Comp Medical Management: Study Profiles Runaway Costs, Weak Results

A recent study by the California Workers’ Compensation Institute (CWCI) could lead a reader to some startling conclusions.  At first glance one is tempted merely to conclude that comp medical management isn’t working.  But it may be even worse than that:  vendor incentives for claims and medical services appear to be profoundly out of whack.  From a vendor incentive perspective, medical management is in the same place mortgage lending was two years ago:  You make more money doing a bad job than a good one, and there is no penalty for failure.

CWCI VP Alex Swedlow summarized their findings in a recent press release:  “Ultimate projected workers’ comp medical costs per claim increased 55% from 2002 to 2008, reaching $36,849 per claim.” Yet costs for medical management are rising even more quickly.  Expenditures for these services more than doubled as a percentage of medical during the same period – from 4.9% to 11% of all medical costs.  (The raw figures are $312 per claim in 2002 vs. $784 in 2007.)

One is tempted to think of the Russian Revolution, where the families of people shot by the Soviets were charged for the bullets.

Medical management defenders have always argued that greater economic forces are at work, and that medical costs would have been even higher without these techniques.  While difficult to prove, such arguments sometimes have merit.  My suspicion is that these techniques were more effective in the 1980s than they are now, and that the inflation we’re seeing is building on a somewhat smaller cost base than we would have seen otherwise.  (It’s an interpretation modeled after William B. Schwartz’s Tufts studies of the overall health economy in the late 1980s – and Schwartz is no managed care fan.)

But even that generous assumption could be wrong.   It may be that whatever cost savings effect comp medical management once provided is long gone.  Either way, it now seems that traditional medical management techniques have a lot of explaining to do.

As for the increase in these costs, it’s hard to defend.  If medical management costs had simply grown with comp medical inflation they would have seen a 55% percent increase in revenue per claim over five years – a healthy rate of growth.  Instead they’ve been outpacing medical inflation, and their per-case revenues have grown 2.5 times over that period.  (Granted, case volume is down, so their aggregate revenue has not grown at the same rate.)

It’s difficult to see how this story could have turned out much differently, given the incentives now in place.  Insurance companies tend to over-rely on medical management, without conducting in-depth studies to determine if it works – or, if so, which cases could respond well to these techniques.  Claims departments are not typically measured for their success in managing these costs.  In fact, I’ve seen claims shops where adjusters routinely overload case management nurses with files – just to take the caseload off their own desks.

The TPA situation is even worse.  The majority of TPAs mark up medical management services and keep a percentage of revenue for themselves.  Under that model they make more money if medical management costs skyrocket.  Why would they control these costs?  Nursing, bill review, and PPO organizations each benefit from greater volume – of RN hours or medical treatments – and greater costs.

It’s a system of perverse incentives, one that employers and the general public have failed to note.  At what point does a backlash become inevitable?

The Impact of Reform on California Workers’ Comp Costs

The Workers’ Compensation Insurance Rating Bureau has released its results on 2006 workers’ compensation costs in California. Reform has saved a great deal of money, as predicted. What’s interesting is where it’s saved money.

Estimated ultimate total loss per indemnity claim is down from the $48,000 range in 2000-02 to $39,851. But most of that savings comes from the indemnity side. Ultimate indemnity’s down from the $20-22,000 range to $13,640. But ultimate medical isn’t down at all. It was $25,567 in 2001, and $26,309 in 2002. But after a u-shaped dip, it was back to $26,211 in 2006.

Hospital payments were down more than 17% from 2005 to 2006. Pharmacy and physician payments dropped slightly in the same one-year period. Total medical was flat for the two years, so cost drivers for this high ultimate medical costs lies elsewhere. (Where isn’t obvious from the available data.)

There is much higher usage of medical networks, from 33% in 2002 to 62% in 2005. That was expected, too. What the report doesn’t state is whether networks themselves had any impact on utilization, or whether their effect was primarily limited to reducing the unit cost of services provided.

Indemnity claims frequency is way down from the last decade, but there’s no reason to assume that the change is driven by reforms. (At least, to my knowledge.)

Physical therapy utilization dropped 66 percent, and chiropractic utilization 82 percent, but both these were the expected result of reforms. The number of medical visits per claim dropped, although the percentage changed based on fee schedule and diagnostic variations. Overall, the number of visits per claim dropped by 9%, whereas visits per claim were increasing at a significant clip before reforms.

It’s reasonable to assume that this reduction in the number of visits also reduced case durations, and therefore had a ‘shadow effect’ that drove indemnity costs down as well.

What’s next? Pushback from the California Applicants’ Attorney Association, for one. Their arguments, especially against reductions in permanent disability costs, may get a sympathetic hearing now that results are so much better for the insurance industry.

What hasn’t changed? Loss adjustment expenses haven’t gone down. That means it still costs the insurance company just as much to administer a claim as it did before. That’s the least surprising result of all.