—John Kenneth Galbraith, American Economist
By Karen O’Hara
One intriguing aspect of workers’ compensation is that medical costs are higher than they are under group health plans for the treatment of comparable conditions. There are some price disparities, but higher utilization rates under the workers’ compensation system are the leading reason for the difference, studies show.
While the frequency of workers’ compensation claims has been steadily falling since the early 1990s, severity rates and medical costs have increased. Despite the use of multiple control mechanisms, observers do not expect these trends to dramatically reverse, even in the midst of the recession.
“While there is no doubt that events such as plant closings and large layoffs do result in clusters of claims, the evidence suggests that this is unlikely to play a major role in frequency patterns,” Harry Shuford, Ph.D., chief economist for NCCI Holdings, Inc., says in an article entitled, What Does the Recession Mean for Workers’ Compensation? 1 “In six of the seven recessions since the early 1960s, workplace injury rates fell; in five of the six expansions, it rose.”
The article is one of several written by industry experts and published in the NCCI’s 2009 Workers’ Compensation Issues Report. Based in Boca Raton, Fla., the National Council on Compensation Insurance (NCCI) manages the nation’s largest database of workers’ compensation insurance information. It also issues rate-setting recommendations and analyzes costs associated with proposed state reform legislation. In his report, Dr. Shuford makes the following observations and predictions, accompanied by one major caveat:
• Claim frequency will continue to decline, perhaps at a modestly faster pace over the course of the recession.
• Growth in indemnity severity will continue but at a slower pace, while indemnity loss costs are likely to decline a bit.
• Medical severity will continue to increase at a “distressingly strong” pace.
• Growth in medical loss costs will ease a bit in response to the anticipated increased decline in frequency.
The caveat: “This analysis reflects experience over the economic downturns of the past 60 years. Many observers are now anticipating the most dramatic decline since the Great Depression of the 1930s. So, the past 60 years may not be representative of the economic behavior of the next decade.”
Medical Costs Rising
Studies show that workers’ compensation medical costs are growing more rapidly than wages. In 2007, the most recent year from which comprehensive data are available, medical costs comprised 59 percent of total losses in NCCI-covered states, with many in the 65-70 percent range. As a result, many stakeholders are looking for solutions, reports Stephen Klingel, president and CEO of NCCI Holdings. Workers’ compensation medical costs are a critical issue for property/casualty insurers and actuaries, Peter Rauner, president of RMS Solutions, Inc., a firm specializing in risk quantification and management, said last fall during a seminar sponsored by the Casualty Actuarial Society and American Academy of Actuaries.
Workers’ compensation is the largest commercial line and the leading source of industry loss reserves among property/casualty insurers, he said, and medical expenses represent a significant portion of workers’ compensation benefits. “Over the last eight years, workers’ compensation medical costs have nearly doubled, from about $13.5 billion in 1999 to more than $25 billion in 2007 – that’s staggering,” he said. “The increasing medical cost trends are a very real concern to the property/casualty industry. The spiraling costs will not only impact workers’ compensation insurance, but also the industry as a whole.”
During his presentation, Mr. Rauner cited some of the factors driving medical costs and severity: inflation, provider consolidation, lifestyle factors such as obesity and chronic diseases such as diabetes. At the same seminar, William Miller, a senior vice president and actuary with ACE USA, a firm that provides insurance and risk-management services through retail brokers, explained that some of the differences between workers’ compensation and group health are driven by coverage and policy terms, political and regulatory pressures, and the duration of medical payout. The entitlement nature of workers’ compensation appears to be one of the leading cost drivers. “While group health includes disincentives for overutilization, workers’ compensation has no co-insurance payment by the injured worker,” Mr. Miller said. “Utilization is one of the primary reasons that workers’ compensation costs are rising so dramatically.”
Mr. Miller used NCCI data to emphasize his point: In a comparison study of 12 types of injuries treated within three months of injury, workers’ compensation costs were 71 percent higher than group health costs, driven primarily by increased office visits and use of physical therapy.2 “Workers compensation injuries result in more intense and costly treatments earlier on than under group health,” he said. He cited medical fee schedules, utilization review, managed provider networks, and pharmacy benefit management programs as examples of the most commonly used cost-control mechanisms. (Please see Page 10 for a related article on pharmacy benefit management.) Mr. Miller encouraged actuaries in attendance to use their analytical skills to help design more efficient workers’ compensation medical coverages.
“Use predictive modeling to find which doctors are providing the best outcomes for getting workers back to work and staying at work,” he advised.
Fee ScheduleEffectiveness
In a paper on the Effectiveness of Workers’ Compensation Fee Schedules: A Closer Look, 3 the NCCI compares group health data provided by Medstat with data provided by multiple workers’ compensation carriers. Medstat is a Thomson Reuters company specializing in the collection and analysis of medical experience data associated with employer-sponsored health benefits plans, including PPOs, HMOs and traditional plans.
Among the findings:
• For comparable injuries, when workers’ compensation pays higher prices than group health for specific services, those services tend to be used more often for the treatment of work-related conditions.
• Fee schedules can result in workers’ compensation reimbursement rates that are higher than group health rates, particularly in specialty areas such as radiology and surgery.
• While fee schedules tend to concentrate reimbursement at the maximum allowable rate, the application of negotiated discounts, technical fee components, facility charges and other factors may result in payments that are either greater or less than the maximum allowable rate.
• Reimbursement for care that physicians provide at hospitals and other facilities is more likely to exceed the fee schedule than care provided in their offices, partly because the fee schedule does not always apply when facilities bill for these services.
• A higher proportion of reimbursements are at or below the fee schedule when workers’ compensation services are provided through a network.
• Prices for services not covered by a physician fee schedule generally increase at a faster rate than prices covered by a fee schedule, so the proportion of total costs for services not covered by the fee schedule increases.
States use several different bases to set workers’ compensation medical fee schedules and a range of processes to determine the maximum reimbursable amount for each covered procedure. Procedures are identified by current procedural terminology (CPT) codes maintained by the American Medical Association. Most states also have cost controls for prescription drugs; some have fee schedules that apply to hospitals and other facilities.
In its fee schedule study, the NCCI found the proportion of workers’ compensation medical costs covered by physician fee schedules is declining by about 1 percentage point per year. One of the primary reasons for the downward shift is that more medical services are being provided by hospitals, ambulatory care centers and other facilities where physician fee schedules do not apply.
“Such facilities cannot be ignored simply because their billings are not as amenable as doctor’s bills to being compared with a CPT-coded price list,” it says in a research brief summarizing the findings. “The use of provider networks helps control workers’ compensation hospital costs, and some states are promulgating fee schedules for hospitals.”
Bundling of procedures may be the key to bringing facility charges under control, NCCI researchers say. Bundling already exists relative to diagnosis-related groups (DRGs) and ambulatory patient classification (APC) categories under Medicare.
“Both bundling and protocols constrain utilization, which is the main driver of higher workers’ compensation medical costs,” the authors say.
While the Medicare fee schedule is useful as a starting point for the design of workers’ compensation medical fee schedules, it has notable shortcomings, including too little emphasis on return to function and insufficient recognition of cost differences among states, experts say. NCCI researchers conclude it may be possible to reverse the declining influence of fee schedules and get better control over utilization by broadening the scope of reimbursement for each individual procedure to encompass all treatment for a specific medical condition.
Claims Costs
Meanwhile, another organization, the Workers’ Compensation Research Institute, has produced a new resource on claim costs. Its report addresses two key questions:
1. How do medical prices, payments, and utilization per claim differ among certain states for similar injuries and workers?
2. How have medical prices, payments, and utilization per claim changed over time, and what are the major drivers of those changes?
The report, The Anatomy of Workers’ Compensation Medical Costs and Utilization, 7th Edition,4 examines experience in 14 states: Arkansas, California, Florida, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, North Carolina, Pennsylvania, Tennessee, Texas and Wisconsin.
Among illustrative findings, the WCRI reports that studies have shown the Wisconsin workers’ compensation system provides “one of the best value propositions for workers and their employers.” Workers in Wisconsin were paid more promptly and achieved better-than-average outcomes with respect to recovery of health, return to work, and access to and satisfaction with care. However, although employers paid lower than average costs per claim, average medical costs per claim continued to increase rapidly in Wisconsin for both hospital and non-hospital providers during the study period.
By comparison, Massachusetts had the lowest medical payments per claim among the 14 study states. The lower medical payments were attributed to lower prices paid for non-surgical services as well as lower utilization, in particular, fewer physician visits per claim. Hospital inpatient payments per claim were basically typical of the study states; hospital outpatient payments per claim were substantially lower.
California Experience
It has been nearly five years since California passed legislation to reform the state’s runaway workers’ compensation system. Now there is discussion about further adjustments that may be needed to correct apparent deficiencies, including rising medical costs. After initial positive post-workers’ compensation reform results, medical cost containment efforts have leveled out, according to research conducted by the California Workers’ Compensation Institute (CWCI).
California Insurance Commissioner Steve Poizner announced he would convene a stakeholder hearing in April to investigate why workers’ compensation insurance medical costs are skyrocketing. The announcement came after the Workers’ Compensation Insurance Rating Bureau, an industry-supported group, recommended a 24.4 percent increase to take effect in July. Meanwhile, California Gov. Arnold Schwarzenegger urged Mr. Poizner to reject such a large increase.
“Before transitioning into public service, I spent 20 years starting companies and creating jobs in Silicon Valley,” Mr. Poizner said. “I know how hard it is to make a payroll and the impact that workers’ compensation insurance costs have on businesses. The last thing that California’s employers need is increasing workers’ compensation costs when so many of them are struggling to keep the employees they have. These soaring costs are unsustainable and must be controlled if we are to prevent a repeat of the workers’ compensation crisis we saw earlier this decade.” In an October 2008 report, California Workers’ Compensation Reform Outcomes: Part I, 5 the CWCI says: “While increases in medical cost containment payments were associated with significant reductions in medical care payments through accident year (AY) 2005, the most recent data show that average amounts paid for workers’ compensation medical treatment increased in 2006 and 2007. These increases may be a short-term anomaly, or they may be the beginning of a reversal of the effectiveness of recent reforms.”
The CWCI defines medical cost containment as a process that “seeks to monitor and manage the unit price of medical services, and where feasible and appropriate, the use and volume of specific services based on clinical efficacy and need.” The unit price depends on health system rules and regulations.
According to CWCI, despite ongoing increases in amounts paid for medical cost containment efforts, post-reform reductions in overall medical payments per claim only occurred between 2002 and 2005. Since then, overall medical payments per claim have increased $248, or 18 percent, at six months post injury, and $241, or 11.4 percent, at 12 months post injury.
In a related report, CWCI discusses medical provider network (MPN) utilization.Under SB 899, the California workers’ compensation reform bill enacted in April 2004, qualified employers may establish and access a provider network to manage injured workers for the life of their claim (unless the employee pre-designates a personal treating physician). The California Division of Workers’ Compensation has approved more than 1,400 MPNs since January 2005, ranging in size from less than 1,000 providers to more than 50,000.
According to the findings, these networks played a significant role in medical service delivery from AY 2002 to 2007, particularly in cases at least 30 days post- injury. Over time, the tendency to use network providers on the day of injury – or at least within the first 30 days of injury – has increased.
“This may indicate a maturation of the MPN program, with more comprehensive and careful direction of injured workers to network providers,” CWCI theorizes.
Evidence-based Medicine
During a recent online presentation, Todd Andrew, D.C., a certified chiropractic sports physician and clinical director for Comprehensive Industrial Disability (CID) Management, offered insights on the situation and some proposed solutions.CID Management, based in San Ramon, Calif., operates a state-certified MPN and provides a variety of services to help “manage the delicate balance of clinical and administrative care of the injured worker’s claim.” (www.cidmcorp.com)
According to Dr. Andrew, a 13 percent reduction in total workers’ compensation medical costs has been achieved in California through the application of multiple strategies including provider networks and utilization and bill review. Meanwhile, the state Division of Workers’ Compensation estimates post-reform savings of nearly $800 million a year in medical cost savings.
He believes more can be done, and he suggests the solution rests with more appropriate application of evidence-based guidelines.
“If you dig deeper into evidence-based medicine, it’s easy to see we are barely scratching the surface of it,” he said.
“As I work with people inside and outside of health care, I find that the concept of evidence-based medicine is easily misunderstood and misapplied.”
In California, providers are required to use American College of Occupational and Environmental Medicine practice guidelines and certain Official Disability Guidelines published by the Work Loss Data Institute.
In California and other states, one of the issues underlying medical costs lies with how these types of guidelines are interpreted. For example, Dr. Andrew says he has observed a tendency among some workers’ compensation system stakeholders – including claims professionals, patients and attorneys – to define evidence-based medicine as the evaluation of a post-injury treatment plan in relation to these established guidelines. In other words, if a recommended treatment is contained in the guidelines, it is “approvable,” and if it’s not, it isn’t.
In contrast, he said clinicians typically perceive evidence-based medicine as the end result of years of clinical experience. “They don’t need to look it up. They know from experience what to do,” he said. Although both approaches make sense to some extent, Dr. Andrews says they also have limitations, and neither represents the true width and breadth of evidence-based medical practice.
“Those who apply book learning are doing cookbook medicine, and those who are using clinical experience are using outdated or less effective practices,” he said. “Evidence-based medicine requires integration of the best research with the best clinical experience that is available. We also have to consider each patient’s unique circumstances. Once those three pieces are put together, you get evidence-based medicine – the right thing to do.”
When practiced appropriately, evidence-based medicine should be the most cost-effective way to treat an injured worker, because it addresses direct medical costs as well as costs associated with lost productivity and disability, he added.
Specific Suggestions
During his presentation, Dr. Andrew cited the following as areas in which he believes workers’ compensation medical cost containment efforts could be enhanced:
Nurse Case Management: Nurses have a depth of knowledge and clinical experience they can draw on to facilitate treatment. For example, a nurse can assist a busy treating physician by contacting the patient to evaluate their condition and researching treatment options based on best practices and the patient’s specific circumstances. “The nurse case manager is perfectly positioned to help the doctor practice evidence-based medicine,” Dr. Andrew said.
Utilization Review (UR): Utilization reviewers have immediate access to evidence-based research and resources. However, they often lack clinical experience. According to Dr. Andrew, “A successful UR program is not focused exclusively on research. It has to be combined with clinical experience and the patient’s perspective for the practice of evidence-based medicine to be appropriate and reduce costs.”
Provider Networks: The use of providers in medical networks who practice true evidence-based medicine has considerable cost-containment potential. However, many networks fall short in this regard. “In general, unless it is custom built, the quality of providers will run the spectrum from greatest to worst, and the patient will end up somewhere within that spectrum,” Dr. Andrew said. “It’s up to the MPN and the employer to hold providers up to a standard of care.” He advises employers to establish personal contact with the primary treating physicians in the networks they use.
Education: Dr. Andrew encourages network sponsors to provide educational materials and courses to help doctors satisfy licensing requirements and increase their knowledge base. “I have heard people say doctors are too busy to practice evidence-based medicine,” he noted, “but this type of training doesn’t take a lot of time, and practice patterns can change in a relatively short period of time. We have seen over the years that it takes a doctor 10 to 25 seconds to find what they need in the guidelines once they know what to look for. “If we can get the networks to train providers on evidence based medicine, we can achieve a whole new level of savings with the same tools we are using now.”
