Yesterday I opined that health care costs are on the way back up, driven by a worsening economy. Premiums will also rise due to cost-shifting by providers seeking compensation for underpayments by Medicaid and Medicare and no payments from the uninsured.

Those providers will also cost-shift to workers comp payers, driving up medical expenses, claims costs, and premiums. Physician income has been stagnant or declining for years, and many docs are struggling to keep the doors open. Here's what comp payers can expect.

As a provider's patient mix (Medicare, Medicaid, commercial, work comp) changes, their income is affected. The price per service is relatively fixed - either by Medicare's RBRVS, the Medicaid fee schedule, their commercial contracts, or the workers comp fee schedule (most states have a physician fee schedule) or their comp PPO contracted rate. A provider seeking to increase his/her income has to either see more patients (pretty tough to do when many are already working sixty hours per week) or figure out how to do more services for the patients they see.

Increasing utilization is the key driver behind rising Medicare costs, with physician service volume up 11.3% in 2006.

Workers comp is particularly vulnerable to increasing utilization, as managed care models actually incentivize networks to drive up utilization by paying networks based on discounts per service delivered. The more services performed, the greater the “savings,” and the more revenue and profit for the network. Everyone benefits from this arrangement; that is, everyone except the payer.

There's already evidence that comp medical costs are on the upswing in California, and my prediction is that true to legend, California's experience foreshadows what we'll see in the rest of the country.

What does this mean for you?

Expect medical to become an even larger part of the claims dollar, expect to pay your PPO network more for the 'savings' they deliver, and expect your combined ratio to deteriorate.