Report 2003-108.2 Summary - January 2004

California's Workers' Compensation Program

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Changes to the Medical Payment System Should Produce Savings Although Uncertainty About New Regulations and Data Limitations Prevent a More Comprehensive Analysis

HIGHLIGHTS

Our analysis of medical claims payment data from the State Compensation Insurance Fund (State Fund) to determine the extent to which new reforms would have produced savings in workers' compensation medical costs had they been in effect during 2002 revealed that:

RESULTS IN BRIEF

Effective January 1, 2004, Chapter 639, Statutes of 2003, brought major changes to the workers' compensation medical payment system. The new law requires that payments for services performed in an outpatient surgical facility outside of a hospital setting (surgical center) or an outpatient surgical facility in a hospital not exceed 120 percent of the fee for the same procedure under Medicare's ambulatory payment classification (APC) facility fee schedule. The new law also requires that for pharmacy services and drugs that Medicare's APC fee schedule does not otherwise cover, payments be limited to 100 percent of the relevant Medi-Cal fee schedule. To determine the extent to which these reforms would produce savings in medical costs, we reviewed medical payments that the State Compensation Insurance Fund (State Fund) made in 2002. Although data limitations constrained our analysis, the data we were able to analyze showed that the recent reforms would produce savings in the form of lower payments for fees for the use of facilities (facility fees)1 at outpatient surgical facilities and pharmaceuticals.

As the Joint Legislative Audit Committee (audit committee) requested, in August 2003 the Bureau of State Audits released a report of the workers' compensation medical payment system, titled California's Workers' Compensation Program: The Medical Payment System Does Not Adequately Control the Costs to Employers to Treat Injured Workers or Allow for Adequate Monitoring of System Costs and Patient Care. That report describes how rising medical costs are contributing to the increasing costs of the workers' compensation medical payment system—costs that California's employers are required to pay. Along with other findings, the report states that fee schedules intended to control the amounts paid for medical services are outdated or nonexistent.

To address the audit committee's request that we focus on payments for workers' compensation medical services that hospitals and surgical centers provided and insurance companies (insurers) paid for, we relied on medical payment data from State Fund, which paid more than a quarter of the medical costs related to California's insured employers in 2002. Although State Fund provided the information we needed to determine that increases in workers' compensation medical costs were being driven more by an increase in the number of services that medical service providers (providers) were performing than by an increase in the average cost of services, State Fund was not able to provide us with other information we sought in order to analyze facility fees paid to surgical centers and pharmaceutical payments for our August 2003 report. As a result, we are presenting our analysis of payment data in this follow-up report.

For this second report, we obtained medical claims payment data from State Fund to determine the extent to which the new legislative reforms would have produced savings in workers' compensation medical costs had they been in effect during 2002. We limited our analysis to data in the medical bill review files that State Fund provided us, and we did not attempt to trace the recorded payments to supporting documents. However, because of limitations in State Fund's data, we were able to analyze only $14.5 million of the $43 million in identifiable facility fee payments to surgical centers that State Fund processed through its medical bill review database during 2002. State Fund's management contends that its databases were designed not for research purposes but rather to provide accurate reimbursement payments that comply with state law. Because these limitations precluded a comprehensive analysis of the data, we used for our analysis Medicare's ambulatory surgical center (ASC) fee schedule, which has only nine groups of procedure classifications, rather than Medicare's APC fee schedule, which has 569 procedure groups. Because the APC fee schedule is more generous overall than the ASC fee schedule, the potential savings would have been less if we had used the APC fee schedule.

Our analysis of the $14.5 million in surgical center payments resulted in a range of potential savings with a midpoint of approximately $8.4 million, or 58 percent. The payments State Fund made to surgical centers was to compensate providers for the use of the facilities and to pay for the supplemental supplies and other services related to medical procedures performed. The physicians who perform the medical procedures are compensated according to a separate fee schedule. Because of the limitations in State Fund's medical bill review database, we had no basis for calculating whether this level of savings would have been possible in the remaining $28.5 million in payments State Fund made to surgical centers or in the unknown amount of settlements it paid to surgical centers as a result of litigated payments. Therefore, we cannot reliably conclude that the payments we analyzed are representative of State Fund's total payments to surgical centers or that the savings we found are representative of the savings possible in all of State Fund's payments to surgical centers. However, we were able to analyze approximately $76 million, which represents 83 percent of the total $91.7 million paid for prescription drug purchases in 2002 for which State Fund recorded sufficient information and estimated that it would have saved $18 million, or 24 percent, had the new reforms been in place during that year.2

Our analysis was limited for three reasons: (1) the data State Fund entered into its medical bill review database were often incomplete, (2) individual items were summarized into general categories and entered into the system without retaining their unique identifiers, and (3) the database design is such that certain detailed analysis is impossible. We could not make a comprehensive estimate of the potential savings associated with the change in the maximum facility fee payments to surgical centers that the new law called for because of the manner in which State Fund collects and classifies facility fee payments it makes to surgical centers for supplemental items such as drugs and supplies in addition to the fee it pays for using the facility. Also, although State Fund often pays surgical centers less than the amounts billed when it considers the amounts excessive, it neither tracks the additional litigated settlement payments it makes—payments that arise from its capping these charges—nor links such payments to the original payment amounts in the medical bill review database to reflect the total amount State Fund pays the surgical centers. We also encountered limitations in the data related to payments for pharmacy services and drugs. Lacking such data, we could not compute all of the potential savings that would have resulted had the new law already been in effect during 2002.

Although the condition of the data in State Fund's medical bill review file limited our analysis of individual payments to surgical centers, and to a lesser degree payments for pharmaceuticals, State Fund contends that its data meets its business purposes and the needs of other research entities. According to State Fund's management, "The State Fund's databases were designed to allow the State Fund to carry out our mission to provide workers' compensation coverage to California employers and to provide those benefits due to their injured employees under California's workers compensation law. Our databases were not designed for public policy research purposes. As we recognize the importance of accurate information to further research and study the workers compensation system we provide data as well as financial and manpower support to the California Workers Compensation Institute, the Workers Compensation Insurance Rating Bureau and the Workers Compensation Research Institute. Our data has been consistently and successfully used by each organization in their studies and reports. State Fund databases are fully sufficient to the task of making and recording accurate compensation and medical benefit payments. Difficulties encountered in completing public policy research must be differentiated from the process of making accurate benefit payments. We are currently implementing two major claims systems development initiatives. Upon completion of these initiatives we will realize a number of business efficiencies. These improvements will include improved data capture at the detail level that, while not altering reimbursement amounts, will further increase the value of the data for research analysis purposes."

Under the new legislation, the California's workers' compensation system may realize additional savings in the form of reduced litigation and reduced amounts in individual insurer's spending to contain spiraling medical costs. For example, during 2002 State Fund paid a preferred provider organization almost $27 million in cost containment fees to gain access to a network of medical providers who were under contract to provide services at negotiated rates. Because provisions in the new law provide similar cost containment, State Fund could largely avoid such fees in the future.

In our analysis of State Fund's payments to surgical centers during 2002, we found a number of instances in which a fee schedule would have standardized payments and resulted in savings. For example, the average amount State Fund paid to individual surgical centers for the use of their facilities sometimes exceeded 300 percent of the Medicare ASC rate, adjusted to reflect the highest California wage index. In addition, the State's official medical fee schedule in place during 2002 required that State Fund pay a reasonable fee for a broad range of items, such as drugs and supplies, associated with outpatient surgical procedures. In some instances, these supplemental payments far exceeded the facility fees involved. Medicare's APC and ASC fee schedules include such items in the facility fee and do not require separate payment.

However, unless the administrative director of the Division of Workers' Compensation (division) ensures that the new reforms are promptly and effectively implemented, the savings may not be fully realized. On December 30, 2003, the division's administrative director posted on the division's Web site proposed emergency regulations to implement the medical fee schedules that the law required. On the same day, the administrative director submitted the proposed emergency regulations to the Office of Administrative Law for review and approval. These proposed regulations attempt to address the issues we identify in this report relating to implementing the newly mandated payment system for services that surgical centers performed, including capping payments at fee schedule amounts and bundling the amounts that insurers pay for drugs and supplies into the facility fee.

Nonetheless, the emergency regulations that the administrative director proposed do not assure the permanent successful implementation of the workers' compensation payment system that the new law mandated. Assuming that the Office of Administrative Law accepts the regulations as written, the emergency regulations will remain in effect for only 120 days. Prior to their expiration, the administrative director must either provide permanent regulations, along with a statement that the regulations comply with all regular rule-making procedures, to the Office of Administrative Law or request that it approve the readoption of the emergency regulations. Therefore, the savings that will result from the payment system that the new law requires will remain unknown until the Office of Administrative Law finalizes and approves the emergency regulations and providers, insurers, and claims administrators who participate in the workers' compensation program interpret and implement them.

Having adequate and reliable medical payment data is critical to any attempt to analyze and monitor how well the workers' compensation system delivers quality care to injured workers at costs that the law allows, as well as to efforts to track the effect of policy changes on the system's performance and costs. However, based on the findings in our first report on California's workers' compensation medical payment system and the knowledge we gained regarding State Fund's medical bill review database during this review, we found that California does not have a database of workers' compensation medical payments that can provide detailed and reliable data for such analysis and monitoring. The division's administrative director told us that the State's hiring freeze and budget shortfalls have hampered his efforts to implement workers' compensation reform.

The division is currently developing a workers' compensation database, the Workers' Compensation Information System, intended to provide the type of information the division needs to analyze and monitor system performance. However, both the division's survey of insurers and our own analysis of the medical payment data that State Fund provided revealed that both State Fund's and the other insurers' data files appear to be incomplete or the data in the files are inaccurately and inconsistently classified. Therefore, neither the insurers nor the division—once these data are reported—will be able to use the data to make informed decisions.

RECOMMENDATIONS

To fully realize the savings from the new reforms to the workers' compensation medical payment system, the division's administrative director must continue to provide the workers' compensation community with the ongoing education and guidance that will ensure that the reforms are promptly and effectively implemented.

The division should ensure that the medical payment data it collects in the Workers' Compensation Information System provides the specific information the division needs to adequately monitor medical payments for compliance with the payment system and for the effectiveness of policy decisions. Specifically, the division should first clearly define the data elements it requires from insurers and claims administrators; second, it should obtain the medical payment data using a standardized reporting instrument, which will ensure that insurers and claims administrators consistently and completely report the data in such a way that it will be useful for the division's analysis and monitoring.

AGENCY COMMENTS

The Labor and Workforce Development Agency (agency) cited the administration's overall goal of reducing costs. Keeping that in mind, the agency stated that the Department of Industrial Relations' Division of Workers' Compensation (division) is working with insurers and claims adjusters to develop a cost-neutral method to transmit electronic medical payment information to the division's Workers' Compensation Information System. The agency also stated that the audit confirms that the 2003 workers' compensation reform package will provide some cost relief to California's employers while citing the administration's belief that more reform is needed.

The State Compensation Insurance Fund (State Fund) stated that its databases are constructed in a manner that is consistent with the current state of the art within the workers' compensation industry. State Fund also acknowledged that using a workers' compensation carrier's large medical and compensation databases for public policy research is very labor intensive and demanding. State Fund believes its databases are fully sufficient to make and record accurate compensation and medical benefit payments, and that difficulties encountered in conducting public policy research must be differentiated from the process of making accurate benefit payments. State Fund is currently implementing two major claims systems development initiatives that it stated will improve data capture at the detail level and increase the value of the research analysis while not altering reimbursement payments. State Fund looks forward to the opportunity of working with the administration and the Legislature to make the improvements still required in the workers' compensation system.

1 According to the new reforms, payments for outpatient surgeries that take place in a hospital or surgical center are based on a payment system used by Medicare. Under Medicare rules, the payment made for outpatient surgeries compensate providers for the use of the facilities and any supplemental supplies and other services directly related to the medical procedures performed, and are known as facility fees.

2 Savings are based on a formula that includes a 5 percent reduction in Medi-Cal payments effective January 1, 2004, that a preliminary injunction partially blocked. Without the 5 percent reduction, savings are estimated at $14.6 million, or 19 percent, for 2002.