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Specialty Managed Care in Workers' Compensation
No industry has been hit harder in recent times than Workers' Compensation insurance. A combination of poor underwriting practices, low rates, low investment returns, and inadequate claims management caused the industry to pay out $1.21 for each dollar of premium collected in 2001. This 121 percent combined ratio (including losses and loss adjustment expenses), while not an all-time high, is certainly among the worst financial performance statistics experienced in recent memory. And 2002 results are not looking any better. The key driver of these horrendous losses appears to be medical cost inflation. For a variety of reasons, Workers' Compensation has been hit hard by increases in the cost of services, the volume of services, and the intensity of services provided to claimants. The result medical costs for Workers' Compensation are increasing at an annual rate of 15 percent.
Many Workers' Compensation insurers and third party administrators (TPAs) have been surprised by the renewed virulence of medical inflation. They had all adopted essentially similar medical management programs consisting of large networks of providers delivering care at discounted rates, some form of medical bill review (automated and manual edits and processes designed to only pay for medical costs appropriate to the Workers' Compensation condition), some form of pre-certification of medical procedures and both telephonic and on-site, or field, nurse case management. If this sounds similar to the group health industry of 1995, its because it is. And, just as the group health industry had to evolve away from these generic models, the Workers' Compensation industry is learning that the tried and true methods are no longer working.
Before we delve into the solutions that are beginning to be employed by the leading Workers' Compensation firms, we first need to understand why the present solutions are no longer effective. But first, a primer on Workers' Compensation in general.
Workers' Compensation insurance has been required in all 50 states (Texas employers can opt-out within specific limits) and the District of Columbia since the 1910s. It covers injuries or illnesses to employees arising out of or in the course of employment. Claimants medical expenses are covered in full, and their lost wages (up to state-set maximums) and other costs are covered as well. Although it was originally designed to end litigation, Workers' Compensation has become a boon to defense and plaintiff attorneys in many states as claimants seek legal assistance to protect what they view as their rights.
Workers' Compensation is highly regulated and very state-specific. There are remarkable differences between and among states in such areas as the amount of wages that are reimbursed; who determines which physician(s) is used by the injured worker; what determines medical necessity; the amount payable to the medical provider for any procedure; and the requirements for establishing the existence of and value for a permanently disabling condition.
Employers can purchase Workers' Compensation insurance from an insurer or in many states they can self-insure if they are large enough and comply with state requirements. Some states, such as Ohio, Washington, and West Virginia are monopolistic. That is, the state runs the Workers' Compensation insurance program to the exclusion of private insurers.
During much of the early and mid-1990s, Workers' Compensation insurers were experiencing healthy returns. Injury rates were declining, medical inflation appeared to be under control, and state regulations were friendly to managed care in Workers' Compensation. The booming economy also helped ensure employers were motivated to bring injured workers back work as quickly as possible.
In addition, most insurers and TPAs (Third Party Administrators) had invested significant resources in both internal, and external, managed care programs comprised of networks, bill review systems, and medical management programs. Many of the internal managed care programs had evolved into profit centers, generating significant positive cash flow for their parent organizations in the form of fees for medical management, per-bill charges for bill review, and a percentage of savings charged for access to PPOs. Similarly, the managed care vendors had grown large and profitable on these fees and charges.
This happy world came crashing down in late 2001 and early 2002. The post 9-11 financial difficulties of the Property and Casualty insurance industry contributed to this downfall, as did the slowing economy and pricing practices of Workers' Compensation insurers in the late 1990s. Simply put, many insurers, led by very aggressive carriers in California, cut prices too far too fast. Many of those carriers, such as Superior National, Fremont, and Golden Eagle, have paid the ultimate price for their lack of judgment and are no longer in business. Perhaps the most important single contributor to this crash was a newly reinvigorated health care inflation problem. Workers' Compensation medical inflation, long deemed to be wrestled into a box and locked in a closet, burst out meaner and nastier then ever.
In the face of this, many insurers and Third Party Administrators (TPAs) were forced to review their present programs and assess their results. The results have not been encouraging. In fact, many large Workers' Compensation insurers are experiencing a decline in the savings delivered by their large networks coupled with an increasing resistance from providers to pre-cert and retro-active bill reduction programs. In addition, medical line items such as pharmacy, long viewed as a trifling issue, have become significant drivers of total medical costs.
The reaction of some insurers and employers has been so much for the promise of managed care. Others, more aware of recent history in other parts of the health care economy, have adopted a different perspective. These payers recognize that what worked in the past wont necessarily work in the future. This is as true in managed care as it is in electronics, telecommunications, and medicine.
Clearly, the large generalist Workers' Compensation managed care firms have served well up till now. While there is some disagreement about their real effectiveness, they have been able to demonstrate significant PPO savings and publish attractive ROI statistics for bill review and case management. Unfortunately, generalist firms appear to have run their course. Across the nation, Workers' Compensation payers savings levels are actually declining while network penetration rates are leveling off. This is especially true in key states such as Texas and California, where providers have become much more aggressive in negotiating with Workers' Compensation PPOs. Meanwhile, a whole new branch of the industry has grown up almost unnoticed, and is now poised to take over a significant share of the Workers' Compensation managed care market.
Specialty managed care companies are the next generation of Workers' Compensation managed care. They represent an evolution from broad and general approaches to a deep and narrow focus. Traditionally, generalist firms provided a full range of services such as networks, bill review, telephonic and field case management, and related services across several, or most markets, to carriers, TPAs, and self-administered employers.
The generalists value proposition is based on the idea that integrated services are easier to administer and deliver better overall results, than fragmented services. While a generalist may not provide the best network in every state, have the right skill set to manage every type of Workers' Compensation injury, or incorporate the latest bill review technology, their overall results and ease of use overcame these shortcomings.
Until recently, payers felt the challenge of working with multiple vendors outweighed the benefits inherent in specialty companies tight focus and special expertise. The recent startling growth of specialty managed care firms proves that many Workers' Compensation carriers, employers, and claims payers are revisiting that calculus and finding that specialty Workers' Compensation managed care programs are highly cost-effective.
Specialty managed care companies concentrate on a geographical area, type of care or provider specialty, such as the management of physical therapy, pharmacy or radiology. They may know a particular state, or a type of provider, better than anyone. They may have networks, bill review, and/or case management and referral management, or just one of these services. Their expertise and focus enables them to deliver outcomes, defined as improved patient functional status, and to lower costs. These are significant improvements over those results delivered by their broad-based competitors. However, unlike the broad-based managed care firms, they make a point of their specialty, concentrating their efforts where they have expertise.
The tight focus has been their strength. It has enabled them to avoid the problems of generalist firms. Freed from having to manage every case, specialists can concentrate on those cases where their experience tells them they will have the greatest impact.
There are two general types of specialty firms; those that are geographically focused and those that concentrate on a type of care or type of provider.
Geographically Focused Specialists
Typically, geographic firms provide network access bill review and case management in a state or region. Their local knowledge and presence has several advantages:
- Strong market share provides good negotiating leverage
- Local experience helps identify providers that are most attractive, lending credibility to the network
- Deep knowledge of state regulations and the legal environment is invaluable to adjusters and assists in negotiating the often byzantine regulatory approval process
- Strong ties to and knowledge of the provider community enables them to negotiate more intelligently and effectively, driving down costs and delivering the best providers
- Ability to work with local claims and policyholder staff to educate them on and interface with the provider community
- Local knowledge ensures they are on top of changes in the health care community; mergers, alliances, and ventures that will impact patients and insureds.
This local knowledge is more important today than at any time in recent history. Significant changes are occurring in the Workers' Compensation environment: changes to Workers' Compensation fee schedules, regulatory approval processes and requirements, Workers' Compensation insurance rates, and managed care regulations. If caught unaware, a Workers' Compensation insurer could find itself selling insurance at a rate too low to offset increases in medical costs due to pending changes in the Workers' Compensation fee schedule. With feet on the street and ears to the ground, specialty managed care firms are likely to be apprised of, and even participating in, regulatory discussions that generalist firms based across the continent are not even aware of.
Examples of strong local firms include Choice Medical Management in Florida, MagnaCare in New York City, and HFN in Illinois. While these are three very different firms, all enjoy strong market share positions, effective networks, and locally expert staff, and deliver excellent results.
Focused solely on Workers' Compensation, Choice is a certified Florida Workers' Compensation Managed Care Arrangement (MCA), and is one of the top three MCAs in the state. The company offers a proprietary Workers' Compensation-specific network, telephonic and field case management services and bill review. Based in Tampa, Choice has strong relationships in the state capital, relationships that are critical to keeping Choice, and Choices customers, apprised of the rapidly changing regulatory environment. Florida is one of the largest states in terms of Workers' Compensation premium, and is one few large insurers can choose to ignore as their national customers are likely to have operations within the state. More importantly, Choice is able to rapidly interpret impending changes, modify programs and processes accordingly, and thus keep its customers in compliance with key regulations.
One of the more challenging situations in the state has been brought on by a fee schedule that is some 13 percent below Medicare reimbursement. Unsurprisingly, there are not many physicians that are willing to accept a discount below what is an already inadequate reimbursement level. Unfortunately, most Workers' Compensation PPOs make their money on the savings they create below the fee schedule. This has led to a situation where fewer and fewer physicians are willing to participate in Workers' Compensation, much less provide a discount. Fewer physicians mean less care is directed into the network which produces poorer results for comp insurers.
Choice recognized this situation some time ago and began pricing network services on a flat-fee basis. This has not only removed a barrier to contracting with key providers, it has enabled Choice to sign agreements with providers that refuse to participate in any other Workers' Compensation network. These providers include key orthopedic surgeons, neurologists, hand surgeons, back specialists, and other specialties critical to Workers' Compensation. This simple solution seems to have escaped the other MCAs in Florida, most of which are offered by large national firms.
MagnaCare is primarily a group health HMO and PPO in the New York City area. MagnaCares exceptional provider discounts in the metro area make it an attractive partner for large employers with significant populations around New York. In addition, as MagnaCare serves a large union population, its providers, operating practices, and name are well recognized by workers that are more disposed to on-the-job injuries than their white collar colleagues. These advantages have positioned MagnaCare well to provide Workers' Compensation PPO services in and around New York City.
MagnaCare enjoys another advantage that results from its long experience in the state. The companys experience with an Alternative Dispute Resolution program has enabled it to carve out an exclusive niche in providing these services to labor-management entities. This program, which grew out of its long-standing good relationships with a labor union, provides a very attractive alternative to Workers' Compensation at a time when employers are actively seeking creative approaches.
No matter how attractive a national solution may be to a national employer, the solution has to work on a local level. In both instances, local knowledge, local relationships, and local understanding have enabled these firms to deliver solutions that specifically, and uniquely, address local needs.
Specialty Firms
Unlike geographically focused companies, specialty firms concentrate their energies and resources on a type of care or specialty and likely operate in several jurisdictions. They may work in the imaging, physical therapy, or pharmacy sectors, to name a few. Wherever they are concentrated, effective specialty firms have several common features.
- A recognition that value must be delivered to both payers and providers
- Providers benefit from access to proprietary technology, billing management, connectivity, medical guidelines, and/or cash flow management tools
- Unique or specific business models that are highly relevant to their niche, with reimbursements that are significantly lower than their competitors
- Extensive in-house clinical expertise in their field
- Highly effective technology solutions that enable integration of their program into broad-based programs
- Strong data collection, analysis, and reporting orientations
- Medical management programs that address the unique nature of their specialty; e.g. DUR for pharmacy; utilization management tools for PT.
Examples of specialty managed care firms are MedRisk, a musculoskeletal specialty company in 19 states; and Express Scripts Inc. (ESI), a national Pharmacy Benefit Management company with Workers' Compensation-specific networks and deep discounts. Both firms are technologically savvy, have dominant market share in their niche, and strong relationships with their affiliated providers.
Pharmacy has recently become a very significant contributor to Workers' Compensation medical expenses. According to the National Academy of Social Insurances 2001 Report on Workers' Compensation, total Workers' Compensation medical expenses were some $28 billion. Of that total, approximately seven percent is pharmacy, an average of over $500 per claimant (ESI 2002 Workers' Compensation Report). With medical costs in Workers' Compensation increasing at an annual rate of 15 percent (NCCI 2002 Fall Report), prescription drugs will likely account for some $2.5 billion in total expenses in 2003. Pharmacy will be even more expensive, as it represents the fastest growing segment of the Workers' Compensation medical dollar with trend rates in the high teens.
While several of the larger Pharmacy Benefit Management (PBM) firms have dabbled in the Workers' Compensation business, ESI is by far the largest, and most successful in the sector. The company has developed a proprietary network of over 38,000 pharmacies specifically contracted for Workers' Compensation. This network delivers discounts in excess of 15 percent below the Workers' Compensation fee schedule. Key to the program is the Workers' Compensation contract. Most pharmacies will not allow Workers' Compensation prescriptions to be processed under a group health contract.
This is one situation where size really matters. As the nations largest independent PBM, ESI has significant buying power and the ability to negotiate strong discounts with pharmacies and the name recognition that is critical to program success. With over $2.5 billion in Workers' Compensation pharmacy charges annually, this represents a small fraction of the total prescription drug volume estimated to be over $115 billion in 2003. Therefore in order for a Workers' Compensation PBMs prescription to be recognized by the pharmacist, it is almost imperative that the PBM have significant group health market share. Without that recognition, the pharmacist will not know whom they should bill; be able to identify any special formulary requirements or other restrictions; or even identify if the patient has coverage. The result, the patient is likely to be asked to pay the bill they and submit it to the carrier or employer for reimbursement at full retail. According to ESI, the national average cost for a Workers' Compensation prescription was $64.38 but full retail is likely 20+percent higher than that figure.
Almost as important in the Workers' Compensation pharmacy world is drug utilization review (DUR). While DUR is certainly common in group health circles, DUR in Workers' Compensation has characteristics all its own. For example, PBMs must be able to assess the relativity of the prescription sought to the Workers' Compensation condition. If the patient is seeking an asthma drug and the Workers' Compensation injury is a cut hand, then the PBMs DUR program must catch that and, through communications with the adjuster, determine what to do.
Physical Medicine Management
According to the Workers Compensation Research Institute, physical medicine in Workers' Compensation accounts for some 20 percent of medical expenses, or approximately $7 billion in 2003. Generalist firms contract with physical therapy (PT) providers on a discount-below-fee-schedule basis. However, unlike most medical care, physical medicine in comp is an anomaly. It is not a price-per-service issue, but rather a volume of services problem. Therefore, the way to control costs is not to seek a discount on each service but to cap total costs through controls over the volume of services delivered.
MedRisk, a specialist focusing on managing physical therapy, employs an integrated approach incorporating EPO, PPO, and utilization review programs. MedRisks EPO has a proprietary reimbursement methodology that delivers a cap on the total cost on a daily basis, as well as on the total potential cost of a case. Therefore, employers save on those cases that only require a few PT visits as well as those that require extensive physical therapy. It is not uncommon for employers to experience cases with over 100 PT visits. By any measure this is wildly excessive. Unfortunately, without a contractual cap, there may be little the payer or employer can do to limit this expense.
To gain acceptance from the EPO provider community, MedRisk has had to do more than just deliver additional patients. The company has built electronic links to streamline bill and treatment note submission to the providers. These links have enabled providers to check their Accounts Receivable on-line through a secure website and developed proprietary physical therapy treatment guidelines that can be accessed by providers to enhance treatment.
The EPO is supported by PPO contracts and utilization review. MedRisk has developed relationships with other managed care firms so MedRisk customers can access their contracted PTs for those patients seeking care outside the EPO. This delivers additional savings to the employer or carrier. Volume of service issues are addressed by a physical medicine-specific UR program. This program employs clinical guidelines developed and continuously updated by MedRisks Expert Clinical Benchmarks subsidiary to manage utilization proactively. By working with the claims adjuster, overall nurse case manager, treating physician and physical therapist, MedRisk is able to educate all parties as to the best course of treatment given the patients condition, treatment history, demographics, and other factors. When necessary, back up information is provided to the therapist along with best practices from medical literature.
Because MedRisk captures the entire episode of care in the form of bill history and clinical notes, the company has a robust database of physical therapy experience in Workers' Compensation. This database is used to enhance and validate the clinical guidelines and for other internal research purposes. This increases the company's expertise and enables it to improve present practices and develop new approaches as physical medicine evolves.
Obstacles
While the case for specialty managed care in Workers' Compensation is compelling, old habits, legacy systems, and inertia can be difficult obstacles. In actuality, there are several obstacles that do bear discussion, as they represent significant, and real barriers to the implementation of specialty managed care programs.
Systems Interfaces
Many Workers' Compensation payers operate, at least in part, on legacy systems. In large part, these systems limitations have been the reason that adoption of specialty managed care programs has not been more rapid. Integrating bill review data exports into claims engines can be cumbersome, complex, and very resource-intensive. Therefore, carriers and other claims-payers can be reluctant to switch bill review vendors, or to work with more than one or two.
Similarly, payers are unwilling to work with multiple networks due to provider file transfer issues. Reimbursement issues multiply with each additional network. Most payers have sought to work with a few networks and have asked other networks to work through an existing vendor. This eliminates some of the work for the payer but it forces competing networks to choose to either work together or lose access to a payers business. While the payer may not care what happens in the short term, by forcing would-be competitors to collaborate, the payer may be inadvertently encouraging the networks to create alliances with non-compete provisions that could ultimately reduce the payers network options in the future.
While these issues may seem daunting at first blush, many specialty companies have developed processes and technologies that have reduced or eliminated concerns about connectivity and systems interfaces. In addition, newer claims and bill review systems have increased the ability of payers to add and delete networks while decreasing both the number and severity of issues associated with these changes. Many carriers and bill review entities hide behind systems issues as a means to maintain their control over the payers managed care program.
Similar, but less significant systems interface issues also arise when considering multiple case management/IR relationships. These issues are usually much more easily addressed. As they are primarily feeds of claim demographic data to UR/CM systems, updates of CM/UR notes downloaded to claims notes, and feeds of UR findings to bill review and claims systems. These can be accomplished through double entry (certainly undesirable, but surprisingly common), cut-and-paste of notes, and data export programs.
Contractual Issues
Many Workers' Compensation insurers have allowed their large national managed care vendors to put them in a contractual box by signing contracts that give exclusivity, in some form or other, to the vendor. Leaving aside the question of who is the customer and who is the vendor, there are usually ways for employers and carriers to remedy this situation. Frequently the payer requests the national vendor work with the specialty company. In most cases the national vendor can benefit from this relationship because their savings will be greater, and therefore their fees will be higher.
Another method is to look for provisions in the contract that allow for use of risk sharing or risk taking by providers or other entities. As many specialty managed care firms have some form of risk sharing in their provider reimbursement methodology, this may be a loophole that allows use of a specialist program.
Finally, and perhaps most importantly, is a request from the payer to the present vendor to allow an exception. If the vendor is indeed interested in a long-term relationship based on delivering results for the payer, then they are likely to look favorably on this request. There may be a quid pro quo, but the deal should benefit all parties if it is structured correctly.
Inertia
While systems and contractual issues can seem daunting, the high level of inertia present in most Workers' Compensation carriers and TPAs is likely to be the biggest obstacle to adopting a specialty managed care approach. Payers are used to dealing with the same vendors, often have long-term relationships with the vendor staff, know the positives and negatives, and are reluctant to change vendors. A change represents additional work and some level of risk. This effort and risk must be balanced against the potential for better results. That potential must be carefully and realistically assessed as well.
With combined ratios of 121 percent nationally, employers are certainly well within their rights to ask carriers and TPAs to strengthen their medical management capabilities. Of course, carriers are rapidly losing money as well. Inertia frustrates employers who are demanding better performance from their Workers' Compensation payer partners. In many cases, without a push from employers, payers will not aggressively pursue relationships with specialty companies. However, employers have a significant amount of influence, influence that can be judiciously applied when and where necessary.
The evolution of managed care in Workers' Compensation continues. External forces such as cost shifting to Workers' Compensation, huge increases in prescription drug costs, and the backlash against HMOs and managed care in general are driving medical costs up at unsustainable rates. Clearly Workers' Compensation payers must seek better answers, answers that go beyond a flat discount off a bill, a routine pre-cert program, or a me-to program purchased because it is cheaper than the previous vendors.
With medical inflation at 15 percent annually, employers, carriers and TPAs have a stark choice. Payers can simply continue to work at the margins, tweaking programs that have led to the 15 percent increase. Or, they can identify their central cost areas and seek vendors with innovative approaches to tough problems, companies that are expert in a particular area, specialty or injury and experienced in delivering that expertise.
Joseph Paduda, Principal of Health Strategy Associates, is an independent consultant focused in the Workers' Compensation and managed care markets. His clients include large Workers' Compensation insurers, managed care organizations, self-insured employers, and software and systems companies. Prior to his present position, Mr. Paduda was vice president of MetraComp, a United HealthCare Company specializing in the application of managed care techniques to the Group Disability and Workers' Compensation industry. Paduda was responsible for marketing, sales, and account management. Paduda holds a Master's of Science Degree in Health Management from the American University and is a frequent speaker on managed care issues. He lives and works in Madison, Connecticut and can be reached at 203 245 1249 or jpaduda@healthstrategyassoc.com
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