Game Theory and Comp. worker: understanding stakeholder friction maps

In the complicated and highly regulated world of workers’ compensation, predicting the trajectory and settlement of a claim can be a complicated challenge.

Interactions between injured workers, employers, insurance adjusters and treating physicians significantly influence how quickly a claim is resolved and how contentious the process could become—the value of the claim is always subject to change. Each of these stakeholders brings their own motivations, risk profile and influences to the table, creating a dynamic environment where outcomes can be unpredictable.

However, by applying game theory, we can develop a more scientific approach to forecasting these interactions, thereby better understanding potential friction points and using this knowledge to reduce settlement times.

The prisoner’s dilemma

Understanding the basics of game theory begins with the “Prisoner’s Dilemma,” a classic scenario that illustrates how individuals make decisions based on their self-interest, even when cooperation could lead to a better outcome.

In this situation, two prisoners are separately offered a deal: if one betrays the other while the other remains silent, the traitor is free and the silent one receives a harsh sentence. If they both betray, they both get moderate sentences, but if they both remain silent, they get the lightest sentences. The dilemma shows how rational individuals may not cooperate even when it appears to be in their best interest, highlighting the complexity of strategic decision-making at its most basic level.

Stakeholders and motivations

The four main entry-level stakeholders in workers’ compensation—injured workers, employers, insurance adjusters, and treating physicians—each have distinct motivations that drive their actions:

1. Injured workers: They want to receive timely and appropriate medical treatment, obtain benefits and return to work relatively quickly.
2. Employers: Their aim is to minimize the impact on productivity and costs, ensure the welfare of employees, comply with legal obligations and mitigate the economic impact and job losses on the business.
3. Insurance Adjusters: These stakeholders focus on effectively assessing and managing claim costs, ensuring proper treatment, labor code compliance, and serving injured workers and the employer, all while preventing fraud.
4. Treating Physicians: They aim to provide accurate diagnoses and effective treatment, facilitate worker recovery, and optimize treatment authorizations while maintaining professional integrity and minimizing practice liability.

These motivations, influenced by external factors such as severity of injury, cost of treatment, and access to medical provider networks (MPNs), lead to a variety of potential actions by each stakeholder, which in turn affect the evolution of the “game” the claim.

An Uneven Playing Surface: Asymmetric Knowledge

These individuals are not playing on a level playing field. There is a vast “asymmetric knowledge” gulf between insurers and workers. The latter consistently make standardised, informed and risk-neutral decisions based on thousands of previous cases. Instead, injured workers are often dealing with the workers’ compensation system for the first time. Risk averse and reluctant to prolong the process, they may choose not to undergo surgery, for example, even though those actions may ultimately be in their best interests.

Workers are prone to make “hot” decisions based on emotion in response to perceived depreciation or delays. This emotional response is similar to grocery shopping while hungry—when hunger drives the decision-making process, people are more likely to make impulse purchases, often choosing options that offer immediate gratification rather than good value. In contrast, insurance companies are rational, detached “cold” decision makers and are more likely to make strategic choices, much like someone shopping with a list that focuses on value rather than immediate cravings.

Game Theory in Workers’ Comp

Game theory provides a framework for analyzing the strategic interactions between these stakeholders. By modeling these interactions, we can identify potential “friction points”—predictable areas of anticipated “stress” at times when delays or conflicts are likely to occur—and estimate how long a request might take to resolve.

Essentially, game theory is about understanding how players make decisions based on a) the anticipated actions of others and b) the outcome of a previous outcome.

In addition to the primary core ‘players’, secondary stakeholders such as lawyers, the judiciary, nurse case managers and even the individual’s family members introduce ‘secondary games’. Each player must make decisions that will affect the others, often without knowledge of the other players’ intentions, actions, or actions, or without knowledge of the data.

To apply game theory to workers’ compensation, we can create “friction maps” that identify potential points of delay in a claim’s progress by analyzing key factors: 1) the length of the claim at the time treatment is sought, 2) the type of claim – such as therapy, medication, imaging or consultation – and 3) the historical behavior of the approval system. These maps also consider the motivations of each stakeholder and the external factors that influence their decisions.

For example:

• A strained employer-employee relationship could prompt the injured worker to hire an attorney, adding several months and significant costs to the settlement process.
• A worker may seek another physician who is considered more “patient friendly” or an “advocate” for recovery.
• An employee with a positive performance history and a diagnosis requiring minimal rehabilitation may experience a rapid and harmonious resolution.
• An insurance adjuster experienced in requiring extensive testing and examinations before a claim settles could prolong the process.
• A Qualified Medical Evaluator (QME) who has previously received significant employer business may, consciously or unconsciously, factor this into the diagnostic and treatment plan in the form of additional testing and rigid compliance requirements.
• Alternatively, the QME may provide a summary assessment for resolution, while the report clearly states that the injured person is not at maximum medical improvement (MMI), adding another level of complexity, cost of clarification and confusion.

Dynamic cooperation and friction

The early stages of a workers’ compensation claim are often characterized by high cooperation and low friction. Insurance companies are generally willing to authorize treatments and tests as they gather information about the case. However, as the claim progresses, authorizations may become less frequent, particularly if utilization review or evidence-based medicine does not support continued treatment.

At this point, friction between primary stakeholders may increase, players may polarize or have partial alliance relationships leading to delays and potential disputes. For example, an insurer may deny further treatment if it believes the injured worker has reached MMI, even if the worker and their doctor disagree. This is a common “on-ramp” for litigation, which immediately increases costs and timelines.

Advanced models and predictive scenarios

To be sure, game theory can help identify potential points of contention and develop strategies to mitigate them—and technology helps that search. By analyzing thousands of similar cases using generative AI engines, insurance companies can determine likely outcome trajectories using advanced databases and ultimately determine settlement expectation conditions based on how claims have been settled in the past.

In this model, the insurer begins by approving authorizations for diagnostic tests, medications, therapy, and consultations in the relatively harmonious early stages of a claim. As more information becomes available, the insurer reduces frequency with this knowledge of previous claim history. These advanced models can analyze large amounts of data to predict how individual claims will progress based on factors such as insurance company, zip code, comorbidities, and the attending physician’s background and experience. In some data models, the results of certain doctors can calculate multipliers on the standardized rating model, creating a Vegas-style “over/under” predictability ratio.

For example, consider a scenario where the biometric injury profile of an injured worker is analyzed and compared to hundreds of similar cases in a comprehensive high-accuracy database. This analysis includes, among other variables, the past behavior of the insurance company, the worker’s medical and claims history, and the expected decisions of the treating physician. This approach could allow accurate predictions for establishing damage reserves and estimating the date of MMI right from the initial emergency room note at the date of injury.

The permutations of these scenarios are nearly infinite, allowing for highly customized and accurate models that can predict the likely outcome of a claim. This level of accuracy will revolutionize the workers’ compensation system by providing stakeholders with unprecedented insights into the likely trajectory of cases.

A new workers’ compensation claim game

The application of game theory to workers’ compensation provides a powerful tool for understanding the strategic interactions between stakeholders and predicting the likely outcome of a claim. By developing friction maps and applying advanced data models, we can identify potential bottlenecks, develop strategies to minimize friction and accelerate solutions.

Ultimately, this approach has the potential to transform the workers’ compensation system, making it more efficient and predictable for all stakeholders. As AI and data analytics continue to evolve, the insights gleaned from these models will become increasingly valuable, providing a roadmap for navigating the complex landscape of workers’ compensation claims.

Alchemy is the founder and CEO of Rate-Fast. He is a diplomate of the American Board of Family Practice. He also holds educational certificates from the American Board of Independent Medical Examiners and the American Association of Medical Review Officers.