By DAN REYNOLDS, senior editor of Risk & Insurance®
One thing to never forget in discussing the consequences of workers' compensation reform in California is that when reform worked, it worked incredibly well. It was a game changer.
Before Senate Bill 899 was passed and became law in 2004, California's medical costs per workers' comp claim were approaching the $15,000 mark, according to the Cambridge, Mass.-based Workers' Compensation Research Institute.
Overutilization was a problem and employers were having little luck curtailing the number of visits injured and recovering workers were racking up for such services as chiropractic and physical therapy.
The 2004 bill, championed and signed into law by California's Gov. Arnold Schwarzenegger, called for return-to-work incentives and clearer definitions of permanent disability.
The bill also allowed for the creation of medical provider networks by employers. Those networks were important because they allowed employers to compile a list of effective doctors they knew weren't going to rake payers over the coals with unnecessary office visits.
"One of the things that we are looking at is the quality of care, rather than just looking for discounts," said Don F. Sloan, an executive vice president and director of managed care services for Memphis, Tenn.-based third-party administrator Sedgwick CMS, which has created medical provider networks for clients that have saved money and maintained quality of care.
"We are trying to locate and identify the providers that have the best outcomes based on the trends that they provide us in controlling those costs," he said.
While that was achieved, other issues have arisen, such as how prescriptions are mixed and dispensed, that threaten to reverse the progress made by the landmark legislation six years ago.
Since the 2004 bill that enabled those provider networks, California has slipped below the middle of the pack in its medical costs per claim of the 15 states that the institute benchmarks in its annual medical benchmarks study. The Golden State now has an average medical cost per claim closer to $10,000.
That's substantial progress and the man who runs the state's workers' compensation fund doesn't want us to forget it.
"The reforms as a package in 2004 were tremendously effective. They were more beneficial to the market than the market understood," said Tom Rowe, who was named the president of the California State Compensation Insurance Fund in July.
Rowe, a veteran of underwriter Fireman's Fund and broker Arthur J. Gallagher & Co., oversees a state fund with more than 180,000 policyholders and $1.6 billion in annual premium.
It's not just Rowe saying this. According to the National Academy of Social Insurance based in Washington, D.C., medical costs per claim in California fell 30 percent between 2002 and 2005.
But no sooner had the state substantially regulated some of its workers' comp cost control problem centers when other problems sprung up.
Physicians, thwarted in some of their revenue streams, found ways to make up the difference by dispensing workers' compensation pharmaceuticals from their offices. They were able to charge higher prices for those drugs by repackaging them and circumventing the state's fee schedule.
"In any environment where there is regulation and there is an active market, regulation will set the stage and then the market will react to it," is how Rowe described the phenomena. That's one way of putting it.
It didn't take long for the issue of physician dispensation to be tracked by carriers.
The Boston-based Liberty Mutual Co. started seeing physician dispensation costs creeping into its cost analysis data in those post-reform years, or around 2006 and 2007.
"There were intended consequences," said Dr. David Dietz, Liberty Mutual's National Medical Director said of the reform effort. "We saw some changes in treatment, in excess chiropractic and excess physical therapy," Dietz said.
Then came those spikes in pharmaceutical costs.
Liberty Mutual started showing its data on the increased pharmacy costs to legislators and in 2007 the state passed legislation limiting the costs of physician-dispensed pharmaceuticals to the state's pharmacy fee schedule.
And that helped, to a degree. But two years after Liberty Mutual was bringing the issue of physician dispensation to the attention of lawmakers, other changes took place that would take their own toll on efforts to control costs.
ALMAREZ, GUZMAN AND OGILVIE
In 2009, workers' comp applicant's attorneys received a set of rulings from the state's Workers' Compensation Appeals Board that amounted to attacks on the piece of the 2004 reforms that mandated that physicians be limited to the American Medical Association guidelines when determining permanent disability.
The decisions, known by the applicant's last names, Guzman, Almarez and Ogilvie, allowed for more liberal interpretations of the guidelines. Under Almarez and Guzman, a back injury, for example, could be linked to a sleeping disorder or to a sexual dysfunction for the purposes of calculating permanent disability.
"It basically gave them permission to go outside the AMA guides without providing a heck of a lot of direction on how you were going to do that," said Dan Dawson, an attorney in the Fresno, Calif.-based Law Offices of Javier Alabart.
The Ogilvie ruling made the diminished future earnings capacity piece of a permanent disability ruling rebuttable, giving applicant's lawyers leverage and adding to the cost of litigating workers' compensation claims. The three rulings, along with increases in physician dispensation and pharmaceutical compounding, have combined to jack up costs.
California is an attractive place and it attracts a lot of talented, ambitious people. That's how it's gotten such a reputation for innovation. That can be a good thing and a bad thing.
It was in California where physician dispensation, the practice of doctors selling drugs from their offices instead of writing a prescription to be filled at a pharmacy, was first identified as a problem in workers' comp.
Its widespread use was first noticed there and then the practice spread east to other states. Florida is another sizable state that is now struggling to contain the costs of physician dispensation.
COMPOUNDING THE PROBLEM
California is where compounding as a workers' compensation cost outlier first reared its head. According to Liberty Mutual's Dietz, compounding has been with the industry as long as pharmacy has been around. There is nothing wrong with it inherently.
Simple stated, compounding involves the practice of combining one medication with another to better meet the medical needs of a patient. But this modern version and how it has been used first in California, then Arizona, Florida and other states has proven troublesome.
Pharmacists are repackaging and combining painkillers with "neutraceuticals," a vitamin, for example, and doctors are charging much higher prices for the repackaged combination than the two elements in the compound would have cost if purchased separately.
Compounding is having a measurable impact on costs and it's not a good one. According to data from Westerville, Ohio-based pharmacy administrator Progressive Medical, narcotics as a percent of total drug spend are at 36.9 percent in California, that's more than three percentage points higher than the national average.
"Utilization is up overall ... and we are seeing compounded medications are up ... physician dispensing is up," said Tron Emptage, Progressive's executive vice president of business development and clinical services.
"It is a little bit like 'whack a mole,' you close the operation here and it pops up somewhere else and that is what we're seeing ... it pops up with compound drugs," said Mark Sektnan, a Sacramento-based vice president with the Association of California Insurance Companies.
Liberty Mutual's Dietz is even more blunt. "It is another way to get around the fee schedule," he said. "We are seeing that in California in these types of creative pharmacy behaviors, and we are now seeing this exported to other states."
Compounds, when measured as an overall percentage of workers' comp pharmacy, represent a small percentage, Rowe said. But their use is exploding.
"We have seen in the state of California a dramatic increase in the use of compound medications but you need to recognize that compound medications in 2006 for example were less than one percent of billed prescription and less than one percent of the paid prescription dollars in the state," Rowe said.
Since that time and up to the end of the first quarter of 2009 Rowe said the use of compounds in California has increased 722 percent on billed pharmacy costs and 800 percent on paid prescription dollars.
"That still only takes into a little over 6 percent of the pie," said Rowe. OK, but don't forget, California by itself is the world's eighth largest economy. That represents a very big pie.
According to Sektnan, data from the State Fund showed that for the nine-month period between April and December of 2009, the fund was billed $27.9 million for compounded medications.
In the first seven months of 2010, from January 1 through July 1, the State Fund was billed $29.5 million for compound medications.
"So they are noticing that this is a big issue and this was just for compounds," Sektnan said.
It may be a small percentage of a big pie now, but it is growing fast and Sektnan for one doesn't want to wait around until compounds become an even bigger part of workers' compensation pharmacy spend in California.
"Part of the problem we are having is because compounding is a relatively new phenomenon," Sektnan said. "So we are just beginning to understand the implications and from what we understand they are significant," Sektnan said.
Legislation (AB 2779) was hatched this year in California that would have placed limits on compound medication use in workers' compensation.
"What the bill would have tried to do is to try and maintain some kind of control over these types of compound drugs," Sektnan said.
Similar to what occurred this year in Florida with legislation that would have limited physician dispensation pharmacy costs, the bill didn't quite make it in the 2010 legislative session.
"When the bill was introduced it would have required prior authorization. It would have required that the drug be proven to be medically beneficial and there had to be some proof that they had tried some other type of treatment. You don't want the most expensive option to be the first option," Sektnan said.
Opponents argued, as they did in Florida, that there wasn't enough time to properly study the impacts of the bill.
The California Medical Association, which opposed the bill, said it would support the bill if it were amended to require the state's division of workers' compensation to create a fee schedule for compounded drugs.
"The bill's provisions limiting reimbursement for compounded drugs need to be more fully evaluated to ensure that all legitimate uses of compounded medications would be compensable were this measure to become law," wrote Carolyn Ginno, of the CMA's Center for Government Relations in an Aug. 10 letter to state Sen. Mark DeSaulnier, chairman of the Senate Labor and Industrial Relations Committee.
Sektnan said a bill addressing compounding in California will resurface and risk managers who are seeing the practice creep into their states would do well to keep an eye on it.
California's workers' comp reforms have worked wonders in the main, but the state also provides a test case for just how complicated maintaining the benefits of reform can become.
November 1, 2010
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