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What’s happened to work comp regulation?

In response to my post on payers shifting medical management strategy decision-making from experts to non-experts, a long-time friend and colleague provided his perspective. With forty years in roles ranging from regulator to compliance consultant to operations exec for payers, states, vendors and employers, he has a depth of knowledge that demands your respect and attention.

Here’s his view [with my edits for clarity]

Over the last several years states have continued to outsource their medical management policy development and implementation. 

Initially this was in the area of treatment guidelines, which seemed logical because states could not afford the staff to develop they type of canonical studies necessary to develop treatment guidelines.  That evolved into the medical fee schedule arena, first as states shifted to Medicare-based fee schedules, with regulators adjusting reimbursement up because of the nature of workers compensation. Over time, many outsourced this to a third party vendor because the state no longer had the resources to develop, update, distribute, and manage fee schedules and the schedules’ associated rules.

This all centers around the budget restraints that states are currently experiencing. 

While most of the administrative agencies are funded by a premium or dedicated tax, legislators tend to ignore that reality and/or fail to make that distinction in reviewing budget requests. [Whether it is the new-found “Cut Taxes!’ orthodoxy or just ignorance, the effect is the same] Across the board, budget requests are denied if additional resources are requested.  More troubling, state agencies are frequently required to down size staffs because of budget short falls [due to declining tax revenues].  All agencies pay the same price; an X percent reduction in the agency budget, and year after year this takes a toll. 

The result is states outsource functions that were traditionally handled internally. Lately there’s been an increasing need for medical management policy development [physician dispensing, formularies, evidence-based clinical guidelines, network adequacy are just some of the areas]. Those states that have sought to meet this need have often had to shift the costs to the payer community, commonly in the form of licensing fees.  Costs have increased but budgets for the states have not, sort of a taxation with out representation. 

Many states have lost key staff with their historical experience and medical knowledge, thereby forcing the regulated to get their answers from the litigation process rather than guidance from the state as to the intent and meaning of the regulations adopted. 

Inevitably, carriers and employers are facing rising costs in administering a workers’ compensation claims.   More to the point, Increases in unallocated loss adjustment expense are harder to recover via rate increase requests than direct loss claim costs i.e. indemnity, medical etc.

In rate hearings attended early in my career I repeatedly observed Commissioners acknowledge direct loss costs but not allow for the full amount of increase tied to unallocated loss adjustment expenses. (the other area that commissioners attacked was trending assumptions that the carriers made.)  Since unallocated loss adjustment expenses are a fixed amount and the carriers are unable to recover those costs through rate adjustments at a pace that is equal to the actual increase in those costs, the carriers are forced to find ways to cut unallocated loss adjustment costs

Here’s the key takeaway.

There are two ways to do this: bundle all medical management into a package and low ball the prices paid to vendors.  Or, in the case where the carrier has retained reputable medical management staff, simply eliminate the department and all of the high-dollar qualified staff and outsource to vendors, adding the expense to claims costs. 

True you may get a work comp program that does not do a good job of reducing lost costs but that is really not a bother as loss cost increases are the easiest to recover.  This will mean higher rates to employers but it will gain profitability for the carriers and keep their shareholders happy. 

My take – What does this mean for you?

Before you complain about taxes or government inefficiency or “incompetence”, you’d do well to actually think about cause-and-effect.

4 thoughts on “What’s happened to work comp regulation?”

  1. Joe, thank you. Your source and your observation, “True you may get a work comp program that does not do a good job of reducing lost costs but that is really not a bother as loss cost increases are the easiest to recover. This will mean higher rates to employers but it will gain profitability for the carriers and keep their shareholders happy,” corroborates the point we here in California have been trying to make for many, many years. Some have begun to coin a term akin to Eisenhower’s “military industrial complex” to describe how the managed care industry’s consolidation and pervasive nature have raised costs with no true value delivered – except the occasional fee splitting, no better outcomes for injured workers and no real accountability for results. One might add to that scenario the rapidly diminishing chance of creating any. Good work!

    1. Steve
      Thanks for the note.

      A big part of the expense in your state of California is due to a small number of docs who are flooding the system with ur and Imr requests despite repeated denials due to lack of clinical support for the treating docs’ requested services. The close affiliation of some WC docs and applicant attorneys may be a factor as well.

      1. No doubt. However the increases caused by that situation whether measured in absolute dollars or percentages while contributory is not driving the statistics being reported. You’ve reported on this. There is much, much more going on.

        1. Steve – I disagree. There is no question the abuse of the UR/IMR process by a relatively few docs is absolutely and significantly driving up costs – not only for the UR-specific costs, but delays in return to work and associated expenses. And let us not forget the many examples of dangerous medical practice that have been halted by IMR.

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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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