RISK MANAGEMENT DEPARTMENT files/1999-RiskMgmt Master.pdf · 2015-03-22 · ZERO-BASED MANAGEMENT REVIEW RISK MANAGEMENT DEPARTMENT SUMMARY 1 I. OVERALL SUMMARY A. SCOPE OF THE REVIEW:

EXECUTIVE SERVICE CORPS

A Division of

ZERO-BASED MANAGEMENT REVIEW

OF THE

RISK MANAGEMENT DEPARTMENT

Presentation to the

SELECT COMMITTEE for Government Efficiency and Fiscal Reform

March 30, 1999

A Report of the Nonprofit Management Solutions

(formerly Support Center/Executive Service Corps) for the

San Diego City Manager and City Council

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Foreword The Nonprofit Management Solutions/ Executive Service Corps is pleased to forward this Zero-Based Management Review, which represents hundreds of hours of research and interviews undertaken by volunteer consultants, experienced in the area of their study focus. We wish to express our gratitude for the generous contribution of time, talent and expertise these citizen consultants provided to produce the recommendations forwarded to the City of San Diego at this time. When citizens and government and elected officials work together...

T H E R E S U L T S C A N B E

O U T S T A N D I N G !

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BACKGROUND

This report is a product of a five-year Zero-Based Management Review effort originated by the Mayor’s Change2 Committee, sponsored by the City Manager, performed under the aegis of the City Council Select Committee for Government Efficiency and Fiscal Reform, and coordinated under the management of the Nonprofit Management Solutions/Executive Service Corps. A select corps of citizen volunteer consulting teams are recruited, trained and supported by NMS to conduct departmental systems assessments. The ZBMR corps is comprised of recently retired and semi-retired individuals, as well as loaned executives and working professionals representing a broad range of private and public sector business background. All have demonstrated a commitment to management effectiveness and an ability to contribute through their knowledge, experience and expertise. A typical assignment involves the recruitment of executive-level volunteers who possess the management skills and experience appropriate for their task. A kick-off meeting is conducted with the City Manager, Linc Ward of the Select Committee, the two-person study team, and appropriate levels of the city departments in the operations to be reviewed. The team spends several sessions in the field, applying a macro-management viewpoint. They also conduct research of comparative practices in other cities across the nation. Their reviews focus on operations to determine answers to the following questions:

♦ Is this work function consistent with City goals and direction?

♦ Is this work function (and its related functions) effective and efficient?

♦ Is this work function consistent with other related functions?

♦ Can this function be done elsewhere?

♦ Is it competitive with private industry? At the end of their review, the team prepares a report for the Department Directors, the City Manager, and the Select Committee on Government Efficiency and Reform. The Select Committee’s Chair Byron Wear, and Council members Harry Mathis and Barbara Warden, meet periodically to assess implementation progress on these reports’ recommendations. Nonprofit Management Solutions/Executive Service Corps is a major provider of comprehensive management assistance to nonprofit organizations in the region since 1984. NMS is a volunteer-driven and client-centered nonprofit technical assistance resource. Its purpose is to high-quality management assistance through cost-effective consulting, training and development services. NMS has built a significant track record of high-quality service to public and private nonprofit institutions, including Arts and Culture, San Diego Community Foundation, Neighborhood House, the Public Health Departments of San Diego and San Bernardino Counties, along with other public and private institutions.

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ZBMR TEAM MEMBERS

The Risk Management Department was visited by four teams of private industry executives during October-November 1998. The Divisions and functions reviewed by these citizen volunteers are listed below. FUNDING AND STRATEGIC MANAGEMENT:

♦ DAVID SKINNER Retired Vice President and Treasurer, The Signal Companies

♦ JEROL (Jerry) SONOSKY Executive Consultant of petroleum financing and energy to clients including Ahlstrom-Pyro Power Corporation, Texaco, Inc.; etc; Retired Executive Vice President and General Manager, International Division, First Interstate Bank

WORKERS COMPENSATIONS AND REHABILITATION:

♦ JOHN LINEHAN Consultant in strategic human resource planning, former Vice President personnel, Chemtronics Corporation

SAFETY AND ENVIRONMENTAL HEALTH:

♦ CAL COHN Consultant in quality management, TQM, former officer, U.S. Navy

EMPLOYEE BENEFITS: ♦ SHEILA HOLM

Consultant in business expansion, human resources management and entrepreneurial training; former Director of Marketing and Human Resources Management, AVCO

Director: Linc Ward, Chair of Zero-Based Management Review Sub-Committee of the City Council Select Committee. Coordinator: Joel J. Snyder, Ph.D., Volunteer Consulting Services, Support Center/Executive Service Corps. These volunteers represent some of the finest executive and professional skills in the community, bringing a wealth of management and operational experience, success and know-how to each team assignment and to the City of San Diego.

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TABLE OF CONTENTS

Page Foreword........................................................................................................................ i Background................................................................................................................... ii ZBMR Team Members..................................................................................................iii Overview of Significant Recommendations ............................................................ 1

♦ Work Comp Incidents Must be Reduced........................................... 1 ♦ Correct the Deficit of Risk Management Information......................... 4 ♦ Simplify Flexible Benefits Plans ........................................................ 5 ♦ Other Significant Recommendations................................................. 6

Estimate of Fiscal Impact .......................................................................................... 8 Team Reports Attachment One: Funding and Strategic Management ............................... 9 Attachment Two: Employee Benefits ........................................................ 15 Attachment Three: Workers Compensation and Rehabilitation.......................................................... 24 Attachment Four: Safety and Environmental Health .................................. 31 TABLE ONE Benefits Functional Flow Chart ....................................................................... 18 TABLE TWO Benefits Staff per Employees and Plans ......................................................... 19 TABLE THREE Comparison of City and Union Health Plans, 1998-1999 ................................ 21 TABLE FOUR Workers Compensation Cost Comparison ...................................................... 24 TABLE FIVE Focus Results in Three Departments.............................................................. 33 TABLE SIX Worker’s Compensation FY98 Rates Charged vs. Claims Paid ...................................................................... 34

ZERO-BASED MANAGEMENT REVIEW RISK MANAGEMENT DEPARTMENT

SUMMARY

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I. OVERALL SUMMARY A. SCOPE OF THE REVIEW: Zero-Based Management Review teams conducted

a macro-management review of the Risk Management Department in four functional areas during October – December, 1998. Members of the ZBMR effort included Jerry Sonosky, David Skinner, John Linehan, Cal Cohn, and Sheila Holm. They interviewed deputy directors and functional supervisors, and they obtained comparative data from private industry, including representatives of Towers Perrin, Bradawn, Inc, and George Driver Insurance Co. Their specific reports and recommendations are included as attachments to this ZBMR review.

1. Funding and strategic management 2. Employee Benefits Division 3. Worker’s Compensation and Rehabilitation Division 4. Safety Focus Program of the Safety & Environmental Health Division 5. Other programs not reviewed were Public Liabilities Division, Savings

Plans, Long Term Disability, Vocation Rehabilitation and Employee Assistance.

B. BACKGROUND: The Risk Management Department has an operating budget of

$6 million and 70 positions to administer $63.5 million dollars a year on various employee benefits and on Worker’s Compensation incidents. Approximately $7.5 million was paid out of general funds of the city for public liability expenses, rather than from loss reserves. The funds managed by this Department equal nearly 10 percent of the entire general services budget. Despite the high costs of Risk Management's business, there is little strategic effort on the part of most levels of city management, or operational departments, to reduce or avoid the risk expenses that have accumulated. The Department itself spends less than 15% of its internal service funds to reduce accidents or costs of incidents.

II. OVERVIEW OF SIGNIFICANT RECOMMENDATIONS A. WORKERS COMPENSATION INCIDENTS AND CLAIMS MUST BE

REDUCED: A vigorous, joint action led by the City Manager, involving all levels of city departments and management and labor is required to make the reduction of accidents and injuries a paramount everyday working condition. The ZBMR teams heartily support the efforts of the City Manager to make safety a priority concern in coming months.

1. Private industry works vigorously to cut down the cost of accidents and

injuries. These efforts are fundamental to most quality improvement initiatives carried out by competitive companies. State and federal laws


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require vigorous safety training programs; recordkeeping and a constant workplace focus on reducing hazards and potential dangers. The City generally meets the work comp reporting standards of Cal/OSHA, but it is not subject to the civil fines of the private sector. Compared to statewide injury and illness incidents for local governments, San Diego’s incident rates are double some other similar jurisdictions: 23% in San Diego, vs. 12% in other local California governments. Police and Fire incidents are half of San Diego’s total, or 31% among their own personnel incident rates. While the costs per employee are similar to other cities (See TABLE FOUR), the high frequency of claims year after year is strong evidence of need for improvements.

2. The work comp problems of the Risk Management Department are not all

of their own making. While there's much to be done within the Department's own functions, the fundamental problem stems from a lack of responsibility and accountability for safe working conditions in every city Department. The city’s department directors feel only an indirect impact on their budget when their employees file lawsuits or claims against the city. The most flagrant example of this is in the police department and fire department, which together represent 52 percent of all claims filed, but whose operating budgets do not accurately reconcile labor charges with actual costs.

3. Other departments in the general services area are equally remiss. Very

few have active safety committees or vigorous accident investigation procedures. In fact, a claim may not be filed until three or four weeks after the actual incident occurred. Many claims are not filed by the supervisor of the injured employee, but instead are filed by a medical office treating the alleged injury. This lack of departmental responsibility has certainly contributed to the high-cost of work comp claims. In San Diego, 10,083 city employees filed 2,286 work comp claims last year. The lack of an aggressive safety program in most departments reflects apparent disregard for the health and safety of employees, at high cost to taxpayers. Vigorous joint action by city managers and labor leaders to reduce accidents and claims incidents is paramount.

4. In recent years the Risk Management Department designed and initiated a

Safety Focus Program to bring attention to the costs of workplace injuries and claims. However, the Focus Program was conducted only for two years in three departments. As a pilot program it demonstrated an average reduction in claims and injuries three times what it cost. This avoided direct cost alone was equal to $347 savings per employee. Lost time due to light duty tasks doubled this cost. If this Focus Program were immediately implemented in every city department, the reduction in the costs to the city would be more than three million dollars. However, few department directors are likely to implement a safety focus program until


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they are clearly ordered to do so by senior management. The Risk Management Department plays an important partnership role in the Focus Program, but it cannot take the place of the city manager’s responsibility for making progress in safety leadership functions.

a. Department managers and supervisors need to be directed to

better control their own workplace risks. Department policy should enforce that claims are filed within 24 hours of every alleged work comp incident. Department records need to be developed regarding incident trends, workplace behavior or employees who file frequent claims and other safety training responsibilities. Every incident investigation should require review at Director level. Corrective hazard audits should be conducted regularly with top management’s participation. Supervisors must take more direct responsibility to lead, train and set examples of accountability for safer, healthier work environments in their own locations. Such leadership activities should be a part of all management evaluations for promotion or salary increases.

b. Joint labor management safety committees need to be organized in

all functional work areas and adequate resources committed to these teams to reduce claims and incidents in their own work areas. The proven Focus Program should be implemented throughout all departments immediately, and Risk Management’s Focus Safety staff should be increased with certified safety and risk management professionals to properly advise and reinforce citywide activities. Every Business Center should have its own Risk Management counterpart safety advisors.

5. Departments should also incentivize their own improvements in safety.

Informal recognition awards and increased leadership assignments work as well as monetary bonuses. Reduction in claims costs should generate some additional budget resources to further enhance department safety programs. Future operations budgets for departments should bear some portion of their own risk expenses, up to a set level of loss, so that those who failed to get on-board would see the consequences in their own current budget resource base.

6. These vital initiatives largely require only a change of attitude on the part

of all supervisors and their employees. Everyone MUST VIEW any injury claim as an avoidable expense, rather than a way to earn full wages while doing light-duty tasks. There is no doubt that vigorous leadership from employee bargaining agents is required to modify this culture. Existing language in current contracts relating to workplace safety should be given top priority.


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B. CORRECT THE DEFICIT OF RISK MANAGEMENT INFORMATION: As a first step the Risk Management Department needs to be modernized with appropriate information technology. Claims processing needs to be moved forward from the paper trail to computer-based management systems widely practiced in the liability insurance industry. At a minimum, a trend analysis is over due. Interim data, developed manually, can be used until this data is available. 1. The Department needs modern data processing technology to better

analyze and interpret the thousands of claims and transactions it carries out during the year. Currently the Department lacks the data to identify historical accident trends or to pinpoint departmental functional areas that suffer unnecessarily high rates of injury. Managers intuitively know what their safety and health challenges might be, but no Department, with the exception of 3 – 4 Safety Focus Programs, can provide a precise, quantified picture of their actual safety experience. This is true for numbers of incidents as well as unfunded liability for those injuries or claims. In effect, because Departments cannot clearly define the causes of their previous experience, their future liability nor accurately reserve against anticipated costs, they cannot take steps to effectively reduce those claims. The Risk Management Department has been unable to assist departments in their analysis of losses and exposures due to lack of a comprehensive information system to track and identify serious accident trends. This situation has worsened over the years.

2. This consistent lack of objective data regarding experience losses,

unfunded liabilities or trends that would be of value to reduce future risk expenses must be corrected. The ZBMR teams believe that outside, independent analysts with related industry backgrounds are immediately required to sort out the key factors. Their 3-6 month assessments are the first step to systematic improvements and long term cost savings. In addition they would bring fresh perspective and up to date methods to enhance the Department’s existing staff capabilities.

3. A simple solution would be to privatize the entire Risk Management

program and run it in the manner of a for-profit business. Unfortunately, the actual costs of doing so might be higher than the City’s present budget. Outside analysts would require 3-6 months to sort out activity-based estimates for a viable RFP. Short of this drastic step the city can carry out some programs to gain the benefits of private industry practices within their own responsibility and authority. Of course, if the resources were made available to support industry-standard staffing and state of the art computer systems, privatizing would probably not be necessary.

4. Claims processing and work comp cost control is a long-term part of this

improvement process, because the real cost of any claim and its processing extends over several years. A commercial insurer with well-


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trained and computer equipped staffing would quickly sort out the current trends and find areas where obvious cost avoidance and future savings might occur, without exceeding the Department’s current budget spent on claims processing the old-fashioned way. Upgraded information technology is required, and a contract to process the current year’s claim records on computer files is the obvious beginning. This effort should be funded immediately with the expectation that it would reduce future year costs and more than pay for its investment.

C. EMPLOYEE FLEXIBLE BENEFITS PLANS should be simplified and better

integrated with union-sponsored benefit plans.

1. Employee Flexible benefits cost the city $36 million for numerous health plans, insurance, reimbursement accounts and cash payments. Each city employee receives $3,700, negotiated annually, to pay for these benefits. Managerial staff receives $2,500 more. The current benefits options cannot be efficiently managed with existing staff or technology. The Interactive Voice Response (IVR) computer system of enrollment information requires improved interface upgrading. Their complexity also requires the assistance of independent advisors or a third party benefits administrator.

2. Health benefits providers and medical treatment of workplace injuries are

interrelated. Last year the Work Comp Division cut medical costs $1.1 million by using hospital preferred providers. The ZBMR recommendations for improvement involve continuing and close cooperation of both divisions. However, the Department sees these processes as functionally specialized; thus it administers them independently. This perspective ignores the possibility that some employees might prefer relatively generous medical benefits offered via work comp provisions instead of more limited health plans. Whenever an injury or illness could possibly be categorized as work-related, the health provider choices are likely to be influenced by the ease of treatment and work comp cost claims. No reliable data to measure this interrelated cost shifting has been collected by the Department, although industry efforts to integrate health treatment provisions are a growing challenge for future risk management improvements.

3. While little or nothing has been done to drive down the cost of risks to the

city and its employees on the one hand, employee bargaining units have vigorously proliferated the number of employee flexible health benefits that this Department administers. New developments such as vision and dental coverage, employee savings and 401 K cash contributions based on annually negotiated amounts have greatly increased paperwork and staff processing required to provide these benefits. However, the department’s budget and its staffing levels have been reduced, because of


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declining budgets over the past few years. This has added to the pressures of work overloads, cutting corners, unavoidable errors, costly processing delays and other inefficiencies.

4. Seventeen union-sponsored health plans effectively compete with the city.

Although city vs. union enrollments fluctuate depending on new providers and benefits, the unions gained about twenty percent last year. Their Sharp plans, for example, provided reduced premiums for similar health benefits, and the union administrators claimed to offer better customer service.

5. Less costly health provider contracts should be negotiated. If these

benefits systems changes are made promptly, some portion of the $815,000 retention fee now paid to Blue Cross could be saved. As a result, the Division personnel could be retrained to provide more expertise and more responsive information to city employees.

D. OTHER SIGNIFICANT RECOMMENDATIONS:

1. Funding for reserve liabilities needs to be given higher priority. In FY97-98, $7 million of the city’s $9.9 million public liabilities was paid from general operating funds. Estimated future liabilities for work comp claims exceeds $30 million, but only a small reserve has been budgeted. Increased reserve funding should be undertaken. An oversight committee composed of Risk Management, City Auditor and City Managers office could administer the reserve fund.

2. Risk Management’s internal service funds should be integrated with the

same funding sources as the benefits and claims payments it administers. This funding mechanism is like that used in the private sector for risk management programs, because it equates true activity costs where they belong. The Department’s programs should also receive part of any cost savings achieved from its proactive loss prevention efforts.

3. Recognize that employee flexible benefits programs are a major meet and

confer issue in the city’s labor relations. The City should assure that Risk Management Department management are regular participants, instead of occasional advisors, in all joint negotiations. The administrative costs of negotiated plans should be made explicit in all proceedings affecting employee flexible benefits compensation.

4. Existing administrative costs for flexible benefits plans include the

Division’s $1.17 million FY99 budget, plus $815,000 for contractual services of Blue Cross self-insured plans. An RFP for third party administration needs to be explored for potential program savings.


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Estimated upgrade costs of less than $200,000, plus staff training expenses should be allocated as a minimum improvement.

5. A comparison of union-sponsored and city premiums for health benefits

reflect a $200 per enrollee difference. (See TABLE THREE) Immediate efforts should be launched to reduce health premium costs in future years. If a $200 cut were realized for 7,000 employees, the city potentially could save nearly $1.5 million.

6. The Workers Compensation and Rehabilitation Division must pursue and

close open claims. Priority needs to be focused on those that can be quickly resolved, despite the cumbersome workers’ compensation system. If ten percent of the 2,925 cases open more than one year were resolved, an estimated $950,000 could be avoided in future years. Tighter coordination with City Attorney staff can sort the major disputed cases from nuisance claims. An independent loss control analyst from private insurers would speed up this reform.

7. Several worker compensation claims processing personnel should

coordinate with departmental safety and environmental health programs to build up preventive measures and reduce claims. At the least, monthly updates on reported injuries, claims, types of incidents, etc., should be published for each department or significant division. A modern information system would allow effective, timely reporting to departments.

However, this savings would require a Council decision to modify negotiated employee benefits allowances to reflect reduced health plan expenses.


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III. ESTIMATES OF DEPARTMENT-WIDE FISCAL IMPACT

Budget Fiscal Outlay Benefits A. EMPLOYEE FLEXIBLE BENEFITS

• Upgrade computers system and train staff: $ 275,000

• Reduce Blue Cross TPA costs 50%: $ 400,000 • Renegotiate premium costs to save

$200 per 7,000 employees: $1,400,000

B. WORKERS COMP CLAIMS

• Install computer-based claims files: $ 850,000 • Rapid closure of 200-300 open claims: $ 950,000 • Provide trend data to reduce current

claims 20-30%: $1,000,000

C. SAFETY FOCUS PROGRAM

• Expand Division staff with 4 – 5 safety professionals this year: $ 280,000

• Reduce claims by 20 – 30 % to avoid $350 @ employee in future years: $2,400,000

• Obtain police and fire participation to reduce avoidable station and training incidents: $1,300,000

D. CONTRACT OUTSIDE SPECIALIST FOR

initial 3-6 month analysis: $ 45,000

E. OVERALL RECOMMENDATIONS: $1,450,000 $7,450,000


ATTACHMENT ONE

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ATTACHMENT ONE

FUNDING AND STRATEGIC MANAGEMENT I. BACKGROUND A. This review was undertaken by Mr. David Skinner and Mr. Jerol Sonosky with

various members of the Risk Management Department (RM) during September and October of 1998. Those interviewed were Ed Oliva, Director, RM; Chuck Mueller, Deputy Director, RM Dept; Pat Brogan, Worker’s Compensation Division; Ron Graham, Safety & Environmental Health Division; and Mary Davis, Data Processing Administration. We also interviewed Mr. Bruce Herring, Deputy City Manager, who was former RM Department Director. Mr. Skinner and Mr. Sonosky wish to thank all of these individuals for their time and the effort they expended. They were all most generous and helpful, and without their honesty, sincerity, and dedication to the project, this report would not have been possible.

B. The Department currently includes 69 positions and expenditures of $63.5 million

annually. Supervisory positions and administration functions include 11 – 12 FTE for a ratio of eight – nine percent of total staff. Staff numbers have been cut in recent years, but the various Risk Management responsibilities and funds have grown. More than $63 million in funds are managed as listed below:

PROGRAMS FUNDS MANAGED Liability $ 9.9 million Insurance $ 2.17 “ Work Comp $13.7 “ Long Term Disability $ 1.58 “ Flexible Benefit Plans $36.1 “ TOTALS $63.57 million

C. The Risk Management Department is somewhat of a hybrid, in that it serves both

employees (benefits and workman’s comp) and the public (public liability claims). It gives the appearance of being ignored in the organization. Everyone knows it is important, but top management is not sure what to do with it, or how to improve its operations. Consequently, significant management, financial, and operational problems have resulted, such as chronic understaffing and outdated computer systems among other challenges.


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II. MAJOR FINDINGS A. FUNDING

The current array of funding sources and pools is complicated and confusing. Although much of this "system" has been inherited over time, a comprehensive review and overhaul (probably by Financial Management) would be advisable to determine whether the accounting system and audit procedures could be streamlined. It appears that too many oversight and approval levels are required for the various funds. These overlapping authorities have created an administrative burden that is wasteful in time and money. At the very least, Risk Management administration should be funded with the same source as claims payments. This funding mechanism is like that used in the private sector and it equates true activity costs where they belong. 1. Reserves: The lack of financial reserves for claims made, and for

expected claims, particularly in the area of public liability, is a major detriment to responsible risk management. Although the city is required by state law to show a reserve liability to its general fund, in recent years actual dollars set aside to pay public liabilities were non-existent. For example, in FY97-98, liabilities cost the city $9.9 million, of which $7.5 million was paid from general funds. By failing to provide adequate financial reserves for losses, the city has in effect created a situation where major unfunded claim liabilities transfer millions of dollars of risk to the general fund on an unstructured and unpredictable basis, often near the end of a fiscal year. This can cause severe disruptions in the allocation of remaining budget funds throughout the system. In addition, claims are often not recognized or are disputed in the year submitted, and may actually become final only after the passage of two or three years. For example, current work comp liabilities are estimated to total more than $30 million in unfunded open claims. Because of the lack of financial reserves to allocate against future claims, the real financial impact often hits long after the initial injury or claim. The existence of adequate claims reserves would make the entire budgeting process more efficient and would greatly reduce the number and impact of future surprises. The first step would be to identify the proper dollar levels needed to provide for existing liabilities. There is enough history available to make that determination without the necessity of lengthy study or data collection. Recognizing that sufficient funds may not be available to fully fund all expected risks immediately, a program of increased reserve funding over a period of time should be undertaken and priority given to protecting its balance. An oversight committee composed of RM, Audit, and the City Managers office could administer such a reserve fund.

2. Experience Based Workers’ Compensation Rates: A major flaw in the

present system is that departmental work comp rates are not experience based, thus limiting any incentive to reduce claims. Instead, a uniform


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monthly rate (cost) per worker is based on job classifications, and equally allocated to various funds, rather than to departments. The Risk Management Department has proposed a specific divisions or system of experience based rates which could be implemented by the city at no overall addition in cost. It would, however, require a redistribution of premium costs and accompanying budget adjustments to the various city departments. The concept of this proposal is sound, but considerable effort would be required to implement a workable workers comp cost plan - perhaps one that is put into place in steps or phases.

3. Loss Control: RM has presented a package of programs designed to

save the city a significant amount of money. These have generally been deferred through the budget approval process. Financial Management may also be concerned about the potential impact that these programs might have on budget decisions embodied in departmental funding. This may be a valid concern in the short run, but if RM is correct in their assumptions and projections, an opportunity is being lost to focus efforts on the departments themselves to achieve long term savings and efficiency.

4. Project Incentives: A possible solution to this problem would be to

create series of safety improvement projects, each of which depends on the success of a previous project. For example, if the $2.1 million net realization of the FOCUS program (1997 vs. 1996) had been allocated, 1/3 to the General Fund, 1/3 to the departments in which these savings occurred, and 1/3 to RM for internal investment, the estimated cost of upgrading the RM computer system would have been essentially funded. Then, when the new system was in place, the savings developed from reduced clerical time and improved efficiency in workman’s comp administration could be applied in similar fashion to another part of the overall plan. This is a somewhat simplistic example, but with real merit. Clearly, long term improvements in the financial well being of RM, and therefore the city, are possible with the application of innovative, yet uncomplicated, decisions.

B. OPERATIONAL

1. Data Development and Processing: The RM staff has been reduced

over 30% in the last six years due to budget constraints, but the total City employment is currently at about the same level as it was. The cost of employee benefits and administration has escalated in recent years also. While the root cause of this cost growth is the benefit package provided by the city, the proliferation of choices available to employees has exacerbated the cost and is now beyond effective manual staff administration. This has put a strain on the ability of RM to deliver its services in an efficient and timely manner. In an attempt to correct this


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problem, RM has proposed a series of programs to ultimately reduce costs and the number of open worker compensation claims significantly. The major constraint to receiving the authority to proceed has been the skepticism of unaudited data to support projected productivity gains over several years, notwithstanding the industry-wide and OSHA verified conclusion that injury and illness prevention programs do result in significant improvements in both cost and productivity. The lack of convincing data can be attributed to both a poorly defined and incomplete system of reporting by the various departments, and to a very inadequate data processing capability. Macro numbers are available by department, but do not give a breakdown as to worker’s comp claim type, trends or repetitive nature, etc. An analysis of data over the last five years could prove a cost-benefit, but this must be done by hand, since the needed detail in the paper files for each claim is not in the computer data bank, nor is there current capacity to place it there. The estimated cost of analyzing work comp trends is nominal (probably less than $25,000), but has not been approved through the budget process. We suggest that time be found within the current staffing levels to establish current and projected benchmarks of performance.

2. Up to date Computer System: The real solution is a modernized and up

to date computer system. This has a significant cost attached, but the long term benefits appear to be real. The estimated cost to put such a system in place is $800,000. Through the elimination of $250,000/year in main frame costs, a 3-year payout is projected from upgrading alone. Additional savings would undoubtedly be realized through achieving detailed tracking of medical information. This would result in a reduction or reassignment of clerical staff, and provide meaningful historical trend data, which could ultimately assist in managing the citywide risks and costs. Also, a new system would be compatible with the CAPPS financial system. At the present time, RM cannot interface with CAPPS, and the bridge program created to solve this problem uses storage space which not only could be used for RM administrative needs, but has actually replaced some previously available data files.

C. MANAGEMENT

The review of the foregoing financial and operational activities of RM also surfaced some management issues that should be addressed. These taken in total, portray a picture that suggests the need for some attention to this issue. Currently 8 supervisory and management positions for 69 staff is a larger number (11.6%) than typical for private industry. The relatively narrow span of control is a result of smaller, specialized divisions. 1. Coordination and Communication: The city-wide nature of risk

management issues requires close coordination and strong management consensus to be effective. To some extent, senior management is project


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oriented and portrays a reactive response to problems. However, this is in no small measure due to the lukewarm support for proven projects, such as FOCUS, let alone innovative ideas. The tight, positive coordination and communication within RM, with other city departments and the City Manager’s office that should exist was not plainly apparent.

2. Leadership: Vigorous political leadership, in the form of dedicated and

active sponsorship of projects, needs to be continued. The Focus program demonstrates what can be achieved, and its future expansion will require even more dedicated persistence. Ideas that sound good are allowed to wither and die for lack of an influential advocate. There appears to be little coordination, or "push", from an authoritative sponsor who has influence with both labor and citywide departments. This has led to continual understaffing, postponed technology and declining resources. Although RM’s leaders have an excellent reputation as city administrators, they are not viewed as experts in related professional fields – either insurance, claims management or safety. In common with most bureaucratic directors, they have little persuasive credibility, without the political support of senior management. At the very least, the Department should strongly encourage its own managers to pursue certified professional training, such as programs of the Board of Certified Safety Professionals, Insurance Education Associations or similar Risk Management programs. Certificates of proficiency could be obtained within the costs of existing tuition reimbursement. The Department’s managers should set the example. In the long term, the Department must acquire expert leadership with pertinent industry-related experience. Independent advisors can be used in the interim to clarify key steps and practical methods of improvement in use by private insurers.

3. Follow-up and Support: The files reflect little, if any, formal responses to

written proposals, which after time becomes very discouraging to people who genuinely are trying to do a good job for the city. Some of these proposals, suggested by individuals at the lower and middle management levels, are literally cries for help, and have been unanswered. The recommendations that required action by departments or management outside of RM had no evidence that cooperation and discussion between the various departments, and the Deputy City Managers to whom they report, had occurred. Responsiveness and follow up within and between departments is needed. The recently proposed departmental Liaison program can help correct this, but only if the various city departments are given a measurable incentive, and support is given at the higher levels of the city in order to make it happen.


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III. RECOMMENDATIONS

A. Create claims reserve fund to achieve efficient funds management. Set up oversight group to establish and coordinate.

B. Establish an experience-based allocation of work comp rates to departments and

modify work comp cost allocations. C. Examine feasibility of replacing workman’s comp claims Division with a third

party, subject to full analysis of long-term impact on open claims liability. (See Attachment Three)

D. Re-institute FOCUS, the safety and accident prevention program, in all

departments. Require establishment of joint safety committees citywide. E. Support RM programs by allocating part of the savings achieved to help pay for

successive applications. F. Invest in an upgraded and compatible computer system for the Risk

Management Department. G. Critically examine interdepartmental and management levels of cooperation and

communication, and implement operations level improvements.


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ATTACHMENT TWO

EMPLOYEE BENEFITS DIVISION I. BACKGROUND The Employee Benefits Division administers an extensive program of benefits, for a variety of employee groups, as well as a full spectrum of financial options for each employee within the various employee (both union and non-union) groups for the City of San Diego. In the current fiscal year, the city provides $3,700 flexible benefits for each employee, plus an additional $2,500 for salaries management staff. The flexible benefits total budget was $36.1 million last year. A. BENEFITS OPTIONS ADMINISTERED BY THE DIVISION’S 12 STAFF

INCLUDE:

• Ten health plans ( 3 city, 7 union) • Ten dental plans (2 city, 8 union) • Three vision plans ( 1 city, 2 union) • Three types of life insurance programs • Catastrophic Illness Expense Protection • Reimbursement Accounts • 401K savings • Cash Payments, (in lieu of program benefits)

B. SCOPE OF THE REVIEW

ZBMR team member, Sheila Holm, whose professional experience includes benefits plans and work comp administration, conducted Division interviews with Valerie VandeWeghe, flexible Benefits Administrator. She reviewed transaction data and flow charts to develop an overall picture of the Division’s operations. Joel Snyder met with Judie Italiano, President of the Municipal Employees Association and MEA staff members. Comparative employee benefits information is presented in TABLE TWO.

C. The focus for the initial review was to determine the number of employees required (industry standard staffing level) for the flexible benefit programs. However, it was apparent that a departmental focus strictly to increase its staffing level, (versus the level of staffing expertise, or service provided) was part of the current efficiency problem. In other words, the Department as a whole and the Employee Benefits Division sees more people as its best solution, given a lack of a comprehensive information system.

1. The annual record of transactions for 5 city and 8 union flexible health

benefits plans only, exceeds 6,000 entries, for new and re-enrollments, family coverage, changes in coverage, terminations and COBRA letters.


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More than half of these transactions occur during the open enrollment month of July. Consequently, the ZBMR team concentrated on this activity and did not review the Division’s other Benefits functions, such as savings plans transactions or reimbursement claims. These transactions more than double the administrative actions required for flexible benefits plans, and therefore magnify the existing complexity for the Division.

2. The ZBMR team did not include related auditor functions for payroll

deductions, cost charges or billing to insurers, since these operating expenses are not included in the Division’s budget. These indirect expenses would be included if performed by a third party administrator.

II. MAJOR FINDINGS A. ISSUES OF PROGRAM COSTS:

1. The city's flexible benefits program has evolved into a complex, generous employee benefits program. Compared to private industry, City workers’ benefits are about twice as costly. In 1998, Bureau of Labor Statistics bulletins estimated comparable benefits expenses at $7.44 per hour in state and local sectors, and $4.78 per hour in private industry. These higher costs are due to variations in work activities and the different occupational structures. More government employees receive employer paid medical care and retirement vs. private industry. Overall, state local employer paid benefits costs are 30% of total compensation.

2. However, compared to state and local governments, San Diego’s flexible

benefits cost averages $1.50 per hour worked, less than the BLS estimate of $1.93 for other public sector employees. This expense compares closely to private sector managerial employees per hour insurance costs.

3. If the city maintains its contracted benefits programs within it’s budgeted

$36 million cost, it has satisfied its fiscal responsibility. Even if these expenses were reduced, any savings in plan premiums would accrue in cash to the employees or be available for other benefits options, unless the Council decided to adjust the costs accordingly. On the contrary, any excess cost is easily met by city labor negotiators who ratchet up the allocation per employee. In short, employees have no incentive to reduce their health benefits spending. The city’s broker has no viable need to trim its commissions to structure a less expensive benefits provider contract, even though its surpluses are returned via increased services to the Department. The bargaining units are making money on their existing health insurance plans. The Risk Management Department’s leadership lacks top policy direction to challenge this lucrative system, or to attempt any savings.


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4. Current citywide policy routinely invites either the Director of the Risk Management Department, or its flexible benefits staff experts to regularly participate in joint labor-management negotiations for employee benefits. Unfortunately, the Department’s administrative needs have not prevailed. Employee benefits have incurred significant administrative costs without increased budgets or benefits staff to provide the new services. Over the past several years, benefits costs have increased 3-4% annually, and they are expected to increase even more in future years. The staffing level of the Division is minimal to handle existing programs, as structured. If employee benefits continue to expand without major systems redesign, additional staffing of at least two full time benefits program administrators will be required.

5. Division's administrative costs also are driven by the lack of computer

based information transfers. Slower, manually entered data files impact every employee, who is required by the existing flexible benefits funding to reenroll in each plan every year. This annual open enrollment period generates more than half of the entire year’s transactions for the Division. In effect, staff is likely to be overwhelmed by the concentrated workload during open enrollment months and left to catch up with their errors the rest of the year. To make ends meet the section uses staff members from its benefits consultant for administrative services. The costs to upgrade the capture and transfer of existing enrollment data would be small, compared to the inefficiency of the current manual system. Immediate steps should be taken to enhance current computer services.

6. Although customer service is a number one priority, and even though the

flexible benefits plans are generous, the Department is viewed by its customers as "beat down, overwhelmed and a pain to deal with." In contrast, other employees express high regard for the services they have received. Such complaints point to an under-staffed Benefits Division, during its open enrollment workload for one or two hectic months. Data entry errors, false coverage, belated changes and late corrections happen. This state of affairs impacts each employee in the Department and influences how the Risk Management Department is viewed by employees citywide. Until the Division employs more up to date computer data input files, this poor situation will get worse. Quality customer service, which the Department desires, will stay out of reach.

7. Employees work on the health plans at an intense pace to try to provide

accurate transactions administration. However, they face nearly an insurmountable problem. A workflow diagram in TABLE ONE illustrates the complexities of their transaction problems. The culprit is lack of automated data transfers between file managers coupled with an overly


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TABLE ONE B e n e f i t s F u n c t i o n a l

F l o w C h a r t

EMPLOYEE R ISK M AN AGEMENT AUDITOR

Process JV to charge/credit departments

Attends New Employee Orientation

(NEO)

Receives materials from Dept.: views

video

Selects benefits;

completes paperwork

Receives OE info from

department

Adds newborn to health plan

changing FBP

Changes benefits via

IVR

Completes applications, sends to Risk Management

Presents Savings info & answers FBP

questions

Assist employee w/enrollment &

paperwork completion

Charge/credit departments

Input benefits in FBP system & payroll deducts

into CAPPS

Send app to provider;

worksheet to employee worksite

Monthly reconciliation and payment to provider

Pre-payment collection

from employee

Send initial COBRA notice to employee

home

Process DP to issue provider payment


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complex flexible benefits program. The Flexible Benefits enrollment and maintenance budget for 8 staff is $388,000, or roughly $30.00 per health plan transaction and $42 per benefited employee. Including all flexible benefits transactions would lower costs considerably. Health care transactions cost between two and three dollars in private industry with the proper technology. One such staff person can manage the employee health benefits programs for 1,500 to 2,500 employees. For the city, a few simple benefits plans would require four people, compared to the eight currently employed to administer 29 health plans. The Benefits staffing level of San Diego versus several other cities is in TABLE TWO. Flexible benefits transactions are a function of demographics and plan choices. In San Diego, Benefits staff handles fewer people but more plans, comparatively. The County of San Diego illustrates the gains from their state of the art computer system.

TABLE TWO

B e n e f i t s S t a f f p e r E m p l o y e e s a n d P l a n s

City of San Diego

City of Los Angeles

City of Phoenix

County of San Diego

Number of employees benefited

9,681 23,000 11,000 16,700

Number of benefit plans offered

29 8 7 13

Number of benefit staff 7 10 13 4

Employees per Benefit staff 1,383 2,300 846 4,175

Benefit plans per staff 4.1 .80 .54 3.25

8. Some of the high-cost pattern of the employee health benefits can be explained by the city's annual, negotiated flexible benefits allocations which require new dollar amounts and new budget data for everyone, every year. Contractual use of commission paid benefits negotiators, who have demonstrated little incentive to lower benefits program expenses, also adds to the expense. The indirect cost for this outside expertise each year would be more than enough to fund a top-level Risk Management negotiator to better represent the city.

9. The cost of the Benefits staff, budgeted in FY99 at $1.17 million, is

magnified by administrative fees paid to Blue Cross to manage the employee benefits premium payments. While a third party administrator


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might charge $700,000 to manage the current benefits, they would expect also to reduce a significant part of the Blue Cross administrative fees, of about $708,000.

10. The City Employee Benefits Division provides free administrative services

for the 17 union-sponsored benefits plans, and more than 2,000 enrolled employees at an estimated cost of two or three full-time staff positions, or $80,000 to $138,000 annually. Some of this cost is inherent in the city's employer responsibility to record and manage its flexible benefits transactions, regardless of sponsors or providers. The MEA plan, for example, duplicates the Division's administrative effort by maintaining its own member files and by monitoring provider premium billing. Like most other union programs, these costs are recovered through members' premiums and indirectly from the city.

11. Understandably, the city benefit staffing levels may be viewed as

noncompetitive with industry. In San Diego, Scripps Health benefits for 6,000 employees are managed by six employees. However, given San Diego’s complex flexible plan provisions, by way of competitive union-sponsored programs, it is unlikely the Benefits Division could function with fewer support staff. The ZBMR team concluded that the driving issue is not so much a matter of inefficiency. Instead, understaffed, archaic benefits transactions methods and a lack of computer upgrades have left the staff unable to cope efficiently with a huge array of flexible benefits plans.

B. ISSUES OF EFFECTIVENESS:

1. The entire flexible health benefits structure should be examined by an independent, outside advisor and improved prior to the next fiscal year open enrollment. If this improvement were implemented within the current fiscal year, the cost savings would exceed hundreds of thousands of dollars immediately. For example, continued inclusion of Blue Cross, as a plan administrator and insurance claims processor, on top of the commission-paid health benefits negotiator is a high cost option. San Diego needs to better use its large number of employees to negotiate fewer new provider plans with substantial cost savings and again, this change needs to be accomplished prior to the new fiscal year, to satisfy open enrollment processes during July – September.

2. In the 1980's, many companies changed their benefit program offerings to

a 'flex' or ‘cafeteria' style. This 'trend' needs to be closely monitored and maintained, to keep the program in a manageable structure, since this is key to the success of the program. When the programs are not tightly managed, important health care information is not available in an easy to review format on the computer. As a result, the perception of employees


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becomes, "the programs are spinning out of control ... it is impossible to know when and how much coverage will be processed….” This appears to be part of the cause of the current financial and structural concerns for this division, and it is a valid concern of employees as well.

3. The variety of options and the size of the various enrollments show

another missed opportunity to bargain for price or coverage. This has created a competitive opportunity for union-sponsored programs to offer their own programs. About 2,200 enrolled city employees are participants in at least one of the union's programs for good reason, since they generally have lower premiums for the employees, and as good or better medical coverage. Moreover, the unions manage these plans, usually by third party administrators. A brief comparison of several health plans is in TABLE THREE. Several union-sponsored plans expect to refund a surplus over premiums to their sponsors or to invest in improved benefits for their enrolled members. Enrollment in these union plans increased about 20 percent, from 1996 – 1997 to 1997 – 1998. They will continue to gain market share, unless system-wide changes are adopted. The city can recapture this enrollment only by offering improved plans at reduced costs, or by charging new fees for existing benefits payments to non-city plans. However, improved customer service also is essential to compete with the union programs effectively.

TABLE THREE

C o m p a r i s o n o f C i t y a n d U n i o n H e a l t h P l a n s , 1 9 9 8 - 1 9 9 9

Plan # Enrolled Annual Cost Comparable Coverage

City Blue Cross – California Care

2,150 $3,681 No deductions, Paid in full

Local 145 310 $4,221 $100 deduct., 95% paid Local 127 – Health Net 220 $3,599 No deduct, paid in full POA Sharp 420 $3,419 No deduct, paid in full MEA Sharp 880 $3,360 No deduct, paid in full

Annual value plus premium for one dependent.


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III. RECOMMENDATIONS: A. COMPUTER PROGRAM UPGRADES:

1. The department is burdened with paperwork. The current Interactive Voice Response computer program is not able to analyze or transfer all enrollment plan information for the department, although payroll data can be automatically transferred. The amount of manual data processing is impacting the effectiveness of the department. The benefits division needs to become ‘unburdened by the manual processing’, and it needs to become pro-active in action and communication with its customers. The estimated Bradawn, Inc., cost to install a competitive system would be approximately $175,000, or about $18.75 per employee. An upgrade of existing DPC files would cost about the same amount.

2. In the long run, an open enrollment will be viewed as a benefit to City

employees when information is updated and available promptly and accurately. Existing paper data trails are within computer files eventually, but even then they require individual requests from data processing staff, response time for benefits review, and re-contact with the employee. This process is not user friendly and is not time effective. Antiquated data handling procedures make the Division an employee “obstacle” instead of a “benefit”, when it comes to finding out about an individual’s coverage.

3. Negotiation and restructure of more cost-effective benefits plans should go

hand-in-hand with the computer-based data input design and reporting phase. This will require outside assistance for change coordination and for upgraded training of key support staff. The goal would be to streamline processing tasks and free up “internal experts” who would be able to provide accurate, efficient service for each benefit plan provided by the City. The Employee Benefits Division should be able to improve its function as the source of plan expertise and advice for citywide employees, as opposed to only acting as Liaison between health plans and employees.

4. Department Training: In the next fiscal year, the department will require

training, i.e., in the specific benefit programs, to provide specialists within each benefit program area, and to assist department employees with accurate benefit communication tools for all city employees.

B. FINANCIAL

1. The large employee groups, when combined, should be able to provide

the city with leverage to negotiate reduced premiums. TABLE THREE reflects that except for the firefighters, other union plans offer similar health benefits at lower premium costs, with enrollments less than half as


ATTACHMENT TWO

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numerous as the city-wide plans. The average difference of comparable premiums in TABLE THREE is $220 per person. If this cost reduction were negotiated effectively for the city’s 9,681 enrolled members, $2 million could be saved.

2. The Department’s practice to use an outside insurance and benefits plan

brokerage, while holding the administration as an internal function, requires immediate attention. The costs are extensive, and they could be quickly avoided, especially if the benefit programs are to be streamlined and re-negotiated prior to the next open enrollment. In addition, costs should be reviewed in light of department employees duplicating work and manually processing insurance claims and benefit payments to the same providers, or for union employee groups “processed” by their plan administrators.

3. Financial and structural issues relating to available benefit program

options should be addressed immediately, because the benefit programs will 'roll-over' with the next open enrollment, prior to the next fiscal year. Therefore, the specific programs and related costs need to be reviewed immediately to meet the fiscal year deadline, and the new annual enrollment period beginning at that time – otherwise these high costs will be imbedded into another enrollment year before improvements will be realized.

4. The potential cost reductions that are possible will affect the contract

services of Blue Cross administration, shift a portion of estimated processing costs of $138,000 to union-sponsored plans and cut health plan premiums paid by enrolled members. A significant effort could have a fiscal impact of as much as $1.5 million, after budget outlays of $275,000 for implementation expenses. However, net savings to current year funds might only be $400,000, unless the costs of flexible benefits plans themselves are revised for the long term.

This potential savings would require an adjustment in currently negotiated employee

benefit allowances. The ZBMR team recommends that the total amount per employee be based on a health benefits cost factor and tied to savings or premium increases as a pro forma item in future years.


ATTACHMENT THREE

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ATTACHMENT THREE

WORKERS’ COMPENSATION AND REHABILITATION DIVISION

I. BACKGROUND A. The ZBMR team member, Mr. John Linehan, President of Sea Bright

Enterprises, Inc., with extensive prior experience in corporate personnel and work comp administration, met with Mr. Pat Brogan, Workers Compensation Division Administrator on three separate occasions. Pat was most helpful in laying out his concerns and providing information regarding the department and the history of claims management. He is dedicated to his work and is open to any opportunities for improvement. Comparative data from private industry and other cities were also obtained for benchmark analysis. The Division’s work on Vocational Rehabilitation was not included in this review.

B. The Division’s lack of data analysis capability and the existence of 2,500 open

claims more than one year old is staggering. There are numerous opportunities in this department for immediate and long-lasting improvements and cost savings. There are currently over 4,000 open work comp claims, besides a steady stream of over 2,500 new claims each year. Although there have been efforts in the past to clean up the open claims, it is mandatory that a renewed effort be undertaken to do so again. A cost comparison of San Diego and other California cities is on TABLE FOUR, provided by the Division for this review:

TABLE FOUR

W O R K E R ’ S C O M P E N S A T I O N C O S T C O M P A R I S O N , F Y 1 9 9 7

W/C COST

EMPLOYEES

W/C COST PER

EMPLOYEE

San Diego

$11.4 million

9,500

$1,200 Sacramento $6.8 million 5,902 $1,147 Long Beach $9.6 million 7,738 $1,242 Oakland $9.1 million 6,225 $1,463

W/C cost includes medical and indemnity funding only, for first year costs.


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II. MAJOR FINDINGS A. Currently 2,286 claims for 10,083 city employees represent a 22.7% rate of

workplace incidents and accidents. Compared to work comp incident rates in other local governments of 8 - 10%, this is a unacceptable labor cost. It cannot all be blamed on fire or police injuries, as TABLE ONE shows. It is a situation that demands top leadership accountability—and strenuous turn-around efforts throughout the city.

B. The actual direct and indirect workers’ comp costs represented in these claims is

huge, and it is a problem not readily understood. To begin with, direct and indirect costs of workers comp claims include several elements:

1. In FY1998 medical expenditures for injuries and illnesses on the job were

$6,945,696. Indemnity expenditures for disability, life pension, vocational rehabilitation and job-related death benefits were another $5,803.630. The costs of investigation and other services were $961,291. These direct work comp costs added up to $13.7 million, instead of $11.4 million of TABLE ONE.

2. The city also pays industrial leave (IL) benefits equal to one year of full

wages. This benefit is approximately double the maximum temporary total disability benefit of the Labor Code for private industry workers compensation. In FY98 IL added $3,408,368 to work comp costs. (This total is adjusted for the small amounts of temporary disability it replaced in specific work comp claims.) The city also offers long term disability benefits (LTD) for totally disabled employees after their year of IL full wage benefits. In FY98, $87,732 LTD benefits was paid. This lost wages benefit added another $3.4 million to the direct costs of claims, although it was paid from other budget resources.

3. Consequently, the total cost to the city’s general fund for work comp

claims in FY98 totaled more than $17 million, but it was not all paid to first year claims. In general, first year claims represent only 20 percent of the $17 million annual cost paid, about $3.4 million. Prior year open claims, therefore, present an unfunded, unreserved, rolling liability that was $13.7 million last year. The current total estimate is $31.7 million, of which $17 million is for Police alone. Thus, medical and indemnity costs for the older 2,925 open claims could exceed $8,000 - $10,000 each, or ten times more than a claim that is settled promptly and paid in its current year. Fortunately only about half of estimated future liabilities are actually paid in any given fiscal year. For example the Department’s average paid cost per injury, per fiscal year is shown below:

FY93 FY94 FY95 FY96 FY97 FY98 $1,704 $2,093 $2,698 $3,218 $4,517 $3,625


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4. None of these reported costs include lost labor expenses as a result of lost time or limited duty assignments. The magnitude of this cost was identified by the Department’s Focus Program Results in 1997: avoidance of $768,784 in paid costs plus $788,480 in avoided light duty. Private industry treats lost labor as a significant indirect workers’ comp cost multiplier. The ZBMR team believes the city should view its indirect costs to be as much as its paid costs; this doubles the waste and expense of workers’ comp claims from $3,625 to $7,250 at least.

C. The percent and number of open cases is below. This distribution of open claims

shows how costs escalate as the cases age. Current FY98 cases still open will be slowly reduced, but the costs for each claim will increase. The 29.6% in FY98, equivalent to cases closed in FY98, represent only 15 – 20% of actual claims costs paid. The seventy-percent of claims still open after the current year of reporting represents 80% of claims costs, on average. In FY98 $9.5 million was paid to prior fiscal year incidents.

Cases open, reported prior to FY94: 1,331 32% (of all open cases) Cases open, reported prior to FY94-95 585 14% “ Cases open, reported in FY96 419 10% “ Cases open, reported in FY97: 590 14% “ Cases open, reported in FY98 1,228 29.6% “ TOTAL 4,153 100%

1. A two-pronged effort could relieve some of the open claims processing

pressure. First the Division needs to vigorously pursue those open claims, i.e. medical only, that can quickly be reclassified and closed. Permanent vs. temporary disabilities, open vs. reviewed cases, etc., would be a start, until more extensive analysis can be performed. Identifying patterns of systematic abuse and fraud would be reason enough to look hard at this excessive stream.

2. Open claims include a number in dispute. This group also cries for careful

analysis.

a. City claims adjusters appear to be quick to settle any dispute under $15,000. The team heard a comment that if an employee’s claims attorney called the Division, it usually speeded up a settlement.

b. On the other hand, work comp claims adjusters also were

described by some outside attorneys as being just as ready to refuse settlements above $15,000. This image is not solely due to the claims adjusters of course. They must work closely with City Attorney staff as well, on cases that go to trial.


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c. A work comp claims court trial incurs added expenses for attorney fees (about 12 percent of the claim settlement). Delays can last three to nine months before a case is resolved. A routine appeal to the state Workers Compensation Appeals Board can consume three to six months to schedule a hearing. Three-month delays are common. Rightly or not, city worker’s compensation claims adjusters do not always negotiate a settlement quickly. “Compromise and Release” tactics usually drive worker compensation claims costs higher.

d. Inconsistent case decisions not purely based on the merits of the

claim strongly indicates need for tighter coordination between claims adjusters and city attorneys. Accurate, extensive trend data can assist the long-term issue of claims management in a more comprehensive and detailed manner. As workers’ comp claims are avoided and open files are reduced, through computer-based data systems, vigorous incident investigation and safety management, some existing staff may be able to shift efforts into new sections in support of claims avoidance activities or other Risk Management program priorities

D. The department suffers from a lack of data collection and analysis capability.

There is insufficient data processing support and they do not have sufficient PCs to perform even the simplest of accident or claims trends analyses. The Workers Compensation Division has 22 employees who are involved in claims processing. The 4,153 open claims has created an average 188 caseload for each claims representative compared to industry standards of 175 - 200 per claims per analyst. Without computers, this currently organized function would need to be increased. Reductions in injuries and accidents would result in reductions in staffing eventually. For example if the number of open claims were halved, then 10 – 12 claims representatives would be sufficient. What is blatantly obvious is that they cannot process all new claims promptly and close older claims both without computers. There is much follow up and paperwork for every open claim. A major upgrade to new computer-based management is an absolute necessity.

1. There is also a need to continually interface with other departments which

do not provide timely reports. Most departments aren’t able to use computer technology or e-mail their reports, because they are either not on a compatible system or there is no report format setup for them to utilize.

2. Post accident claim forms are not regularly turned in a timely manner by

many of the city departments. The Fire Department and “Focus Group” participants have organized a quick response mechanism, but other Departments take as long 3 to 4 weeks to file the initial claim. Most files begin with a report from the physician. Simplified, computerized claim


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forms which are sent within 24 hours by the immediate manager / supervisor of the injured employee are standard procedures in most companies today. This fundamental control is either missing or not utilized by all departments in the city. Supervisor training and the institution of both new tools and enforced discipline can reduce both claims processing time and cost. The burden of timely and accurate initial claims submission must be shifted to the cognizant department in which the injury occurs.

3. There is no current data on injury tracking by body part, type of injury,

frequency of occurrence, or many of the key tracking elements for a descriptive or historical analysis. A basic OSHA log-style incident summary would cost no more than $25,000. However, at present nobody knows how many claims filed are actually OSHA Log recordable accidents or injuries. Worse still, a presumption that some portion of claims filed might not be bonafide, recordable, work-related incidents is a red flag for potential fraud.

4. A quick walk around the office and discussion with employees will tell the

observer that the paper flow and filing system are antiquated and were never intended to provide trends data or preventive efforts to reduce claims. There are claims files all over the office awaiting storage space, but no concerted efforts to prioritize or sort out the most important cases. The staff reacts to claims processing, not claims reductions. A fully functional computer system would assist this process once it was efficiently organized, as would the use of a microfiche or other type of document controls, archiving and retrieval system. Clearing up the backlog of open claims is a first priority.

5. We reviewed the claims intake process. The initial claims intake person is

a key element to assuring proper and immediate attention to all claims and some changes have been made. Further analysis of the workflow from receipt of claim to its final disposition is needed. This Division is in true need of a staff analyst to provide a comprehensive and ongoing review of all claims and categorization of claims data.

6. The Fire and Life Safety Department has more data regarding the nature

of injuries in its department than is available to the Risk Management Department. A person is assigned to track the claims, identify the cause and type of injury etc. Such analysis is critical to the Work Comp group if they are to be pro-active. The sharing of this information with departments is the first step to the management of claims and costs. Fire fighters, for instance, appear to have an excessive number of claims due to accidents or injuries not on emergency calls, but in the stations or during training – 62% of the total – and mostly avoidable. Further review of this concern is


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in order, especially because the open claims in this department alone exceed $4.6 million in estimated future liabilities.

E. The County of San Diego recently conducted a review of its’ Workers Comp unit

and put out an RFP for a third party administrator. On a competitive basis, its own self-administered program prevailed over private industry. No doubt their experience holds many new ideas that this Division could profitably use to improve existing conditions.

III. RECOMMENDATIONS A. There are numerous opportunities for improvement in this Division. The team

appears to be up to the challenge, but they have not been provided the computerized tools nor worker’s comp claims management training to handle their jobs in a proficient manner.

B. A competitive bid process by private insurers is in order here, even given large

unfunded liabilities for the acceptance of older open claims. However, no commercial carrier is likely to accept a $12 – 30 million liability for older open claims. New, updated management could streamline current year operations and reduce future liabilities. This issue would be resolved if the City were to work an arrangement to accept liability and claims responsibility for all claims as of a certain date and turn over responsibility for future claims management to an outside party. This would also provide a smoother transition for any displaced employees and provide incentive for this department to clean up their backlog. The City would need to be willing to increase costs over the first few years of such a contract. The analysis of long-term impacts would reveal whether there would be any savings at all. Given industry-standard level staffing, and up to date technology the City’s self-administered program would be likely to prove cost-effective as well.

C. Without outside assistance, the Division must develop a process improvement

plan as a part of that strategic plan. This should include an internal PC database that identifies key indicators that will tell the Workers Comp and Rehabilitation Division how well their claims processes are performing. A simple, electronic injury reporting system that is user friendly to field activities, reports accidents by type etc. and automatically provides data, could eliminate some paperwork, provide the beginnings of an easily accessed historical record and make the reporting process simpler and more timely.

D. SUMMARY OF FISCAL IMPACT

1. A minimum ten percent reduction of prior year open claims, about 200-300 cases, at the current liability ranging from $9 - $13 million annually, would avoid current year costs of more than $1 million. These savings would


ATTACHMENT THREE

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easily offset reorganizing staff available and computer upgrading expenses, which are estimated at $850,000. A portion of this cost ($300,000) would be regained from reducing current personnel by four – five positions eventually.

2. Vigorous workers’ comp claims analysis, department by department,

coupled with expanded safety focus efforts, could reduce current year claims incidence significantly. A 20 – 30 percent first year impact would generate cost avoidance of at least another $1 million in the current $3 million total now paid for first year claims. If future claims costs are likely to escalate ten times when unsettled, then these 750 avoided open cases also would sidestep another $6 - $7.5 million in future years liabilities.


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ATTACHMENT FOUR

SAFETY AND ENVIRONMENTAL HEALTH DIVISION

I. BACKGROUND A. This Division was reviewed by Cal Cohn, consultant in quality management and

former Navy officer. He was joined by Joel Snyder for several of his field interviews with the Division Deputy Director, Ron Graham and two Division Safety Officers, Bryan Green and Debra Talmich. Additional contacts were made with three Departmental Safety counterparts: Steve Fontana, Environmental Services, Beethoven Burks, Park & Recreation, and Charles Buchanon, Transportation. These people had participated in the Safety Focus pilot programs.

B. The Division conducts a number of activities to help provide safe facilities and

work sites, develop loss prevention strategies, reduce accidents and injuries and train and monitor safe work behaviors. It employs ten staff and has a current budget of $560,794. Seven employees work on pre-incident services and training; the rest provide post-incident services, investigations and retraining. No staff are directly deployed to its Environmental Health objectives. Consequently, the ZBMR effort concentrated on the Division’s pre-incident activities and its Safety Focus pilot program and results.

II. MAJOR FINDINGS: A. The ten people in this Division are trying to prevent or reduce claims and costs.

However, specific measurable goals that can be used to establish safety performance measures for the department have not been defined. No Division in the Risk Management Department has developed a workable data base of information that can identify key indicators of how well or how poorly their processes are working. They have a written “customer service commitment,” but it does not identify what customers want, how the department intends to provide the service, or how they will measure Risk Management success. To quote, "people need to know what done right looks like." An information system is being developed over a five year period to meet this basic monitoring function, but no real data is available to assist management choices.

B. The Safety and Environmental Health Division launched its Safety Focus

Program in July 1997 with a goal of reducing the number of injuries and avoiding


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claims costs. They achieved a measure of initial success: from FY97-98, injuries dropped by 243 claims. Workers compensation payments were reduced by $981,000 and industrial leave costs were down $170,000. Additionally, light duty usage decreased 55,482 man-hours during this same period. This was equivalent to a cost avoidance of $788,480 in indirect expenses, nearly double the direct payments of $951,000 that were avoided. The FY97 Focus implementation expenses of $331,000 had earned a positive return on investment better than 3:1.

C. The three selected departments’ first year Focus Program results are compiled in

TABLE THREE. An average incident reduction of 22.5% and light duty hour reductions of 57.8% are especially noteworthy, because not all department personnel actively participated. The pilot Focus Programs involved only 1,930 positions, mainly at Division level. Departments that embraced the Focus Program wholeheartedly continued to reduce incidents and costs of first year claims.

1. For example, Environmental Services Department provides awareness

training twice a month that reaches 90% of employees. Additionally, they bring in outside safety or technical trainers on an average of four to six times a year. The Director of the Department has added his own visibility and importance to the safety program by attending "tailgate" safety meetings with employees. Management has also provided positive incentives for people to work safely. One example is movie tickets for employees if the department goes two months without accidents.

2. The Transportation Department did not promote Focus throughout. As its

Focus effort ended, costs for work comp claims spent in two of its divisions doubled from $308,000 to $634,000. Of course, a hefty chunk of those expenses were for open claims of prior years, which proved the need for long-term, consistent safety Focus effort.

D. Even discounting variations in prior year claims costs – about 70–80% of the cost

of total claims paid – Focus Programs have delivered a fiscal savings/cost avoidance of nearly $350.00 per employee. This is the result of 147 less claims, less severe injuries and fewer frequently injured employees who won’t add to open future claims.


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TABLE FIVE

F o c u s R e s u l t s I n T h r e e D e p a r t m e n t s , F y 9 7

DEPARTMENTS

INJURIES

REDUCTION

LITE-DUTY

REDUCTION (in man-hours)

ACTUAL CLAIMS

PAID REDUCTION

Refuse Collection Division / Environmental Services

-66

-15,698 $321,660

Coastal Division / Park & Recreation

-5

-17,070 $348,284

Streets Division / Transportation

-76

-22,764 $28,574

FOCUS TOTALS

-147

-55,482

$698,518 E. Similar results of vigorous safety pre-incident efforts are visible in the Water

Department and MWWD, the latter with a thorough, top-priority safety program of its own. In FY 1997, Water paid $959,264 for its workers comp claims. The same year, MWWD paid $204,176; the per capita costs were about $1,300 in Water and $225 for MWWD. The next year MWWD’s costs increased to about $428 per worker, as new people were transferred from the Water Department and new claims for the year declined ten per cent. Water, with fewer employees and no safety focus, still paid $935,122 in workers comp claims at a per capita cost of nearly $1,700. This demonstrates a difference of four times the costs without a safety focus program.

F. These citywide achievements clearly demonstrate what could happen with a

strenuous safety and injury prevention program. Private industry regularly gains 20-30 per cent reductions in a variety of workplace conditions. If similar improvements in safety were reached throughout city departments, another $2.4 million could be avoided in future year budgets. Proactive safety efforts in police and fire fighting staffs would cut station “trips and falls”, that currently make up 62% of existing claim incidents and might contribute another $1.3 million in current claims, and $3.7 million in avoided future claims costs.

G. Why don't city departments eagerly take part in proven safety efforts? ZBMR

teams found that Directors receive no real incentive to reduce costs or workers’ claims. A Department's work rates are set arbitrarily without the benefit of experience and are not charged directly to Departments. These rates have been based upon six general groups of job classifications instead of actual state worker or compensation manual rates. Although these rates are higher for hazardous jobs like public safety, than for clerical, they do not match current industrial experiences. Since the recent “open-rating”, workers compensation reforms, commercial loss rates have declined 50-65% across many occupations.


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The city’s work comp rates and its claims costs have not shown any similar reductions, largely because its costs have not declined the way private industry costs have. Proposed changes to the new city budget would make use of experience to determine charges, but the larger issue is that under the current situation, no one holds the Department's accountable for reducing their safety incidents and costs. The current disparity between rates charged and actual claims paid for several departments are listed in TABLE SIX. The unavoidable conclusion at the current time is that Directors pay scant attention to these charges because they are neither based on experience, nor do they have any direct impact on their operating budgets. Directors’ performance responsibilities must include efforts to reduce their workers compensation claims, frequency and long term costs.

TABLE SIX

W o r k e r s C o m p e n s a t i o n F y 9 8 R a t e s C h a r g e d V s . C l a i m s P a i d

Department

Rate Charged Approximate

Rate per Capita

Claims

Paid Park & Recreation $561,796 $642 $516,347Environmental Services $518,880 $1,076 $1,003,679Equipment Division $223,402 $1,423 $142,911Streets Division $464,396 $970 $491,142Water $682,972 $1,220 $935,122MWWD $883,759 $803 $471,114SAMPLE TOTALS $2,773,970 ------- $3,560,315 III. RECOMMENDATIONS: A. Current proposals are correct to adopt a private industry approach to assigning

work cost costs where they belong. Workers’ Compensation claims payments, actual expenses and administrative costs should be charged directly to city departments. Liability reserves should be based on actual experience factors. Departmental budgets should bear the costs of their own workplace safety, and they should enjoy the benefits of avoided costs when realized.

B. The Safety Focus teams should participate in a strategic planning process, to

develop a clear mission statement that includes measurable performance standards for the division and safety program staff. They should strive to benchmark with other municipalities risk management and safety awareness programs to determine best practices. The Division should put together process improvement plans for safety that all divisions can implement.


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C. The cost of 2,286 work comp claims is more lamentable, because it can be sharply reduced by visible management commitment and employee involvement. The city’s proven safety Focus Program should be quickly implemented in every lacking department and revitalized wherever its message has dulled.

1. Every department should select safety leaders and get them trained with

professional certificates in workplace safety and health technology. The Safety Section of Risk Management can install programs and lead but cannot take the place of departmental accountabilities for workplace safety. As many as 20-30 employees from all departments should be assigned as safety leaders, collaterally.

2. Joint labor/management safety committees in every department (in accord

with work place safety memos of understanding) need to be created, funded and empowered to investigate safety incidents, and conduct audits of hazardous conditions. These workplace teams are the best mechanism for securing employee involvement and cutting work claim costs.

3. Department procedures for filing work comp claims and reviewing

investigation reports at Director levels also should be updated or modified. No department should permit long delays in such reporting, or ignore top management reviews of incident claims. Letting a medical office file a work comp incident claim simply allows the doctors to pick the work comp way to be paid promptly.

4. A first year goal of 30% less claims should be adopted. This would

amount to an eventual $4 - 5 million annual cost avoidance. Future year improvements in frequency and lost time incidents should be expected from these efforts.

D. Create a simple electronic injury reporting system that is user friendly to field

activities, reports accidents by type and automatically provides data that will easily show key indicators. This could eliminate some paperwork, provide the beginnings of an easily accessed historical record and make the reporting process simpler and more timely. Several major commercial insurers have developed work comp tracking software. They should be invited to bid services to meet this need.

E. Safety and Environment needs to republish its Focus newsletter as a citywide

“report card” on savings attributable to safety. Recognition to safety leaders and department activities should be publicized.

F. Focus, in the ZBMR team’s view, needs to become part of the culture of all city

departments. A visible commitment by the city will expand existing staff positions by at least 4–5 safety professionals immediately, with responsibilities for training and retraining, incident investigation and customer contact. A well trained and


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certified Division can help to provide internal consulting training and safety audit leadership to line Departments. Some of these staff should be safety committee facilitators to assist start-up expansion efforts in every department. Future plans to add another 15 positions to Focus programs should be accelerated.

G. Establish an incentive program associated with work comp cost savings. Every

department supervisor needs to see what is in it for him or her, whether it be increased compensation, more people available to do the work, or recognition and satisfaction for a job well done. Safety progress should also be a section of every managerial evaluation for promotion.

Documents

RISK MANAGEMENT DEPARTMENT files/1999-RiskMgmt Master.pdf · 2015-03-22 · ZERO-BASED MANAGEMENT REVIEW RISK MANAGEMENT DEPARTMENT SUMMARY 1 I. OVERALL SUMMARY A. SCOPE OF THE REVIEW: