Pushing a revolutionary agenda: legislation in California has opened the door for a new paradigm in the workers' compensation medical model. But to inspire this change, we need to ask some hard questions about our current discount-provider networks

Risk & Insurance, July, 2005 by Maddy Bowling

Workers' compensation medical costs continue to rise at double-digit rates, reaching such sky-high levels that they all but wipe out the reduction in the frequency of workers' comp medical claims. Why?

Fundamentally, it's because the system's current medical model operates with the wrong motivation: to manage unit costs rather than keep total costs under control. There is little regard for how quickly the injured worker recovers and is back on the job. The preferred-provider networks that form the core of this medical model focus on unit-cost discounts rather than ensuring the patient gets to the right doctor for the right type of care for the quickest recovery. In fact, the medical providers' pricing and discounting structure can be manipulated to speed the rate of medical cost increases rather than restrain it.

But there is another way.

The comprehensive changes in the California workers' comp laws now give us the chance to reshape the delivery of health care in the workers' compensation marketplace by testing new ideas and even lessons learned from the group health care model.

Most of us would probably agree that in the management of our own health care, the two highly interrelated keys to maintaining our well-being at reasonable medical costs are our attitude and the quality of our physician.

Is it any different when an employee experiences a work-related injury? Those of us enmeshed in this workers' comp system have known for some time that medical and return-to-work costs and quality outcomes are very dependent upon employee attitude and the quality of the physician. Every stakeholder in the workers' comp system would agree that all aspects of this system work better when we "get the injured employee to the 'right medical provider' at the right time."

This, however, does not describe how our workers' comp system operates. Our workers' comp medical costs are neither reasonable nor trending downward. According to the most recent State of the Line Report from the National Council on Compensation Insurance, our medical costs continue to rise at double-digit rates. Additionally, there is clear evidence nationally that the continued cost hikes are driven by usage increases of both medical services and pharmaceuticals rather than unit-cost increases, which raises quality concerns as well. Clearly, our workers' comp medical model is not working.

The current model is primarily built on the premise of large broad-based discount networks where each medical transaction is discounted below the state-regulated fee schedule or the location's usual and customary rate. Discount networks have existed for 20 years, accompanied by penetration reports (the medical transactions or charges from a PPO-contracted provider that receive a discount) and savings reports (the dollars "saved" due to the PPO discounts-per-procedure code).

Most workers' comp payers experience a charge penetration of more than 50 percent (meaning a majority of their total medical charges were billed by PPO-participating providers) and see PPO savings of approximately 3 percent to 5 percent off originally billed charges. These PPO savings are in addition to the bill-review savings that result from repricing the medical bills to the state fee schedule or the usual and customary amounts (which typically generate savings of at least 35 percent to 40 percent off originally billed charges). While savings of 38 percent to 45 percent sound impressive, the industry reports indicate medical costs are not abating, begging some important questions:

* Although they are easy to measure, are savings from bill review and PPO discounts truly meaningful measures of how we are doing?

* Are the unit-cost discounts from PPOs saving us medical dollars, or have the system players become adept at manipulating our perceptions of medical savings?

* Can participating PPO medical providers offset their agreed unit-cost discounts, and therefore not really produce real-dollar savings, by increasing medical utilization (more visits and/or more services per visit)?

* By definition, broad-based discount networks seek to include as many providers as possible for higher charge penetration and savings results, but are these the providers who deliver the best workers' comp outcomes?

* Are the medical providers' financial incentives aligned with the claims outcomes we seek: lower loss costs and quicker, sustainable return-to-work rates?

* Finally, given all of these questions, are we prepared to move away from bill-review savings and broad-based unit-cost discount networks?

When California passed SB899 in 2004, allowing employers to not only create networks of medical providers for their employees' work-related injuries but additionally to economically profile these providers, it set the stage for an industry paradigm shift from broad-based unit-cost discount PPO networks to outcomes-oriented employer-specific networks composed of the right medical providers.

We have been given an opportunity to change the workers' comp landscape to achieve a medical model in which every aspect works better because we "get the injured employee to the 'right medical provider' at the right time" and medical provider financial incentives align with outcome expectations.