Workers’ Compensation continues to evolve. Any provider delivering care through the past decade has experienced significant change—and has discovered that economic survival often requires planning for an uncertain future.

How do we know where we are going and when will we arrive? Some ideas can be gleaned from states where change seems to happen earliest and most often.

As one of the largest states in the U.S., California is home to a workers’ compensation program that draws proportionate attention. In 2000, the U.S. Department of Labor reported 5,287,600¹ injury cases; during that same year California had 787,400² cases, representing 15% of the total.

In addition, California has a great deal of experience in the work comp marketplace, including:

• provider contracting for delivery of services through Preferred Provider Organizations, Exclusive Provider Organizations, Managed Care Organizations, Independent Provider Associations, etc;
• Health Care Organizations as a vehicle for managed care;
• extensive, perhaps inordinate, influence in the healthcare delivery system by non-providers, e.g., attorneys, unions, employers, and insurers;
• significant penetration of the marketplace by for-profit entities that divert portions of the payer-to-provider revenue stream, often with little or no corresponding value added.

Such activity and experience often flows from California to other states and therefore discussion and legislation there may serve as a harbinger of future issues elsewhere.

History of Workers’ Compensation Legislation in California

The Roseberry Act of 1911 introduced Workers’ Compensation in California by providing a voluntary plan of compensation benefits. Superseding legislation followed in 1913 with the Boynton Act, making the benefits compulsory.

Subsequent history includes significant modification of a complex and often inefficient system. The California Labor Code provides that "…the employer’s duty to provide treatment includes all medical, surgical, nursing and hospital care reasonably required to cure or relieve the effects of the injury."³ This is interpreted to include care for preexisting conditions should they impede resolution of the industrial injury; e.g., hospitalization and management of uncontrolled diabetes mellitus that complicates treatment of a foot infection.

The Labor Code also provides that a primary treating physician be identified by the employer within the first 30 days following an injury unless the employee has pre-designated his or her own family doctor. After the initial 30 days, the employee may switch his treatment to any physician he desires, whether s/he was pre-designated or not. Further, until Assembly Bill 749 went into effect on January 1, 2003, the primary treating physician was presumed to be correct regarding issues of injury causation, need for and type of medical care required, and permanent disability.

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Challenges in the California System

In a system burdened by obfuscation, three components are particularly challenging.

• Claims administration is cumbersome, inefficient, and protracted.
• Disproportionate resources are consumed in dealing with minor, compared to major, disabilities.
• Economic issues predominate.

Claims administration is characterized by large caseloads, often numbering 200 to 300 for adjusters, and delays in processing by the Disability Evaluation Unit and the Workers’ Compensation Appeals Board.

Partial Permanent Disability (PPD) cases consume a disproportionate amount of system resources. Claims with less than 25% disability account for 90% of PPD claims, 80% of medical benefits, 70% of indemnity benefits, and 60% of legal fees.⁴ Most minor claims require three or more years to resolve, even though temporary disability often lasts only five months. Major claims take even longer to resolve.

Figure 1 shows the distribution of PPD claims by the number of cases vs. ratings (percent of disability). Clearly, cases with lesser degrees of disability dominate the California workers’ compensation system.

Economic issues have burdened the system during the past decade. Prior to 1993, workers’ compensation insurance premiums in California were established by law and created a threshold below which the cost to an employer could not fall. The mix of employee job titles as well as the employer’s payout history over the prior three-year period determined an individual employer’s rates. Following reform legislation in 1993, open ratings combined with mandated rate reductions produced a drop in premiums of approximately 35% in two years, and total premiums fell from nearly $9 billion in 1993 to $5.7 billion in 1995.

By 1997, industry-wide losses exceeded premiums. Many insurance companies became insolvent or discontinued business in the state, and the California Insurance Guarantee Association failed. The rising cost of indemnity claims, due to the steadily-increasing cost per case, aggravated the situation, even in the presence of declining injury rates (see Figure 2).

Workers’ Compensation Reform

The most substantial reforms in California’s workers’ compensation program have been implemented during the past 13 years and include:

• Workers’ Compensation Reform Act of 1989;
• reform legislation enacted in 1993, including AB 110;
• legislative bills AB 749 and AB 846, effective in 2003.
• improvements to the California Workers’ Compensation system enacted in 2003 will be substantial, with increases in injured employee benefits, enhanced educational materials for employees, improved vocational rehabilitation processes, stepped-up enforcement of laws fighting fraud and illegally-insured employers, and revisions of some medical issues.

Particularly important to providers, with effects yet to be determined, are:

• abolition of the presumption of correctness of the primary treating physician’s diagnosis and
  management;
• modifications to formation and use of Health Care Organizations;
• attempted management of pharmaceutical costs.

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AB 110 (1993) was intended to reduce medical-legal costs by giving the opinion of the primary treating physician the presumption of correctness in legal proceedings related to permanent disability. A court ruling in 1996, Minniear v. Mt. San Antonio Community College, extended that presumption to issues of medical treatment. This presumption was expected to minimize the inordinate and costly examinations and procedures performed by applicant and defense physicians when litigation was involved. In practice, 30 days after the injury, control of medical care shifted from the employer (insurance carrier) to the patient (applicant attorney), and carte blanche utilization of expensive therapy, testing, and other procedures ensued. As in the figures on the following page, these two changes to the system led to increased costs in both workers’ comp settlements and treatments. The data in Figure 3a demonstrate the trend to increased permanent disability awards following AB 110, and Figure 3b shows increased medical costs following the Minniear decision.

Health Care Organizations (HCOs) emerged from legislation in 1993 and were intended to provide employers with extended control of physician selection in exchange for multiple healthcare options for employees, particularly Health Maintenance Organizations, if group healthcare were included. Control could extend for a maximum of 360 days. HCOs were expected to contract for all services, subcontracting with other groups as needed. HCOs were to participate in claims administration and offer a complete quality control program.

Unfortunately, the negative response by medical groups to the complicated and extensive submission process resulted in only a small cadre of providers tendering applications. AB 749 simplifies the process of employer contracting with HCOs by eliminating the need for more than one HCO and allowing fee-for-service billing.

Finally, California is attempting to manage pharmaceutical costs by requiring pharmacies to offer generic medications whenever available, and by permitting workers’ compensation insurance carriers to contract directly with pharmacy networks. Provider groups that dispense pre-packaged medications will need to monitor patient inconvenience in travel to another location for prescriptions as well as potentially significant revenue loss.

Implications for Occupational Healthcare Providers

For Occ Med providers concerned about the future and watching California with interest and apprehension, here are recommendations that may mitigate adverse future circumstances.

• Participate in the state planning process. In California, significant input has come from the Industrial Medical Council as well as the Commission on Health and Safety and Workers’ Compensation. The latter group was a result of reform in 1993 and has significant communication with planners. Both groups solicit provider comment. In the absence of provider advice, decisions are left to employers, payers, unions, and attorneys.
• Network with other providers on a local and regional basis in the interest of developing leverage in the economic marketplace. Too often Preferred Provider Organizations include "any willing providers" with the result of pricing themselves down for no incremental increase in business.
• Contract directly with employers whenever possible; they are the origin of the revenue stream and providers are the endpoint. Too many vendors along the way dip into the stream without adding any real value.
• Assure operating efficiencies and manage your business cost-effectively. You may be able to compete with pharmacy networks for pricing.
• Manage your business electronically whenever possible. It’s just a matter of time before clinical records will be electronic and all reporting and billing will be standardized.

Resources

Herlick, Sanford D., "California Workers’ Compensation Handbook," Lexis Law Publishing, Parker
Publications Division, 1998.

California State Department of Industrial Relations, "California Commission on Health and Safety
and Workers’ Compensation," 2001.

"Doctors and Courts: Do Legal Decisions Affect Medical Treatment Practice?" www.dir.ca.gov/
CHSWC/CHSWCLegalDecAffectMedTreatPractice/ptpfinalrpt.html#14.

"State of the Workers’ Compensation Industry in California," www.dir.ca.gov/CHSWC/StateInsuranceIndustry2002/Stateinsuranceindustry042002.html.

Rand Corporation, "Findings and Recommendations on California’s Permanent Partial Disability
System: Executive Summary," www.rand.org/publications/MR/MR919/index.html.

Footnotes

1 U.S. Department of Labor, Bureau of Statistics, data.bls.gov/cgi-bin/surveymost?sh, Retrieve data for Private Industry-Injury Count - Total Cases - SHU00000051.

2 California Department of Industrial Relations, www.dir.ca.gov/DLSR/Injuries/2000/AnSum/Tab2.pdf.

3 California Labor Code Section 4600, www.leginfo.ca.gov/cgi-bin/displaycode?section=lab&group=04001-05000&file=4600-4614.1.

4 Rand Corporation, "Findings and Recommendation on California’s Permanent Partial Disability System: Executive Summary," 1997, www.rand.org/publications/MR/MR919/mr919.sec5.html.

5 Ibid.

6 California Commission on Health and Safety and Workers’ Compensation, www.dir.ca.gov/CHSWC/StateInsuranceIndustry2002/Stateinsuranceindustry042002.html.

7 California Commission on Health and Safety and Workers’ Compensation, www.dir.ca.gov/CHSWC/CHSWCLegalDecAffectMedTreatPractice/ptpfinalrpt.html#14.