Workers' comp via managed care: workers' comp insurers that use a managed-care approach may be able to help some small firms cut costs - workers' compensation

Nation's Business, July, 1996 by Roberta Reynes

Workers' comp insurers that use a managed-care approach may be able to help some small firms cut costs.

Three years ago at Robert Carpenter's drywall company near Phoenix, claims for workplace injuries totaled nearly $21,000. But by last year, with 30 percent more employees on his payroll, his worker's compensation claims had dropped nearly 38 percent, to just over $13,000.

It's no secret how Carpenter managed to shrink workers' comp claims at his business, Able Drywall in Peoria, Ariz. He switched to an insurer committed to a managed-care approach to workplace accidents and injuries--the state-sponsored Arizona State Fund, which competes in the private market for business.

And Carpenter is not alone. Nationwide, many workers' comp insurers have adopted managed care as a cost-effective way to treat workers' injuries. That enables small firms such as Able Drywall, with 50 year-round employees, to choose managed care over the traditional approach, which makes no attempt to restrain choice of doctors or cost of care.

Managed care brings to workers' comp the same cost-cutting strategies used in group health insurance--and more. Just as with group health policies, workers' comp insurers restrict employees' choice of doctors, provide case management, and review treatment decisions. But managed-care providers for workers' comp claims must go a step further than other managed-care providers. They must also be concerned with rehabilitating an injured worker to return to work. And they often teach safety techniques that can prevent accidents and injuries from happening in the first place.

So far this decade, more than half the states have enacted laws that encourage the use of managed-care networks to treat workers for job-related illness or injury. The driving force behind the rapid spread of workers' comp managed care is the high cost of medical treatment. Traditional workers' comp provides workers with a virtual blank check for medical care and guarantees they will have no out-of-pocket expenses.

By law, employers pay the premiums, and workers receive treatment at no personal expense. In exchange for picking up the tab, employers get insulation from liability lawsuits stemming from workplace injuries and illness.

Workers' comp coverage has two components--medical costs and replacement of wages lost because of disability. Medical costs have seen the sharpest rise over the past decade. They increased at an annual rate of 15.6 percent between 1984 and 1990, but that rate has since declined to about 5 percent.

Part of the deceleration is attributable to a general decline in cost inflation throughout the economy. But managed care also is credited with playing an important role. David Durbin, vice president and director of research at the National Council on Compensation Insurance, says managed care has had a "very significant impact" on slowing medical-cost growth. The council, based in Boca Raton, Fla., is a leading source of workers' comp data.

Getting injured workers back on the job, even at light-duty assignments until fully recovered, also reduces disability payments by workers' comp insurers. "Research suggests that managed care, through practices like early intervention and preventing the disability mind-set from occurring, gets people back to work sooner," says Durbin. "We're already seeing higher case-closure rates, a strong indicator that future costs aren't going to be as great as projected."

No one knows exactly how many workers' comp insurers have begun to offer managed care since the early 1990s, but industry watchers describe a real sea change. "All companies have a lot more options than a few years ago," says Jane Anderson, editor of Workers' Comp Managed Care, a newsletter produced by Capitol Publications, in Alexandria, Va. "There has been a tremendous increase in the number of providers."

Says Laurence Miller, workers' comp medical director at Community Care Network, based in San Diego and the primary managed-care provider for the Arizona State Fund: "For the first time, the smallbusiness owner is in the driver's seat."

A recent study of one category of managed-care provides--health-maintenance organizations--underscores the point. The number of HMOs offering workers' comp coverage exploded from 17 in 1994 to 72 in 1995, according to a study by Milliman & Robertson, a nationwide actuarial and benefits consulting firm. Self-insured groups, usually composed of small companies, are a prime target for the HMO workers' comp networks.

But HMOs are hardly the only providers wooing small businesses. Major insurers such as ITT Hartford, based in Hartford, Conn., have moved aggressively into this area. The company's workers' comp managed-care program covers about 100,000 businesses with 100 or fewer employees.

Wausau Insurance Cos., in Wausau, Wis., has seen an "explosion" in its Safety Group Dividend Plan program during the past three years, according to Harold Larson, vice president for custom accounts. The plan is geared to small companies bound together through associations or franchise groups.