The last five years have been good ones for Florida's employers.Workers' compensation costs are down dramatically, claim frequencycontinues to drop, and premiums have followed the same trajectory.However, all good things must come to an end, and in this case theevent that triggers the end may well be the state's recent decisionto increase reimbursement for outpatient procedures.

On November 20, Florida's workers' compensation regulatorybosses (the Three-Member Panel) approved a change in the wayworkers' compensation payers will reimburse outpatient facilitybills. According to www.WorkCompCentral.com, Florida regulatorswill “begin drafting a rule to base outpatient fees paid tohospitals on the Medicare Outpatient Prospective Payment System.But the fees would be adjusted using Florida-specific multipliersbased on the usual-and-customary charges now employed to establishoutpatient fees… . Under the new system, the Medicare-based feeswould be adjusted by a new factor created by a hospital's usual andcustomary charges, by 174 percent for outpatient surgeries and 395percent for other outpatient services.”

Interestingly, an analysis by the National Council onCompensation Insurance (NCCI) of the proposed change provided tothe Department of Financial Services (DFS) in a Nov. 4 letterpredicts it will be “premium neutral.” That is, the added cost dueto higher prices won't materially affect premiums. I'd note thatthis doesn't address the already sky-high profits hospitals aremaking on workers' compensation in Florida, profits that make itthe best payer by far in the Sunshine State. It also fails toadequately address the likelihood that increased reimbursement willlead to more procedures performed in more lucrative settings.

Significant Increase

We don't have to look far to see what will happen as a result ofthe panel's proposed changes. South Carolina put in a Medicare-plushospital fee schedule on Oct. 1, 2006. Now, per NCCI, there is a23.7 percent workers' compensation rate increase filed and pending.And, the Palmetto State's Medicare+ hospital fee schedule payshospitals less than the fee schedule being proposed by Florida'sDFS (140 percent of what Medicare pays in South Carolina versus174-395 percent of what Medicare pays being proposed for Florida).Paying hospitals more has significantly increased medical costs andutilization in South Carolina.

The proposed change would link what Medicare pays hospitals asdefined by the Ambulatory Payment Classifications (APC) paymentrate, adjusted to mark up the Medicare APC payment on a hospital'scharge, to roughly equate with what DFS thinks are the averagecharges billed by Florida hospitals for that “group” of APCs.

Florida is putting APCs into two groups — surgical and “otherhospital outpatient.” I'll leave the mind-numbing minutiae ofMedicare reimbursement analyses at that, and focus on the keyproblems with the panel's decision.

Let's start with the use of Medicare's reimbursement rates andmethodologies. Workers' compensation systems should not useMedicare as a basis for reimbursement. Medicare fees reimburseproviders for providing care to elderly folks, not working-age,employed people. As a corollary, providers treating Medicarepatients are not concerned with functionality or return to work.The Centers for Medicare & Medicaid Services (CMS) hasrepeatedly stated their reimbursement methodology is specific totheir population, and discouraged use of that methodology by otherpayers. Yet these differences have never been evaluated. To myknowledge, there has never been any thorough study of how theinpatient or outpatient hospital resources used by workers'compensation patients compare with resources used by Medicarepatents. Logic indicates there are significant differences, but theregulators have not determined if these differences exist, muchless what impact any differences would have on treatments, andtherefore costs.

The panel's reimbursement scheme pays hospitals 74 percent morethan Medicare for surgeries and four times Medicare for otheroutpatient services. This is insane. Workers' compensation isalready the most profitable line of business for Florida hospitals,delivering gross margins in excess of 50 percent. This methodologymakes it even more lucrative. It is indeed curious that DFS wouldrequire employers to pay much more for health care delivered toworkers' compensation claimants than the state is willing to payfor care delivered to Medicaid patients. I impute no nefariousmotives, but do wonder how the panel can justify this dramaticdifference.

Locking in Increases

There's more. Basing reimbursement on charges is just nutty.Most obviously, providers can inflate charges at will — and do.Often, hospital charges are many times their actual delivery cost.A 2004 study by the Institute for Health and Socioeconomic Policyfound that 14 Florida hospitals charged more than five and a halftimes their actual cost of delivering care. Moreover, providersincrease charges around 14 percent every year. The panel'srecommended methodology now locks in a 14 percent trend rate foroutpatient hospital services in Florida, on top of charges that arealready several times actual costs.

As noted above, one can expect that services currently providedin physician offices will increasingly be performed in higher-costhospital locations. So procedures that were billed at the lowerphysician rate will now be billed at the much higher rates byhospitals. Here's how this would happen: Hospitals will befinancially incented to encourage their affiliated physicians topartner with the hospital in building or buying outpatient surgicaland other facilities. As the procedures would now be billed by thehospital, they would be reimbursed at the hospital fee schedule,not at the (much lower) physician rate.

These issues have been raised in previous meetings and providedin documents submitted to the panel over the last few months.According to sources present at the Nov. 20 hearing, additionalinformation was presented regarding the basis for the panel'sdetermination that the change would not have any significant impacton costs. Florida State University health economics guru GaryFortier submitted a brief that stated that the methodology beingused by DFS was “fundamentally flawed, and in my opinion the studyand methodology used cannot be relied upon … to make policy.”Fortier also warned that once this payment system, which encouragesgreatly increased utilization of hospital services to treatworkers' compensation patients, is put in place, it will be hard tochange even if payments become more tight-fisted in the future.

It is indeed unfortunate that the Sunshine State has the secondhighest percentage of working folks without health insurance, butwhy make workers' compensation payers cover their medical bills?No, there's not a direct link, and no, this wasn't expresslyaddressed (as far as I know, as I wasn't at the hearing), but fromhere it sure looks like workers' compensation payers are beingasked to help facilities cover the underpayments from Medicaid andto provide funds to help treat the uninsured.

Oh, and Florida's workers' compensation facility costs will nowbe the highest in the country.