Effectiveness of WC Fee Schedules A Closer Look

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1 NCCI RESEARCH BRIEF February 2009 By Barry Lipton, Dan Corro, Natasha Moore and John Robertson Effectiveness of WC Fee Schedules A Closer Look Executive Summary This brief summarizes findings from a study 1 on Workers Compensation (WC) medical fee schedules. The study uses experience from Group Health coverage as a natural measure to assess the effectiveness of WC fee schedules. 2 The fee schedule promulgated by Medicare provides another useful comparison. Our previous studies have found that utilization is the main reason WC pays more than Group Health to treat comparable injuries. While the main emphasis in this study is on the prices that WC pays for medical services, the study looks at both utilization and price. The main findings are: The proportion of WC medical cost that is subject to physician fee schedules is declining by about one percentage point per year Confirmation of prior findings that higher prices and utilization push WC costs higher than Group Health, with utilization as the main driver For comparable injuries, when WC pays higher prices than Group Health for specific services, those services tend to be used more often in WC than in Group Health Particularly in specialty areas such as radiology and surgery, fee schedules can result in WC reimbursement rates that are especially high compared with Group Health The Medicare fee schedule is very useful as a starting point for the design of WC medical fee schedules, but has notable shortcomings for WC, including too little emphasis on return to function and too little sensitivity to cost differences among states While fee schedules tend to concentrate reimbursements at the maximum allowable rate, the application of negotiated discounts, technical fee components, facility charges, etc., complicate things and result in many payments that are either greater than or less than the maximum allowable rate Reimbursement for care that physicians provide at hospitals and other facilities is more likely to exceed the fee schedule than care provided in their offices, partly due to the fact that the fee schedule need not always apply when facilities bill for these services A higher proportion of reimbursements are at or below the fee schedule when WC medical services are provided through a network as opposed to when they are not 1 Effectiveness of WC Fee Schedules: A Closer Look, NCCI, Group Health data used in this study was provided by Medstat, a Thomson Reuters company specializing in the collection and analysis of medical experience from employer-sponsored health benefit plans, including PPOs, HMOs, and traditional plans. WC data is sample data provided by carriers.

2 While the main thrust of the study is use of WC and Group Health medical experience to investigate the effectiveness of WC medical fee schedules, the study also discusses: The design, implementation, and maintenance of WC medical fee schedules The competing requirements to ensure access to medical care while controlling utilization of medical services The challenges posed by a rapidly changing environment in the delivery of medical care, including a growing use of ambulatory surgical centers and specialists in hospital care Summary of the Study This section summarizes the main discussions in the full report. The complete report gives many more examples than can be included in this brief. How fee schedules are introduced, regulated, and maintained States use several different bases to set WC medical fee schedules and a range of processes to determine the maximum reimbursable amount for each covered procedure. Procedures are identified by their Current Procedural Terminology classification code, or CPT. More than 7,000 procedures are identified by their CPT coding, which is maintained by the American Medical Association. CPT coding is convenient for physician fee schedules because it is the standard for itemizing doctors bills and is required by Medicare and Group Health insurers. Usually, states either have public hearings or some other mechanism to allow for public input to possible fee schedules. Arguments frequently made in these venues include: Access to care will be compromised if fees are too low WC claimants require more paperwork, which is more costly for the medical provider to administer Rural areas might have a limited number of certain types of specialists Concerns whether the data used to establish a fee schedule is sufficiently reliable for that purpose Questions as to whether the proposed WC medical fee schedule meets the standards set by regulation or statute The proportion of WC medical costs that are covered by WC physician fee schedules is declining Figure 1 shows that the proportion of WC medical costs that are covered by physician fee schedules in states where NCCI provides ratemaking services declined from about 58% in 2001 to about 53% in In addition to WC physician fee schedules, most states have cost controls for prescription drugs used in WC, 3 and some have WC medical fee schedules that apply to hospitals and other facilities to some degree. Across NCCI states, the bulk of medical costs subject to fee schedules are physician fees and prescription drugs. Two major contributors to the decline in the proportion of services covered by WC physician fee schedules are: Prices for services not covered by the state WC physician fee schedule generally increase at a faster rate than prices for services covered by the physician fee schedule, so the proportion of total costs for services not covered by the fee schedule increases In general healthcare, and in WC, there has been a shift to a greater proportion of medical services being provided by hospitals and other facilities, and a lower proportion by private physicians 3 NCCI has produced a series of studies on prescription drug costs in WC. In addition to cost trends, the studies discuss topics such as criticisms of the use of the Average Wholesale Price in state prescription drug fee schedules. See the Workers Compensation Prescription Drug Study and its updates, including the 2008 edition, available at ncci.com. 2

3 60% Percentage of WC Medical Costs Subject to Physician Fee Schedules 55% 50% Year Figure 1: Percentage of WC medical costs subject to physician fee schedules Confirmation of prior findings on price and utilization This study is a continuation of previous research on WC medical fee schedules. 4 The methodology is modified from our previous studies to encompass more medical conditions over longer treatment windows. Prior NCCI studies have determined that higher utilization is the dominant force making WC more expensive to treat, and, while the price component tracks with fee schedule benchmarks, utilization does not. In Figure 2, WC fee schedules from 21 NCCI states are compared to Medicare (horizontal axis) while WC price and utilization are compared to Group Health (vertical axis). Each state is represented by two points. For example, the lower square for Connecticut (shown in the ellipse) indicates that the WC medical fee schedule sets the average maximum allowable reimbursement at about 215% of Medicare reimbursement and that the average actual WC medical reimbursement is about 160% of the state s average Group Health reimbursement. The diamond directly above that square indicates that WC utilization for Connecticut is more than double that for GH (about 220% of GH). 4 Making Workers Compensation Medical Fee Schedules More Effective, Workers Compensation vs. Group Health: A Comparison of Utilization, and What Can Workers Compensation Learn From Group Medical Insurance? These are available at ncci.com. 3

4 WC Costs as % of GH Price, Utilization and Fee Schedules 350% 300% Utilization Price Linear (Price) 250% Linear (Utilization) 200% 150% 150% 200% 250% WC Fee Schedules as % of MC Figure 2: WC price and utilization differentials (% Group Health) vs. amount allowed by WC fee schedule (% Medicare) While Figure 2 is based on the more recent, broader data used in this study, it is also a good confirmation of prior findings: For each of the 21 NCCI states considered, both WC utilization and WC price were greater than Group Health The utilization component is always above the price, indicating that higher utilization accounts for more than price in explaining why WC costs more than Group Health to treat comparable medical conditions As might be expected, the price points show a definite tendency to increase with the ratio to Medicare, as illustrated by an upward trend line from left to right WC utilization of medical services, benchmarked against Group Health, does not correlate with the state WC fee schedule ratio to Medicare, as evidenced by the scattered pattern and flat trend of the utilization points Also, our prior studies did not find relationships between utilization and WC medical fee schedules. 5 WC generally pays more for given medical services than Group Health, and both pay substantially more than Medicare. Assuming that patients covered by a Group Health plan or Medicare can get treatment, when we combine this with the markedly higher utilization levels in WC over Group Health, we must conclude that WC fee schedules have not, for the most part, restricted access to care. Higher prices paid by WC are associated with higher utilization We looked at the treatment of 50 medical conditions common to work-related injuries. By gearing the investigation to medical conditions, we are able to consider more medical conditions than previous studies as well as longer durations of care. A key new finding emerged from this approach: there is a strong correlation between the price and utilization 5 This between-state comparison of the levels of utilization and fee schedules does not mean that, within a state, a decrease in the fee schedule will not increase utilization. This latter phenomenon has been observed in studies of Medicare. See, for example, the study Physician Volume and Intensity Response by the Centers for Medicare and Medicaid Services, which found a statistically significant relationship between price reductions for physicians services covered by Medicare and increases in their volume and intensity. This is available at cms.hhs.gov. 4

5 Utilization components of WC over Group Health when data is grouped by the medical condition being treated (rather than, say, by state). The scatter plot in Figure 3 illustrates the overall pattern. Each of the dots in Figure 3 corresponds to one of the 50 medical conditions, which have been grouped into five broad categories. While this correlation between price and utilization markups does not necessarily imply any causal connections, there are some plausible relationships: Higher reimbursements are a financial incentive to medical providers to perform more procedures on WC claimants WC insurers are more willing to pay premium prices for the care most necessary to effect return to work The more frequently used procedures are the more likely to be lobbied for higher fee schedule reimbursement Because higher price differentials apply to conditions with the greater utilization markup, bringing WC reimbursements closer to market price will (all else being equal) necessarily help to reduce the cost of overutilization. WC physician fee schedules do not dictate utilization levels and the experience indicates that the higher utilization of WC care is driven more by medical condition than by price. This suggests that it may be more cost-effective to reimburse for the full course of treatment of a medical condition rather than for particular medical procedures. Medicare has devised the two most familiar approaches for bundling procedures by medical condition. When reimbursing hospitals and ambulatory surgical centers, Medicare uses Diagnosis Related Groups (DRGs) and Ambulatory Patient Classifications (APCs). Another approach was taken by the WC reform in California, where the number of covered procedures is limited according to protocols for treating specific medical conditions. Both bundling and protocols target utilization, which accounts for most of the higher cost of WC over Group Health. WC Markup Over GH 1000% 900% 800% 700% 600% 500% fracture/laceration sprain/strain pain general other 400% 300% 200% 0% 0% 25% 50% 75% 125% 150% 175% 200% 225% 250% 275% 300% Price Figure 3: Price vs. Utilization of WC over Group Health grouped by medical condition 5

6 Fee schedules can pull some WC reimbursement rates well above Group Health Figure 4 examines the reimbursement for radiologic examinations of a shoulder (CPT 73030) and compares the state WC and Group Health median prices with WC fee schedule maximum allowable reimbursement (MAR) and Medicare reimbursement for X-rays performed in States are ordered by increasing MAR. It is typical for radiology MARs to be above GH and to be set well above Medicare. Half the state WC fee schedules set the MAR for a shoulder X-ray at more than double what Medicare pays and a third at more than a 50% markup over the market price, as measured by GH. Radiologic Examination of Shoulder $80 $60 WC Median GH Median FeeSched MAR MC Paid $40 $20 $0 MD FL KY OK UT CO ME MS OR AR LA GA TN AZ NE AL Figure 4: Radiology Example Comparison of median 2006 state reimbursements for CPT Code 73030: Radiologic examination, shoulder complete, minimum of two views Medicare is not sensitive to state cost differences Figure 5 has the same format as Figure 4 but considers the reimbursement for carpal tunnel syndrome (CTS) surgery (CPT 64721), a much more expensive procedure. The median WC reimbursement tracks closely with the MAR and consistently exceeds the median GH reimbursement. Reimbursement for CTS Surgery $1,200 $1,000 $800 WC Median GH Median FeeSched MAR MC Paid $600 $400 $200 $0 MD FL UT LA ME NE AR CO OK MS KY AL AZ OR GA TN Figure 5: Surgery Example Comparison of median 2006 state reimbursements for CPT Code 64721: Neuroplasty and/or transposition; median nerve at carpal tunnel syndrome 6

7 The comparatively flat line at the bottom of Figures 4 and 5 (Medicare paid) shows that Medicare reimbursements for CTS surgery and shoulder X-rays do not vary greatly from one state to another. In contrast, Group Health and WC payments do vary significantly by state. Figures 4 and 5 also illustrate the following typical relationships: WC pays more for many services than Group Health, especially in the areas of surgery and radiology Both WC and Group Health pay more than Medicare Both WC and Group Health show substantial variation in amounts paid by state WC payments are generally in line with, and less than, fee schedule maximums WC payments concentrate at the fee schedule rate Figure 6 relates WC and Group Health payments for carpal tunnel syndrome surgery and shoulder X-rays with WC fee schedule amounts. The stacked bars illustrate that WC medical fee schedules impact the distribution of WC reimbursements, putting more payments at the fee schedule amount: Most WC payments are at or below the WC fee schedule maximum. For CTS surgery, approximately two thirds of WC payments were at or below the fee schedule maximum Of the two-thirds of WC payments for CTS surgery at or below, nearly half (30%) are concentrated within 10% of the fee schedule amount, as compared with only a nominal percentage of Group Health payments in that narrow price range While both WC and Group Health have about 85% of payments for shoulder X-rays at or below the WC fee schedule maximum, WC has a much greater percentage (38% vs. 9%) of those payments concentrated within 10% of the fee schedule amount Reimbursement Compared With WC Medical Fee Schedule 75% 34% 23% 3% 15% 16% 9% >MAR 38% 50% 30% 90 to MAR <90% MAR 72% 75% 25% 36% 47% 0% WC GH WC GH CTS Surgery Shoulder X-ray Figure 6: Distributions of WC and Group Health reimbursements for CPT Codes and

8 WC payments for hospital services are more likely to exceed the fee schedule Figure 7 shows amounts paid for a procedure performed in a hospital. More than 60% of WC payments exceed the fee schedule amount as do four-fifths of Group Health payments. By comparison, for the CTS surgery and shoulder X-ray examples discussed previously, 34% and 15% of WC payments exceed the fee schedule, respectively. One complicating issue here is that, when billing for emergency room care, hospitals may include technical and facility charges not envisioned in WC and Medicare physician fee schedules. Reimbursement for ER Visit 75% 61% 50% >MAR 90 to MAR <90% MAR 80% 25% 0% 35% 4% WC 8% 12% GH Figure 7: Evaluation and Management Example Distributions of WC and Group Health reimbursements for CPT Code 99282: Emergency department visit for the evaluation and management of a patient Services provided within a network are more likely to be at or below the WC medical fee schedule Figure 8 compares prices paid in WC for this hospital-based procedure when provided within a network and when provided outside a network. Almost 55% of those provided through a network were at or below the WC fee schedule, while only about 30% of services not provided through a network were at this level. This illustrates how networks can augment the effectiveness of a fee schedule. 8

9 Reimbursement for ER Visit 75% 46% 50% >MAR 90 to MAR <90% MAR 68% 25% 52% 26% 0% 3% WC In Network 6% WC Out of Network Figure 8: Evaluation and Management Example Distributions of WC reimbursements in and out of network for CPT Code Conclusion To stay viable, WC medical fee schedules need to adapt and expand. The proportion of WC medical costs covered by physician fee schedules is declining, due in part to a growing proportion of reimbursements going to hospitals and ambulatory surgical centers. Such facilities cannot be ignored simply because their billings are not as amenable as doctor s bills to being compared with a CPT coded price list. The use of provider networks helps control WC hospital costs and some states are promulgating fee schedules for hospitals. The key to bringing facility charges under control might lie in bundling procedures. The two most familiar approaches for bundling procedures are being promoted within Medicare setting reimbursement amounts by Diagnosis Related Group (DRG) or by Ambulatory Patient Classification (APC). The California reforms of 2003 and 2004 provide an alternative approach using treatment protocols. Both bundling and protocols constrain utilization, which is the main driver of higher WC medical costs. WC fee schedules confront two critical challenges: to reverse a shrinking influence and to control utilization. Progress is possible on both fronts by broadening the scope of WC fee schedules from a traditional focus on individual procedures toward limiting reimbursements by medical condition. For more examples, and more detailed discussion, please see the more technically oriented paper, Effectiveness of Workers Compensation Fee Schedules: A Closer Look. Copyright 2009 National Council on Compensation Insurance Inc. All Rights Reserved. THE RESEARCH ARTICLES AND CONTENT DISTRIBUTED BY NCCI ARE PROVIDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND ARE PROVIDED AS IS. NCCI DOES NOT GUARANTEE THEIR ACCURACY OR COMPLETENESS NOR DOES NCCI ASSUME ANY LIABILITY THAT MAY RESULT IN YOUR RELIANCE UPON SUCH INFORMATION. NCCI EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND INCLUDING ALL EXPRESS, STATUTORY AND IMPLIED WARRANTIES INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 9