Workers Comp Allocated Expenses – Who Pays For Which Bills?

February 5, 2021 By JL Risk Management Consultants

Workers Comp Allocated Expenses – The Hidden Premium Charges You May Not Owe

A long-running debate still exists today on how workers comp allocated expenses are charged to employers’ accounts. Let us cover the:

Definition of the expenses
Process of charging the allocated expenses to the employer’s Experience Mod
Sources of payment confusion
Specialized programs for large deductible policies
New important finding – reserve shifting
Which workers comp bills that mistakenly end up paid as medical charges
How to audit workers comp allocated expenses on loss runs

pic hidden lighthouse workers comp allocated expenses

Workers Comp Allocated Expenses Definition

The definition of allocated expenses is:

(also known as ALAE) are expenses charged to a Workers Comp term file that are not indemnity or medical benefits. They are associated with the adjusting of the file. Expenses for defending claims such as attorney fees, private investigators, independent medical exams, and many others are considered as Allocated.

Process of Charging Allocated Expenses To Employer’s Mod

The expenses for a file such as attorneys, private investigators, and rehabilitation nurses are usually paid by the worker’s comp carrier. The charges usually appear under the Expenses column in a loss run. The other two types of payments appear under Indemnity and Medical.

Sources of Payment Confusion

When a new or inexperienced payment processor comes across a bill, they are left to choose which one of the three payment types to add the payment to when cutting a check. Some payment systems will not allow a medical bill to be paid under the indemnity. Very few systems prevent a payment that should be under the workers comp allocated expenses from going under medical.

If payment is paid under medical, how is that caught by the system?

When the bill payment is issued becomes critical to make sure the bill is charged to the employer or the insurance carrier.

Reserve Shifting

Reserve shifting occurs when a claims adjuster does not have enough funds to pay a certain benefit, Instead of increasing the reserve category (medical, indemnity, or expenses), reserves are moved from one reserve category to another.

The reserve shifting makes sense when one looks at a workers’ comp file. The one drawback is when monies are moved from the workers comp allocated expenses reserve to indemnity or medical.

The insured Experience Mod, in essence, just incurred a reserve increase without the total file reserves being increased. The indemnity or medical reserve increase from the reserve shifting will cause a file that seems to be the same reserve size to have gotten much larger.

J&L sees this occurring more often each year. I have one now on my screen that I am reviewing for an agency in California where this very situation occurred very recently. The amount of $43,500 was moved from allocated expenses to medical.

This shift may seem like a harmless adjustment of the reserves, but the employer experienced a $43,500 bump to the amounts that count into their Experience Mod.

Yes, if the adjuster just raised the file $43,500 it would have had the same effect, but this would have increased the total amount of the file which would make the increase in reserves and eventually the Mod more obvious.

Workers Comp Bill – Medical or Allocated Expense?

The bills that usually end up mistakenly input into the medical payments are Rehabilitation Nurses. This happens frequently. Rehabilitation nurse bills should routinely be paid under the Allocated Expense category, not medical.

Independent medical exams are a grey area. The bills are medical appointments but are they not essentially adjustment expenses on the file and not true medical treatment.

The debate still yet occurs on these two types of bills yet even today.

When I have attended the NCCI data conferences in West Palm Beach, the determination was made that allocated expenses were s any type of funds that were not incurred to assist the injured employee medically.

Auditing Workers Comp Allocated Expenses on Loss Runs

Reviewing workers comp payments without direct online access is next to impossible. Obtaining online access can save time and headaches when reviewing files.

The best way to review these payments is to look at each payment to see what reserve type it was paid under for each check. This can be confusing at times.

Some carriers may have a backstop in their systems that will not allow, for example, a certain law firm to have a check issued from the medical reserves. Most do not.

Following the claims monthly for reserving, payment, and handling usually results in the best outcome.

Please note that I have never seen an insurance carrier purposely pay workers comp allocated expenses under medical or indemnity reserves.

What Are Allocated Loss Adjustment Expenses( ALAE)?

January 20, 2011 By JL Risk Management Consultants

Term Of The Day – Allocated Loss Adjustment Expenses

The Loss Adjustment expenses (ALAE) can be allocated to the adjustment of a certain claim. Often, you will see this on Workers Compensation claims in the Expense Total Incurred figure. There has been much debate concerning what to include in the ALAE figure. Attorneys, PI’s, and expert witnesses can all be attributed to ALAE.

The one area that is so confusing is the rehabilitation nurses. Some carriers and TPA’s include their expenses as ALAE. Others include it as medical expenses.

Picture of Loss Adjustment Expenses Hands holding blackboard

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ALAE Allocated Loss Adjustment Expense Definition

November 27, 2010 By JL Risk Management Consultants

Term Of The Day – ALAE

ALAE is the acronym for Allocated Loss Adjustment Expense . In Workers Compensation, there are three areas of reserves and loss payments. They are indemnity, medical, and Allocated Loss Adjustment Expenses or just expenses.

Picture Of Hand Carrying ALAE Plant With Coins

Wikimedia Commons – Cieresek

Indemnity benefits are defined very specifically. The lines between medical and expenses has been blurred over the last few decades. There is really no hard and fast standard for splitting payments between the two categories. Some insurance carriers pay certain expenses under medical while other do not.

For Experience rating purposes, the difference is very critical as Expenses are not part of the Experience Mod calculations.

There has been much discussion about some of the ALAE being added to the medical reserves by the insurance claims staff. Charges such as rehabilitation nurses, medical bill review, PPO network, etc. are not consistently charged to the right area by the carrier or TPA. Allocated expenses for Workers Comp usually includes defense attorneys, Private Investigators or any type of outside services that aids in the investigation of or reduction of losses.

At one time, insurance carriers discussed whether or not to charge rehabilitation nurses under this category.

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Travel and Expense Charges to Reserves (T&E) – Area To Check On

August 4, 2009 By JL Risk Management Consultants

Travel and Expense Charges to Reserves – Controversial Subject

Travel and expense charges to reserves creates many questions on how to handle these in the files.

Graphic Of Airplane And Suit Case Travel and Expense Charges Different Country On Globe

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There is one set of charges to reserves that employers should be aware of whether self-insured or not. Travel and Expense charges should always be absorbed by Workers Comp insurance carrier.

These charges should have been negotiated into the premiums paid in regular commercial policies. The same is true for self-insureds. In some of our reviews, we have seen adjusters charging off their expenses incurred into the file, usually under the Expense reserves.

Unless there is some type of hybrid agreement between the insured and the insurance company, these charges SHOULD never show up in the reserves of a file or in the adjustment costs of a TPA. The T&E expenses may not be that apparent if you are reviewing the reserves or the payments made by the insurance carrier.

These expenses are sometimes referred to as LAE (Loss Adjustment Expenses) or ULAE (Unallocated Loss Adjustment Expenses). Once again, these are calculated into the premiums or TPA costs before a policy or TPA agreement is issued. An employer should not have to pay these expenses twice.

There are a few other expenses that have concerned me when reviewing Workers Comp files that should not be covered by the reserves or TPA costs. I will cover those next time.

2019 Update – We have seen many large deductible policies where the carrier included these expenses as part of the ALAE. Review the large deductible side agreements very closely for travel and expense charges.

Workers Compensation Expense Reserves Are Often Ignored

August 2, 2009 By JL Risk Management Consultants

Expense Reserves vs. Medical Reserves

The third and final reserve figures are the Expense Reserves. These reserves have caused quite a large amount of confusion ever since I started my career in Workers Compensation. The confusion always centered on what should be included in the Expense Reserves vs. Medical Reserves.

Picture of Hand Draw Arrow Increase Expense Reserves With Dollar Signs Graphic

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The definition is the funds set aside for the cost of adjusting the Workers Comp file. The following fees are sometimes coded as Expense:

Defense Attorney
Independent Medical Exam (?)
Rehabilitation Nurse (?)
Bill Review (?)
Adjuster Time and Expense (T&E) (?)
Medicare Set Aside Services (?)

I inserted the ?’s as these are the areas that confuse all the claims departments as to where these expenses are included. Quite often, even inside each claims department these expenses are included in different reserves.

The best way to think about this category of funds is what the claims staff decides to directly pay to help adjust or process the claim – not medical or indemnity such as a weekly workers comp TTD check or a medical bill for a physician office visit. The adjuster has more control over the provider than any other type of payout.

There is no need for concern if you are not self-insured. The reserves are still charged to your Workers Comp premiums as one total (Compensation + Medical + Expenses). There are some other areas of concern that I will post next.

There is one expense that SHOULD NEVER be included as any type of reserve in the above list. Which one do you think it is?