Here, in no particular order, are a few questions you may want to pose to the folks who manage your work comp medical dollars. Whether the answers are ‘right’, ‘wrong’, or neither depends on your situation, but regardless of the answer, these are things you should be thinking about.
1. Are your incentives aligned? To know, you’ll obviously need to have a tight grasp on the strategic objectives for your comp program. Minimize cost? Maintain strong employee relations? Avoid antagonizing union workers? Maximize employee productivity? And the follow on question – do your vendors know and understand those objectives, and finally how have they demonstrated that understanding?
This is the foundation for a successful program; if you aren’t starting with the same strategic goal you’ll be constantly battling over direction, focus, resources, cost. The relationship will be time-consuming, frustrating, and ultimately fail. To be successful you, and your vendors, must ‘succeed’ together, or fail together. Here’s an example. If your objective is to manage total program cost, make sure the vendors are aware of their role in that effort, and specifically how their fees add to the program’s cost. Pharmacy Benefit Managers make money on each and every script that flows thru their network, yet several have very effective clinical management programs that reduce overuse of expensive drugs. How does your program recognize and address this apparent conflict?
2. Are their reports meaningful? I’ve seen hundreds of reports from managed care vendors, and only a few have been useful. Most recently, I have been reviewing reports on bill review and network results from a couple of the big TPAs; they include ‘savings’ below billed charges; network ‘savings’ below billed charges, and network penetration as a percent of billed charges.
The continued focus on billed charges as the basis for calculating savings makes little sense. Paying what you are legally required to pay and no more does not create ‘savings’. It’s analogous to your credit card company telling you it ‘saved’ you a thousand dollars by not charging you for fraudulent use of your card.
Savings should be based on cost per claim. How much did you pay for medical expenses – in total and by separate category – and how does that compare to prior years and benchmarks? That’s a big difference from the industry’s traditional view of ‘savings’, which look only at reductions in cost on each line item on each medical bill. That metric is helpful, but it can also be very misleading.
If a claimant gets lumbar surgery at a high cost hospital, which bills you $100,000, and your PPO gets a 20% discount, you ‘save’ about $15,000 – the amount of the discount less the PPO fee.
But lets say the claimant goes to a less expensive, but nonetheless equal quality facility, which only charges $75,000. This hospital happens to be out of network, so there are no PPO ‘savings’, yet your costs are still $10,000 less than the PPO facility.
So your savings reports show the PPO hospital visit creating $15,000 in savings, the non-PPO stay creating no savings, and your medical costs are $10,000 higher. Oh, and your bonus plan and performance appraisal take a hit too…
That’s not to say ‘savings’ reports aren’t useful, but they can divert attention from the key metric – cost per claim. Make sure the PPO reports show savings below fee schedule or UCR, and agree on the basis for UCR as well.
3. Is your utilization review/case management function electronically linked to bill review? My firm conducted a survey of bill review in workers comp earlier this summer, and found that most programs are still not connected. While there are manual workarounds and checks and audit schemes in place at many payers, we all know that they are poor substitutes for automated connections.
After you’ve asked the initial question, audit several cases to determine if UR determinations actually show up in bill review. A couple places to check – PT visits, MRIs, and drugs. Check the claimant’s paid medical records for several months after the initial determination, and look for payment to any provider for that service.
If you’ve decided to buy bill review and UR from different vendors, it is going to be incumbent on you to ensure they are connected; and this is going to cost you. That’s fine, if the benefit is worth the added expense.
These are just a few of the questions that should be on your list, but these should be at the top.

Work comp is affected by several factors, but none are as significant as the economy. After over a year of horrible news, things look to be slowly getting better. As activity picks up, we can expect the comp industry to start breathing again.
Last week the index of leading economic indicators improved again, marked by increases in housing starts and sales of existing homes, and manufacturing hours worked. Things have been on the upswing since April, although digging out of the worst recession since the 1930s is proving hugely difficult.
The employment picture also brightened somewhat in July, but the improvement is an indicator of just how bad things have been. 247,000 jobs were lost during July, the lowest total since last August. Auto sales were also up fifteen percent in the month driven in part by the ‘cash for clunkers’ program, and Ford announced it will actually increase production by 21% later this year.
The big concern has been inflation, which would choke off any recovery; so far, there appears to be no dramatic increase in consumer prices, with the consumer price index flat last month.
Those of us deep in the workers comp business have watched as the injury rate has declined along with the economy; with fewer people working fewer hours, particularly in high-frequency industries such as manufacturing, construction, and transportation, the number of claims ‘fell off a cliff’ during the winter. Moreover, the people who were laid off were the ones with less experience, and the pace of work likely lessened as well.
The drop in frequency hammered many workers comp service firms; with fewer claims, there has been much less demand for claim intake and triage, claims management, primary medical care, physical therapy and diagnostic imaging, medical case management, bill repricing, and utilization review. Provider networks have suffered as well with fewer bills resulting in lower revenues.
The decline in frequency was somewhat offset by a continued rise in severity – medical expenses and wage replacement costs.
Now what?
As economic activity increases, premium volume will increase in line with payroll. That’s the good news – more revenue for comp writers. The bad news – for those comp writers, is the injury rate is likely to jump, and there are no indications that severity is going to decline. We may well be looking at an increase in the number of injuries coupled with higher costs per injury.
The good folks at the NCCI have looked at the impact of economic recoveries on workers comp, finding “Job creation is related to an increase in the proportion of workers who are inexperienced in their current job and, hence, more likely to sustain a workplace injury.”
As firms staff up to meet demand for new houses, cars, and services, the faster pace of work, coupled with the inexperience of the new hires, will likely result in more injuries both in total and as a function of hours worked. Again, according to NCCI, “On net, the effect of job creation dominates quantitatively, thus generating the observed pro cyclical behavior in the growth rate of workplace injury and illness incidence rates. Further, it is shown that the growth rate of frequency tends to overshoot during economic recoveries, although this effect is not common to all recessions.”
In layman’s terms, we can expect a ‘higher than expected’ increase in the number and frequency of injuries. Here’s how this will affect the comp industry:
– Insurers – higher claims volume and higher medical/indemnity expense equals greater losses, which may not be balanced by premium increases. I’m expecting combined ratios to increase this year and next, as premiums tend to lag experience (the continued soft market is a contributing factor, as some comp insurers persist in fighting price wars,)
– Claims organizations – TPAs can’t wait much longer for a better market. Several have cratered, and others are losing business at a scary rate. Many TPAs get paid on a per-claim basis, and the drop in frequency has just murdered their top line, while the increase in severity means they are spending more resources (or not, for those TPAs near death) to manage those claims that do occur.
– Medical providers – The occ clinic companies – Concentra, USHealthworks, and their regional and health system-affiliated competitors, have been hammered by the drop in frequency. These clinics are primary-care focused, and are directly, and immediately, affected by any changes in frequency. Increases in severity have little effect on their results, as more expensive claims are almost always treated by specialists which don’t practice at clinics.
– Managed care firms – While Coventry has continued to increase revenue during the recession, this has been driven by price increases and hard bargaining. Other firms, including Genex, IntraCorp, and the regional players have seen precipitous drops in activity for two reasons. The obvious one is there are fewer claims to handle; the less obvious is many of their customers – TPAs and insurers – have internalized managed care functions in an effort to hold on to revenue and capture whatever margin went to vendors.
– Specialty managed care firms – Companies focused on PT, pharmacy, and especially durable medical equipment and home health care have been affected less severely than other service firms. As the injury rate picks up, they will see more volume, particularly in the areas of PT and pharmacy.
What to watch for
Tracking trends in work comp requires the ability to see ‘over the horizon’; none of the reporting agencies or entities have been able to collect data in real time, or anything close to it. Unless you want to wait for eighteen months, you’ll have to rely on anecdotal ‘data’. Here are a couple potential sources.
– TPAs and case management firms posting new jobs
– Individual company hiring notices, especially in manufacturing, construction, transportation, health care
– Employment statistics, particularly increases in hours worked and jobs created

Today’s NYTimes confirms that the deal struck by big PHRMA and the Administration over drug costs is set in stone; the White House confirmed that they will not go back to drug companies and ask for concessions beyond the $80 billion already promised. House Speaker Nancy Pelosi (D CA) has said Congress is not bound by the deal, but it appears that pharma is safe.
I’ll leave the sticky policy implications for a later post, but for now consider what this means for workers comp.
Recall that the current law of the land prevents negotiations by the Secretary of HHS with drug companies over price. This significantly limits the Feds’ ability to reduce costs, and is somewhat unique as most other of the G20 countries do negotiate directly with drug companies – either for prices directly or via a reference or index price scheme.
With yesterday’s ‘announcement’, the concern that work comp PBMs and payers (should have) had over the potential for a massive cost shift to comp appears allayed. There was significant concern that had the Feds forced the pharmaceutical industry to cut prices (via price negotiations, reference/index pricing, or a mandated Medicare rebate) manufacturers would raise prices charged to other payers – and the softest target out there in most states is the comp industry.
The big PBMs – CVS Caremark, Medco, Express – are all large enough to negotiate attractive deals on their own, and many of the payer-based PBMs would also be able to protect their pricing (or piggyback on deals cut by the big three). Not so for comp PBMs, which traditionally pay higher rates to pharmacies due to the higher handling and transaction costs associated with complying with state regulations and identifying and routing scripts.
What does this mean for you?
This doesn’t mean all is fine in the comp drug world, but it does mean the $2 billion plus industry has dodged a very large bullet.

and if you want to know why, read NCCI’s latest research brief on the decline in claim frequency.
That’s not to say some companies haven’t shot themselves in the foot – repeatedly – with over-hyped expectations, poor service, and lousy results. But the core problem facing vendors big and small is that there are fewer claims to work.
NCCI – usually the ‘first to market’ with real data, informs us that frequency dropped 4% last year, after a 2.7% decline in 2007. My bet is the decline accelerated this year, due to the crashing economy and attendant drops in employment in the heavy-injury industries (construction, transportation, manufacturing).
Lest readers think this is all a bad dream that will turn around with the economic recovery, recall that frequency has been declining for about twenty years, with a total drop of over 55% since 1991. This is a structural issue, a force that overwhelms other, more transient events. Sure we can expect to see a bump in frequency as employment recovers, but that will likely be a temporary situation; after that works its way thru the system, we’ll return to a downward trend.
And yes severity continues to grow faster than the medical CPI (6% vs 3.7%) (my sense is this number is far too low; clients indicate their medical costs are spiking rather dramatically, with some showing medical inflation nearing double digits). But frequency drives the comp managed care business – without claims to work, case managers, bill reviewers, physician advisers, network developers, and their support and management staff just have less to do.
Other key points
Notably, the frequency decline is sharpest in the northeast and midwest (23% over five years), with the west seeing the least (13%). The recent crash of the housing and construction industries likely means the folks ‘out west’ are catching up rapidly.
There’s been an increase in claim severity, but it wasn’t driven by older workers. In fact, the number of permanent and total claims suffered by younger workers increased eight times faster than for their AARP-eligible coworkers.

Implications
The lifeblood of the workers comp managed care business is a continued stream of new claims. In most respects, this is a mature industry, with vendors fighting each other for share; with a few notable exceptions there are no ‘greenfield’ opportunities. Fights for share, in a business that has largely been commoditized, usually leads to concessions on pricing, and then margins decline.
We are already seeing some of this in the PBM business. Although this sector is better protected from the frequency issue than other businesses (along with home health and DME), pricing is getting even more tight as vendors fight for share.
The bill review business is in a bit of upheaval, with payers switching bill review vendors, and bill review companies changing hands, adopting different strategies, focusing on network revenue or concentrating on pure bill review. The drop in frequency is somewhat balanced by the increase in severity (claims cost more), but this historically-competitive business is getting even more so.
The clinic companies are suffering badly. The big clinic outfits, and their regional and local competitors, are the front line of the comp industry, and they are feeling the decline most acutely. Reports indicate that there’s a bit of light at the end of the proverbial tunnel, but this can’t come soon enough.
Network vendors are experiencing a decline in volume that they are trying to make up with price increases. As one might expect, payers are quite reluctant to pony up more dollars for the same service…
TPAs continue to move more case management and related services inhouse; they’ve been just hammered by the combination of the soft market (employers buy insurance instead of going self insured) and claim frequency declines (many price their services on a per-claim basis) and are trying desperately to make up for lost revenue by capturing more managed care business.
The case management/utilization review business is very jurisdictionally driven. The reform in California was a boon (to say the least) for managed care firms in the Golden State. That windfall has kept many afloat as it has led to a dramatic increase in demand for UM/CM services. As that works its way thru the business cycle, expect to see a decline in demand as it is overwhelmed by the frequency drop.
Companies less vulnerable include PBMs and the catastrophic/complex case management services firms. While ‘frequency drives severity’, these vendors usually work cases for years, making them a bit less worried about cyclical issues.
Finally, despite all this gloom, some companies in the work comp managed care space are doing pretty well, thank you. I’m seeing no decline in the level of interest in this ‘space’ on the part of private equity/venture capital firms, and know of several specialty companies that are growing nicely.
There is a wealth of other important information in NCCI’s report; it is available free of charge here.

There is no discussion or intention to include workers comp in any health reform package currently under consideration in Washington.
Let me be even more clear.
No one in the White House or Senate or the House or any staffer or party policy group – mo one even remotely close to the legislative process is in any way shape or form considering, contemplating, evaluating, mentioning or even thinking about workers comp. Comp is not now has never been and will not be part of any health reform program package bill or proposal.
I have no idea where this rumor is coming from, but I’ve talked with several folks who have heard that there is a task force working on this. If there is, they aren’t located inside the Capital Beltway. Ostensibly this is part of some deal involving labor who theoretically will trade giving up on the card check program if the Feds make work comp a national program. I may well have this wrong because labor bosses would sooner give up their mothers fathers and pensions before giving up on cardcheck, much less something as inconsequential as federalizing comp.
And yes, we all know that comp was originally part of the Clinton reform package, known as Title Ten. What you may not know (and I didn’t until Bob Laszewski told me) is exactly one (1) person in DC wanted Title Ten. Bill Clinton. No one else, not Ira Magaziner or Jay Rockefeller or Hillary gave two hoots about WC, but the big dog did.
What is also little known is that the person who deleted Title Ten was none other than Ted Kennedy. And the Senator has not had a change of heart.
Could thus change? No.
As Sen. Ron Wyden told me several months ago, when it comes to health reform, no one wants to pick a fight with anyone they don’t have to.
Will health reform meaningfully affect workers comp?
Absolutely. If – and it’s a big IF – reform passes into law comp will be indirectly affected. I’ve written on this extensively and will be doing so again shortly.
But comp WILL NOT be part of any bill.