The 50% Medical Cost Myth
Tuesday, April 29, 2008 | 0
By Robert M. Aurbach
There are two major movements in workers’ compensation reform in the last few years. One is the emphasis placed on controlling medical costs in workers’ compensation. While it is clear that there are real reasons to look at the utilization of treatments and other issues in the medical delivery model in use in workers’ compensation, the primary push for these changes is not a rational examination of the realities of medical practice and outcomes, but rather an emotional call to arms, primarily sounded by two stakeholders with agendas quite different from those of the medical community, employers or workers.
The other major reform movement in workers’ compensation involves experimentation with alternatives to workers’ compensation, as we know it, or significant variations in the mode of delivery of traditional benefits. These experiments include “carve-out” programs and a flirtation with 24-hour care and alternative disability determination and delivery mechanisms. These experimental efforts arise from dissatisfaction with the role of workers’ compensation in today’s social insurance environment (or just a conviction that there’s a better way), a desire to eliminate certain influences pervasively affecting that environment, or both.
I will argue that the first movement, despite it’s superficial appeal, is largely based upon faulty reasoning. While it is true that there are benefits to be had from focusing medical attention on treatment efforts that have empirical evidence of effectiveness, the pressure to control medical costs is coming from an entirely different perspective. The second reform movement attempts to address a more basic issue, and one that perhaps points to the future of workers’ compensation in a changing world.
Current medical cost containment efforts are based on faulty reasoning
Regulatory intervention is designed (at least when it is designed well) to accomplish a goal with the least disruption of the regulated environment possible. The principle of least disruption is important (though often ignored) because the disruption of the environment introduces a variable that may affect the regulatory goal in unpredictable ways, and almost always is a cost driver in itself, as the parties scramble to adapt to the new system, define it’s limits or challenge it. Therefore medical cost containment efforts, to be well designed and effective, must reduce medical costs without undo adverse consequences on the delivery of efficacious treatment to workers.
What’s necessary and appropriate in efforts to reduce costs? One of the things that we hear a lot about is the rate of medical inflation, and it’s comparison to the general inflation rate. NCCI tells us that the rate of medical inflation has been running at 9.5% per year in the period since 1997, and clearly general inflation is less during the same period.
More importantly, the workers’ compensation constitutes approximately 4% of the payments made to private health insurers in 2004, which gives rise to some question about how the suppression of treatment costs in workers’ compensation is supposed to affect the general medical inflation picture.
Without the ability to affect medical inflation, the only way that workers’ compensation medical costs can be trimmed vis-à-vis general medical costs is by gaining efficiency. Yet most of our efforts do exactly the opposite. Fee schedules are seldom effective over the long term, because coding and utilization practices can be manipulated to avoid the impact of the schedule. Bill review, to prevent the coding manipulations, results in delays in payment and significant additional cost – in fact one study says that our attempts to control costs with outside reviews cost the system at least 7 % of the total loss cost expenditures. Utilization review, as presently implemented, requires restrictive pre-approval procedures that again delay treatment, or post – procedure reviews that increase litigation, delay payments to physicians (again resulting in more indirect cost) and demand paperwork and other “hassle factor” activities that, yet again, drive up the system costs of medical delivery.
The 50% Myth
But we are told, medical costs have grown to crisis proportions, because they’ve always been below 50% of the total benefit dollar – and now they are approaching 60%, nationally. What we are not told is where the determination that 50% represented a crisis point came from – and with good reason.
Consider a theoretical world where we were much better than we are today at healing injured workers and returning them to work without significant wages loss. Surely that is the intention of the current model of workers’ compensation and most of us would agree that a system that achieved such results was running as intended. But what would be the distribution of benefit expenditures in such a world? With fewer and fewer dollars spent on indemnity benefits as workers were successfully returned to employment at pre-injury wage levels, the percentage of benefit dollars spent on medical and rehabilitation would rise, even if the absolute dollars spent on the care held steady. We could, in such a theoretical world, see medical benefits consuming 75% to 90% of total expenditures on benefits, and workers and employers would justly be delighted with the outcome.
Even restricting ourselves to present reality, the influence of doctors on the functioning (or failure to function) of the workers’ compensation system is hard to overstate. While direct expenditures for the payment of medical treatment only amounted to 24% of total benefit costs in California in 2006 (plus another 2% for medico-legal evaluations), payments to hospitals and pharmacies and other medical expenses (for whom the doctors are usually the gatekeepers) amounted to an additional 29% of the benefit dollar. But doctors are making the decisions with regard to when a worker may return to work, as well, and so act as the gatekeeper for another 22% of the benefit dollar spent on temporary disability payments. Finally, doctors act as the raters for permanent disability, which amounts to another 22 % of the California system. If doctors are going to be in direct control or have an indirect influence on something like 99% of the workers’ compensation system, then it doesn’t it make sense to pay them well enough so that they’ll do a good job with that responsibility?
The theoretical world of universal return to work is not even on the horizon, and some will say that in this environment the mythical 50 % number still means something. After all, legislators and regulators are given that statistic by sources closely tied to the insurance community, and they believe that it has independent meaning, in the absence of other data. I agree that the 50% figure has meaning – but only as a smokescreen for other separate agendas coincidentally and concurrently advanced by other stakeholders. Both the insurance industry and the trial and defense bars have been proponents of this kind of thinking, but likely for different reasons.
The forces behind the 50% myth
The insurance industry, at least as represented by it’s advocacy organizations, has been extremely active in the promotion of medical cost containment. This is mysterious behavior, especially when one looks at position papers issued by AIA, in which any deviation from their prescribed cookbook for medical cost containment can result in their withholding support from medical cost containment efforts, and publicly questioning whether any savings at all can be expected without all of their critical elements in place. The behavior is even more mysterious when viewed in terms of normal rate making practices, which are intended to normalize for loss costs, and therefore make it irrelevant what law the insurers work under, as long as the law is sufficiently predictable to generate fair premiums.
The one common denominator of all the AIA proposed reforms is that they all tend to objectify the claims-administration process. Of course this leads to predictability, which lessens the likelihood of unforeseen shortfalls in premiums. Perhaps more importantly, such objectification of the claims process means that there is less discretion in the adjusting of claims. When there is a lot of discretion in the system, the adjusters implementing it have to be entrusted with the ability to make potentially costly decisions, or the whole claims administration process grinds to a halt.
But a system with more discretion requires more experienced and more highly trained adjusters to work fewer cases to allow for the time needed to exercise the discretion properly. And more experienced adjusters, with smaller case loads, drives up the insurer’s personnel costs, which either bites into profits or, in a competitive environment, can cost them market share. The otherwise mysterious obsession with a particular suite of medical cost containment initiatives, and the promotion of the 50% myth, seems to have an economic base, after all.
The other group that always seems to advocate for medical cost containment is the attorneys. This is a bit strange, at first blush, since at least the applicant’s side of the trial bar often stands alongside the doctors, wrapped together in the assumption that they can speak for the best interests of the worker than the worker’s representatives can manage. To be sure, when an event such as the adoption of the American College of Occupational and Environmental Management Guidelines as a presumptive standard in California or the adoption of the American Medical Association Guide to Physical Impairment, 6th Edition is concerned, the trail bar predictably opposes a change from the status quo ante, but a different phenomenon is observed when general questions of reform are raised.
Attorneys from both sides are quick to point out that recent loss cost increases are due to medical benefit payments, and even quicker to recommend that reform efforts be focused, sometimes exclusively, on medical cost-containment efforts.
There are two apparent reasons for this phenomenon. First is the obvious – more medical cost containment, at least efforts of the style that are currently in vogue, is likely to create opportunities for dispute, litigation and fee generation. Indeed, any systemic change will give rise to a period of legal interpretation, where the attorneys jockey with the courts to obtain the most advantageous interpretation of the new law for their position. But medical cost-containment efforts to date have not been designed, for the most part, with the reduction of court involvement in medical issues as a priority. We are still addicted, it seems, to having lawyers and judges make medical decisions, no matter how poorly qualified they are for the task.
The second reason is more insidious, and probably more calculated. In most states, the trial bar has enjoyed the support of organized labor and the medical profession in diverting attention from their formidable role in indirectly driving the cost of workers’ compensation. Despite being in a non-fault environment, where liability is very often presumed, lawyers continue in most jurisdictions to charge a contingent fee based on the size of the award obtained, just as they do in tort cases, where fault is usually in issue. The trial bar is generally not happy with the economic consequences that they’ve seen with the advent of alternative dispute resolution schemes, such as mediation, because they are cut out of some of those fees. They’ve gotten more organized in their opposition of systemic alterations that would cut their profits further.
Lawyers unquestionably cause more medical treatment to be given, have an impact in delaying return to work and contribute significantly to what has been termed “wounded worker syndrome”. The statistics are clear – in one Eastern state over a two-year period, cases with lawyer representation of the worker averaged 1,100% higher medical benefit expenditures and 3,000% higher indemnity expenditures.
The lawyers argued that the cases they took were the most serious, and that they were only getting the workers they represented the benefits they deserved. That explanation falls a little flat when viewing the discrepancy between the results with indemnity and medical – if the cases were truly more serious, then one would expect that the increment of medical expense increase would track much more closely with the increment of indemnity increase. The fact that attorneys were nearly three times as successful in obtaining indemnity benefits than they were in obtaining medical benefits on the same cases is better explained by an attorney fee structure that weights indemnity benefits much more heavily in overall fee calculations.
Interestingly, Australia – hardly a harsh environment for social insurance programs – controls lawyer compensation on an entirely different paradigm. Their system of paying for the work done, rather than for the award obtained has not resulted in cries that workers cannot obtain competent representation or are having their rights violated, and in the bargain, medical costs in Australia are only running at about 20% of total loss cost.
In workers’ compensation, no fault need be shown and the risk of taking a case that won’t be compensated is substantially less. But, absent external controls, the fee structure stays the same. During 2006, Delaware allowed lawyers to charge both contingent fees to the worker and also obtain additional fees for hearings paid by the employer. The Oregon workers’ compensation comparative premium study for 2006 listed Delaware as third-highest premiums in the country. Not surprisingly, the lawyers were arguing that the medical profession was the only important cost driver in the system.
To be sure, it is devilishly hard for researchers to tease the indirect cost components in medical and indemnity caused by the involvement of the legal profession out of the rest. But every major researcher acknowledges that attorneys are a major, if un-quantified, cost driver. The “dueling doctor” phenomenon, and it’s solution, the “independent medical examination” are clearly lawyer-made. Medical-legal dispute resolution, and its associated costs, including interminable depositions and unnecessary medical testing, is also born of the legal system. Questionable surgeries are performed with the encouragement of lawyers who know that they will get an increment of fee just by virtue of the existence of a “disfiguring” surgical scar.
There is reason to believe that these phenomena are only the tip of the iceberg. The point is, however, that the last thing attorneys want is for the policy makers and legislators of this country to notice how much they are raking out of the system and how little advancement of the real purposes of workers’ compensation we get for what we’re paying. So they strive mightily to focus out attention elsewhere. Lately, “elsewhere” has been the medical profession.
Appropriate aims for Medical Cost containment
To say that the current push for medical cost containment is based on poor reasoning is not to say that medical cost-containment efforts are inappropriate or to say that they can’t accomplish a number of beneficial results, if properly scoped and designed. Some health care providers, tired of being squeezed from all sides, justify in their own minds the idea that workers’ compensation should make up for their costs of under-compensated care elsewhere. The doctor who feels the pinch of restrictive hospital indigent care policies or Medicare payments may even take an unrepentant public stand in favor of cost shifting into workers’ compensation.
The profiteering that goes on under this rationalization is unjustifiable. If workers’ compensation is too small to influence overall medical inflation, then it cannot make up for the perceived inequities of general health either. Any well-designed scheme of medical cost containment will prevent most cost shifting and contain methods for weeding those who practice it out of the system.
Medical cost containment can help control the economic incentives for compromising quality care. The most obvious examples are the economic tie-ins. The physician who has to make payments on his MRI equipment may have less restraint than normal in prescribing that a patient have imaging at the doctor’s facility. Similar tie-ins with physical therapy and other modalities of medial treatment are well known. Even where the efficiencies of these practices justify some consideration, the distrust that they engender is not worth the cost to the profession.
But economic self-interest can influence more subtle decisions too. Therapeutic options seldom present clear-cut, black-and -white, decisions. The development of evidence-based medical practice guidelines is the most positive development in this debate in recent memory. While it is key to make sure that such guidelines are properly implemented, it is difficult to gainsay the benefits of the concept. They help physicians make better clinical decisions. When used in conjunction with technology to make them more accessible to the claims administration community they can increase the efficiency of claims administration and reduce disputes and litigation.
While treatment guidelines are about quality of care, they also address the real issues of controllable medical costs. It is a position that is politically very difficult to oppose in principle, so the lawyers generally attempt to obfuscate, so as to preserve their ability to make fees by arguing an issue that should never be argued by lawyers in front of a non-medically qualified tribunal – namely purely medical issues of diagnosis and treatment.
Occasionally a medical practitioner engages in misguided intentional conduct. Unbundling of procedures, repackaging and dispensing prescription drugs at higher prices, billing for services not rendered are just a few examples of behavior that must be uncovered and stopped, if for no other reason than fairness to the vast majority of practitioners that do conform to expected norms. It can no longer be maintained that such actions do not harm the patient. Every example of doctor misbehavior makes it more likely that policymakers will impose harsh and unyielding criteria on medical practice that will potentially compromise care. Medical cost containment efforts should be designed to remove these practitioners from the workers’ compensation environment.
Most importantly, medical cost containment should be aimed at ensuring that quality care, based on sound medical knowledge, reduces disability. Provision of high quality care is clearly a practical way to reduce overall medical costs and medical cost containment efforts must recognize and address this fact if they are going to be effective.
Some other factors affecting the environment
There are two other factors that should be considered in understanding the current environment in which medical cost containment is being discussed: the paucity and sources of statistical data on the issue, and the inherent timidity of workers’ compensation regulators (and often, the legislators and executives to whom they report).
There are those who will object that there is plenty of data to demonstrate what medical treatment costs in workers’ compensation. After all, the insurance companies know exactly what they spend, report that data to rate making agencies and the rate makers publish analyses of the data to the public. Let’s assume for the moment that the close connections between some of the rate makers and the insurance industry do not contaminate the data or analysis. The question still remains – what data is collected and what kind of analysis is routinely performed? The answer is that the data collected pertains to expenditures, not to outcomes, so analysis of it usually fails to address critical issues about treatment efficacy.
In that environment, it is no surprise that the analytical emphasis is on measures that will reduce expenditures. Even the relatively sophisticated analyses performed by more independent research entities often fall short of real insight because the data they work with isn’t organized to allow important questions to be asked in relation to other data bases, which would allow the effects of medical cost containment on patient outcomes to be studied more directly.
The other factor that the medical profession has to deal with is the relative timidity of most workers’ compensation policymakers. Workers’ compensation regulators may have substantial authority in their jurisdiction, but in the larger political pond, they’re typically fairly small, vulnerable fish. Legislators, few of whom truly understand the organic nature of workers’ compensation regulation, fall quickly into a “what do other states do” mentality and ideas are perpetuated without understanding why they worked in one place, or even if they truly worked at all. In this context, entrenched forces, such as the attorneys who make their living skimming off a cut of the system, often don’t have to work very hard to perpetuate old ideas, or defeat new initiatives. Adding to the problem is that review in the courts, which is where the attorneys go to “change back” reforms, is largely based on former tort lawyers applying the lessons of old cases – hardly a recipe for innovation and increased efficiency.
Lessons to be learned from experiments with different models of workers compensation reform
Several states are experimenting with approaches to workers’ compensation that are based on different paradigms. California, for instance, allows “carve-out” programs that administer workers’ compensation benefits for discrete populations (usually unionized labor, but also recently local government workers, in one instance) on a model of dispute resolution that is fundamentally different than traditional workers’ compensation. As in general health, medical personnel review medical decisions. Lawyers are not prohibited, but don’t need to be – medical personnel have little patience for a lawyer’s argument about the appropriateness of treatment. Medical decisions are made more expeditiously, with minimal delays, formality and expense. Indeed, the whole system is set up to avoid the worst of the adversarial approach to dispute resolution, and it appears to be working – costs in such systems appear to more than offset the cost of administration, and they are growing in popularity.
Several states are experimenting with 24-hour health care or mandatory employment based short-term disability. Both share the dispute resolution mechanisms of their general insurance counterparts, with reduced litigation and litigation related delay. If these programs are combined, then the role of workers’ compensation will be largely limited to resolution of dispute concerning permanent disability. Predictably, proponents are claiming that their programs are more efficient than their workers’ compensation counterparts.
The lesson to be learned from these reforms is that sustainable savings are most likely to be achieved by reduction of internal friction within the system. When people agree, them things go smoothly. When disputes are resolved quickly, then no party is pressured by the delay and develops resentment to the system or the other side. When no representative of the disputants has an economic stake in the continued existence of disputes, costs go down and stay down.
Steps the medical profession can take to enhance the chances of a good outcome
There are seven principles (with corollaries) that can guide the medical profession to better outcomes in dealing with the difficult environment in which they find themselves.
Principle 1: Cut loose form the lawyers – they aren’t your allies.
Even a casual observer will realize that the lawyers have an inherent conflict of interest with their clients in arguing for a medically questionable surgery when they receive a portion of the benefit award attributed to their client’s surgical scar. That conflict of interest extends to the traditional close relationship they’ve had with the medical profession.
Make no mistake – lawyers form associations and share insights and strategies. One of the recent strategies is to obfuscate their role as a cost driver by directing attention at a new target of opportunity – the medical profession. At the same time, they still try to protect large fees based on large awards by defending the patient’s right to any treatment, whether or not it’s shown to be effective. Never mind that the positions are inconsistent – arguing inconsistent positions is such a venerable position for lawyers to take that there is a whole sub- genre of lawyer jokes based on the phenomenon.
Corollary 1: Get medical issues out of the litigation model of dispute resolution. General health long abandoned this model as inefficient, and likely to lead to bad decisions. After all, when was the last time that a judge was appointed or elected because they were truly competent to review medical decisions? The impact of taking lawyers out of these decisions will be less hassle factor for the practitioner, patients who have not been primed to demand particular treatments, more consistency and less treatment delay.
Corollary 2: Help regulators and legislators learn better ways of resolving medical disputes. Litigation is time consuming, expensive, and delays treatment. Even if treatment delay doesn’t directly cause a worsening of condition, it fosters the development of “wounded worker syndrome” and genuine economic and psychosocial stress. The delay serves no one but the lawyers and insurers.
Principle 2: Get good representation.
Medical society politics are difficult, but it seems like, too often, the role assumed by the representative of the medical profession is to protect the income of practitioners. The doctor who volunteers for the job often has an agenda of his or her own – not surprising, since the job does take away from medical practice time. Yet, such representatives often do not have the larger picture well in mind.
Corollary 1: The wrong person can hurt you in the long run. A doctor who insists on watering down a fee schedule or medical practice guidelines to achieve local or personal benefit may be successful in the short run. But in the longer run, if medical costs do not respond to the lessened initial intervention then policymakers may be driven to more draconian measures, with less input form the medical profession in the future. Moreover, the profession’s legislative credibility rides on it’s representative. It is hard to argue for the imperative of high quality patient care when, for instance, simultaneously arguing that cost shifting into workers’ compensation to make up for shortfalls elsewhere is a legitimate approach. Yet some medical society representatives have taken exactly that position.
Corollary 2: It’s a hard duty – it would be best for a group of medical advocates to share the duty, allowing collegial strategy determination to overcome individual biases, spreading the time burden and providing different personalities to work with different policymakers.
Principle 3: Quit trying to control with fear
Lately it seems that every attempt to control medical practice in workers’ compensation is met with the threat that workers will not have access to care. Such arguments are counter-productive.
Corollary 1: Access claims don’t stand up well to scrutiny. The claim that an individual patient may not be able to see their first choice of doctor is already true – many doctors refuse to accept workers’ compensation patients already. But such research as has been done does not support the overall conclusion that access to quality care will dry up. And it becomes very hard for a doctor to passionately argue for the quality of patient care while maintaining that doctors will abandon patients wholesale if they don’t get their price. Any short-term effects of arguing access don’t justify giving up the moral high ground in the legislative debate.
Corollary 2: Arguing quality of patient care is more effective. Healing patients faster is clearly associated with lower overall workers’ compensation costs15. It therefore appeals to most of the political factions, and the rest will be afraid to frontally oppose it.
Principle 4: Be open to new ways of doing things.
Albert Einstein said: “The significant problems we face today cannot be solved with the same level of thinking that created them.” The last 20 years of medical cost containment have largely been unsuccessful – indeed if they had been successful the perceived crisis arising from the growth of the medical component of workers’ compensation from 41% to 59% presumably would not have occurred. If the medical contribution to workers’ compensation is to be controlled (indeed, if the problems of medical inflation in general health are to be controlled) it will be with new ideas and innovative strategies. As noted above, regulators and policymakers are already inherently conservative. If the medical profession follows suit, nothing constructive will happen, and the pressure to take unproductive measures will rise.
Corollary 1: The medical profession is likely to be the source of well-designed medical cost containment initiatives. Collectively, the profession knows what’s broken, and what’s fixable. The results of people who don’t have an intimate working knowledge of the medical profession being the ones who try to fix it are how we got to where we are today.
Corollary 2: Individual medical practitioners will fear what they don’t understand. To sell constructive change within the medical community requires excellent internal communications. It is not enough to assume that the same old communications methodologies will work, or that after the fact training will be sufficient. It is necessary to proactively engage your colleagues to obtain their buy-in.
Corollary 3: The regulators will fear change too. Most regulators do not have staff with sufficient medical expertise to help them understand that a different approach to medical cost containment can be “win-win” for them too. Time spent with such officials discussing the implementation of new approaches will not be wasted.
Principle 5: The path to individual justice is through systemic justice.
There is a huge temptation in the everyday practice of workers’ compensation medicine to make the system work well for the patient in front of you. Patient demands, a genuine desire to see fairness done and other factors sometimes influence practitioners to use their knowledge of the system to give the patient a little “help”16. Bending the system doesn’t make the system work; it just makes it less of a system, less predictable and more likely to stimulate reaction.17
Corollary 1: You can’t keep a “voice” for quality patient care, when records review shows over-treatment, inappropriate treatment, and inter-rater inconsistency. Strangely enough, physicians subject to these criticisms often are representatives of the profession.
Corollary 2: Serious and reliable peer pressure to work correctly in the system is the only way for policing medical practice that doesn’t create a serious “hassle factor” – and every practitioner has the responsibility to participate. If they don’t then they have only themselves to blame when others step into the void.
Principle 6. Approach regulators with a “better way to build a mousetrap”
It is an old adage in legislation and regulation that there’s almost always more than one way to achieve a goal. Just because you don’t like the method originally advanced doesn’t mean that you need to oppose the underlying objective.
Corollary 1: Regulators will almost always first propose a “brute force” solution to a problem. I’ve been guilty of it. It’s just what we do. But they can often see the virtue in different approaches, especially when they reduce your opposition. After all, regulators don’t necessarily know who politically supports a particular interest group, and confrontation is avoided when reasonably possible.
Corollary 2: Understanding that there’s almost always more than one way to accomplish the regulatory aim, it’s often very effective to find the real intent behind unacceptable proposed regulations or statutes, and offer a different method of achieving the same end that is less onerous. Merely opening the discussion can often lead to a partnership that has beneficial consequences.
Principle 7: Change is coming – the medical profession can fight it and lose, or become part of it.
Corollary 1: The regulator will always choose to work with a cooperative party, and may bend over backwards to accommodate someone that will meet them half way. Regulators don’t choose avoidable confrontations, which drain resources and are potentially politically dangerous. They will fight only when given no other public choice. Sun Tsu, in The Art of War, reminded us twenty-six centuries ago that an enemy that has no position to retreat to is exceptionally dangerous. The medical profession would be well advised not to put regulators and legislators into that position.
Corollary 2: Cooperation, creative thinking and a little understanding about the needs and motivations of other stakeholders can help win the war for quality patient care.
Robert Aurbach is a 1979 graduate of Cornell Law School and served as General Counsel for the New Mexico Workers’ Compensation Administration from 1990 to 2005. This copywrited opinion column was reprinted with his permission.
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