My Talk With David North; Preventing A Romano

David North, Chief Executive of Sedgwick Claims Services, gave me a call the other day. I wasn't around to take his call, so I rang him back yesterday.

Mr. North was, of course, calling about my blogging on the Charles Romano case.

Assuring me that he, and Sedgwick in general, had the utmost compassion for the Romano family, Mr. North acknowledged quite forthrightly that there were no excuses for the events that led to the death of Mr. Romano.

Here's what has happened at Sedgwick since the Romano case took a turn for the worse: a massive internal investigation was launched to identify the how and why; the claims adjuster managing the claim and her supervisor were separated from the company; new internal processes have been developed (and are under continuous examination) to improve claims handling and the management of those responsible; the Romano family has been compensated (I did not ask for particulars) and North said the matter was "closed."

Sedgwick has used the opportunity to further educate its claims management staff and revisit its best practices.

North, of course, defends his company noting that this last year Sedgwick managed 2.2 million claims involving $11 billion in loss costs, so inevitably there are going to be mistakes, but the firm has been ranked very high in state audits the past 5 years.

But North did not discount the fact that in all claims, attention to detail is critical.

North also denied the rumors that Sedgwick had any financial "interest in the claim," stating that in fact the incentive is the reverse - to do good on claims; Sedgwick earned a good reputation in the claims community by treating every claim on its own merits, that culturally and ethically the emphasis within the company is on doing the right thing.

Regardless, North returned frequently to state that he and the company had a deep felt regret for what happened, had compassion and empathy for the Romano family but that, unfortunately, the case HAS led to the healthy dialogue.

Okay - so we spent some time lamenting about the claim, what led to it and its outcome.

But what came next did demonstrate why Mr. North can be counted on to lead Sedgwick, and the industry, towards more responsible, effective, claims management, answering my challenge.

The one enforcement mechanism that is universal in claims handling is audits. For a large third party administrator like Sedgwick, audits are a part of every day life. There are audits by the state, of course, audits by the employer, audits by CPAs, internal audits. There are individual claim audits, supervisory audits, department audits.

Everything is audited in multiple ways by multiple parties investigating multiple factors.

But all of these audits have a single, common, characteristic that makes them relatively ineffective on the management of claims in real time: all of these audits are retrospective in nature.

The audit process does not result in current claim management decision review or prospective planning or re-engineering of a claim handling plan.

And in this illuminating thought, North I think is on to a big revolution in claims management - what I would call Active Claims Auditing (ACA).

The industry needs to think about audits in a different way - presently audits are retrospective and penalizing in nature, rather than proactive to catch mistakes and errors before they mushroom into catastrophe.

Claims adjusters become more concerned with passing an audit, retrospectively, rather than correcting real time decision making; the focus of the adjuster is on protecting decisions made in the past rather than guiding decisions in the future.

In aviation, the overwhelming majority of accidents are the product of not just a single mistake, but an accumulation of mistakes that compound a situation ultimately leading to catastrophe.

There are always red flags along the accident chain; little elements of error that would otherwise be benign unto themselves, but when chained together these little errors affect the active decision making process resulting in incorrect assumptions and/or understanding of a situation. Thus, the decision maker is led down the wrong path.

And the direction to the correct path is blocked because the mind can not overcome the initial incorrect assumption.

I think North is on to something. The audit process really needs to start early during the claim life, e.g. first 90 days, rather than retrospectively, so that red flags can alert decision makers up the chain of command about a potential problem.

Current claims management computer systems automate many of the tasks that, just 10 years ago, required manual intervention - dates, numbers, forms, alerts, etc.

But while these systems save labor and increase efficiency, they were not designed to engage the complex business rules that encompass the myriad of possible fact combinations affecting claims management decisions. They are not designed around a risk management decision making matrix.

If upper management at Sedgwick could have been alerted early on in the Romano claim that a relatively simple injury had started down the wrong path, an intervention could have been summoned and likely Mr. Romano would be here today, and quite possibly back at work.

I get asked often to speak at industry events about trends that I see in workers' compensation.

I think one of the trends that we will see emerge as a consequence of the Romano case is the development and deployment of more active claims management systems using sophisticated rules that provide earlier "audits" and alarms up the command chain to permit a more active management role.

I agree with North - audits should not just be retrospective in nature. By then it's too late. Sure, the claims manager will "learn" from the audit, but by then the injured worker has already been harmed beyond the initial injury. And as I stated, the mind-set of the adjuster is wrong under the current system because the motivation is to avoid a penalty, not to actively challenge the decision making process for proper guidance.

If the auditing process is initiated earlier in a claim, and the motivation is for proper decision making rather than penalization, then there is a greater opportunity for better claims handling, better outcomes for the workers, and less expense for the employer.

An ACA system would enable companies to stop bad things from happening in a claim before it's too late.

I commend Mr. North for stepping up to the plate and meeting the challenge - in the least communicating that he and the rest of the company are going to work on improving the claims management experience and work on early identification systems to prevent incorrect decision making that could lead to disaster.

The real challenge, of course, will be the execution of the plan because designing, building and deploying an ACA system, whether manual or computerized, will be tremendously complex and expensive.

But the long term return on investment - the investment in human lives - could be the biggest influence in workers' compensation claims management since the processing of indemnity checks via computer was introduced.

Sedgwick has a great opportunity to distinguish itself as THE leader in workers' compensation claims by building and deploying on a wide basis an ACA system and sharing that knowledge with the industry.

North said to me that at the end of the day the job is to protect workers with health care and an opportunity to return to work, and that "I believe strongly in that mission."

I have no reason to doubt Mr. North.

Other cases will come along that will challenge other administrators in the same manner that the Romano case challenged Sedgwick.

When we change how, when and why audits are performed, that strong belief in that mission will be more evident.