In the work comp world there’s an oft-used term used to describe medical costs – ‘severity’.
I’m beginning to think that word itself is a problem, and perhaps is part of the reason the work comp payer community has proven itself, with few exceptions, unable to effectively manage medical expense.
There are any number of meanings for the term itself, but as it is used in the claim world ‘severity’ refers to the medical cost of a claim, or when used more broadly, medical costs overall (e.g. Severity of lost time claims increased in 2008 by xx%).
Severity is something that sort of just happens – a claim is either really severe or it isn’t. Severity is driven by uncontrollable factors and thus we can only deal with the fallout, or results, or impact of severity.
Severity happens.
It does, but only if we let severity ‘happen’. In reality, medical costs are much more controllable than many think; severity doesn’t have to happen to you, unless you passively allow it to. But because we’ve grown accustomed to hearing things like “claims costs increased driven by a 9% increase in medical severity”, we think ‘oh well, there’s that severity again, yawn…”
What we should be doing is asking a lot more ‘why’ and ‘how’ questions, and using the answers, or lack thereof, as the basis for actions to control severity:
– why is severity increasing?
– what specific areas and types of medical expenses are up?
– is there a region or state that appears to be up more than others?
– what are we not doing and why are our present programs not controlling cost?
– how do our results compare to our competitors? why? what are they doing differently?
Because the fact is, ‘severity’ is controllable – if you’re willing to ask the hard questions and address some perhaps uncomfortable answers; able to concede that your programs aren’t really ‘best in class’, and willing to adjust, retool, and revamp processes to drive better results.
In my experience most comp payers aren’t willing to do what it takes to control severity. And that’s why ‘severity’ controls them.

Today’s WorkCompCentral edition [sub req] reported on an emergency revision to Illinois’ state workers comp fee schedule that will change the methodology for repricing surgical implant devices.
The move is a response to what the Illinois Workers Comp Commission described as ‘price gouging’. In the announcement, [opens pdf] the state noted “some providers have inflated their reported charges for implants so high that the final reimbursement is as much as 33% over the average cost from other providers.
The previous rate was set at 65% of billed charges; the new reg sets reimbursement at 25% over manufacturer’s net invoice price. The rationale for this? The “reimbursement rate is reasonable. It provides a significant profit margin while providing cost-containment and certainty for payers. In addition, in order to arrive at an accurate provider’s cost, the Commission decided that the invoice price would be net of any rebates but also that actual and customary shipping costs for the implants additionally would be reimbursed.”
What does this mean?
Well, using an invoice plus is better than a discount off billed charges, which has to be the most easily-gamed pricing methodology every conceived. Factoring in rebates is a good step as well; to my knowledge IL is the only state that considers the impact of rebates. And stating reimbursement is for the NET manufacturer’s invoice price will help forestall gaming the invoice as well.
The challenge lies in determining what ‘rebate’ means, how it will be determined, reported, and factored into pricing, and how ‘net’ will be defined.
As I noted in a post a while back, The problem lies in the documentation of the paid amount. Most payers ask for a copy of the invoice, which, on the surface, makes sense – this is what was paid.
Not exactly. What the invoice doesn’t show can include:
– volume purchase discounts
– rebates
– “3 for the price of 2” deals
– waste (some surgeons use the cage from one kit and screws from another, so the payer is paying for more hardward than is actually being used)
– internally developed invoices (documents prepared not by the supplier but by the provider)
This last point is the crux of the issue. Hospital systems often buy in bulk, with several implant kits shipped and billed; this obviously makes it impossible for the provider to produce the invoice for the device used in a specific surgery, as they never got one. Thus, many providers develop the invoice for a specific implant kit themselves.
There’s another problem with implants – when they are defective, the patient has to go back in for more surgery. And the WC insurer has to pay. The only way to mitigate risk is to track the model and manufacturer for each implant – yes, it’s work, and yes, it’s work worth doing.
Finally, even the original invoice is for a device with a markup that is, well, huge. One analyst estimates gross margins are in the 80% range…driving profit margins that are the envy of any payer or health system.
The net? Kudos to IL for recognizing and addressing this issue. Now it will be up to payers to enforce the regulation, by demanding the actual invoice, not one developed in the basement. They may also want the provider’s notarized statement that the invoice is the real, actual, honest-to-goodness true price net of rebates, discounts, etc.

Coventry Health will be taking a $278 million charge against earnings to cover the company’s fine plus interest and legal costs resulting from last week’s Louisiana appellate courte ruling in a workers comp PPO network case.
On a per-share basis, the bill is $1.18 pre-tax.
the charge will be partially offset by improved earnings from other sectors, including Medicare Advantage Private-Fee-for-Service. According to Zacks, the “2010 EPS outlook was also revised to $1.57−$1.72 in view of the impact of the charge, down from the prior range of $2.35−$2.50 per share. Excluding the charge, Coventry anticipates the EPS outlook to increase by 40 cents per share to range between $2.75 and $2.90.”
Since moving back into the executive suite over a year ago, CEO and Chairman Allen Wise has done an excellent job turning the company around – refocusing the company on its core businesses, shedding underperforming and inefficient operations and profit centers, even revamping the way the company negotiates provider contracts to focus on Medicaid, Medicare, group, and individual health businesses.
The quarter-billion dollar charge is undoubtedly the subject of much discussion at the company’s, executive committee meetings as it will suck cash out of the coffers that would have been used to acquire more regional health plans and help Coventry prepare for the post-reform health insurance world. It is also notable as it comes from a division, workers comp, which heretofore had been a cash machine, generating significantly more profits than its rather modest top line would predict.
For now, Coventry appears to be weathering the storm, recently announcing the acquisition of a couple of regional health plans and predicting continued improvements in operating earnings.
Whether this continues may depend in some part on the outcome of the company’s appeal of the LA case.

Yesterday’s Louisiana appellate court ruling against Coventry’s First Health work comp network is a major blow to comp insurers, employers, and networks in Louisiana, with potential impact in other states as well.
The ruling is here.
The court’s finding supported a lower court’s ruling affirming a state statute requiring PPOs to provide injured workers with PPO identity cards or give notice to providers 30 days before taking discounts. While Coventry will appeal to the state Supreme Court, the appellate court ruled against almost all of Coventry’s arguments, making this an uphill battle for the nation’s biggest work comp managed care firm. I’d also note that the decision itself takes Coventry’s legal team to task for failings to accurately cite evidence in its written appeal, stating the “failure to provide record citations suggests that many of these assignments were interposed only for purposes of delay and confusion.”
Ouch. (no pun intended)
While the finding may be bad enough, the size of the penalty is stunning – Coventry will have to pay $262 million – $2000 for each of the “131,024 instances in the past 10 years when it discounted providers’ charges below the state workers’ compensation fee schedule.” (WorkCompCentral)
Some workers comp networks decided early on to avoid doing business at all in LA; MedRisk (HSA client) left the state after the initial ruling against Coventry along with several other PPO and specialty networks.
Implications
For Coventry, it doesn’t look good. While I’ve taken the company to task in the past for what I perceive to be missteps, and some would argue that they should have pulled out long ago, it’s hard to fault Coventry for believing they could conduct business in LA as they do in most other states, by contracting with providers to deliver discounted care to workers comp claimants. The additional notice requirements in Louisiana are unique to that state; in retrospect all networks should have picked up on this nuance, but in retrospect we all would have sold our stocks two months ago…
It doesn’t look good for employers in Louisiana either. As MedRisk’s General Counsel, Darrell Demoss noted in the WorkCompCentral piece, WCRI data suggests comp medical costs are significantly higher in Louisiana than in other states. Now that the ruling has been upheld, expect insurers and managed care organizations to avoid the state completely in fear that they too could be nailed by class-action suit.
On a national basis, this ruling will likely cause many network vendors and insurers to stop and very carefully review each state’s laws and regulations pertaining to networks, with compliance staffs tasked with doubly ensuring their contracts comply with the letter and spirit of each jurisdiction’s rules and regs. That’s not a bad thing, as it’s a heck of a lot cheaper to pay attorneys and compliance staff than a $262 million penalty.
What does this mean for you?
Sorry, but bad news on a Friday – and a holiday Friday at that.
Except if you’re a comp provider in LA.
Thanks to WorkCompCentral for the heads up.

Newsday broke a story yesterday about a former Islip, NY parks workers who was busted for insurance fraud.
But this isn’t your typical “out on TTD, moonlighting as a handyman” gig.
Nope, John Livingston, out of work due to a comp injury and according to his statements to his employer and adjuster, unable to find employment, was allegedly working as a bouncer at a bar.
A nude bar.
It seems that the $17 grand Livingston collected so far wasn’t enough to sustain his lifestyle and other obligations, so a man’s got to do, what a man’s got to do. In this case, what Mr Livingston had to do was ensure patrons didn’t get unruly or obstreperous. Let’s think about this. Livingston, who was employed as an automotive equipment operator, told the Town he couldn’t work in that job, yet he was able to find work tossing potentially beefy, probably inebriated guys out of a ‘gentleman’s’ club.
Livingston’s previous job must’ve been much more strenuous than your typical truck driving gig, or perhaps he couldn’t sit for long hours, yet could, without too much pain or chance for injury exacerbation, latch onto struggling guys and launch them thru the back door.
Or maybe this was part of his therapy and work conditioning program.
Livingston pled not guilty.
The Empire State has gotten rather forceful about comp fraud, so I’d expect Mr Livingston will come to regret his alleged decision to mess with the system.
Hats off (no pun intended) to the adjuster or employer who ordered the investigation (if in fact this was the result of surveillance) and busted Mr Livingston.