The Valuable Insights of Real-Time Claim Risk Assessment
October 13, 2023 | Categories: ODG by MCG
Italian sociologist Vilfredo Pareto (1848-1923) is best known for his namesake principle the “Pareto” rule, which states that for many distributions, approximately 80% of outputs are driven by just 20% of possible inputs (called “the vital few”). The converse of this is that the other 80% of inputs – “the trivial many” – drive only 20% of outputs.
One goal for business leaders is to identify those inputs most influential to our desired outputs, and then make them our priority. If we manage inputs equally, we are not optimizing resources, and risk being outcompeted by better stewards of capital. Since they drive 80% of outputs, the vital few deserve 80% of resources, leaving 20% for the trivial. An input among the few deserves 16x the resources (time, money, manpower) as one of the many.
The math looks like this: 80 resource widgets directed to 20 vital gizmos is four widgets per gizmo, with 20 widgets remaining for 80 trivial gizmos (0.25 widget per gizmo).
4 = 16 x 0.25
All gizmos are not created equal. Vilfredo nods…
Theory is great, but does it apply to workers’ comp claims management? It does. In fact, the principle is even more pronounced. In reviewing workers’ comp claims data, we find just 15% of claims frequently represent more than 80% of total costs.
The ODG Risk Assessment Score
From that finding, ODG developed a Risk Assessment Score (RAS) that is updated annually and is available in both the web-based versions of ODG (as well as an automatable version via ODG’s application programming interface (API)) for real-time risk scoring inside claims and case management systems. Such applications can connect to ODG through the API, leveraging predictive analytics for risk scoring at the claim level. Designed for interventional triage or risk-adjusted benchmarking, this tool can be used to help focus claims management efforts on the most necessary cases.
The inputs are medical codes (FNOL, ICD, CPT, NDC, and HCPCS) plus claim demographics. Two concepts are considered. The first is a Magnitude, which represents severity, and measures total claim duration/cost relative to other claims. The second is Volatility, which represents opportunity, measuring the difference between a good and bad outcome for similar claims. These two scores combine to form RAS. ODG also predicts disability duration and costs using a proprietary causal model derived from “like” claims in the ODG database of millions of claims and tens of millions of medical interventions.
Payers can trigger interventions as resources allow. Below is the visual aid, where each claim is scored in real-time on the 0 – 100 scale.
This monitoring of claims with alerts ensures claims managers never miss a warning sign, putting the right resources on the right claims early, while not engaging complex and costly referrals unnecessarily. Supplementing experience with business intelligence is critical as millennials and Gen Z take the reins from the industry’s “old guard”.
Catastrophic claims have high Magnitude, but lower Volatility. “Creeper claims”, or those that develop into high dollar but are innocuous at intake, have high Magnitude but even higher Volatility. They score very high on the ODG scale. This is where maximum benefit can be obtained from early intervention to prevent them from going off track.
Historically, interventions like field case management or IMEs are only introduced after certain thresholds are hit, but the claim is already a mess, and facilitating closure is more difficult, often resulting in permanent disability or lifetime reserves for claims that could be resolved sooner. Using RAS, clients can target these claims early.
RAS has tested well on external workers’ compensation data, for example, predicting the 15% of claims that ultimately account for 81% of spend for one payer.
Claim costs show a near-perfect doubling as the scores move up 10 points.
Costs in every bucket grow exponentially as scores move up the spectrum.
Vilfredo Pareto first observed this well-known principle when noting that 80% of the wealth in Italy belonged to 20% of the population. He could have easily been referring to 80% of revenue belonging to 20% of businesses in most industries. What those businesses do well, then and today, is prioritize efforts and resources, whether directing 80% product efforts at 20% of customers – the best and biggest – or most cost containment efforts at their biggest cost drivers. The key is to pick the right few – “the vital few” – and identify them early.
-Phil LeFevre, Managing Director, ODG by MCG.
Published October 12, 2023.
The information contained in this article concerns the ODG guidelines (or solutions) as of the date of publication, and may not reflect revisions made to the guidelines (or solutions) or any other developments in the subject matter after the publication date of the article.
Image courtesy Shutterstock/Elnur
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