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The rising cost of workers' compensation and how to contain it.

The Rising Cost Of Workers' Compensation And How to Contain It

The workers' compensation system was created to provide security to both employers and employees. Employers wanted to be protected from financially crippling lawsuits related to on-the-job injuries, while employees wanted to be assured that their medical bills and salaries would be paid if they were injured. Today, however, the security provided by the insurance is being eroded due to the skyrocketing costs of health care.

For employers, serious problems result from such escalating and unpredictable costs. Many businesses face large profit cuts and have to increase what they charge for goods and services. Others are forced to close their operations because they can no longer afford to stay in business.

Ironically, advanced medical techniques are largely responsible for the rising costs, hurting the very systems (workers' compensation and group health insurance) that make them available to people who otherwise might not be able to afford such care. Lifegiving technology, such as heart bypass surgery, CAT scans and organ transplants, contribute significantly to the costs of health care. So do AIDS and stress-related claims, which previously did not exist and are now becoming more prominent.

The alarming escalation in health care costs can be seen by looking at a few statistics. The 1987 estimate for health expenditures is approximately $515 billion, or 11.4 percent, of the Gross National Product. In 1965, it was 6.1 percent. According to the National Council on Compensation Insurance, the average medical cost in 1982 was approximately 25 percent of total benefits paid, and by 1986, that figure had soared to 40 percent. Federal and state governments are paying out 12 or 13 percent of their budgets for health care, and that figure is higher in some urban areas.

The Workers' Compensation Research Institute found that while consumer prices almost doubled between 1975 and 1986, the costs of medical services nearly tripled. The institute reported three reasons for the inconsistency. First, medical care decisions are more technical than decisions regarding goods and other services. Second, because most people have insurance to pay for all or part of medical services, they have little incentive to be cost conscious. Lastly, because most medical care providers are paid fees for service, the more service they provide, the greater their total fees.

The problems related to these costs put legislators in a difficult position. Employers are demanding that something be done to quell increasing health care costs, but the problem is one of America's most perplexing, involving balancing economic realities, personal needs and social choices in health care and insurance claims management. These pressures were clearly the driving force behind the increase in legislative activity on workers' compensation issues during the past few years. The current issues dominating the legislative workers' compensation debates, however, concern favorable business climates and job development, not simply the adequacy of benefits.

Insurers are also feeling the pressure. The emphasis in recent years on medical cost containment, like that found in the Medicare system, has created major cost shifting problems for workers' compensation insurers. Many of the mechanisms for workers' compensation come from government and health insurance cost containment programs which have not been developed specifically for industrial injuries. While some of these plans may cap the cost per unit of service, they may not control the frequency of that service. Other cost containment techniques for reducing group health insurance costs have proven successful because the employer is able to control or direct the provider of medical or hospital services.

However, in workers' compensation, 29 U.S. jurisdictions allow the worker to make the first choice of the treating physician. Although politically difficult, this must be changed because successful approaches to medical cost containment involve innovative programs such as HMOs, DRGs and PPOs. It is important to remember that workers' compensation medical benefits are different than other types of health care benefits. Under the workers' compensation system; medical care is fixed by law and cannot be negotiated as though it were an employee benefit.

Compared to Medicare, Medicaid and private group health insurance programs, workers' compensation medical expenses are still fairly unregulated. In many states, the standard practice of fee-for-service remains. The only guidance in this arrangement comes from state workers' compensation laws that require employers to pay reasonable and necessary medical costs related to the work injury.

But the new and innovative plans and the use of fee schedules can incorporate regulation into the system and control costs. Fee schedules state maximum payment amounts, depending on the injury. Twenty states currently use some form of medical or hospital fee schedule, and 10 more are considering their use.

Other methods for reducing medical costs include involvement of medical professionals in the claims management process, active claims management, hospital bill audit programs and having employers and insurers review the workers' compensation system's medical utilization.

These cost saving measures will only work if insurers, business, government and the medical community cooperate. Workers' compensation is a vital function of this country's work force, but if health care costs continue to climb, it may no longer be able to provide the security for which it was intended.

Steven D. Millikan is vice president and director of workers' compensation for the Alliance of American Insurers in Chicago, IL. Mr. Millikan is a former deputy insurance commissioner of Missouri.
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Author:Millikan, Steven D.
Publication:Risk Management
Date:Mar 1, 1989
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