California, Florida, and Texas Top List of 'Problem' Comp States

"Upcoding"–billing less severe injuries at higher intensity codes in order to enhance revenue–is common among California doctors and contributes to the 10 percent average annual claim cost increase, the study concluded. According to a WCRI Web presentation last month, upcoding is one of the reasons why the average price of a physician office visit in California is higher than 11 other states.

For those treated on an outpatient basis, the number of chiropractor visits by injured California employees was up to 100 percent higher than the median of 12 other large states studied by the WCRI, according to 1999-2000 data in a soon-to-be-published study referred to in a recent WCRI Webcast.

Chiropractors in California were singled out as requiring an especially high number of visits–an average of 34 visits per claim–more than any other state in the study.

Indemnity payments (the wage replacement component of workers' comp) were found by the study to be 39 percent higher in California than in the other states. Benefit delivery costs were 13 percent higher due to more litigation and attorney involvement, according to the WCRI.

Making matters worse, the state is still trying to recover from a market share competition by insurers that had them slashing premiums after deregulation of workers' comp rates during the 1990′s soft market, the NAII's Ms. Ryndak pointed out.

Insurance rates in California have risen sharply, according to a new report by New York City-based Standard & Poor's Insurance Ratings Service. The report found that average workers' comp rates in the state were 50 percent higher in the third quarter of 2002 than the 2001 average.

The S&P report also found that there is a $14 billion workers' comp loss reserve shortfall in the state due to the 1990s soft market underpricing. Zenith Insurance Company, a major California workers' comp insurer, bolstered reserves by 4.5 percent in February, the report noted.

S&P researchers described the California workers' comp market as "too cheap to be profitable and too expensive to be affordable." It referred to the state as "the poster child for difficulties in the workers' compensation arena."

Besides employers and commercial insurers, one very prominent victim of this morass has been the California State Compensation Insurance Fund. The Fund, originally intended to be a market of last resort for hard-to-place risks, began insuring more and more employers when several commercial insurers became insolvent and others stopped writing in the state.

PAULA Insurance Company, Legion Insurance Company and Villanova Insurance Company, all of which wrote a significant amount of workers' comp coverage in California, became insolvent in 2002, Standard & Poor's noted.

Dianne Oki, the State Fund's president, told the California Assembly's insurance committee in late March that the Fund may have to stop writing new business if the workers' comp situation in the state does not improve. The State Fund, which wrote 20 percent of the California market in 1994, now has up to 45 percent of it, noted Standard & Poor's.

The State Fund did have some good news in April, after a federal district court judge in San Francisco upheld the Fund's reserving method against a complaint that accused it of unfairly increasing experience-rated premiums and lowering policyholder dividends. The judge held that the claims of the plaintiff businesses, which had sought $1 billion in damages in a class action lawsuit, were without merit, and that the Fund had acted in good faith.

California's troubles have spawned a host of potential legislative solutions. According to the NAII, there are 20 workers' comp-related bills being considered by the state Assembly. These include proposals setting more stringent requirements for benefit awards, changes to medical fee schedules, special certification for workers comp treating doctors and wage data to help insurers detect working "injured."

On May 1, Gov. Gray Davis of California announced his own slate of proposed reforms, together with California Insurance Commissioner John Garamendi. That proposed package of reforms includes fee schedules for outpatient surgery, greater use of generic prescription drugs instead of the more costly brand-names, fraud prevention and procedures for ensuring prompt payment to workers' comp medical care providers.

Sam Sorich, president of the Sacramento-based Association of California Insurance Companies, said that he is "favorably impressed with the governor's proposed reforms, as they identify the cost drivers in the workers' comp system and attempt to do something about them."

Other bills would restrict pharmaceutical fee levels and set limits for chiropractic visits.

In Florida the workers comp system is also in difficulty, according to other WCRI research. Figures on benefit delivery expensesthe expenses incurred when administering workers comp claims, managing medical care and resolving disputestell part of the story.

Ranked on the basis of average benefit delivery expenses per claim (from highest to lowest), Florida–with $2,605 per claim–came in just behind California ($2,723 per claim), indicating a high degree of loss adjustment, litigation, attorney involvement and dispute-related costs in both states. (See accompanying chart.) Compare this to the lowest rates states in the study, Connecticut, $944, and Wisconsin, $842.

"If states like California and Florida can find a way to reduce the cost of delivering benefits, this money could be redistributed and made available to increase benefits to injured workers or to reduce the cost paid by employers," said Richard Victor, WCRI executive director. Benefit delivery expenses are "a measure of system efficiency," Mr. Victor added.

Despite a 13.7 percent overall average rate increase that went into effect on April 1, insurers are responding to the state's inhospitable workers' comp market by cutting back on writing new and renewal business.

For example, The Hartford Financial Services Group, based in Hartford, Conn., announced in March that it will pull out of a program providing workers' comp insurance to 4,500 small contractors.

"We will not renew the policies because rates aren't high enough to cover rising medical and legal costs," said Hartford spokesperson Cynthia Michener.

Florida is considering legislative reforms that it hopes will improve its workers' comp system. For instance, H.B. 1837 would establish more stringent standards for permanent total disability, which is currently based on federal Social Security disability standards. The reforms would also, among other things, bar attorneys from charging by the hour and limit corporate officer exemptions.

On May 1, the Florida House passed H.B. 1837 and sent the bill on to the state Senate, but the Senate failed to pass the legislation by the end of its regular session on May 2. According to the Alliance of American Insurers, H.B. 1837 would have resulted in substantial savingsreducing costs by more than 14 percent based on estimates from the National Council on Compensation Insurance.

Creating a state workers' comp fund company to insure businesses that can't obtain coverage elsewhere was considered by the legislature. But that idea received a setback in March when the House Select Committee on Workers' Compensation in its recommendations for reform legislation removed language related to a fund.

That move was praised by insurance groups, which believe they can profitably write business in Florida once reforms are in place. "Private insurers can adequately service the needs of the workers' compensation market if these reforms are passed," said William Stander, a Tallahassee-based lobbyist for the Alliance of American Insurers.

Even after reform activity, however, states can run into trouble. Texas, which enacted major comp revisions only two years ago, is once again experiencing problems.

The WCRI found that Texas had the highest average workers' comp claim payment, $2,413, about 54 percent more than the average state in an eight-state study. One of the reasons, according to the research, was the frequent involvement of chiropractors, who were involved in a fifth of all claims (twice as often as in the other states).

In addition, a 2001 study by the Texas Research and Oversight Council found that Texas had the highest medical costs of the nine states examined.

Texas also had the highest percentage of injured employees out of work for more than a month, according to a report by the Corpus Christi, Texas-based Work Loss Data Institute. For Texas, the percentage was 32, while the national average is 21 percent, the report said.

In the states at the other end of the time-off-the job spectrum, Minnesota and Wisconsin, only 13 percent of employees were out that long. The report also found that Texas ranked next to last in favorable outcomes for back sprains and strains, ahead of only California.

The WCRI study also discovered significant disparities in medical costs in different parts of Texas. (See accompanying chart.) Medical costs for claims in Houston were 58 percent higher than for a similar claim in Austin. Costs in Dallas were 38 percent higher than Austin. "Excess care" provided in some areas was behind the disparities, according to the WCRI's Dr. Victor.

Certain Texas lawmakers, hoping to trim medical costs, are considering introducing a bill that would bring the managed care concept to workers' comp.

Other proposed reforms, the AAI noted, include overturning a state court decision that gave insurers only seven days to deny or pay a workers' comp claim, and bills to limit use of acupuncturists and chiropractors as providers of primary treatment for job-related injuries.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.