Addressing Care Costs in California’s WC Market Adds More Questions

In March, Insurance Commissioner John Garamendi announced a seven-point plan for restructuring the California workers’ compensation system. In addition to addressing medical cost containment, the plan includes improving financial oversight; determining a consistent level of permanent disability; improving coordination and communication with state agencies regulating the system; continuing aggressive fraud interdiction; creating a 24-hour medical care system merging health insurance with workers’ comp medical care; and developing professional training and quality standards for decision makers.

Some of the recommendations outlined in Commissioner Garamendi’s proposal appear to be very sound. Others, particularly the proposal to merge workers’ comp medical benefits into the general health plan, may seem promising, but create major questions regarding the feasibility of implementation and its impact.

Why would merging health and workers compensation medical care not be effective? The answer becomes obvious when you examine the current dynamics of the California workers’ comp system. The growth in the system medical costs is a product of both the overall growth in medical costs and in specific features of the California system.

Over the last few years, the spike in workers’ comp medical costs has reflected the growth experienced in other sectors of health care. Higher pharmaceutical costs, more expensive and sophisticated diagnostic and treatment technology, and even the aging work force impact workers’ compensation medical benefits. The result is that, between 1996 and 2001, the average annual growth in workers’ comp medical costs across the nation was 6.8 percent, with the highest growth in the last couple of years. However, the rate of growth varies substantially from state to state depending on the tools that insurers have to address excessive costs and utilization, as well as the basic incentives in the system.

Despite some efforts to address health care costs, California medical costs are among the highest in the nation, and increases are far outpacing both the national average for workers’ comp and for overall health care costs.

Why won’t merging workers’ comp and medical benefits provide a quick, and relatively painless, fix to the cost problems in California? A major reason is that the system has built-in incentives for care that will not go away. A combined system is less likely to respond to requests for care that are driven by litigation. Another reason is that there have not been comprehensive, workable solutions brought forward to address the escalating group health costs. Because of the lack of useful solutions, the most common response to the current crises in group-health is to shift more of the costs to employees through higher deductibles and co-payments.

There are major questions about what Commissioner Garamendi has in mind for merging the two systems. Will the proposal involve mandating health coverage? Will it take away workers’ compensation benefits since group health plans generally involve employee deductibles and co-pays? Will there still be a distinction between workers’ comp and group health in order to maintain the separate level of benefits? How will the system address disputes over whether the care is for a worker-related condition? How will it address litigation-driven costs?

There is one bright spot in California—the wealth of information about the medical costs in the system and what can be done to correct it. Data shows that utilization is one of the major cost drivers in California. The number of services per claim rose more than 10 percent each year between 1996 and 1998. No evidence exists to suggest that this situation has changed. Increased services per claim is both the product of the presumption of correctness for the treating physician’s decisions and the lack of tools to address excessive care. Other documented problems include: the level of the fee schedule, the growth in physical medicine costs, and the increases in the use of technology. Besides needed changes in the permanent partial disability system, which would address some of the adverse incentives, there are changes that would directly combat these problems:

• Elimination of the treating physician presumption of correctness;
• Extension of employer control over selection of the medical provider, or, at the least, a more effective managed care program;
• Tight, evidence-based protocols, perhaps including caps on certain types of visits;
• Adoption of fee schedules based on Medicare; and,
• Addressing pharmaceutical costs.

We hope the state legislature will have the courage to make the changes necessary to adequately tackle medical costs in California, and bring them in line with other states.