1. California WC Reform A Self Insured Perspective May 16, 2005

2. CA – Claims Management Costco TPA is SCMS. Dedicated team of 25 claims professionals in Orange, CA. We receive 2100 claims per year; 500 IN & 1600 MO. One Costco Regional Manager is responsible for CA results. She provides direction to claims team and oversees 2 claim reviews per year with the Costco locations.

3. CA Reform Legislation Loss of presumption of correctness for AP TTD capped at 104 Weeks Permanent Disability – Based on AMA 5 th Apportionment RTW Incentives Medical Provider Networks – Approved 4/8 ACOEM Guidelines

4. Response to Reform - Claims Added 6 Bunch Nurses (In-House with SCMS) –Utilization Review –Complex Claims Consultation –Peer Reviews Prospective Bill Review 8 Weeks of TTD

5. Response to Reform - Claims Reserving Practices in 2004/2005 –Elimination of presumption –No reserve for voc rehab ($16K) –ACOEM Guidelines –Caps on Chiropractic and PT –PD reserves based on AMA Guides

6. What Do I Know? WC costs affect the Bottom Line of Costco. Ultimate is a big number that takes 5 to 8 years to develop. Key is to control the ultimate cost each policy year. You can only manage/control what you can measure.

7. What Do I DO? Break down ultimate loss costs for each policy year to a yearly target. Set clearly defined financial goals. Communicate goals appropriately. Implement a feedback loop. Reward your team.

8. Break Down Loss Costs Fiscal Year UltimatePaid To Date 1 Yr. Expected Target FY0347,5734,10615,19411,088 FY0243,50913,89622,2968,400 FY0132,84616,83221,4344,602 Total24,090

9. Set Financial Goals Financial Goals = Payments –Develop payment goals for each policy year. Manage the Money –One adjuster can spend $60K to $250K per month without knowing it. Reserves are Important too

10. Manage Your Cash Flow Payments by Policy Year Payments by Bucket –Indemnity –Medical –Expense Payments by Pay Code

11. Communicate Appropriately Financial Goals for Program Management. Correct Analysis is Critical. Translate to expectations that supervisors and adjusters can execute and control.

12. WC Goals Open IN over $100K Incurred Closing Goal for IN Claims by PY Closing Goal for IN Claims over 2 Yrs Investigation Expectations Medical Management Expectations Claim Handling Expectations

13. Additional WC Goals Manage Expenses Expectations for Utilization Management PPO Penetration Bill Review Savings Percentage

14. What Does Costco Expect? Highest Quality of Claims Handling Use Current Laws to Our Best Advantage Use the Resources Costco is Providing Excellent Customer Service

15. Feedback Loop Share Information with your Team Don’t just Hope for the Best –Develop a Report! Manage what you Measure –Dig into the Details Continuously Train your Team Be Firm but Fair

16. Reward Your Team Notice the team members that work hard for you. When expectations are met, Say Something. When expectations are exceeded – Do What you Can.

17. Conclusion This approach is different than how I used to manage a WC program. Means no actuarial surprises. ACOEM Guidelines – Most Important CA Reform. FY04 loss rate was 7.08%. Now 5.56%.