The Case Against Comp Physician Discounts

The most important player in any workers' comp case is the treating physician. Physicians diagnose conditions, determine causality, develop treatment plans and order tests. We hope that they also work with the adjuster and employer to arrange for transitional duty and encourage the injured worker to return to work as quickly as practicable.

Nevertheless, payers believe that they are delivering good results by paying these critical players as little as possible. This fallacious belief has led to a business model that actually encourages higher medical expenses, while ostensibly showing lower medical costs. The "unintended consequence" is that workers' comp medical is increasing at an annual rate of 12 percent, much higher than the rate experienced by Medicare or commercial payers.

Where is the proof that lower per-unit prices don't result in lower total medical expenses?

First, there is the myth of the workers' comp fee schedule. The theory behind low fee schedules is simple lower prices equal lower medical costs. If this theory worked, states with the lowest fee schedules would have the lowest medical costs and the converse would be true.

However, Florida, according to an April 2003 Workers' Compensation Research Institute report, had one of the lowest fee schedules, while its average medical cost for lost-time claims was slightly above a 12-state median. Meanwhile, Connecticut has one of the highest fee schedules in the country and its average medical cost for lost-time claims is almost 30 percent below the median.

Yet most payers cling to some form of a preferred provider organization arrangement based on providers delivering care at a rate below the fee schedule/usual and customary rate.

While a host of factors contribute to rising medical costs, it is clear that the deep-discount preferred provider model has done little to reduce medical trend. In fact, I would argue that the PPO business model prevalent in the industry has actually exacerbated the medical expense problem.

Superficially the PPO business model is quite attractive. PPOs contract with providers to deliver services at a discount. Most PPOs get paid a percentage (typically 15-to-22 percent) of the savings that is delivered by that discount. So, the more the PPO "saves," the more it makes. On the surface, this sounds good: The system rewards the PPO for saving money and does not pay it when it delivers no savings.

However, a closer look reveals that when PPO vendors win, the payer loses. The PPO gets paid for savings on individual bills, not on total medical costs. Therefore, the more services delivered and the more bills generated, the greater the "savings" and the more money the PPO makes. Moreover, the providers, who have discounted services on a per-unit basis, have a perverse incentive to make up the discounts by performing more services.

Perhaps even more troubling, many payers have business models that also benefit from this strategy. Managed care departments at many carriers and third-party administrators are evaluated on the basis of their network penetration (the percentage of dollars that flow through a network provider) and network savings on a per-bill basis.

Now, lets examine the opposite model: the Expert Provider Organization. Simply put, identifying the right providers and sending patients to them results in lower total medical expenses, reduced lost time duration and lower total claims costs.

The California Workers' Compensation Institute's February 2003 report by Alex Swedlow and Laura B. Gardner, titled "Provider Experience and Volume-Based Outcomes in California Workers' Compensation," indicates that relatively few "expert" providers deliver the best outcomes and lowest medical costs for workers' compensation cases. The study includes almost 1.1 million claims over an eight-year period treated by some 40,000 separate providers.

Their study found that the medical costs of claims treated by the most experienced providers who cared for the highest number of workers' comp cases (highest-volume providers) were less than half that of their peers who treated the fewest workers' comp cases.

For temporary disability claims, the average length of disability for the highest-volume comp providers was less than half that of the lowest-volume providers, (17.2 days vs. 35.9). For permanent disability claims, the highest-volume providers' length of disability was 71 days less than that delivered by the lowest-volume providers.

The more workers' comp experience a provider had, the lower the likelihood of attorney involvement in their claims.

The CWCI study was replicated, albeit on a smaller patient population base, by an actuarial study of the results delivered by Choice Medical Management Services Inc., a workers comp managed care firm in Tampa, Fla.

Choices study showed cases managed by experienced workers' compensation physicians had significantly lower total case costs and that medical costs were 30 percent less than the industry average. Interestingly, Choice actively recruits experienced workers' comp doctors and its business model is not predicated on a percentage-of-savings basis, nor does it seek deep discounts from most of its providers. Thus, the CWCI study indicates that a relatively few experienced doctors deliver the best outcomes, and the Choice model indicates that paying these doctors more actually reduces total claims costs.

Clearly, for employers and carriers interested in total cost per claim, it is far better to recruit the right physicians into an expert provider network and pay them fairly.

Joseph Paduda is an independent consultant to the workers comp managed care industry based in Madison, Conn. He can be reached at jpaduda@healthstrategyassoc.com

Reproduced from National Underwriter Edition, April 30, 2004. Copyright 2004 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.