The lowdown on those plummeting workers' comp costs - California and elsewhere - includes related article

Business & Health, April, 1995 by Geoffrey Leavenworth

Events in California and elsewhere are pushing more and more employers toward managed-care solutions to their workers' comp problems. But cost savings aren't guaranteed.

"It's turmoil, pandemonium, chaos, and confusion," says John Keenan, the CEO of a large California insurance agency. He's not reporting on the aftermath of an earthquake, but rather on the aftershock of the Jan. 1 deregulation of the California workers' compensation insurance market. The market is also adjusting to the ascendancy of managed care, a slump in claims over the past two years, and the proliferation of joint ventures and mergers among managed-care organizations and insurers.

For now, employers are benefiting from the upheaval. Keenan, for example, paid about $375,000 for workers' compensation coverage for the 375 employees of Keenan & Associates in 1994. A recent bid for the same insurance: $199,000. "From the buyer's point of view, it's great," says Keenan, whose company is headquartered in Torrance, Calif. "You can probably buy coverage at below cost."

In some ways, what's going on in California is a caricature--a representation with all its features exaggerated--of the current state of workers' compensation nationally. Thanks to new legislation and aggressive marketing by managed-care companies, more employers nationwide are opting for workers' comp strategies and products that give them greater control over the care injured employees receive and the conditions under which they return to work. They're also saving a lot of money. "Early evaluations show that managed-care programs that are aggressively controlled reduce workers' comp costs 20 percent on average, net of implementation costs," says Arnold Milstein, M.D., managing director in the San Francisco office of William Mercer Inc., a New York-based consulting firm.

Meanwhile, more managed-care organizations are branching out into workers' compensation. A 1994 survey of 316 HMOs in 42 states showed that 18 percent offered workers' comp networks and services, while another 33 percent planned to get into the business. Those currently doing workers' comp touted savings on medical costs of 15 percent to 35 percent. The survey was conducted by Milliman & Robertson, an actuarial and management consulting firm based in Seattle.

Risk managers surveyed in 1994 predicted that virtually all medical care for workers' comp claims will be provided through managed-care systems within five years, according to a Louis Harris & Associates study. Almost all respondents were using at least one managed-care technique from a menu that includes "early return to work" programs, utilization review protocols, aggressive claims management, and large-case management for serious injuries and long-term illness. However, while 70 percent were using PPOs for workers' comp, the survey found only 28 percent contracting with HMOs. About 400 risk managers from Fortune 1000 companies with 10,000 or more employees participated in the survey, which was conducted for American International Group, a New York City-based insurance company.

Combined, these statistics forecast an imminent explosion in the amount of workers' comp handled by managed-care organizations. What's happening now in California and a few other hotspots may suggest what's in store for the rest of the country.

SEISMIC EVENTS IN CALIFORNIA

"The workers' comp industry is embracing managed care actively," says David Appel, director of economic consulting at the New York office of Milliman & Robertson, citing California as a particularly interesting case in point. California workers' compensation insurance premiums had been rigidly controlled. Their deregulation, combined with injury frequency rates in 1993 that were the lowest since 1972, has created an intensely competitive market, according to Appel.

"Insurers are quoting prices that are lower than the previous year's loss experience, let alone what was budgeted for administrative costs, taxes, and profit," says Gregory L. Johnson, of the San Francisco office of consulting firm Ernst & Young. "It's hard to make money that way. So the big bet is on managed care. The insurance companies believe they can control losses through alliances with managed-care groups and by offering health care and workers' comp jointly."

But that's not necessarily a safe bet. "Managed care is still fairly new to workers' comp," says insurance broker Keenan. "Insurance companies have great hope that it's going to get them out of this spot that competition has put them in, because in California, 45 cents of each claims dollar is spent on medical care. Those carriers without managed-care partners are scurrying around trying to figure out how to get involved in managed care and 24-hour disability. All this will lead to a lot more mergers--and to some companies going bankrupt."

Three large mergers already have united influential managed-care organizations with workers' comp insurers: Blue Cross of California's Wellpoint Health Network division in Woodland Hills acquired Unicare Financial Corp.; Foundation Health Corp. in Rancho Cordova acquired California Compensation Insurance Co. as well as three large third-party administrators, and FHP International Corp. in Fountain Valley acquired Great States Insurance Co.