WCIRB Research Forum SB 863 Cost Monitoring Report

W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a WCIRB Research Forum SB 863 Cost Monitoring Report November 19, 2014 Notice The information provided in this Webinar was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this Webinar. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this Webinar. 2014 Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California, 525 Market Street, Suite 800, San Francisco, California 94105-2767. 1

Webinar Presenters Dave Bellusci Chief Actuary, EVP, COO Tony Milano VP, Actuary Greg Johnson, Ph. D. Director, Medical Analytics

WCIRB SB 863 Cost Monitoring Cost Monitoring Plan Submitted to CDI in March 2013 Identifies Cost Components to Be Measured, Data Elements and Methodology, and Scheduled Timeframes Initial Retrospective Evaluation Released in October 2013 2014 Report Released on November 14 4

PD Benefits WCIRB Prospective Estimate 2013 Changes to PD Benefits Estimated to Increase Costs by 0.3% ($60M) (Incl. Frequency Impact) Includes increases to weekly PD benefit min. & max., increase in burial allowance, and changes to SJDB benefits Increase to PD minimums most significant component for 2013 2014 Changes to PD Maximums Estimated to Increase Costs by 3.1% ($590M) (Incl. Freq. Impact) 5

PD Benefits Summary of Current Information Early PD Claims Available from Preliminary USR Data for AY 2013 Estimated PD Benefits Calculated Using Old (2012 & Prior) and New (2013) Min. & Max. Based on reported weekly wage and PD rating on USR Results were Consistent with Prospective Estimates 6

PD Ratings WCIRB Prospective Estimate Replacement of FEC Factor with Uniform 1.40 Adjustment Estimated to Increase Costs by 2.9% ($550M) (Incl. Freq. Impact) Elimination of PD Rating Add-ons Estimated to Decrease Costs by 0.9% ($170M) (Incl. Freq. Impact) 10% of psych add-ons assumed to remain as a result of catastrophic injuries or violent acts Combined Impact Estimated At 6% Increase in Average PD Rating Does not reflect additional impact of eliminating Ogilvie (-1.1%; -$210M impact on total costs) 7

Average PD Ratings Based on DEU Data 18 16 % Average Final Rating Average Final Rating Issued within 15 Months of Injury Projected Based on Prospective SB 863 Estimate 14.5 14 12 11.6 12.1 12.4 12.6 12.7 13.4 13.3 13.7 14.3 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 Accident Year Source: DEU database. 8

Impact of Replacing FEC Adjustment 40 Average Final Rating Prior FEC Approach (Pre-SB 863) Uniform 1.40 Adjustment (Post-SB 863) 30 20 Based on 20,000 Ratings of Varying Ages 22.9 21.1 Based on 1,800 Ratings Aged 0-15 Months 11.9 13.2 10 0 Prospective Estimate - AYs 2005-2012 Rated in 2011-2012 Source: DEU database. Retrospective Estimate - AY 2013 Rated in 2013-2014 9

Prevalence of PD Add-ons Based on DEU Data 12% 10% 8% Percentage of DEU Ratings with Add-on for: Psychiatric Impairment, Sleep Disorder, Sexual Dysfunction Final Rating between 0-15 Months Final Rating between 15-27 Months Final Rating between 27-39 Months Final Rating between 39-51 Months Final Rating After 51 Months 6% 4% 2% 0.2% 0.4% 0.6% 0.7% 0.6% 0.5% 0.7% 0.8% 0.8% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: DEU database. 10

PD Ratings Summary of Current Information Early 2013 PD Ratings from DEU Slightly Below Prospective Estimates Impact of FEC Changes Slightly Greater than Projected Add-ons Still Exist in Early 2013 Ratings but Typically Don t Appear Until Much Later Overall Impact Still Uncertain Since Final PD Ratings Emerge Slowly 11

Indemnity Claim Frequency WCIRB Prospective Estimate Total SB 863 Impact (Including 2014 PD Benefit Increases) on Frequency Estimated to Increase Costs by 1.1% ($200M) Assumed Frequency Changes Approx. 0.2% for Every 1% Change in Indemnity Benefits 12

Estimated Change in Indemnity Claim Frequency 10 5 % Change As of June 30, 2014 6.9 4.1 3.2 1.9 0-5 -1.5-3.0-2.3-3.9-1.9-0.9-6.7-6.4-10 -15-20 -13.9-17.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 Accident Year 6 Months 13

Estimated Change in Indemnity Claim Frequency Projected vs. Actual 6 % As of June 30, 2014 Projected Actual (Current Estimate) 4.1 3 3.2 2.3 1.9 0-0.1 6 months -1.3-3 2012 2013 2014 Accident Year 14

Distribution of PD Claims by Average Weekly Wage Interval 100% Percentage of PD Claims for Accident Year* 2010 2011 2012 2013 80% 66% 66% 66% 64% 60% 40% 20% 10% 11% 11% 11% 13% 13% 13% 14% 10% 10% 11% 12% 0% $0 to $160 $161 to $229 $230 to $269 $270 and Above PD Weekly Wage Interval** *Accident year 2013 is preliminary. **Average wages are adjusted to a 2013 level. PD weekly wage is 2/3 of the average weekly wage. 15

Liens WCIRB Prospective Estimate Total Impact of SB 863 Lien Provisions Estimated to Decrease Costs by 2.5% ($480M) Assumed 260,000 Liens (41%) Eliminated by Filing Fee and Statute of Limitations Relatively Smaller Liens Impacted Significant Savings in Administrative Costs 16

Quarterly Number of Liens Filed In Thousands 500 460K liens filed in 2011 1.2 million liens filed in 2012 47.3 Los Angeles Area 400 65.5 Rest of State 300 200 398.3 19.8 21.9 30.4 292.8 465.7 190K liens filed in 2013 100 0 166.1 135.3 5.2 63.9 4.2 5.1 5.7 5.7 5.9 6.0 25.9 35.9 40.4 35.8 41.4 41.9 2011 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Calendar Year/Quarter Source: EAMS Liens Data 17

Distribution of Liens Filed by Type 100% 2011 2012 2013 2014 (3 Quarters) 80% 74% 82% 60% 63% 59% 40% 20% 0% 22% 17% 17% 13% 10% 9% 7% 6% 1% 2% 1% Medical Med-Legal Interpreter Other 17% Source: EAMS Liens Data 18

Liens Summary of Current Information Volume of Liens Reduced by 60%+ Compared to 41% Projected Size of Liens Impacted Prospective estimates assumed smaller liens impacted WCIRB Lien Survey results suggest post-1/1/2013 lien demand/resolution amounts are higher or comparable to pre-sb 863 liens on average Adjusted WCIRB Estimate Increases Savings by $0.2 Billion 19

Surgical Implant Hardware WCIRB Prospective Estimate Elimination of Separate Reimbursements for Implantable Hardware Estimated to Decrease Costs by 0.6% ($110M) Estimate Based on CWCI Study of Multiple Reimbursements Duplicate payments added $20,000 to each procedure 20

Surgical Implant Hardware Summary of WCIRB MDC Data SERVICE PERIOD 2H 2012 2H 2013 DIFFERENCE ALL 14 IMPLANT DRGs (1) Total Paid $ on Implant Bills to Hospital (2) ALL 14 IMPLANT DRGs Total Episodes (3) ALL INPLANT DRGs Avg. $ Paid/ Surgical Bill to Hospital ALL DRGS LESS 14 IMPLANT DRGs Total Paid ALL DRGs INCLUDING 14 IMPLANT DRGs Total Paid $18.8M $14.1M -25% 326 294-10% $57,608 47,985-17% $87.4M $89.4M +2% $106.2M $103.5M -3% 1/1/13- Effective Date of SB 863 Change on Implant Payments (1) 14 Back Implant DRGs: 028, 029, 030, 453, 454, 455, 456, 457, 458, 459, 460, 471, 472, 473. (2) Includes Payments for the Implant-Specific Revenue Code (0278) plus other revenue codes on the same hospital bill (e.g., Radiology, Lab, Pharmacy, Supplies, and Physical Therapy) (3) Episode defined as a unique surgical event with defined from and through days of service. 21

Ambulatory Surgical Center Fees WCIRB Prospective Estimate Changes to ASC Fees Estimated to Decrease Costs by 0.4% ($80M) Some ASC Fees Reimbursed Under Contract Levels Below Current Fee Schedule Assumed Reduction in ASC Facility Fees of 25% Approximate average of savings if all fees are impacted (33%) and if no contract fees are impacted (20%) 22

Average Paid per ASC Surgical Episode 2012 Services 2013 + 1 st Half 2014 Services ASC Episodes 20,640 37,110 $ Paid $41.3M $54.8M $ Paid/Episode $1,999 $1,476 Compared to 2012-26% New ASC Reimbursement Schedule Effective 1/1/13 23

ASC and Outpatient Hospital Episodes For the Same 30 Procedures 2012 Services 2013 + 1H 2014 Services ASC Episodes 20,640 37,110 Outpatient Hospital Episodes (% of All Episodes) 5,550 (21%) 9,308 (20%) ASC Paid $41.3M $54.8 Outpatient Hospital Paid (% of All Paid) $13.5M (25%) $24.2 (31%) ASC Avg. Paid/Episode $1,999 $1,476 Outpatient Hospital Paid/Episode (Difference vs. ASC) $2,427 (+21%) $2,603 (+76%) New ASC Reimbursement Schedule Effective 1/1/13 24

Independent Medical Review WCIRB Prospective Estimate Total Quantifiable Impact of SB 863 IMR Provisions Estimated to Decrease Costs by 2.1% ($390M) IMR Frictional Cost Saving Assumptions 30,000 medical liens for UR disputes replaced by IMR reports 21,000 QMEs for medical treatment replaced by IMR reports 9,000 expedited hearings eliminated Reduction in Delays for Medical Treatment Assumed to Reduce TD Duration by 4% Reduced Litigation Related to Medical Treatment Assumed to Reduce ALAE Costs by 2.4% No Estimate for IMR Impact on Medical Treatment Levels Provided 25

Number of IMR Requests by Quarter 80,000 60,000 59,967 61,793 40,000 35,131 40,930 37,083 20,000 0 784 1Q & 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 Source: DWC. Includes duplicates and ineligible requests. 26

IMR Process Flow 2013 and 2014 Applications As of 10/1/2014 IMR APPLICATIONS TO MAXIMUS N = 255,624 (100%) DROPPED AFTER PRELIMINARY VERIFICATION N = 97,793 (38%) TOTAL ELIGIBLE MAXIMUS REVIEWS N = 157,831 (62%) TOTAL COMPLETED REVIEWS N = 120,492 TOTAL TERMINATED REVIEWS N = 9,025 PENDING BILLS 22,425 MAXIMUS SENDS BILLS TO PAYERS N = 107,092 $51,229,310 BILLS PENDING PAYMENT N = 40,132 PAYMENTS BY PAYERS TO MAXIMUS N = 66,960 $34,393,680 D U P L I C A T E S I N E L I G I B L E N= 60,890 N= 36,903 BACKLOG 26,431 (17%) STANDARD N = 87,613 $45,470.200 PHARMA N = 9,453 $3,686,670 EXPEDITED N = 153 $98,135 TERMINATED N= 9,873 $1,974,305 TOTAL ESTIMATED PAID ON 2013 & 2014 IMR APPLICATIONS = $77.3M 27

Temporary Disability Duration 120 Average Paid TD Days as of 12 Months 100 80 75.8 79.6 78.8 80.7 83.3 91.8 85.0 88.6 92.5 60 40 2005 2006 2007 2008 2009 2010 2011 2012 2013 Calendar Year Source: CWCI ICIS data 28

Medical-Legal Costs Based on WCIRB MDC Data 12.0 % of MDC Claims with Med-Legal Payments $1,500 Average Paid per Med-Legal Report 9.0 9.3 8.6 8.8 9.2 $1,200 $1,036 $1,022 $1,141 $1,220 $900 6.0 $600 3.0 $300 0.0 Jul-Dec 2012 Jan-Jun Jul-Dec 2013 2013 Service Year Jan-Jun 2014 $0 Jul-Dec 2012 Jan-Jun Jul-Dec 2013 2013 Service Year Jan-Jun 2014 29

2013 LAE Severity Changes Projected Vs. Actual 10% Projected Actual (Current Estimate) 6.2% 5% 3.8% 2.1% 0% -0.5% -5% -10% -7.8% -15% -12.3% ULAE ALAE (Excl MCCP) MCCP 30

Payments Made to Attorneys $ s in Millions $1,000 $800 Applicant Attorneys Defense Attorneys $712 $774 $830 $600 $577 $608 $400 $303 $349 $386 $450 $456 $200 $0 2009 2010 2011 2012 2013 Calendar Year 31

Change in Ultimate On-Level Medical Severity 20 % Change As of June 30, 2014 15 10 10.6 10.2 8.2 7.3 5 3.2 2.1 0-0.6-5 -3.3-10 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 Accident Year 32

Independent Medical Review Summary of Current Information Impact on Frictional Costs & Litigation Volume of IMRs 2 Times Higher than Projected After Excluding Duplicate and Ineligible IMRs Medical-Legal Costs Continuing to Increase Post-SB 863 LAE Up Sharply in 2013 Instead of Declining as Projected Applicant and Defense Attorney Payments Consistent with Pre-Reform Trend through 2013 Updated WCIRB Estimate Eliminates Frictional Cost & Litigation Savings from IMR 33

Independent Medical Review Summary of Current Information Impact on Medical Treatment Costs & TD Duration IMR Impact on Medical Treatment Costs Still Uncertain Overall medical severities emerging lower for 2013 Preliminary Data Shows TD Duration Not Declining in 2013 34

MPN Strengthening WCIRB Prospective Estimate Total Quantifiable Impact of SB 863 MPN Changes Estimated to Decrease Costs by 1.0% ($190M) Key Assumptions 76% of PD claims are within MPNs with 70% litigated 20% of in-network litigated PD claims will obtain services outside the MPN Out-of-network costs 10% higher for medical, 14% higher for TD, and 23% higher for PD 35

MPN Utilization 100 80 60 68.7 Percentage of 1st Year Visits to Network Providers Percentage of 1st Year Payments to Network Providers 74.8 76.2 78.4 80.1 70.9 72.2 65.3 67.5 62.7 59.4 60.3 57.1 70.0 82.6 73.5 85.7 87.3 77.9 76.7 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Preliminary Source: CWCI ICIS data 2014 Preliminary 36

RBRVS WCIRB Prospective Estimate Evaluated as Part of 1/1/14 Filing Estimated Impact on 2014 Services = +2.4% on Overall Physician Payments Key Assumptions Services cross-walked based on RAND Study No changes in utilization patterns 37

Fee Schedule Payments by Service and Payment Quarter (in millions) Service Quarter Paid within 1Q 2013 OMFS Paid within 2Q 2013 OMFS Paid within 3Q 2013 OMFS Paid within 4Q 2013 OMFS Paid within 1Q 2014 RBRVS Paid within 2Q 2014 RBRVS 1Q 2013 $100.6 $103.5 $22.9 $8.0 $4.3 $2.9 2Q 2013 $100.1 $112.7 $18.8 $7.8 $4.3 3Q 2013 $107.6 $102.7 $18.9 $6.8 4Q 2013 $106.0 $99.3 $16.4 1Q 2014 $95.6 $103.4 2Q 2014 $103.7 Combination 6 Service/Payment Quarters $304.3 $303.3 38

WCIRB SB 863 Cost Monitoring Indemnity Reforms WCIRB Original Cost Estimates ($ s in billions) Preliminary Monitoring Results Impact on Net Adjustments to SB 863 Savings ($ s in billions) SB 863 Provisions SB 863 Savings Changes to Weekly PD Min & Max +$0.7 --- Replacement of FEC Factor +$0.6 --- Elimination of PD Add-ons ($0.2) TBD --- Three-Tiered Weekly PD Benefits ($0.1) TBD --- Ogilvie Decision ($0.2) TBD --- Indemnity Claim Frequency Small Increase --- Indemnity Severity Small Increase --- Total Indemnity Reforms +$0.8 --- $0.0 39

WCIRB SB 863 Cost Monitoring Medical & LAE Reforms WCIRB Original Cost Estimates ($ s in billions) Preliminary Monitoring Results Impact on Net Adjustments to SB 863 Savings ($ s in billions) SB 863 Provisions SB 863 Savings Liens ($0.5) +$0.2 Surgical Implant Hardware ($0.1) --- ASC Fees ($0.1) --- IMR Impact on Frictional Costs ($0.2) ($0.2) IMR Impact on TD Duration ($0.2) --- IMR Impact on Medical Treatment --- TBD --- MPN Strengthening ($0.2) --- RBRVS Fee Schedule +$0.3 --- Medical Severities Small Increase --- ALAE and ULAE Severities Significant Declines --- Total Medical & LAE Reforms ($1.0) $0.0 Total Estimate All Items ($0.2) --- $0.0 40

W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a SB 863 Cost Monitoring Report 41