and if you want to know why, read NCCI’s latest research brief on the decline in claim frequency.
That’s not to say some companies haven’t shot themselves in the foot – repeatedly – with over-hyped expectations, poor service, and lousy results. But the core problem facing vendors big and small is that there are fewer claims to work.
NCCI – usually the ‘first to market’ with real data, informs us that frequency dropped 4% last year, after a 2.7% decline in 2007. My bet is the decline accelerated this year, due to the crashing economy and attendant drops in employment in the heavy-injury industries (construction, transportation, manufacturing).
Lest readers think this is all a bad dream that will turn around with the economic recovery, recall that frequency has been declining for about twenty years, with a total drop of over 55% since 1991. This is a structural issue, a force that overwhelms other, more transient events. Sure we can expect to see a bump in frequency as employment recovers, but that will likely be a temporary situation; after that works its way thru the system, we’ll return to a downward trend.
And yes severity continues to grow faster than the medical CPI (6% vs 3.7%) (my sense is this number is far too low; clients indicate their medical costs are spiking rather dramatically, with some showing medical inflation nearing double digits). But frequency drives the comp managed care business – without claims to work, case managers, bill reviewers, physician advisers, network developers, and their support and management staff just have less to do.
Other key points
Notably, the frequency decline is sharpest in the northeast and midwest (23% over five years), with the west seeing the least (13%). The recent crash of the housing and construction industries likely means the folks ‘out west’ are catching up rapidly.
There’s been an increase in claim severity, but it wasn’t driven by older workers. In fact, the number of permanent and total claims suffered by younger workers increased eight times faster than for their AARP-eligible coworkers.

Implications
The lifeblood of the workers comp managed care business is a continued stream of new claims. In most respects, this is a mature industry, with vendors fighting each other for share; with a few notable exceptions there are no ‘greenfield’ opportunities. Fights for share, in a business that has largely been commoditized, usually leads to concessions on pricing, and then margins decline.
We are already seeing some of this in the PBM business. Although this sector is better protected from the frequency issue than other businesses (along with home health and DME), pricing is getting even more tight as vendors fight for share.
The bill review business is in a bit of upheaval, with payers switching bill review vendors, and bill review companies changing hands, adopting different strategies, focusing on network revenue or concentrating on pure bill review. The drop in frequency is somewhat balanced by the increase in severity (claims cost more), but this historically-competitive business is getting even more so.
The clinic companies are suffering badly. The big clinic outfits, and their regional and local competitors, are the front line of the comp industry, and they are feeling the decline most acutely. Reports indicate that there’s a bit of light at the end of the proverbial tunnel, but this can’t come soon enough.
Network vendors are experiencing a decline in volume that they are trying to make up with price increases. As one might expect, payers are quite reluctant to pony up more dollars for the same service…
TPAs continue to move more case management and related services inhouse; they’ve been just hammered by the combination of the soft market (employers buy insurance instead of going self insured) and claim frequency declines (many price their services on a per-claim basis) and are trying desperately to make up for lost revenue by capturing more managed care business.
The case management/utilization review business is very jurisdictionally driven. The reform in California was a boon (to say the least) for managed care firms in the Golden State. That windfall has kept many afloat as it has led to a dramatic increase in demand for UM/CM services. As that works its way thru the business cycle, expect to see a decline in demand as it is overwhelmed by the frequency drop.
Companies less vulnerable include PBMs and the catastrophic/complex case management services firms. While ‘frequency drives severity’, these vendors usually work cases for years, making them a bit less worried about cyclical issues.
Finally, despite all this gloom, some companies in the work comp managed care space are doing pretty well, thank you. I’m seeing no decline in the level of interest in this ‘space’ on the part of private equity/venture capital firms, and know of several specialty companies that are growing nicely.
There is a wealth of other important information in NCCI’s report; it is available free of charge here.

There is no discussion or intention to include workers comp in any health reform package currently under consideration in Washington.
Let me be even more clear.
No one in the White House or Senate or the House or any staffer or party policy group – mo one even remotely close to the legislative process is in any way shape or form considering, contemplating, evaluating, mentioning or even thinking about workers comp. Comp is not now has never been and will not be part of any health reform program package bill or proposal.
I have no idea where this rumor is coming from, but I’ve talked with several folks who have heard that there is a task force working on this. If there is, they aren’t located inside the Capital Beltway. Ostensibly this is part of some deal involving labor who theoretically will trade giving up on the card check program if the Feds make work comp a national program. I may well have this wrong because labor bosses would sooner give up their mothers fathers and pensions before giving up on cardcheck, much less something as inconsequential as federalizing comp.
And yes, we all know that comp was originally part of the Clinton reform package, known as Title Ten. What you may not know (and I didn’t until Bob Laszewski told me) is exactly one (1) person in DC wanted Title Ten. Bill Clinton. No one else, not Ira Magaziner or Jay Rockefeller or Hillary gave two hoots about WC, but the big dog did.
What is also little known is that the person who deleted Title Ten was none other than Ted Kennedy. And the Senator has not had a change of heart.
Could thus change? No.
As Sen. Ron Wyden told me several months ago, when it comes to health reform, no one wants to pick a fight with anyone they don’t have to.
Will health reform meaningfully affect workers comp?
Absolutely. If – and it’s a big IF – reform passes into law comp will be indirectly affected. I’ve written on this extensively and will be doing so again shortly.
But comp WILL NOT be part of any bill.

I received several calls about my post a couple weeks ago regarding using peer review to manage PT.
Generally, there appears to be some confusion over the article I cited in the post – specifically about its conclusion that peer review “may have had an impact” on the number of visits.
Here are the key paragraphs:
“It seems that peer review may have had an impact – possibly by reducing the number of claims with more than 24 visits (this wasn’t apparent from the article). Complicating the analysis was the underlying data; it wasn’t possible to determine objectively if there were jurisdictional differences or claim severity differences (e.g. there is a very wide range of ‘severity’ associated with lumbago). The article noted that more severe claims were probably more likely to have peer review, but that was based on the assumption (a reasonable one in my view) that lost time claims were more likely to have requests for peer review than medical only claims…if the peer review program did result in fewer cases with more than 24 visits, how many of those were still excessive (the average number of visits for PT in comp is much lower than 24). And what was done during those visits, were the claimants ‘shaked and baked’ or was there actual work hardening and therapy designed to increase the patient’s functionality?”
In actuality, despite a close read of the study itself there was no conclusive evidence that peer review had any impact on the number of visits.
The underlying data did not have enough detail to provide any meaningful comparisons; for example it wasn’t possible to determine if a specific claim was a med only or lost time, or how severe the injury was.
And the analysis of a smaller number of claims from one large employer (reportedly UPS) was not directly comparable as the claims may have been in different jurisdiction (or more or less severe).
The net is this. It was not possible from the article to determine if peer review had any impact on duration of treatment. Yet some readers (at least a few who contacted me) drew that conclusion.
As I noted in the conclusion, “more questions were raised than answered.” Here are a few:
– why was the article published if the conclusions were so…inconclusive? would it not have been more useful and interesting if some of these issues were addressed more thoroughly?
– the data was not corrected for jurisdictional variations. If that wasn’t possible, I’d suggest that another data set should have been sought, as there are huge differences among and between states regarding utilization and cost of PT, as well as changes within a state due to regulatory changes (see Florida, New York, Texas and California). It could be that no other data set was available.
– the severity issue is quite important; the data were evidently not sufficiently robust to make some assessment of differences in severity. Without some measure of severity, it is impossible to make comparisons and draw conclusions about those comparisons, especially as there can be wide ranges of severity for conditions such as lumbago (one of the diagnoses featured in the report).
I applaud the author (Janet Jamieson, PhD) for her research and effort to add to our understanding of this critical issue. While it would be best to wait until all the data are in, and tested, and all follow up questions asked and answered, that’s not realistic nor possible. Instead, it is usually more helpful to publish what you have, recognizing that it will likely spur additional research.
It is incumbent on those who read reports and analyses to think critically, and not read more into the results than they should.
That is a disservice to the researcher, and may well lead to inappropriate conclusions.

There are two key takeaways from the WCIRB report on California’s work comp costs (as reported by workcompcentral.com).
Medical costs are rising fast, and managed care costs are rising much faster.
Medical expenses climbed 7.9% last year, led by a ten percent increase in hospital expenses. Drug costs were up marginally while physician expense growth was flat.
Hospital costs are approaching a third of all medical expense in the Golden State and are growing despite a tighter fee schedule and all millions spent on ‘medical management’.
There are two contributors to this unhappy circumstance. One is the double payment for surgical implants that occurs due to a loophole in the CA fee schedule. HSA clients report their costs for implants in California are much higher than in any other states driven by both price and more frequent usage of devices.
The second driver is the disconnect between utilization review and the bill review and payment function. As noted previously here, many UR determinations don’t find their way thru the electronic labyrinth to bill review and payment.
Which is why there is so much frustration among employers forced to pay ever increasing fees for managed care services that, in many cases, do little to ‘manage’ claimants’ care much less reduce costs.
The California reforms have done much to restrain cost growth but the individual rules and regs have often done harm as well as good. The pharmacy fee schedule and associated regs resulted in the explosion of physicians dispensing repackaged drugs at wildly inflated prices. The 24 visit cap for PT etc has resulted in too many visits for some claimants with modest injuries and too much hassle for all parties involved in complex claims. And the implant issue is exhibit one.
The stakeholders benefiting least from the reforms are the physicians.
What’s wrong with this picture?

There are specialty managed care offerings for PT, imaging, pharmacy, home health, DME, facilities; even dental. Till now, the only type of medical spend that didn’t have a custom answer had bern diagnostic lab.
That gap has now been filled.
Work comp managed care firm DiaTri (www.diatri.net) has signed a deal that provides their clients with access at deep discounts to the 5000 Quest lab facilities. The access enables payers to benefit from rates that look to be substantially under most generalist networks, and far less than fee schedule rates.
The deal requires payers to work diligently (my words not their’s) to encourage claimants to use the participating labs; payers will have to do more than just take discounts. However, the discounted rates will be applied to retro as well as prospective referrals.
DiaTri has an exclusive deal here; thus is a savvy business move for the company which has been operating in other work comp and group health niche markets.
Note: neither myself nor HSA have any professional or business relationship with DiaTri or Quest.

‘Managing the Impossible’, an analysis of catastrophic case management firm Paradigm’s results and comparison of those results to those achieved by work comp insurers, has been sitting on the upper right corner of my desk for a couple of months now.
I’ve read it, re-read it, discussed it with Paradigm staffers and a couple of their clients, and started to post on this at least twice. Each time other hotter issues popped up, and this got pushed back into the corner of the desk.
This may be similar to how Paradigm has been dealt with by many in the payer community. Sure, those cat cases are important, and yes, we really need to do something about it, but hey, I have a really important meeting on the latest PeopleSoft upgrade to go to, and I really need to review the latest case closure report, and…
So the urgent takes precedence over the important. And make no mistake, catastrophic cases are very important indeed in work comp. According to an analysis by NCCI, half of all medical expenses are for 6.2% of claims.
Six percent of medical dollars are spent on 0.3% of claims. By my calculation, that’s $1.8 billion annually on a very few claims. The real dollars are much larger, as cat claims account for a very large chunk of the industry’s reserves.
Many payers have set up dedicated teams to handle cat claims. Staffed by senior claims reps supported by legal and medical experts, these are variously known as ‘high exposure’, ‘large loss’, or ‘complex claim’ units. While there’s undoubtedly a lot of experience embedded in many of these units, it is simply impossible for a single payer to have the depth if expertise in specific types of cat claims that is resident in Paradigm. No insurer has seen as many TBIs, burns or spinal cord injuries; if they had they’d be long out of business.
Yet despite the demonstrated expertise and documented results of Paradigm, many claims execs refuse to objectively consider referring cat claims to Paradigm (or a similar entity).
Why?
Experience tells me some are threatened by the potential that an outside firm could actually handle a claim better than their own people. Others blindly believe (with inadequate justification) that no one outside their company could possibly do a better job.
Paradigm isn’t blameless. The company has stumbled in their efforts to build a succesful sales and marketing program. At times they have been insensitive to the threat they pose to clients’ entrenched processes and personnel. That said, there’s no question they have far more expertise in cat claims than any single payer, and their financial model is usually compelling.
Note: Paradigm is not a consulting client and has no business relationship with HSA or myself.

Physical therapy is one of the least understood components of work comp medical expense. This lack of understanding begins with a wide range of ‘definitions’ of what counts as PT – from services performed by physical therapists, to all the 97xxx procedure codes, to services billed by a PT clinic tax identification number (TIN).
Confusion continues when the widely varying state regulations are brought into focus, with states like Florida and California setting a hard-and-fast maximum number of visits (‘the 24-visit rule’), while others ignore PT altogether in their medical management regs, and still other jurisdictions require payers to review and authorize PT.
Physical therapy is not a price-per-service issue, but rather a number-of-services issue. Several years ago I did an analysis for a very large self insured employer that identified several claims with more than five hundred PT visits over periods of no more than three years.
That’s not a typo nor hyperbole.
Another analysis, this one for a large insurer, found over a dozen claims with more than a hundred visits over the course of a year. In both cases, there was no apparent medical necessity for the excessive visits, they were not authorized in settlement agreements, and most of the treatment records reflected massage and whirlpool treatments, repeated day after day after day.
Overutilization not only drives up medical costs, but also keeps the claimant out of work.
A recent article in the IAIABC Journal (sub req) authored by Janet Jamieson, PhD, President of the Physical Medicine Research Institute, an organization funded by PT management firm Universal SmartComp, evaluated one strategy for controlling PT visits – peer review.
Janet’s been studying the work comp world for years, so I was excited to learn of her study. Janet was kind enough to clarify several questions I had after reading the article, as I couldn’t determine if peer review had an impact on controlling utilization, and if so, if that impact was quantified.
It seems that peer review may have had an impact – possibly by reducing the number of claims with more than 24 visits (this wasn’t apparent from the article). Complicating the analysis was the underlying data; it wasn’t possible to determine objectively if there were jurisdictional differences or claim severity differences (e.g. there is a very wide range of ‘severity’ associated with lumbago). The article noted that more severe claims were probably more likely to have peer review, but that was based on the assumption (a reasonable one in my view) that lost time claims were more likely to have requests for peer review than medical only claims.
That begs the question – was the ‘right’ number of visits 24? And if the peer review program did result in fewer cases with more than 24 visits, how many of those were still excessive (the average number of visits for PT in comp is much lower than 24). And what was done during those visits, were the claimants ‘shaked and baked’ or was there actual work hardening and therapy designed to increase the patient’s functionality?
One finding of note was that active involvement of the payer appeared to reduce the number of visits more than the possible impact of peer review itself. That is not surprising; employers with strong risk management, injury prevention, and claims management programs always get better results than those who rely on utilization review alone.
As with almost any study, more questions were raised than answered.

Those of us with plenty of gray (or silver) hair have not been surprised by the significant increase in medical expense in California since the implementation of reform several years ago. What has been surprising is that it has taken this long for medical inflation to ‘present’.
Medical costs are the primary reason premiums are headed back up, but before we get too excited, let’s remember that work comp premiums plummeted over the last few years, dropping to almost-unprecedented levels. Carriers rushed into the state, new insurers started up, and existing carriers sought to write even more business. The result was a very competitive market, and a dramatic drop in employers’ workers comp costs.
The market has turned; the insurance rating board is looking for a rate increase of almost 24%, driven in large part by the increase in medical expense.
In a recent hearing before the state’s insurance commissioner, two problems became apparent – one obvious and the other much less so.
The obvious problem is the rapid rise in medical expense in California. According to a recent release by CWCI, their analysis shows “significant increases in California workers’ comp medical payments since AY 2005, with amounts paid for treatment, pharmaceuticals and durable medical equipment…all on the rise.”
The less obvious problem is the lack of understanding on the part of most insurers, TPAs, and other payers about the factors driving up medical expense. This ignorance is demonstrated by their continued reliance on medical management techniques and tools that are not only ineffective but I would argue are likely contributing to the increase in costs.
As reported in WorkCompCentral (subscription required);
“Despite the fact that self-insured employers such as Safeway and the University of California reported much smaller medical cost increases than commercial insurers, they pointed out that their medical networks have helped reduce much of their exposure to cost drivers because of the quality of their physicians [emphasis added], and their ability to encourage claimants to seek treatment within their medical networks and avoid litigation.”
Big generalist networks do not reduce comp medical expense because the incentives are all wrong and they contain too many docs who can’t spell workers comp.
What does this mean for you?
Until and unless payers figure this out and stop talking about doing something and actually start doing that ‘something’ medical costs are going to continue to rocket up, and so will employers’ premiums.