The work comp supply chain is killing work comp

Last week I wrote a post on workers comp insurers’ loss of control over medical costs. The post triggered a good bit of email traffic and requests to expand on my central point –
big networks now dictate terms to insurers, and the network business model is a major reason for the continued growth in work comp medical expense.
Think of the work comp claims process as organizing the products and services necessary to return an injured worker to full employment – and keep him/her there. The services – doctors, nurses, voc rehab, other providers, attorneys, field adjusters, investigators – supply expertise and skills that produces the desired end result – sustained return to work.
This process is analogous to manufacturing’s supply chain management.
A quick explanation – Supply chain management (SCM) has become one of the keys to profitable manufacturing. Defined as the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible, SCM is based on the idea that companies should focus on what they do really well, their core competencies, and outsource tasks and functions that are not ‘core’ to organizations that do those things very well.
This allows the manufacturer to concentrate on what they do well, reduce overhead and staff, and focus management time and expertise on stuff that really drives value.
In the old days, companies tried to control as much of their raw materials – and the refining and transportation of those raw materials – as possible. In addition to auto plants Ford owned iron mines, steel mills, glass factories, rubber plantations, ships, and railroad cars. Nowadays Ford outsources some of its vehicles’ key components (engines, transmissions, steering linkages) to other companies, concentrating on designing, assembling and marketing instead.
Over the last couple of decades, manufacturers found themselves increasingly relying on other companies for critical processes and components – if all worked well, profits zoomed, and if not, heads rolled. Recognizing the importance of their suppliers (important = if they screwed up the manufacturer could be out of business), over time manufacturers combined these processes, approaches, and management techniques into the process of supply chain management.
The purpose of supply chain management is to make sure the company gains all the desired benefits from SCM, and avoids the nasty results of a failure in the supply chain – engines don’t show up at the assembly line, the wrong size tires appear, screws have left handed threads when right handed were spec’ed.
Or, the fancy order tracking system designed to make sure enough widgets are on hand to make the thingies ordered by customers just in time to meet the delivery deadline breaks down, or the investment in automation of central processes is a complete failure, or a working plant is closed and manufacturing sent to a cheaper plant that can’t deliver a quality product.
This happens more often than you might think, and when it does disaster often ensues. There are plenty of examples; reading about them gives one a mild sense of superiority (jeez, we’d never be that dumb) that alternates with a cold dash of reality (uhh, actually I could see us screwing up like that – or worse…).
What’s happening in workers comp (see, I told you we’d get to this eventually) is rather more insidious. I would argue that most payers’ approach to medical is tantamount to Sony outsourcing design and marketing, Honda outsourcing engine R&D, Ruth’s Chris outsourcing cooking, or Dave Mathews outsourcing singing (wait, that might not be a bad idea…). As I argued last week, medical is central, core, a critical function – fixing broken claimants so they can return to work is more important than anything else a comp insurer can do. I know, loss prevention is key as well, but claims will happen, and when they do the payer simply must ensure the claimant gets the right medical care that gets him/her back to full functionality.
But comp payers have, with a few, rare exceptions, completely lost track of what’s important. Fact is, almost all workers comp insurers buy medical care without regard to how good it is, or how fast it returns injured workers to employment. No, they buy it based on how much of a discount the doc or hospital will give them. The bigger the discount, the better – that’s how most comp payers evaluate medical care. While a few insurers are trying to change the model, and a few experiments, albeit on a very small scale, are in place, essentially all medical care for work comp is evaluated not on the basis of performance but on price per service.
Analogy – Sony buys LCD panels not on clarity and brightness but on cost, thinking hey, they are cheap so more folks can afford them – don’t worry if the picture is lousy and colors muddy – in fact don’t even look at the picture before you select a vendor.
Analogy – Airlines decide what travelers really want is low cost – so they remove seats from airplanes and have everyone stand up.
Ridiculous? Absolutely – about as ridiculous as choosing a doctor based on the discount they give your network.
I’m pretty passionate about this, so much so that tomorrow’s post will dive even deeper into the issue of how dumb supply management is killing work comp.