Magazine for Senior Financial Executives: A Brand New Start of It

A Brand New Start of It – Brief Article

Russ Banham

By bringing claims management into the 21 st century, Comptroller Alan Hevesi has saved New York City millions.

WHEN ALAN HEVESI was elected Comptroller of New York City in 1994, his office at One Centre Street looked pretty much the way it did when Tammany Hall, J.P. Morgan, and John D. Rockefeller ruled the town. Little had been refurbished, not everyone had computers, and files were overflowing into the hallway.

The time warp extended to the mountain of paperwork burying the city’s claims processors. “If someone fell on the sidewalk, a policeman filled out Form UF-18, the same form a policeman filled out a hundred years ago,” says Michael Aaronson, chief of the New York City Bureau of Law and Adjustment, which is responsible for managing claims filed against the city. Moreover, says First Deputy Comptroller Steven Newman, chief of the city’s Bureau of Management and Accounting, “When attorneys showed up to settle claims, there was no place to meet with them. We had to seat them in the elevator bay–not exactly the most comfortable way to reach a settlement.”

Hevesi, a former state Assemblyman, was stunned. “I visited the claims unit when I became Comptroller, and found the offices filled with cartons of papers with files overflowing,” he says. “I soon realized why I was receiving calls from my old colleagues at the Assembly, complaining that their constituents with claims could not get any service. The reason was the staff around here spent most of their time just trying to locate files.”

To bring 21st-century solutions to the city’s 19th-century bureaucracy, Hevesi began overhauling the entire claims process function. The overhaul, which included leveraging state-of-the-art technology, strategically using consulting expertise, and forging a new partnership with the city’s law department, has paid off in ways that would make Vanderbilt and the other old titans proud. So far, more than $50 million has been saved for New York City’s taxpayers. “We’re spending now about $500 million a year on claims,” says Hevesi. “Our goal is to stop the annual increase. To get there, we’re hoping to cut in half the average claims costs we incur in several categories, such as schools, roadway claims, and sidewalk trips and falls.”

A LEGACY OF CHAOS More than antiquated surroundings and outmoded business practices challenged the Comptroller. “There was a culture here that believed the way to deal with claims was, well, not to deal with them,” says Newman. “The assumption was that claimants would die or lose interest–not the best way to manage claims.”

The mordant response derived from the “pass-the-buck” mentality of politics. “A company thinks long term, but in the world of politics, we think short term,” says Newman. “From a business standpoint, we should be more like Allstate: settling claims right away. But politically, the culture was to push off paying a claim–even if you could settle it for one-third less–into the next administration.”

Complicating matters was the fact that claims processes were established at a time when the legal environment in New York was profoundly different. According to Newman, “The populace had become far more litigious, and the legal profession had evolved into an aggressive and powerful business interest capable of taking advantage of every weakness in the system.”

In fact, in 1992, the city had 10,495 new action starts (claims that progressed to a lawsuit), a level that hit 12,769 in 1995. “We were beset with an ever-increasing caseload, higher payouts, and rising long-term claim liability projections,” says Hevesi. “Yet we were bogged down by inefficient procedures and systems that lagged decades behind insurance industry best practices.”

The result, says Newman, was complete chaos: “On average, each employee was assigned more than 1,500 claims. We had a backlog of 60,000 claims that was projected to reach 100,000 by 2007. And 20 percent of the time, [when a claim was requested,] the staff couldn’t even find the caseload.”

To rectify matters, Hevesi began by earmarking $1 million for renovation of the workspace, which was crowded, hazardous, and downright antediluvian. “We’re no longer in a bullpen setting,” says Newman, “but in traditional, modern cubicles. We can now treat claimants and their attorneys professionally.”

Hevesi then brought in Price Waterhouse (now PricewaterhouseCoopers) to do a comparative best practices study at a cost of approximately $1 million, funded jointly by the Comptroller’s office and Mayor Rudolph Giuliani’s office. The firm had little difficulty finding the trouble spots. “The biggest impediment was New York’s bifurcated system for handling claim cases,” explains David Home, a PricewaterhouseCoopers director. “Unlike [in] other cities, the Comptroller in New York does not control the claims process end to end. While claims originate and are investigated by the Comptroller, the city’s law department [which reports to the separately elected Mayor] handles the city’s legal defense.”

The divisional approach, which could not be changed because it was legislated by city charter, made settling a claim a time-consuming process. “Claims handling was resident in two different parts of the city, with documents flowing back and forth ad nauseam,” says Horne.

The only recourse, then, was to identify ways in which both agencies could work together to have an impact on claim frequency and costs. The Pricewaterhouse study, for example, noted that the city settled claims only after litigation had commenced, which caused outcomes to be more costly and was in sharp contrast to insurance industry practices. In response, Hevesi funded a pilot study that offered prelitigation settlements immediately after statutory hearings of a case, which are held very early in the claims process. And by April 1999, 924 claims in the pilot study had been settled at half the average cost of claims that, historically, were settled early in litigation–a savings of some $5.7 million.

The study also pointed to the dismal state of technology in the claims process, something the office was already improving. Claims-processing software was purchased for $7 million from Integic Inc., in Chantilly, Virginia, to manage claims for both the law department and the Comptroller’s office. An optical imaging system that replaced paper claims with electronic ones was introduced, allowing staff at the Comptroller’s office and at the law department to track claims together. “Now if I get a call from a claimant, I can immediately call [the claim] up and see where it is in the process,” says Aaronson.

The new automated system also offers claims analysis, something that eluded the Comptroller’s staff in the past. “A dozen people could trip over the same sidewalk crack before we’d ever realize it and get it fixed,” says Newman. “Now this pops up immediately as a red flag.”

Aaronson notes another benefit. “It used to take us 22 discrete steps to disallow a claim, all of them involving human intervention,” he says. “Now we have a sophisticated workflow system that does all of these clerical tasks automatically. In other words, we’ve gone from 22 steps to 1 that involves no human intervention whatsoever.”

SIDEWALKS OF NEW YORK With the new claims system up and running, Hevesi launched his most ambitious initiative to date: the large-scale early disposition of bodily injury claims. The initiative focused on the two biggest claim categories–sidewalk trips and falls, and claims arising from the city’s Board of Education–which together represented 35 percent of all bodily injury claims filed and 22 percent of all bodily injury claim expenses.

To encourage settlements in those categories, vertical teams were created in March 1999 to manage the entire claims process, from investigation through settlement. Under the vertical approach, employees were assigned specific claim types and given the responsibility to manage the process. At the same time, duties that previously were performed by staff, such as field investigations and statutory hearings, were outsourced, freeing staff to focus on settling the claims. “We outsourced the investigation function to professional claim investigators, who go out immediately to an accident scene, take good pictures, find witnesses, and so on,” says Aaronson. “None of this happened before.”

Other outsourcing proved to be equally vital. Outside law firms, for example, were hired to conduct prelitigation hearings instead of having employees conduct them, putting the city on a more even footing with a plaintiff’s attorneys. Having an experienced defense attorney conduct the deposition has become a powerful tool in reducing case backlog: so far, more than 130 cases have been abandoned by plaintiffs immediately preceding or following what Newman describes as “pretty rigorous proceedings.”

The Comptroller’s office also entered into contracts with independent medical examiners who were hired to conduct physical examinations of claimants right after they had filed a claim. Such exams had never been conducted prior to litigation before, and they are a compelling disincentive to feign or exaggerate injury claims. “We’re seeing cases where claimants refuse to appear for the [medical exams], and the cases are dropped,” says Aaronson. “In fiscal year 2000 [ended June 30], there were 200 cases where the claimants totally dropped their claims or the attorneys removed themselves from representing the claim, he adds. “If these had gone to settlement, given that our average settlement is $20,000 per claim, the cost would have been $4 million. And that is only settlement costs. The processing and carrying costs are also substantial, and we avoid litigation.”

Armed with timely, well-documented investigations, more incisive hearings, and complete medical reports, Hevesi’s staff now has a comprehensive case file workup. They’re able to quickly assess the value of a case long before litigation starts, and proactively negotiate settlements. In fiscal 2000, only 9,343 action starts were filed, compared with 12,769 in 1995. The number is still dropping: In the first quarter of fiscal 2001 (through September), the city has experienced a 17 percent decrease in action starts compared with the previous year, from 2,538 to 2,091. In short, claims settlement is now an art form and not a pass-the-buck strategy.

And in cases where prelitigation settlements are not made, the case file workup provides better litigation support to the city’s law department. “We’ve changed our employees from information gatherers to decision-makers,” says Hevesi.

Those decisions have yielded significant savings so far. In fiscal 2000, the office settled 1,241 sidewalk and school personal injury claims prior to litigation. For school-related claims, the average settlement was $3,383, $18,904 less than the average school claim payout in fiscal 1999. Altogether, the cost savings on school-related settlements were $11.7 million. For sidewalk claims, the average payout was $7,005, $13,588 less than the average payout in fiscal 1999, for a total settlement cost savings of $8.4 million.

Next on the Comptroller’s agenda is expansion of the sidewalk and school claims projects to include claims arising from car accidents as well as the scourge of every big city: potholes. After that, the city will attack city hospital malpractice claims and lawsuits arising from alleged police abuse, which, according to Newman, are “much tougher nuts to crack.”


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