Workers' Comp: Success Breeds Success

As a result, one of the main goals behind the 2003 reforms was to create a system that is more efficient and self-executing, and the evidence suggest that those goals are largely being met. Along with the reduction in claims frequency, the profile of claims has been altered due to statutory changes in injured workers' benefits that have reined in litigation costs. Other improvements also included a revamped law aimed at reducing fraud in the construction industry and the implementation of higher standards that carriers must meet when delivering medical care and indemnity benefits.

Much Controversy Resolved

It all adds up to a picture where many of the controversies that once plagued employers, insurers, and regulators have been resolved. One measure of the efficiency of the system is the decline in the amount of dollars that employer/carriers must pay for the state's oversight of the system. The Workers' Compensation Administrative Trust Fund assessment has dropped from 1.75 percent of net premiums in calendar year 2003 to just 0.50 percent for 2007. As a result, employer/carriers paid out $83 million in 2007 as compared to the $159 million in 2003.

"The pieces of the puzzle have come together to create a better system, which is far more self-executing than it was four years ago," said Division of Workers' Compensation Deputy Director Andrew Sabolic.

Claims Frequency and Costs

Recently, the DWC has released its 2007 annual report which, combined with NCCI's statistics, portrays a system operating at a level of efficiency that some would consider almost unnerving. No doubt, much of that is attributable to the changing dynamics of claims, which is both a state and national phenomenon. NCCI's proposed rate cut is almost solely attributed to a drop in claims frequency, which has declined from 1.7 claims per 100,000 workers in 1997 to just 1.1 claims per 100,000 workers in 2006. Florida's claims frequency has dropped by a cumulative total of nearly 50 percent between 1991 and 2005.

The DWC's report states that the state's total number of lost-time claims has declined from 82,000 in 1997 to a projected 63,000 in 2006. Lost-time claims are defined as a claim where a worker misses seven days or more due to an on-the-job accident and therefore is eligible for indemnity benefits. The DWC notes that the number of the 2006 claims will most likely increase, since many of the claims have yet to mature. Even so, however, the number of claims is being more than offset by the growth in employment and the subsequent rise in wages.

Emphasis on Safety

The reasons behind the drop in total claims range from better job training, the increased use of computer, and changes in construction and manufacturing techniques. Those reasons aside, the dominant force behind the drop in clams is an emphasis on safety. "Employers have realized that safety is one place they can actively affect their workers' compensation costs," said Lori Lovgren, government relations executive for NCCI.

The decline in claims frequency can also be measured by the reduction in litigation activity. The Office of the Judges of Compensation Claims has reported that the number of petitions for benefits has fallen from 127,826 in 2004 to just 91,000 in 2006. Likewise, the number of new cases filed has fallen from 44,800 to 37,000 in the same time period.

Workers' compensation benefits fall into two categories: the amount paid out in wage-loss or indemnity benefits, and that portion of the benefit dollar that is reimbursed to health-care providers for their services. Looking at the indemnity side of the claims equation, employer/carriers paid out roughly $440 million from 1997 through 2003. Since then, the total amount of indemnity payments has trended downward to an estimated $188 million in 2006. While that downturn is partially due to the fact that the later claims have yet to mature, another major factor is the change in benefits enacted by lawmakers.

The legislature significantly increased the standard that injured workers must meet to receive permanent and total disability benefits while increasing some lower benefit levels. The total amount paid out for permanent total claims has dropped from $54 million in 2000 to just $3 million in 2003. Temporary total benefits represent the largest benefit category, representing over half of all indemnity payments paid out between 1997 and 2006. All told, employer/carriers have paid out $2 billion in temporary total benefits during that time period.

While indemnity benefits have their place in the system, it is medical costs that continue to be a cause of concern. According to NCCI, Florida's medical payments account for 68 percent of the total benefit dollar. And while the average claims frequency pre- and post-reform has declined 13.9 percent, and indemnity severity by 18.4 percent, medical severity has increased by nearly four percent. The total medical payments for lost-time claims in 2002 registered $615 million, and while that number has declined somewhat, it still remains the number-one concern in the industry. On a paid basis, the average cost per medical claim reached $34,000 last year, which is an increase of $10,000 from what carriers paid out five years ago.

Looking at medical payments per provider, doctors and other health-care providers represent the highest share of the state's total medical payout of $1.3 billion in 2006. Together, the providers received over $500 million. Hospitals outpatient and inpatient services divided the other 40 percent, with outpatient services accounting for $277 million in reimbursements and inpatient services $262 million. The remaining costs are divided between pharmacies ($136 million), ambulatory surgical centers ($76 million), medical supplies ($29 million), and dental costs ($3.7 million).

Medical Disputes Resolved

With such a high percentage of the total benefit dollar going toward medical costs, disputes over payments between employer/carriers and health-care providers and hospitals is now the core monetary issue that has eclipsed even the amount of dollars spent on litigation.

The Three-Member Panel on Workers' Compensation, which is responsible for setting health-care provider reimbursement rates, recently approved a settlement agreement between hospitals, employer/carriers, and the DEC that finally ends a long-standing controversy over the new version of the Florida Workers' Compensation Reimbursement Manual for Hospitals. The agreement focuses on the method for calculating reimbursements that involve the cost of physical implants, orthotics, and prosthetics. In addition, the panel signed-off on several changes to the Florida Workers' Compensation Reimbursement Manual for Ambulatory Surgical Centers.

Finalizing the hospital reimbursement manual had been a hotly debated process as employer/carriers pushed regulators to change the way hospitals bill for physical implants, orthotics, and prosthetics. Under the hospitals' current reimbursement scheme, they received a per diem amount for an injured worker's inpatient stay. If the patient's charges top a stop-loss level of $50,000, the hospital can receive a higher reimbursement rate of 75 percent of usual and customary charges. Employer/carriers argued that the hospitals were manipulating the cost of the physical devices to breach the $50,000 stop-loss amount. They also complained that a lack of access to the invoices made it nearly impossible to tell what exactly the hospitals were charging for the items. As a result, the employer/carriers wanted several changes to the manual including that the cost of the physical devices be removed from the calculation of an inpatient's total cost.

Settlement Reached

After months of heated negotiations between regulators, health-care providers, and hospitals, a settlement was reached between the parties that focused on several areas including the per diem rates, the stop-loss level, a cap on charges for the implants, and an agreement that the devices must be charged separately from the inpatient's other costs for purposes of meeting the stop-loss level. Specifically, the 2006 manual calls for the implants, orthotics, and prosthetics to be reimbursed at acquisition invoice cost plus 60 percent. Additionally, a reimbursement amount for any disposable instrument necessary to install the devices is set at acquisition cost plus 20 percent. When calculating an inpatient's total charges, the medical devices must be a separate charge that doesn't count toward the stop-loss level.

One point of contention that remains is that the new manual allows the hospitals to charge for the medical devices on an "aggregate" acquisition basis. This allows hospitals to submit one bill to employer/carriers that bundles the cost of more than one device if needed per surgery. Employer/carriers initially opposed the provision, but lifted their opposition when they were assured they would have access to the separate invoices under the audit provisions of the medical billing rule.

The manual also sets out the first increase in the per diem rate and stop-loss level in over a decade. Based on its statutory authority, the three-member panel increased the per diem rates and the stop-loss threshold by 2.8 percent. The stop-loss amount increased from $50,000 to $50,100. The per diem rate for inpatient surgical stays will increase from $3,213.73 to $3,304. Non-surgical stays will likewise increase from $1,906.89 to $1,960. Looking at trauma centers, surgical per diems will increase from $3,214.66 to $3,305. Non-surgical stays will be adjusted from $1,931.96 to $1,986.

For the first time, inpatient services at rehabilitation or psychiatric hospitals would be reimbursed on a per diem basis as opposed to 75 percent of usual and customary charges. Radiology and clinical laboratory services associated with scheduled outpatient surgery, but not performed within three days of the surgery, will be reimbursed based on the maximum reimbursement allowances contained in the health-care providers' fee schedule. Currently, such services are reimbursed at 60 percent of usual and customary charges. The Florida Workers' Compensation Reimbursement Manual for Ambulatory Surgical Centers has been modified so that it includes the same definition of medical implants, orthotics, and prosthetics found in the hospital manual. However, unlike the hospitals, the ambulatory centers will only be reimbursed at cost plus 50 percent.

Compliance Efforts Yield Results

Of all the changes made in the 2003 reforms, the change in construction exemptions has arguably had the biggest impact on the business practices in one of the state's leading economic sectors. For years, the industry was perennially identified as the state's number one source of fraud. Employers willingly flouted the law to gain an economic advantage over their competitors, especially since the chances of getting caught were slim and the penalties negligible.

In 2003, the legislature was finally willing to fight back by taking a 'law and order" approach that substantially increased the DWC's resources and ability to regulate the industry. Thirty-five additional compliance officers were hired, bringing the number of investigators to 71 located in 18 cities around the state.

More importantly, the exemption law was changed so only three officers of a corporation or a limited liability company that own at least a 10 percent stake in the company could opt out of the workers' compensation system. The number of exemptions has actually increased since the reforms, jumping from 138,000 in December 2003, to 185,000 as of June. Sabolic said that the division is taking that as a positive sign that more employers are complying with the law. 'There was a learning curve after the reforms," he said. "But we're not experiencing as much confusion under the law. Employers are aware of what they have to do to comply with the law."

Sabolic emphasized, however, that the division would continue to take an aggressive approach to enforcement. The statistics tell the story. In fiscal year 2006-2007, the division issued 2,517 stop work orders, which generated over $75 million in fines and penalties. Compliance investigations resulted in 6,700 new workers being covered under the workers' compensation coverage law, yielding $12 million in additional premium. "We're still seeing a significant underreporting of payroll by employers," he said.