Turning the tide on workers' comp: while workers' compensation costs have risen dramatically in recent years, new approaches and legislation are opening the door to real change.

In 1993, then-Governor Pete Wilson of California signed a high-profile bill that reformed the state's workers' compensation system. That system was seen by many as a costly burden that was prompting businesses to leave the state. With the legislation, Wilson said, "We have driven a stake through the heart of the No. 1 job killer in California."

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Or so it seemed. In spite of those and other reforms, total workers' compensation costs in California climbed from $9.5 billion in 1995 to some $25 billion in 2002. In 2004, looking back on a two-year period in which workers' comp insurance rates more than doubled, Governor Arnold Schwarzenegger announced, "California employers are bleeding red ink from the workers' comp system. Our high costs are driving away jobs and businesses."

California's frustrating experience with workers' compensation has been echoed across much of the country. Each state operates its own system, but in many, real reform has been elusive. From 1995 to 2004, the cost of the average indemnity claim--that is, one that involves time off from work--went from $9,700 to more than $17,500, according to the National Council on Compensation Insurance.

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"No matter what we have done in the last 10 years, we have not reduced the [workers' comp] payout that employers are responsible for," says Maddy Bowling, president of Maddy Bowling Consulting in Wheaton, Ill. Perhaps more troubling, those increases have occurred over a period when businesses have had great success in reducing workplace injuries, and the frequency of lost-time claims has dropped by about 40 percent.

The growing burden represents a significant drag on profits and competitiveness, and it is clearly on the minds of many CEOs. "I think workers' compensation costs are one of the most serious risks facing employers today--especially large employers," says Larry Johnston, CEO of Albertsons, the $40 billion food and drug retailer based in Boise, Idaho (see "Fighting Costs with Culture," opposite page). "It becomes very important for top executives to develop and implement a strategic plan for controlling these costs."

Historically, CEOs have felt frustrated in their attempts to tackle workers' comp costs. But several factors are giving businesses new incentive to address the problem, including innovative approaches to treating injured workers, a better understanding of cost drivers, the use of data to drive decision making and fundamental change in workers' comp legislation. "The system has clearly been broken," says Andrew Daniels, senior vice president at Concentra, the Addison, Texas-based provider of out-sourced health services. "But now business leaders have a real opportunity to fix it and to simultaneously achieve both lower costs and higher-quality patient outcomes for their workforces."

Targeting Total Costs

Through the years, companies and health care providers have tried a number of approaches largely aimed at controlling medical costs, from sophisticated bill-review software to capping fees for services. Although these programs have helped, they haven't really solved the problem. That's because even though medical costs have risen rapidly, indemnity costs for lost wages still account for nearly half the typical workers' comp bill. Indeed, companies may achieve significant savings in medical costs yet still see overall workers' comp costs continue to rise.

As a result, a number of organizations are working with their providers to address the total cost of workers' compensation. Key to this approach is the "return to work" strategy, under which a provider that specializes in occupational health focuses on getting injured workers back on the job. Instead of simply sending those employees home for bed rest, "the mentality is, 'How can we safely get you back to work quickly, without compromising your healing, so that you're not staying home having things atrophy, losing money, losing sleep and not being able to maintain your self-esteem?'" explains Lori Kammerer, a workers' compensation policy consultant at Kammerer & Company in Sacramento, Calif.

Often, injured employees do not go right back to their regular duties but are instead assigned to restricted activities until they are fully recovered. By staying in the workplace, they remain active and engaged with colleagues and social networks--and, in all likelihood, their healing will progress more favorably. "A variety of research shows that injured employees recover more quickly when they continue working than when they don't," says W. Tom Fogarty, M.D., senior vice president and chief medical officer at Concentra.

Overall, the return-to-work strategy is effective because it addresses health issues early, which helps reduce downstream costs for everything from lost wages to case managers, fraud investigations and litigation. "Employers that have implemented strategies to enhance work-force health and productivity enjoy measurable results," says James Greenwood, Concentra's executive vice president of corporate development. "There is absolutely no doubt that getting people back to work in a safe and timely manner adds value to the individual and to the organization."

Return to work does not mean shortchanging employees on care or mindlessly shuttling injured people back to the workplace. Indeed, says Kammerer, that kind of approach only makes things worse. "You don't compromise medical treatment, because if you do, that claim is going to cost you more in the long run. If you bring workers back who never healed properly or are still injured, they're likely to reinjure themselves, and you've now doubled your claims for them."

Daniels likens return-to-work-centered treatment to sports medicine, in which doctors work aggressively to get athletes back in the game without exacerbating the injury. An injured employee coming to one of Concentra's clinics, for example, might see his or her doctor every two to three days (then as needed based on his or her medical condition), and potentially receive several physical therapy sessions in the first week of treatment, as opposed to the traditional approach of having an initial physician visit, coming back in a week, returning again in another two weeks and so on.

"When people look at this type of treatment, they say, 'Wow, you've accelerated the physical therapy.' That approach can speed up the investment in appropriate medical services, especially when you look at only the first few weeks of treatment," says Daniels. "That person who is treated quickly may be back to work in a day or two, while someone who is just sent home to rest may not be back for two weeks--long enough to start being compensated for lost wages. The key is to look at the investments required to generate a positive patient outcome while still creating a lower total-cost workers' comp claim."

The results of such comprehensive occupational health programs can be substantial: Independent studies of companies using this strategy have shown total cost reductions of 30 percent to 60 percent. "If a company spends, say, $50 million a year on workers' comp and it can get even half of its employees into these kinds of programs with a 30 percent reduction, that's a savings of $7.5 million, or 15 percent," says Daniels. "That's clearly significant, and it can have a real impact on an employer's overall profitability."

Using Data to Drive Decisions

Achieving those kinds of results largely comes down to having the specialization and experience that allow a provider to take a comprehensive approach to managing cases. "Quality occupational medicine is often about utilizing the right medical resources at the right time," says Fogarty. "But it also means covering the total picture and doing things like bringing in case managers or life counselors at the right time. All those things work to decrease the total cost of a case."

To hone their understanding of "the right medical resources at the right time," some providers are using sophisticated technology to dig into the mountains of data amassed by the industry over the years. By looking at treatments and outcomes, they can develop data-driven insights that can support continuous improvements in treatment and cost control.

For example, Concentra's occupational health services practice maintains a database of some four million cases treated and managed over the course of a decade. "Our information system can collect very detailed medical outcomes information. We could tell you, for example, how patients with certain injuries respond to certain treatment protocols and the impact on return to work," says Fogarty. "We use that data to take an evidence-based approach to occupational health--analyzing the data and then sharing it with our medical directors and therapy directors, who use it to manage our practices and help our clinicians understand what processes and protocols lead to the right outcomes." To further bolster that evidence-based approach, his company has also established the Concentra Occupational Health Research Institute, which analyzes data and conducts scientific studies to help practitioners understand what treatments are most effective in achieving desired medical outcomes.

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On a broader level, companies can use such data to benchmark and assess the performance of providers. "They can figure out who is delivering the best outcome, from a return-to-work standpoint and a cost standpoint," says Bowling. "It's amazing when you run the data how clear it is which of the providers are performing well."

Such data-driven approaches are not widespread in the industry, but they may soon be as employers demand it, observers say. "Companies need to make sure that their providers are taking a critical look at themselves and that they are implementing sound quality processes," says Greenwood. "Executives understand this--they do it in their manufacturing processes or finance or distribution processes, and they can do it when evaluating and working with their medical providers."

Employers Regain Control

In essence, business now has effective tools that it can draw on to bring down workers' comp costs. However, the ability to use those tools has in some ways been limited by the law. "A real key to success in this is the medical provider that [employees] see when they first get injured," says Bowling. But even though a company may have a particular provider lined up, there is often no guarantee that it can get employees to use that provider.

Laws vary from state to state, but in some, employers may not require employees to use their occupational health network. In other "employer-directed" states, the company can send the employee to its provider of choice, but for a limited time, such as 60 or 90 days. At that point, the employee can go to whatever provider he or she chooses--including someone outside the occupational health arena who may not be aware of the strategies needed to control workers' comp costs.

That appears to be changing, however, with a major workers' comp bill passed in April 2004 in California. The bill does a number of things, including establishing standard guidelines for care, changing rules about disability and, especially, empowering companies to direct employees to an occupational health medical network for the life of a claim. As a result, California companies can take advantage of specialized providers, return-to-work strategies and data-driven decision making to provide high-quality care at a lower total cost.

Many observers note that this is not just another reform, but rather a sea change in the philosophy behind workers' comp. Bowling has said that the legal changes in California "give us a chance to reshape the delivery of health care in the workers' compensation marketplace." Since the reform legislation took effect, California has seen several significant reductions in workers' comp insurance rates.

"It's a fundamentally different model, and executive leaders should think about how their organizations can benefit from it," says Daniels. That model appears to be taking root in other parts of the U.S., as well--a similarly intended workers' compensation law went into effect in Texas on September 1, 2005, and reforms are being considered in a number of other states. "This is the beginning of a new era that is empowering companies to take more control over both occupational health costs and quality patient outcomes," he adds.

To make the most of this new era, executives need to ensure that their organizations are aware of and focused on the company's workers' comp strategies, "You have to be able to execute in the field, which means having your managers and supervisors understand what they need to do when an employee is injured, including directing that person to a medical network physician or hospital," says Daniels. "And those same frontline managers have to be ready to accommodate injured workers when they are ready to come back to work."

Such efforts will often require the involvement of the CEO, Daniels adds. Efforts to support up-front health and injury-prevention programs, return-to-work strategies, outcome-measurement approaches and new uses of technology "will touch on many aspects of the company, including risk management, business operations, finance, HR and legal," he explains. "The CEO's leadership is needed to properly align and motivate these functional groups and leaders, so that the benefits of lower costs and increased worker health, safety and productivity are achieved."

Finally, says Greenwood, "executives and the company have to be willing and active participants in this. When we have that partnership with employers. we can be very successful in impacting costs. CEOs have long felt somewhat powerless in dealing with workers' compensation, but they really are not. They can measure and monitor and improve it. In reality, they can manage it, and manage it very effectively."

RELATED ARTICLE: 5 Action Steps for CEOs

In the effort to control workers' compensation costs, CEOs need to bear in mind several best practices:

* Creatively assign executive ownership. While tradition may dictate a handoff to HR, consider who can best drive change regardless of departmental affiliation.

* Shift the focus of financial strategy from medical costs to total workers' compensation costs. Look beyond narrow savings in medical bills to understand the complete costs involved in workers' comp and the activities that will truly address them.

* Monitor the evolving regulatory environment. In a number of states (such as California and Texas) new or proposed legislation is moving toward "employer-directed," rather than "employee-directed," workers' comp systems. These new regulations empower employers and open the door to more effective patient care and cost control.

* Evaluate and select medical provider networks (MPNs) and preferred provider organizations (PPOs) based on their ability to deliver the patient and cost outcomes you want. Effective occupational health and workers' comp management requires specialization and close communication between the company and its providers.

* Move from a "unit cost discount" strategy to a "right doctor + right care = quickest recovery" formula. Discounting and rationing of medical services can be counterproductive in workers' comp. Focus on achieving the right outcomes with quick intervention and proactive return-to-work programs.

Costs Keep Rising as Injuries Fall

      Employers'           Workplace
      workers' comp costs  injuries per 100
      per $100 of wages    employees

1999  $1.33                6.3
2000  $1.32                6.1
2001  $1.42                5.7
2002  $1.59                5.3
2003  $1.71                5.0

After reaching a low point in 2000, employers' workers' comp costs have
risen significantly. At the same time, the rate of workplace injuries
has continued a decline that goes back more than a decade.

Sources: National Academy of Social Insurance: U.S. Bureau of Labor
Statistics

Note: Table made from bar graph.