Insight, analysis & opinion from Joe Paduda


Interesting item on state WC issues

Tom Lynch’s “Workers’ Comp Insider” blog provides interesting news related to return to work, safety and risk management among other topics. The latest post is a synopsis of state-specific WC news.
A good site to bookmark and check frequently; the archives are a treasure trove of information on these topics.


CMS, the federal agency that oversees Medicare, announced yesterday that it will be increasing payments to physicians across the board effective 1/1/05. The increase will directly affect Worker Comp fee schedules, which (in large part) are based on Medicare’s fee schedule.
CMS’ announcement includes the following:
“The Physician Fee Schedule sets rates for how Medicare pays more than 875,000 physicians and other health care professionals. In 2005, CMS projects that aggregate spending under the fee schedule will increase 4 percent to $55.3 billion, up from $53.1 billion in 2004. The spending increase is due in part to an MMA provision that increased physician payment rates by 1.5 percent, a move that negated a previous law’s planned cut of payment rates by 3.3 percent for 2005.”
We have been telling clients and state agencies for years that basing fee schedules on Medicare is a bad idea for several reasons. Here is a clear demonstration of one of them – the state effectively cedes control over pricing to the feds.
Others include a much different mix of services (comp – musculoskeletal, Medicare geriatric, oncology, cardiac) and completely different communications requirements (none in Medicare, intensive in comp for RTW, care management, etc.)
Here’s the net. Comp insurers and self insured employers will be paying more for physician services (on a unit cost basis) than they did this year. Moreover, with the change from the planned reduction to an increase, the impact is almost 5%.
The news is not all bad for the simple reason that price per unit of service is but one of the drivers of medical inflation in workers comp. But therein lies the rub; with the overwhelming emphasis on price controls in the WC managed care industry, many have neglected utilization and frequency which are significantly more important contributors to medical trend increases.


Geographic variation in medical treatment and costs in Texas

The wide geographic variation in treatment has received extensive coverage in the Medicare and group health arenas, with one of the most-cited studies coming from the Dartmouth Medical School. The Dartmouth Atlas of Health Care uses Medicare data to illustrate the difference in frequency and utilization across states and MSAs, and is required reading for anyone pursuing this subject.
One of the questions raised by the Atlas is “does this variation also occur in other lines of coverage?” While there is not nearly as much data available on this subject, two fairly recent studies in Texas indicate that disparities in cost are not limited to the Medicare world.
The Research and Oversight Council’s (ROC) Analysis of the Cost and Quality of Medical Care in the Texas Workers’ Compensation System provides an excellent (and brief) summary of the two studies, one by the Council itself and the other by the well-respect Workers Compensation Research Institute (WCRI). Of note, the ROC’s study indicates that the average annual medical cost per claim range from $4242 in the Dallas/Fort Worth area to $2835 in San Antonio/Austin.
Undoubtedly this variation exists in other states as well. This raises some interesting issues, including:
–In states with regulated rates, do underwriters select risks based on lower-cost medical areas? If not, why not?
–Can payers focus their managed care efforts on high cost areas and away from low cost areas, and if not, why not?
–What is going on? Are treatment patterns different? Are costs higher? Are injuries or illnesses different? Is there a different mix of providers?
Clearly, medical care is delivered in different amounts, by different types of providers, via different procedures, in different areas. That being the case, why are managed care programs so generic? And could that be one of the reasons why they are both frustrating to the provider and ineffective at moderating health care cost increases?


More on contingent commissions

I recently had a conversation with an attorney at a major insurer regarding the “Spitzer investigations.” When asked his opinion of the emerging scandal, he all but brushed it off, saying “these risk managers knew what was going on all along.”
My reaction was one of disbelief mixed with alarm. Disbelief at the cavalier brush off of what is becoming a rapidly growing scandal, and alarm that this attorney thought it was OK as long as the victims knew they were being victimized. I also felt somewhat na


Fallout from the Spitzer investigations

In the last two days I have been interviewed by two separate publications (Kiplinger’s and Risk and Insurance) regarding the potential impact of the Spitzer investigations into contingent commissions, bid-rigging, and other unethical and inappropriate activities in the insurance industry. Both publications were seeking information about the potential fallout, impact on policyholders and insurers, and prognostication about on whom the next shoe would drop.
Here’s the summary in brief.
This investigation has just gotten started. Garamendi in California and Blumenthal in Connecticut are but two of the other State Attorneys General who are beginning their own investigations.
Although Spitzer started with P&C insurance, the insurance investigations have expanded significantly. Expect to see more subpoenas of life and health insurers, especially those with significant blocks of AD&D, STD, LTD, and life business.
While the life and health industry will be a target, it is unlikely that the practices that have so enraged Mr. Spitzer et al are as prevalent on this side of the business as they evidently are in the P&C world.
Those who pooh-pooh the contingent commission and sham bidding practices by claiming that risk managers and their colleagues knew what was going on are whistling past the graveyard. These are precisely the kind of back-room, clubby relationships that have led to the drastic reforms in the mutual fund and investment banking industries.
There are many other relationships in the insurance world that share similar traits with these alleged offences. TPAs that receive payments from managed care firms, providers that steer patients to their own imaging clinics, and the “percentage of savings” fee system are but a few that come to mind.
Finally, AIG was recently indicted by Spitzer. This was the first indictment directed against a corporate entity rather than an individual. As the Wall Street Journal recently noted, no financial services company has survived an indictment. While it would be wildly inappropriate to suggest that the very existence of AIG is at risk, it would also be foolhardy to think that the company will emerge unscathed.


NCCI prescription drug survey

NCCI recently released the 2004 WC Prescription Drug Survey update. Key findings include:
Rx costs now account for over 12% of WC medical expense, up from 11.8% last year and 10.1% in 1997
Price has overtaken utilization as the primary driver of inflation, although utilization is still a significant contributor
– PBMs are seen as part of the answer, but certainly not all
The survey also notes that three classes of drugs account for 87% of scripts – painkillers, muscle relaxants, and antidepressants, with Celebrex(r) and Vioxx(r) holding down the top and third spot in terms of total dollars paid.
Watch this space for updates on HSA’s Second Annual Survey of Prescription Drug Management in Workers’ Comp(sm). This Survey will expand on the First Annual Survey.


Coventry to acquire First Health

Coventry Health Care announced yesterday it is going to acquire FirstHealth Group for stock and cash equivalent to about $18.70 per share. Coventry is a second-tier managed care company focused on small group, fully insured business, in 15 states.
This may well indicate a change in Coventry’s strategy, as it evolves from its tight focus on small group insurance in limited markets. The acquisition gives Coventry a national PPO for work comp and group, ownership of the federal MailHandler’s health benefit program, and ancillary or related services including PBM capabilities and Medicaid services.
Notably, there were no indications on the part of Coventry senior staff of a desire to retain FH senior management over the long term; while this is conjecture the tone and wording of their statements does not give one the sense that the top layer of FH management is around for the long term.
One interesting question is what will Coventry do with the WC business? Coventry is managed by people who have little past experience with WC, and actually worked for firms that rid themselves of WC subsidiaries (UnitedHealthGroup selling MetraComp and Focus) to focus on core business. My sense is Coventry will leave the WC alone for now, and see what develops – stay tuned over the next six months, as any change in this may happen around the middle of next year.


Oxycontin in WC

Interesting item from Workers Comp Insider today:
There is an interesting convergence of issues concerning the pain killer, Oxycontin. Originally developed to combat cancer pain, Oxycontin has been aggressively marketed over the past three years by its manufacturer Purdue, to the point where the drug is now the pain-killer of preference for work related injuries. This drug is twice as powerful as morphine and, while not technically addicting, it can create withdrawal symptoms when a person stops taking it. According to a study by NCCI, Oxycontin is prescribed for pain in 69% of permanent partial disability cases. This same study also points out that 49% of these prescriptions go to people with back injuries. When you combine that with the next interesting piece of data – Oxycontin is almost always dispensed in 50 day supplies (100 tablets) — you have a potentially volatile mix.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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