rates are 111 reporting, click here.
better equipped to comply with CMS’ MSA guidelines.
To visit the CMS website and register as an RRE, visit:
State Regulatory Requirements for Bill Repricing Activities: Many states require various creden- www.section111.cms.hhs.gov.
tials and capabilities to perform bill repricing activities. MSA Administrators who comply with all
bill review legislation clearly demonstrate their experience and ability to adhere to the letter of the
law, thereby eliminating potential liability. Sample state requirements include: If you have a question you’d like answered, email the editor at:
RiskAdvisor@praxiom-rm.com.
...Continue Reading
© 2010 P rax iom Risk Management LLC
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 03/11

2. PEO
RISK MANAGEMENT
ADVISOR
Measuring PEO Performance PEO Risk Management best practices are split into 5
primary categories. This month we outline the
fourth of the five:
Our Measuring PEO Performance section is dedicated to those PEOs that manage
their Workers Compensation program through a Large Deductible or captive arrange-
ment, and utilize positive results as a profit center. Each month we highlight different
Loss Prevention Management
performance metrics that should be used in measuring WC performance.
Consistently implemented best practices in the area of loss preven-
Medical Savings Analysis tion consist of the following elements:
The execution and services provided by WC carrier claims depart-
ments are NOT created equal. Most carriers will profess that they Compliance with Loss Prevention Requirements - the PEO must es-
are “best in class” for claims handling, so go ahead and ask for tablish and follow written procedures for requiring the client to com-
details. Specifically, ask for a Medical Savings Analysis. This analy- ply with “critical” requirements. The procedures should include (a)
sis is a report that outlines the flow of medical dollars associated communicating requirements to the client, (b) establishing target
with a specific claimant, client, or policy(s). In it, the carrier should dates, (c) taking appropriate action for failure to comply, and (d)
be able to itemize the following cost savings associated with their documenting action(s) taken.
claims handling practices:
Usual & customary New Client Needs Assessment –the PEO must establish and follow
Fee Schedule procedures for conducting a needs assessment and producing a ser-
Utilization Review vice plan. The assessment should consider exposures, loss history,
Clinical Review and compliance with state or federal regulations.
Negotiations
PPO Network Savings Providing Appropriate Loss Prevention Services – written procedures
Denials (by reason) must be established and followed for delivering loss prevention ser-
Other Bill Review vices to the client with the service plan.
Subrogation
Accident Investigation – written policies should include a provision
When executed properly, these claims practices should save 40-
requiring investigation of employee accidents when
50%+ of the original filed cost.
the accidents result in work related injury and claim
to the PEO. Procedures should describe which acci-
Workers Compensation Highlights dents will be investigated, the method and the form
documenting the results.
Workers' Compensation - Premium, Discounts, & Credits
John Keller, CRM ARM CIC AAI
Certificate Tracking Confirmation – the PEO should confirm that
clients with material contingent WC exposures (i.e. subcontractors)
A rating plan is simply the method or set of equations that go into
have certificate tracking processes in place
the calculation of premium, and the variations are many depend-
ent on size of company purchasing the policy, state(s) of operation,
risk tolerance (willingness to gamble), claims history, and insurance Background Investigation – the PEO should require that clients coop-
carrier providing the policy.
erate in conducting background investigations as permitted by law
for job positions with significant exposures.
In general all WC plans can be put into one of a few categories
depending on when premium and costs will be established. Most
plans can be categorized as Prospective, Retrospective, or Cash Claims Review – the PEO should review and document at least
Flow Plans (Deductibles). All these plans contemplate that the monthly claims experience and resulting recommendations for clients
premium will be comprised of the cost of claims, expenses associ- with claims frequency and severity issues.
ated with handling the claims, profit for the carrier, and taxes.
Continue reading... For more on CI requirements visit: www.certificationinstitute.org
© 2010 P rax iom Risk Management LLC
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 03/11

3. PEO
RISK MANAGEMENT
ADVISOR
Benchmarking
The Benchmarking section is used to outline various industries in terms of their Workers Compensation risk factors, historical claims statistics, and
key loss sources. Benchmarking statistics are obtained from a variety of credible sources including the largest WC insurance companies in the U.S.
and The Bureau of Labor and Statistics. The statistics used are aggregated from all states and averaged over a 5 year rolling period. All stats be-
low are from claims incurred between 1/1/06—12/31/10.
Rate Definitions:
Frequency Rate = # non $0 claims / payroll per $1M Recordable = # OSHA recordable incidents / 200,000 hours1
Loss Rate = Total Incurred $ / payroll per $100 DART = incidents w/ Days Away, Restricted duty or job Transfer / 200,000 hours1
This month we continue our look at professional services with a review of Real Estate Agencies and Insurance Brokerages/Agencies.
Industry SIC: 6531 - Real Estate Loss Sources Avg. Inc. % Inc % Claims
As of: 1/31/2011 Material Handling $ 8,785 24.5% 19.8%
Period: 1/1/06 - 12/31/2010 Slip/Fall - Same Level $ 8,673 21.7% 17.8%
Average Incurred $7,116 Slip/Fall - Elevated $ 4,204 16.2% 8.1%
Average Paid $5,401 Struck By/Against $ 4,158 14.1% 24.2%
% claims > $10,000 10.5% Vehicles $ 15,306 5.6% 2.6%
% Incurred >$10,000 88.5% All Other 17.9% 27.5%
% claims >$25,000 6.1% SIC 6531 - Top 5 Loss Sources % Total Incurred
% Incurred >$25,000 78.3% All Other
Vehicles Material
NAIC 531200 6% 18% Handling
24%
Key Metrics - SIC 65xx BLS Stat 2006 2007 2008 2009
Struck
Frequency Rate 1.2 Slip/Fall -
Recordable 1.1 1.4 0.8 1.5 By/Against
Same Level
14% Slip/Fall -
Loss Rate $0.59 DART 0.5 0.8 0.4 0.8 Elevated
22%
16%
Industry SIC: 6411 - Insurance Agency
Loss Sources Avg. Inc. % Inc % Claims
As of: 1/31/2011
Struck By/Against $ 5,403 24.7% 17.7%
Period: 1/1/06 - 12/31/2010
Slip/Fall - Same Level $ 10,465 20.3% 21.0%
Average Incurred $9,003
Material Handling $ 11,660 11.9% 11.2%
Average Paid $5,813
Repeated Trauma $ 6,669 10.5% 4.3%
% claims > $10,000 11.5%
Vehicles $ 15,630 8.6% 6.0%
% Incurred >$10,000 91.1%
All Other 24.1% 39.9%
% claims >$25,000 7.4% SIC 6411 - Top 5 Loss Sources % Total Incurred
% Incurred >$25,000 83.5%
All Other Struck
24% By/Against
NAIC 524200 25%
Key Metrics - SIC 64xx BLS Stat 2006 2007 2008 2009 Vehicles
9% Slip/Fall -
Frequency Rate 0.26 Recordable 0.7 0.8 0.6 0.7 Repeated Same Level
Trauma Material 20%
Loss Rate $0.20 DART 0.2 0.4 0.2 0.2 10% Handling
12%
1—200,000 hours represents the amount of time worked by 100 WSE in one year
© 2010 P rax iom Risk Management LLC
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 03/11

4. PEO
RISK MANAGEMENT
ADVISOR
Stay Connected...
If you haven’t already joined, there is now a group on LinkedIn dedicated to PEO
Risk Management. All PEO Executives and Risk Managers are encouraged to join
and participate in the online discussions. Or, you can simply follow the news posts that relate to PEO,
Risk Management, and Workers Compensation.
Click here to go to the PEO Risk Management group on LinkedIn and join.
With PEO Risk Management professionals averaging 20 years of experience and encompassing a
broad range of industry expertise, Praxiom Risk Management is committed to providing a wide
range of resources to help PEOs mitigate risk and grow their Workers Compensation profit center.
This PEO RM Advisor is a monthly e-newsletter designed to keep PEO executives and Risk Manage-
ment professionals informed of relevant topics in the area of PEO risk management. Sharing infor-
mation and best practice through e-newsletters is one of the many ways we help support PEO or-
ganizations' risk management efforts.
If you would like to contribute industry specific content or articles for publication in the areas be-
low, you may submit them to the Editor at:
RiskAdvisor@praxiom-rm.com.
Loss Control
Claims Management
Performance Metrics
RM Information Systems
Policy Administration
Carrier Relationships
Industry Certifications
Up Next…
We’ll continue with our performance benchmarking of service com-
panies with a look into the WC results of:
7212—Garment Cleaners & Agents
7349—Building Maintenance Services
© 2010 P rax iom Risk Management LLC
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 03/11