Comp Networks and Hospital Costs

Thursday, August 7, 2008 | 0

By Joe Paduda

A few weeks ago I wrote about the big profits hospitals get from workers comp, and closed with the observation that comp payers are overpaying hospitals. The question is why?

Glad you asked.

Since Occupational-Urgent Care Health first started the work comp network business in a major way (although AIG's managed care sub had one in the Washington D.C. area in the mid-80s, OUCH's entry really got things going in the late 80s) the business has exploded, with pretty much every work comp payer using a PPO nowadays. The idea is payers get to reduce their expenses and only pay the PPO for 'savings'.

So, are networks actually saving medical dollars?

Lets run the numbers. National PPO penetration averages around 58-62%, with wide variations among the states (New Jersey and Florida are up above 90% with New York down below 45%). Savings (below fee schedule or usual and customary but not net of PPO fees) runs about 10-12%, and PPOs charge from 16-23% to their 'retail' customers.

Total work comp medical spend this year will be about $32 billion. PPOs are 'saving' about $2.4 billion and getting paid about $480 million for that service.

But medical costs in comp are still going up faster than group health medical inflation, and considerably faster than the medical CPI. The biggest contributor to that inflation is facility costs.

According to the latest stats from NCCI, comp medical trend was 6.0% in 2007, 8.6% in 2006, and 6.2% in 2004. By way of comparison, the CPI was 4.4% in '07, 4% in '06, and 4.4% in '05. Anecdotal information from several payers indicates trend is heading up in 2008, with facility costs particularly problematic. And that anecdotal information is backed up by national figures, which indicate facility costs are the fastest growing component of the medical CPI at an annual rate of 4.8%.

In contrast, drugs and supplies were up 0.1 percent in June after dropping 0.7 percent in May. Professional services increased 0.3 percent in June after a 0.7 percent increase in May.

Facility costs in workers comp make up between 35% to 55% of total medical expense (depending on the state) - a pretty significant chunk. As they continue to rise faster than other sectors, that 'share' will also rise, making facility costs increasingly significant.

Why aren't networks able to deliver better results for facilities? Market share. Workers comp makes up less than 2% of total medical costs in the US. When a workers comp network calls on a hospital, the red carpet isn't exactly rolled out - the managed care contracting department is pretty uninterested in offering a deal to a network that might deliver one percent of their total revenue. While workers comp can be very profitable for hospitals, most facilities look at the revenue numbers and set priorities accordingly.

This isn't going to change - work comp network deals (with a few minor exceptions) are specific to workers comp. A PPO owned by a group health company may try to leverage the group business when negotiating with a hospital, but get real - the group contract is way more important to the insurer/network than work comp, so when push comes to shove during the contract negotiation process, work comp discounts will be given up to get a better group health discount.

Although there is consolidation going on as one would expect in what is a mature market, there is little in the way of innovation among the larger generalist network vendors. Even though their results are declining, the big PPOs have nothing to gain from innovation, and a half-billion dollars to lose.

What does this mean for you?

Until payers decide they are sick of being pushed around by networks producing increasingly crappy results, this isn't going to change.

Joe Paduda is principal of Health Strategy Associates, an employers' consulting business based in Connecticut. This column was reprinted from his blog on workers' compensation and health insurance issues, http://www.managedcarematters.com