Principles of Six Sigma: Building a Quality Claims Management Program, The
In the 1980s, engineers for Motorola, Inc. began a project to dramatically improve the company’s quality monitoring processes. Deciding that its traditional method, which measured the number of manufacturing defects that occurred per thousands of opportunities, was insufficient, the engineers enhanced the process to measure defects per million opportunities. Motorola called this new standard Six Sigma (a term it subsequently trademarked). Combined with the cultural changes needed to fully implement the process companywide, Six Sigma saved Motorola billions of dollars in production costs, launching a new way of gauging manufacturing efficiency.
Since then, Six Sigma has been adopted by many different industries around the world. It has evolved into a management tool for improving business results through the integration of business operations, statistical measurements and product development, and it is now being applied to business areas as diverse as human resources, purchasing and customer service.
Companies that have adopted these principles have reported dramatic increases in customer satisfaction, productivity and shareholder value. They have also shown significant savings, often without capital expense. (GE, for instance, reported that adopting Six Sigma on an organizational level added $600 million to its bottom line in 1998 alone.)
Clearly, the claims services industry could benefit from results such as these. Claims management has tended to focus on only a small portion of the total loss equation, leaving significant room for improvement. By introducing the principles of Six Sigma to all aspects of the claims process, however, organizations can improve their claims performance and bring about fundamental changes that will benefit themselves as well as their customers.
Over the years, “quality” in the claims industry has become synonymous with expense control and process measurement. In sales literature and proposals, claims administrators proudly cite average claims turnaround, percentages of claimants and physicians contacted within 24 hours of an incident as key performance indicators.
The industry has traditionally relied on these standard performance measures in part because they are easy to identify and control. Furthermore, there is a prevailingif not mistaken-belief that although paid loss performance accounts for some 85 percent of the total claims cost, it cannot be quantified. This is driven by a resistance to measure factors perceived to be subjective, such as evaluations, settlements and ultimate outcomes.
The industry can no longer afford to rely on expense control alone, however. Workers’ compensation renewals have risen to double-digit levels due to skyrocketing medical costs, difficulty in obtaining reinsurance, the ongoing war on terrorism and other factors. In addition, a preoccupation with expense control can translate into institutionalized behaviors that actually ignore paid loss control, thereby exacerbating the problem. For example, if an organization is only focused on lowering claims turnaround, it may be ignoring other key factors, such as relevant fact gathering, detailed compensibility/liability analysis, fraudulent claims, areas of high risk or best claims practices. Therefore, it is imperative that the industry find ways to control total claims costs-including expenses and paid loss-as both are meaningful and manageable. On all counts, Six Sigma is worthy of consideration.
Applying Six Sigma Principles
Within Six Sigma are two basic submethodologies for measuring results: DMAIC (define, measure, analyze, improve, control), used when existing processes have fallen below acceptable levels and incremental improvement is desired; and DMADV (define, measure, analyze, design, verify), used when new processes or dramatic improvement in existing processes are desired.
Applied to claims services, DMAIC and DMADV allow administrators to recognize a wide variety of factors that drive total loss costs and create meaningful and effective measures, such as outcome-focused claims practices, cost of risk, program satisfaction, operational effectiveness, loss mitigation and capital management.
Outcome-focused best claim practices. Achieving best practices in claims administration is the most reliable leading indicator of good performance outcomes and a prerequisite to maximizing performance. Adherence to true outcome-focused best practices requires an organization to perform at a clearly specified level. By focusing on best practices, an organization can directly correlate claim handling behaviors and outcomes.
Best practices must focus primarily on the qualitative aspects of performance rather than on the process and, ultimately, on improved outcomes. This will require reaching beyond the typical “checklist” approach (i.e., Were contacts timely? Was the claimant’s statement taken? Did we request a wage statement? Did we request medical reports?) and applying a more thoughtful, analytical approach to each phase of the claim.
A more outcomes-driven approach may entail asking more relevant and substantive questions tied to the needs of the loss, such as:
* Did the accident occur on a Monday morning or a Friday afternoon with a Monday report?
* Did the accident occur immediately before or after a strike, job termination, layoff, end of a big project or at the conclusion of seasonal work?
* Are the healthcare and legal providers known and reputable or do they have a past history of handling suspicious claims?
* Were witnesses contacted for relevant information or was supporting rationale provided for not contacting them?
* Do the employee’s descriptions of the incident, the medical history and the first report of loss collaborate the cause of injury?
* Does the employee have a history of prior suspicious or litigated claims?
* Has the employee refused a diagnostic procedure which will confirm the nature and extent of injury or frequently failed to attend medical appointments?
* Has there been an unreasonable delay in reporting the claim?
* Is it difficult to reach the employee, and if so, why?
* Does the employee have a history of malingering, frequently changing physicians, changing addresses or numerous past employment changes?
The claims adjuster would be further encouraged to dig deeper into the claim, potentially uncovering other vital information that could impact the outcome. This will also require consistent execution of fundamentals, including gathering all relevant information from physicians, witnesses, employers, etc. If applied to all claims, such an approach will help to manage loss costs and ensure better outcomes on all cases.
Cost of risk. Clearly one of the most important goals for claim administrators is the reduction of risk. Recognizing that certain factors such as risk selection may not be within the scope of the administrator’s control, the administrator can begin with a clear understanding of current claim costs and compare those to the industry standard. Once standards have been determined, the administrator may use that information to develop a benchmarking comparison tool. This type of measurement, analysis and comparison will provide valuable guidance in setting client goals.
Program satisfaction. Client satisfaction is an important measurement, as it directly correlates to program outcomes. If the administrator is providing data on how well it meets its clients’ expectations at every level, performance can be quantified. Performance can be monitored through ongoing client performance audits and satislaction surveys.
Operational effectiveness. Measuring operational effectiveness ensures that an organization consistently uses appropriate claims-related services and analyzes their impact on factors such as claims duration, opening to closure rates and, in workers’ compensation claims, return-to-work results. For example, a higher close ratio and effective return-to-work programs often contribute to lower overall costs and increased productivity. Whether the employer uses an outside claim vendor or an internal claims department, the critical element in evaluating productivity should be those aspects of productivity that fall within the claims administrator’s control and its scope of service.
Loss mitigation. This measures improvements resulting from the identification of certain trends and behaviors, which, when properly addressed, can positively affect financial results. Measuring performance relative to loss mitigation requires an analytical review of how well an organization uses its internal resources, technology and information management to identify opportunities for program improvement. For example, does the claims administrator effectively use storehouses of data to pinpoint areas of highest cost and drill down to the root causes? This would serve as an alert regarding financial risk factors and as the foundation for planning and executing specific improvement initiatives.
Capital management. Capital management relates to the identification of key performance indicators and the steps to develop correlations between losses of human and physical capital. To be most effective, the nature of an organization’s industry must be carefully analyzed to determine those elements. When properly implemented, employers will be able to measure and improve environmental factors such as ergonomie safety or lighting conditions, which are typically not recognized by a claims administrator.
Developing Best Practices
Six Sigma-based best practices that go beyond procedure and focus on outcomes can be applied to all phases of the claims process, including coverage, investigation, evaluation, negotiation, recovery, medical and disability management, and litigation management. By applying these principles, organizations have been known to achieve up to a 33 percent reduction in paid loss overpayment during the first year of implementation, as well as reduce the frequency of overpayment by 38 percent. Most importantly, organizations have reported achieving up to a 30 percent increase in best claim practices execution, assuring continued future savings.
A particularly effective way to implement Six Sigma best practices is to divide them into procedural and outcomes approaches.
Coverage. Procedural approach: If the computer accepts the claim as a loss occurring within the policy period, coverage is accepted.
Outcomes approach: The adjuster asks additional questions to determine if there are multiple jurisdictions involved and then researches to confirm that coverage exists in the applicable jurisdiction.
Investigation. Procedural approach: The adjuster contacts the injured worker, employer and doctor within the 24-hour standard time frame, determines the injury is not being questioned and asks for no additional information.
Outcomes approach: The adjuster makes the appropriate contacts within an acceptable timeframe but does a more meaningful investigation and discovers a pre-existing disability or a sports injury over the weekend, which could reduce the ultimate outcome of the claim.
Evaluation. Procedural approach: If an employer does not challenge a claim, the information gathered is taken at face value and no further investigation will take place.
Outcomes approach: The adjuster conducts a next-level analysis, asking additional questions to confirm compensability and the facts of loss. Follow-up activities are based on their importance in helping influence the outcome of the file.
Negotiation. Procedural approach: A seulement range is established; an initial demand within the range is accepted; the emphasis is on closing the claim quickly rather than on paying the sought-after amount.
Outcomes approach: In addition to setting a range, a negotiation plan is established to achieve optimum resolution. The plan includes a review of strengths and weaknesses, an offer and counteroffer strategy, and the substance of arguments in establishing a settlement value and better outcome.
Recovery. Procedural approach: A worker is seriously injured in a slip and fall accident on the employer’s premises. The worker does not pursue a third party claim or seek legal representation, and the employer does not question the claim. The adjuster confirms that the employer owns the premises and rules out recovery possibilities.
Outcomes approach: The administrator’s recovery team conducts a more detailed investigation and determines that an outside contractor had improperly completed repairs on water pipes, which created the hazard that resulted in the slip and fall. The adjuster’s orientation should be to determine why there is subrogation as opposed to why there is not subrogation. The administrator pursues subrogation resulting in a greater recovery for the client.
Medical and disability management. Procedural approach: While evaluating a disability claim, the adjuster contacts the injured worker’s employer and confirmed that no light duty was available. Weekly benefits are continued.
Outcomes approach: The adjuster examines various job descriptions available al the employer and, as reslriclions may change, periodically follows up for work opportunities based on the claimant’s abilities. The adjuster communicates with the physician to clarify what types of job duties are required. By focusing on the claimant’s abilities for work versus his or her disability and by communicating with the physician, the adjuster is able to return the injured worker to productivity sooner, which will have a positive impact on the claim’s ultimate outcome.
Litigation management. Procedural approach: A case moves into litigation and is referred to a defense attorney based on the attorney’s win-loss record. Future management of the case is turned over to defense counsel.
Outcomes approach: The case is referred to an attorney with appropriate expertise. A plan of action is provided up front which clearly delineates the role of the employer, attorney, and claim professional, thus creating an effective partnership in managing the litigation. The plan helps to avoid unnecessary legal activity. The claim professional continues to retain ownership of the file.
Implementing a Six Sigma program need not be time-consuming or complex. It begins with instilling a companywide commitment to excellence and holding administrators accountable for results. Those who provide proven quality and service today will be more apt to retain and secure new business in the future.
Six Sigma involves taking claims operations to the next level by looking beyond just expenses and making paid loss a focal point of cost control. This entails providing claims professionals with the training to apply analytical thinking and focus on behaviors that drive improved outcomes versus merely following a checklist of procedures. Over time, these seemingly small efforts will reap big rewards for their clients.
“Getting the Tough cases Back to Work”
RM November 2002
Archive at rmmag.com
Austin Lewis, CCLA, WCCLA, is vice president, business practices, liability product group leader and Brad Lipscomb, CPCU, is vice president, business practices, workers compensation product group leader of Cambridge Integrated Services Group, Inc. located in Cranbury, New Jersey.
Copyright Risk Management Society Publishing, Inc. Feb 2004
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