The Workers' Comp Crossroads

After Florida mandated the use of managed care in workers' compensation, administrative costs associated with workers' comp soared. The state is now considering repealing the mandate.

The workers' compensation financial crisis continues to worsen. Going back to 1995, when the workers' comp industry was considered healthy, the combined ratio was 97.0 percent. By 1998, it had increased to 107.8 and in 1999, climbed to 115.3. The combined loss ratio is expected to be even worse when results for 2000 are released.

Rising medical costs are a key catalyst in pushing up the losses that impact the combined ratio. Medical costs for all health care in the United States are predicted to rise between 10 percent and 15 percent in 2001, more than triple the current rate of general inflation. Aggressive forms of managed care, used in the group health arena since the early 1990s, initially brought savings from restrictions on provider choice and capitating and or discounting provider fees. Now, with a tight economy and overall dissatisfaction with aggressive forms of managed care, employers and health care plans have acquiesced to employee demands for freedom in choosing doctors and medical services.

In 2000, use of PPOs had increased to 60 percent, while use of HMOs had leveled out at just over 30 percent. Prospects for winning further discounts from doctors and hospitals, or limiting provider use of high-cost services, the primary cost control strategies of the 1990s, are dim. Since managed care has already eliminated much of the excesses seen in earlier decades, costs are escalating and employers are asking employees to pick up a greater portion of their health care tab.

Impact on WC

Employers will feel the bite of medical inflation in their cost of providing workers' compensation coverage. Why? If aggressive forms of managed care, as described above, are no longer bringing savings for group health plans, what will happen in the workers' compensation industry, where managed care (due to industry constraints) is, for all practical purposes, a managed care "lite" program? What are the key differences between group health and workers' compensation managed care programs that foster a "managed care lite" approach for occupational injuries and illnesses?

* Medical provider reimbursement: There has been little, if any, use of capitated programs where providers are paid based on number of employees enrolled. While capitation is the financial bedrock for group health HMO plans, workers' compensation continues to focus on fee schedule discounts through the use of PPOs.

* Medical gatekeeper approach: Use of one primary care provider to channel for specialty care is used in nearly all group health HMO and PPO point-of-service plans, they are used very little in workers' compensation.

* Authorization for medical care: In group health, payer authorization can usually be given in a short period of time, if the recommended care is in network and is covered under the plan. Claims administration is a basic check processing function. But in workers' compensation, authorization for medical care must be given by the payer. Time frames are very often lengthy for authorization due to multiple parties working on the claim: nurse case manager, adjuster, etc.

* Employee's financial contribution: In workers' compensation, the employer pays first dollar for unlimited benefits, while in group health, the employee is required to pay deductibles and/or co-pays.

* Return-to-work focus: There is little, if any, focus on return to work in group health plans, while in workers' compensation, it should be a core component.

* Practical protocols and outcomes: Protocols and outcomes data are used routinely in analyzing medical treatment under group health plans; they are just emerging in workers' compensation.

Florida's Experience

The first and only state to legislate a mandate for all employers' use of managed care in their workers' compensation programs is now looking at possible repeal of the mandate, making it a voluntary program. Several other states have legislated managed care mandates, but not to include all employer groups.

In attempts to stem rising workers' compensation costs, Florida mandated the use of managed care for all employers via legislation enacted in 1993. Compliance was not required until January 1997, but many insurers complied within the first three years. Offering managed care programs enabled them to use up to a 10 percent premium discount, which was used as a competitive advantage. The mandate precipitated a tidal wave of business for managed care firms. Currently there are more than 750 managed care programs that have been approved. Florida has been considered a bellwether state for managed care with other states looking to pattern their programs on the Florida model.

Why repeal the mandate? The administrative costs associated with medical cost containment (managed care) are higher in Florida than the seven other high volume states, as reported by the Workers Compensation Research Institute (WCRI) in Cambridge, Mass., late last year. At the same time, average medical costs are the third highest at $4,709 per claim. In addition, litigation and its associated costs have increased--many say linked to inconsistencies in how managed care programs are being administered.

There are several reasons for Florida's high costs associated with medical cost containment.

Medical cost containment costs increased in direct proportion to the managed care statutory requirements for: provider networks, medical care coordination, provider certification, case management, grievance procedures, peer review, second medical opinions, utilization review and quality assurance.

Litigation costs, associated with workers' compensation managed care, also increased due to several reasons:

* Provider network inadequacies in rural areas resulting in treatment delays, while an appropriate out of network provider is selected;

* The required grievance procedures, without standards for consistency; and

* Multi-organizational system at the state level to regulate the managed care program resulted in mixed answers, delays in administrative code changes, and turf battles between agency staff.

Managed Workers' Comp

The jury is still out in Florida. Not until after the legislative session is concluded in May will we know the verdict for managed care but all signs point to a repeal. Perhaps we need to stop focusing on "managed care lite" in isolation and look at a broader perspective.

One of the primary problems associated with any form of managed care is the focus on process versus bottom-line outcomes of claim resolution. Since managed care in group health really has very little meaning for workers' compensation, the industry could refocus efforts on creating managed workers' compensation programs.

Rather than focus on workers' compensation managed care mechanisms, solution-based programs should have real meaning for workers' compensation stakeholders. Here are some ideas as to how this realignment might be structured:

* Prevention and loss control: Reducing frequency and severity of claims is the name of the game for employers and insurers who are truly committed to workers' compensation best practices. An old adage, but so true, if time and money are invested on the front end, far fewer dollars will flow out as direct and indirect costs.

* Identify, use and appropriately reimburse those medical providers who are truly experienced and knowledgeable in treating and returning injured workers back to productivity. What use is a network with thousands of providers if they are not skilled in how to treat and manage workers' compensation injuries? Providers should be reimbursed, not on discounts from outdated fee schedules, but based on their ability to timely and appropriately treat injured workers to facilitate return to work.

* Increase focus on return to work. In Florida's statutory requirements, return to work is used very superficially and buried within text about quality of provider outcomes. The bottom line for workers' compensation is return to work. When employment is not possible with the current employer, timely and aggressive efforts need to be made to find alternative employment.

Gordon Butler, president of Florida-based, Re-Employment Services, states that "through disability intervention, employers and insurers can reduce their costs and at the same time, provide injured workers with good opportunities to break the disability cycle. We are using technology and telephone research to provide comprehensive reemployment opportunities that move claims to resolution."

* The Internet's capabilities have just begun to be used in workers' compensation and provide valuable tools to improve communication between all involved on a workers' compensation claim.

A key benefit from the Internet is its ability to shorten the time frames for decision making, which are often lengthy and cumbersome. For example, authorizing medical care via the Internet could facilitate more timely treatment, which would benefit the employee and, at the same time, help to reduce costs.

Ken Martino, senior vice president with Specialty Risk Services, is convinced that "using the Internet to link provider offices with claim departments for billing, payments to physicians, receiving reports and communicating return-to-work information, will greatly enhance the ability to execute on the fundamentals of the workers' compensation process, reducing the frictional drag, and bring new innovations to the workers' comp system."

* Using outcomes and identifying real loss cost drivers is needed to better manage workers' compensation program costs. Payers must learn what factors are driving costs by state and by industry. Medical benefits paid for treatment by physicians, hospitals, drugs, and physical therapy will vary from state to state.

Analyzing the actual payout by provider type by state gives a much more accurate breakdown of cash outlay and use. Having this knowledge will enable the payer to better formulate claim management programs that are individualized by jurisdiction.

Whatever terms are used to describe managed care within the workers' compensation system, industry stakeholders need to make a more concerted effort to realign their focus.

To curb this current financial crisis, we must move away from viewing "managed care-lite" as an isolated solution and integrate the core components that work for workers' compensation with managed workers' compensation solutions. The good news is that the industry has the knowledge and experience to succeed.

Cathy Johnson is president of HJH Group Inc., a national, independent management consulting and executive/professional search service firm, based in Tampa. Andrea Lewis is an associate consultant with HJH Group and resides in Tallahassee, Fla., and a former staff member of the Agency for Health Care Administration.

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