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By DAN REYNOLDS, senior editor of Risk & Insurance®

In 2004 the California state legislature passed and Governor Arnold Schwarzenegger signed into law SB 899, a sweeping piece of workers' compensation reform legislation that, for a period, harnessed the state's workers' compensation costs.

After SB 899 became law, much became rosy. In 2004, 2005 and 2006, accident combined loss and expense ratios for workers' comp in California were at fractions of what they were in previous years.

But now look what's happened. Applicants' attorneys have achieved, in the form of some 2009 Workers' Compensation Appeals Board rulings--Ogilvie v. City and County of San Francisco and Almarez v. Environmental Recovery Services/Guzman v Milpitas Unified School District--decisions that attacked the law's provisions that called for ironclad interpretations of the American Medical Association's guidelines for determining permanent disability.

These more liberal interpretations of the AMA guidelines allow applicants' attorneys to tack permanent disability of one kind on top of a work-related permanent disability of another. The new interpretation, for example, enables the linking of a back injury with such things as sleep disorders and sexual dysfunction.

"The crux of the issue is chaos versus consistency," said Don Barthel, the attorney that is arguing the Guzman side of the Almarez/Guzman case in front of the California Sixth District Court of Appeals.

Barthel told Risk & Insurance® that standards like "fair" and "more accurate" as they are used in the Almarez/Guzman rulings are way too vague.

"What may be fair to one doctor may not be fair to another doctor. Now, they've replaced it with the standard 'more accurate' without defining more accurate," Barthel said.

This has left the door wide open for more costs, according to Barthel and others.

"The applicants' attorneys start to panic and look for ways to increase the disability," Catherine Wolzmuth, a hearing representative with the Fresno, Calif.-based Law Offices of Javier A. Alabart, said.

"What we saw very quickly when the AMA guides came out were add-on things ... these things that could be added in within the AMA guidelines to pump up a rating," Wolzmuth said.

The Ogilvie ruling allowed for the rebuttal of the future earnings capacity piece of a disability rating, which has resulted in further jacking up of costs.

DRUGS AND MORE DRUGS

And that's not all that's happened. The use of painkillers is on the rise in California, out of whack with utilization in the rest of the country, jabbing another thorn into the sides of those charged with managing workers' comp costs.

According to data from Westerville, Ohio-based pharmacy benefits manager Progressive Medical, narcotics as a percent of total drug spend are at 36.9 percent in California--more than three points higher than the national average.

"Utilization is up overall ... and we are seeing compounded medications are up ... physician dispensing is up," Tron Emptage, Progressive Medical's executive vice president of business development and clinical services, said.

WIDE BERTH

Insurers seem to be giving California a wide berth in this area. Written premium in the area of California workers' comp has fallen off of a cliff, dropping from some $23.5 billion in 2004, according to data from the Workers' Compensation Insurance Ratings Bureau of California, to around $8.9 billion in 2009, according to preliminary data from that bureau.

That same agency estimates that 2008's combined loss and expense ratio is 108 percent, 17 points higher than 2007. And the agency warns that 2009 will probably be "considerably higher."

"Costs have started to climb again," said Darrell Brown, the senior practice leader for workers' compensation for national third-party administrator Sedgwick Claims Management Services.

"They are not at prereform levels ... but we are headed there, and we are headed there pretty quickly," Brown said.

So, what to do? Turn and run from the carnage? Put your surfboard in mothballs and head East?

PRIVATE SECTOR TO THE RESCUE

Not so fast. The workers' comp appeals board and the legislature in California may not be on the same page, SB 899 still being in effect, and Ogilvie and Almarez/Guzman being what they are, but there is still plenty that the private sector can do. That's according to Don F. Sloan, executive vice president, managed care services, for Sedgwick.

Remember that SB 899 allows employers to create pools of doctors for the analysis and treatment of workers' comp eligible injuries.

Sloan reports that Sedgwick CMS has piloted a medical provider network with four large self-insured employers that has produced a 20 percent reduction in costs in the first year of the program. Compare that with an overall state climate that has seen medical indemnity per claim for insureds rise from an average of $24,414 in 2004 to $39,083 in 2009, according to the WCIRB.

"What we are looking at is a reliable way to relate the quality of care to total claim costs, rather than just looking for discounts," Sloan said. "This enables us to identify the providers that have the best medical outcomes based on trends in controlling medical and indemnity costs."

Sloan noted that employers had been asking for something along the lines of Sedgwick CMS's pilot program for some time.

"It's not like we went to employers with something they never thought about before," he said. "We've been having a dialogue with them for a long time based on the recognition that this is ultimately the real answer. With a successful pilot of a practical and workable system, we will now be offering our solutions in other states."

Likewise, the pharmacy managers have their own ideas about how to control costs in California.

Kevin Tribout, a director of government affairs for Tampa, Fla.-based pharmacy and workers' comp medical manager PMSI, said his company is working with several states, California included, to get a better grip on the impact that physician dispensing is having on pharmacy costs and overall medical spend.

Keep in mind that, if an injured worker is visiting a doctor to pick up their OxyContin, the company or the carrier is paying not only for the cost of the drug but also for the cost of the doctor's visit. Adding to the cost is that physicians aren't being consistent in how they dispense or charge for the medicine.

"What we don't understand on behalf of our clients and the retail clients that we work with is why the doctors who are seeing the injured worker are dispensing the medication in a package of 10 instead of a package of seven, or 33 instead of 30, circumvent the fee schedule, and come up with these bills that are two or three times higher than it would be for a retail pharmacy," Tribout said.

He pointed to New York, where pharmacy networks have been established that are helping to control both price and utilization. He said that the same effort is now underway in California.

CALIFORNIA SWINGING

"They are looking at making some tweaks and adjusting it and letting them recognize pharmacy as an ancillary provider that can be included in the MPN," Tribout said.

As things stand, according to Javier Alabart, the founder of the Fresno practice that employs Wolzmuth, California is at the midway point of its historical and eternal swing between a set of regulations that favors applicants and a set that favors employers.

But he and his partners said that the amount of litigation that SB 899 and Ogilvie and Almarez/Guzman have spawned is making this pendulum swing a lot more drawn out than most. So you can add to disability ratings and increased pharmacy price tags the increased cost of litigation in California.

He added that legislators really aren't best equipped to be setting workers' compensation standards.

"While this may have been well-intended, but the reality is the car needs a tune-up, so we are going to change the tires on it. What they did is they really didn't address the problems the way they should have in my opinion," he said.

And what of the prospects for the legislators and their appointees on the workers' comp appeals board ever getting it right and stopping that pendulum at center?

"There is not going to be any peace, there is always politics," Alabart said.

July 1, 2010

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