Look Out for Workers’ Comp “Black Swans”

June 1, 2015 Insurance Topics 0

By Robert J. Malooly

When early cartographers reached the boundaries of charted territories on their maps, they often inscribed “Here be dragons” into the blank spaces beyond.

This fanciful warning warned travelers to prepare for previously undocumented or even imagined dangers. Whether from uncharted reefs or mythical beasts, failing to take unknown hazards seriously could result in an unprofitable voyage, not to mention the loss of ships and their crews.

Public domain courtesy of Arpingstone

Public domain courtesy of Arpingstone

While GPS satellites have filled in the blank spaces on maps, the unknown continues to plague today’s investors and workers’ compensation. Yesteryear’s dragons have been replaced by another rare bird – the “Black Swan” as defined by Nassim Nicholas Taleb in his 2001 book, Fooled by Randomness. Today the label describes a perceived impossibility that later is proven to be an unanticipated reality.

In business, Black Swans tend to be outlier events that fall off the radar of regular expectations because nothing in the past can convincingly point to their possibility. But once encountered, they can have an extreme impact. “Black Swan logic,” Taleb told the New York Times, “makes what you don’t know far more relevant than what you do know.”

Workers’ compensation faces a future filled with Black Swans that will affect the outcome of ratings, premiums and financial results for both insured and self-insured organizations.

One example of a workers’ comp Black Swan is physician dispensing of medication that is usually more expensive than pharmacy prices. According to the PMSI website, “…physician dispensing began to surface in California in the middle of the last decade, as physicians… found a secondary stream of income to fill gaps created by reimbursement cuts in the commercial, workers’ compensation and government markets.”

Beginning as isolated instances, this Black Swan is a workers’ comp reality that will continue to affect the health of workers and the bottom line of their employers for the foreseeable future. A Workers Compensation Research Institute (WCRI) study in 2012, Physician Dispensing in Workers’ Compensation, documented its rapid growth. A more recent WCRI study, Are Physician Dispensing Reforms Sustainable?, indicates that physicians are now countering reform efforts by finding loopholes that allow them to continue the practice of dispensing drugs at high prices.

Workers’ compensation faces a future filled with Black Swans
that will affect the outcome of ratings,
premiums and financial results
for both insured and self-insured organizations.

What other Black Swans may soon have an effect on workers’ compensation? MarketWatch predicts that 3D printing technology in healthcare will be a $1.2 billion market by 2020. According to its recent article, “3D printing has numerous applications in healthcare and can be segmented into implants & prosthetics, surgical guides, hearing aids, and tissue engineering.” This advancement alone will have a significant impact on workers’ comp disability ratings.

Many more Black Swans will come from out of the blue to impact workers’ compensation. But by their very nature, they will not be noticed until they begin to have practical applications and slowly affect insurance companies, doctors, employers and workers. According to Taleb, the danger lurks in the third element of Black Swans – the need for human nature to concoct, after the fact, explanations that make them appear less random than they were.

The inference is that if we had looked harder, the Black Swan would have been revealed. In the same New York Times article mentioned above, Taleb points out the risks in this practice, “Black Swans being unpredictable, we need to adjust to their existence (rather than naively predicting them).”

Awareness of potential workers’ comp Black Swans is critical. Those involved in workers’ comp should be mindful of the Black Swan theory, watch the horizon carefully for signs of a new brood hatching and conduct future scenario planning to anticipate and measure their impact early on. Whether this leads to actions designed to mitigate new risks or being the first to leverage new technology, an extra measure of vigilance will pay dividends to both the health of workers and the corporate bottom line.

Robert J. Malooly is CEO of Claim-Maps an Olympia, Washington-based organization dedicated to making adjusters heroes, giving injured workers the best possible outcome, and providing cost savings to self-insured organizations. For more information, contact Robert at: robertmalolly@claim-maps.com.

For more information on physician dispensing, click here. To learn more about how technology will affect health care, click here.