I’ve been watching a disturbing trend in workers comp medical costs – they appear to be headed up. New information from California adds fuel to that fire.
The insurance rating board in California has recommended a premium increase of 17.8%, driven mostly by medical inflation – inflation that has caught regulators somewhat by surprise. According to an article in WorkCompCentral (sub req):
“new medical data from 2006 and 2007 convinced the board that an even bigger increase is necessary. The rating bureau says the rate must jump by 10.8% just to cover rising medical costs.
[California Work Comp Insurance Rating Board Communications Director Jack] Hannan said the governing board, in its last two filing recommendations, adjusted pure premium rate recommendations based on an assumption of 1% medical inflation. He said the board believes the inflation trend in medical costs is actually closer to an increase of 5% per year. [emphasis added]
Hannan could not say specifically what area of medicine is spurring the rise in costs, but he said the bureau hopes to have a breakdown by the time the Insurance Department holds hearings on the rate recommendation in September.”
I’ll take an educated guess. Facility costs, with a big push from surgical implants, and a smaller contribution from drug pricing.
After a year of essentially little to no increase in drug pricing, manufacturers raised prices for a relatively small number of brand drugs – few of which are commonly (or ever) used in work comp. But that was a year ago, and manufacturers, stung by flat utilization, are going to have to get top-line growth from somewhere. If they can’t sell more drugs, they’ll have to increase pricing on the pills they do sell.
What does this mean for you?
Nothing good.

A few weeks ago I wrote about the big profits hospitals get from workers comp, and closed with the observation that comp payers are overpaying hospitals. The question is why?
Glad you asked.
Since OUCH (predecessor organization to First Health, now Coventry) first started the work comp network business in a major way (although AIG’s managed care sub had one in the DC area in the mid-eighties, OUCH’s entry really got things going in the late eighties) the business has exploded, with pretty much every work comp payer using a PPO nowadays. The idea is payers get to reduce their expenses and only pay the PPO for ‘savings’.
So, are networks actually saving medical dollars?
Lets run the numbers. National PPO penetration averages around 58-62%, with wide variations among the states (NJ and FL are up above 90% with NY down below 45%). Savings (below FS or U&C but not net of PPO fees) runs about 10-12%, and PPOs charge from 16-23% to their ‘retail’ customers.
Total work comp medical spend this year will be about $32 billion. PPOs are ‘saving’ about $2.4 billion and getting paid about $480 million for that service.
But medical costs in comp are still going up faster than group health medical inflation, and considerably faster than the medical CPI. The biggest contributor to that inflation is facility costs.
According to the latest stats from NCCI, comp medical trend was 6.0% in 2007, 8.6% in 2006, and 6.2% in 2004. By way of comparison, the CPI was 4.4% in ’07, 4% in ’06, and 4.4% in ’05. Anecdotal information from several payers indicates trend is heading up in 2008, with facility costs particularly problematic. And that anecdotal information is backed up by national figures, which indicate facility costs are the fastest growing component of the medical CPI at an annual rate of 4.8%.
In contrast, drugs and supplies were up 0.1 percent in June after dropping 0.7 percent in May. Professional services increased 0.3 percent in June after a 0.7 percent increase in May.
Facility costs in workers comp make up between 35% to 55% of total medical expense (depending on the state) – a pretty significant chunk. As they continue to rise faster than other sectors, that ‘share’ will also rise, making facility costs increasingly significant.
Why aren’t networks able to deliver better results for facilities? Market share. Workers comp makes up less than 2% of total medical costs in the US. When a workers comp network calls on a hospital, the red carpet isn’t exactly rolled out – the managed care contracting department is pretty uninterested in offering a deal to a network that might deliver one percent of their total revenue. While workers comp can be very profitable for hospitals, most facilities look at the revenue numbers and set priorities accordingly.
This isn’t going to change – work comp network deals (with a few minor exceptions) are specific to workers comp. A PPO owned by a group health company may try to leverage the group business when negotiating with a hospital, but get real – the group contract is way more important to the insurer/network than work comp, so when push comes to shove during the contract negotiation process, work comp discounts will be given up to get a better group health discount.
Although there is consolidation going on as one would expect in what is a mature market, there is little in the way of innovation among the larger generalist network vendors. Even though their results are declining, the big PPOs have nothing to gain from innovation, and a half-billion dollars to lose.
What does this mean for you?
Until payers decide they are sick of being pushed around by networks producing increasingly crappy results, this isn’t going to change.

From our good friends at WorkersCompInsider comes this entertaining post on the Massachusetts firefighter/bodybuilder. It’s always great to have a hobby. Especially when one is totally disabled.
Yes, the bodybuilding ex-firefighter is out on disability. Total, complete, permanent disability.
One has to respect Mr Arroyo – He could have given up, resigned himself to a life in front of the TV, with little to look forward to but the next day’s sports pages. But no, in what can only be described as an uplifting (no pun intended) story of perseverance and a willingness to live life to the fullest, Arroyo entered a bodybuilding contest, and competed, just 6 weeks after he was declared fully disabled.

Adding even more drama to the story, Mr Arroyo’s disability was due to an injury to his back suffered when he slipped down some stairs. Unfortunately, no one was there to help him during his time of trouble, or to witness the accident itself.
What’s even more incredible/unbelievable/ridiculous is Mr. Arroyo’s attorney’s statement in response to the recent publicity. Here’s what Attorney Neil Osborne said:”Nothing in his specialized training regiment [sic] for the competition contradicts his neurologist’s documentation of his injuries.” And (this just gets better and better) this was our hero’s sixth injury while on the job.
Here’s a video of Mr Arroyo – got to love the thong.
Oops, late breaking news from another source – this wasn’t a miraculous recovery; it turns out Mr Arroyo has been training for years, has won several body-building contests, and perhaps, just perhaps, his completely-disabling injury is somehow due to his avocation instead of the unwitnessed slip down the stairs.
Just perhaps.

Insurance Journal’s new pub MyNewMarkets has an entertaining piece about the history of workers comp, which according to author Chris Boggs, began back in the days of the pirate.
Boggs does allow opinion to influence his rendering of history – notably he claims former German Chancellor Otto von Bismarck “was not known as a socially-conscious ruler; the working conditions of the common man were not necessarily foremost in his mind.”
I beg to differ.
von Bismarck was nothing if not pragmatic, and the fact that he forced passage of the first national health insurance, pension, and disability legislation shows that if anything, he was extremely socially conscious. Any ruler of a European country in the latter half of the nineteenth century had to be socially conscious, as the locus of power was moving rapidly away from the genetically-chosen elite.
The ones who were not socially conscious (e.g. Czar Nicholas Alexander) didn’t survive very long.
Other than that difference of opinion, the piece is well done and provides a brief intro with a promise of more to come.