Workers Compensation and Group Health

1. Workers Compensation and Group Health Presented by John Robertson, FCAS, MAAA Casualty Actuaries of the Southeast Meeting April 11, 2006

2. Medical Costs • Workers Compensation (WC) medical costs per claim grew 9% to 12% per year over the last several years • WC does control prices for non-hospital medical services through fee schedules in most states • But medical costs can be high even with price controls due to overutilization • Utilization controls are new to WC, but have been in place in Group Health (GH) for many years • How do WC medical costs compare to those in GH? 2 of 41

3. Workers CompensationMedical Cost Trends 3 of 41

4. WC Medical Claim Cost TrendsRemain High in 2004 Lost–Time Claims Medical Claim Cost (000s) Annual Change 1991–1995: +3.9% Annual Change 1996–2003: +9.2% Accident Year 1991-2004: Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies 4 of 41

5. Workers Compensation Medical Severity Has Been Growing Much Faster Than the Medical CPILost–Time Claims Percent Change Year Medical severity 1995-2004: Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services, excludes the effects of deductible policies Source: Calendar year medical Consumer Price Index (CPI), Economy.com; accident year medical severity, NCCI 5 of 41

6. 2004 Medical Indemnity 1984 Indemnity Medical Workers Compensation Medical Losses Are More Than Half of Total Losses All Claims—NCCI States 1994 Indemnity Medical Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies 6 of 41

7. Cost, Price, and Utilization 7 of 41

8. Price Versus Costof Medical Services • Cost = Price x Utilization • Utilization = Quantity adjusted for Quality/Mix • Cost and price are usually but not always correlated • Utilization patterns are the difference 8 of 41

9. Prices Per Service 9 of 41

10. Prices for Individual Medical ServicesExcluding Hospitals • Prices paid per service for WC are similar to those paid for GH • States with a WC medical fee schedule showed a WC price level from 8% to 31% below that of GH • States with no applicable fee schedule showed a WC price level 16% to 19% above that of GH 10 of 41

11. States Studied • Comparisons are based on workers compensation [WC] and group health [GH] data for 1997 to 2001 • Studied five states: Florida, Georgia, Illinois, Kentucky, Tennessee • States selected to represent some variety of physician cost controls in the workers compensation system 11 of 41

12. Comparison of State Controls 1 WCRI Managed Care & Medical Cost Cont Inventory 2001-2002, Table 3.8 AWP: Average wholesale price for a prescription drug DAW: Dispense as written DRG: Diagnosis Related Group RBVRS: Resource based relative value scale UCR: Usual, customary and reasonable 12 of 41

13. WC Prices Are Lower Than GHin Fee Schedule StatesMedian Reimbursement per ServiceExcluding Hospitals Illinois and Tennessee did not have fee schedules in timeframe of study 13 of 41

14. Network Price Discounts Bigger ifThere Is No Fee ScheduleMedian Reimbursement per ServiceExcluding Hospitals Illinois and Tennessee did not have fee schedules in timeframe of study 14 of 41

15. Injuries Studied • Price per service comparisons based on a market basket of professional services for five injuries • Carpal Tunnel Syndrome • Inguinal Hernia • Back Strain or Sprain • Open Wound of Fingers • Contusion of Lower Limb • Injuries selected to include • Hard and Soft Tissue Injuries • Cumulative and Traumatic Injuries 15 of 41

16. Treatments Associated WithCarpal Tunnel Cases CPT: Current procedural terminology * Truncated to four digits 16 of 41

17. Strong Correlation Between WC and GH for Individual Treatments 17 of 41

18. Costs of Treating Injuries 18 of 41

19. Overall Cost of Treating an Injury • WC costs more than GH to treat similar injuries, mostly because of differences in by utilization • WC has more intense and costly treatments earlier on than does GH • Cost differences are smaller than average for acute injuries and trauma-related conditions like fractures or sprains • Cost differences are greater for injuries subject to surgery and for chronic or pain-related injuries • GH has a greater proportion of low cost treatments than does WC 19 of 41

20. Medical Conditions Includedin Cost Analysis Cost analysis is based on treatment of twelve conditions 20 of 41

21. Cost Analysis is Based onSuper-Episodes • GH does not have a concept similar to “claim” in WC • Sophisticated episode groupers have evolved for analyzing GH medical data, including Medstat’s Episodes Grouper™ (Grouper) • As Grouper builds episodes, each is put into a “major diagnostic category” (MDC) 21 of 41

22. Super-Episodes • Grouper splits WC claims into several episodes • Noticed that many WC injuries have a “core episode,” i.e., an episode that occurs exactly once and that is characteristic to the WC injury • A “Super-Episode” is a combination of a unique core episode with other related treatment episodes within a claim for WC and Patient ID for GH • Identified 12 core episode MDCs • For each core episode, developed a customized list of related treatment MDC codes 22 of 41

23. Assembling Super-Episodes • Core Outliers: Remove WC claims/GH patients with any core episode for which paid is greater than the 95th percentile or less than the 5th percentile • Time Window: Include only episodes within defined time periods relative to the core episode • Related Care: Include only episodes with MDC in the related treatment list • Related to Total: For WC, include only WC claims for which core plus related care accounts for 90% of all care over the time window • Core to Related: Include only super-episodes for which the ratio of core episode paid to all related paid exceeds the 5th percentile for that ratio among the included WC claims 23 of 41

24. Super-Episode: Related Episodes Core Episode Time Window 24 of 41

25. Super-Episodes 25 of 41

26. Methodology • Most analysis from regression models • Controlled for age, gender, time (inflation) • Generally based on costs of treatments provided in first three months 26 of 41

27. Demographics Play a Role • Medical costs correlate with age • Do costs also correlate with gender? • Before we compare WC and GH costs, we need to adjust for cost differences due to differing demographics 27 of 41

28. Costs Increase with Age Percent Based on WC and GH Combined Five-State Average 28 of 41

29. WC Claimants Are More Likely To Be Male Five-State Average 29 of 41

30. Costs by Gender Are Less StraightforwardFemale Cost Relativity by Medical ConditionMale = 100% Percent Based on WC and GH Combined Five-State Average 30 of 41

31. Nearly Half of the GH Cases Are Below $500 31 of 41

32. After Removing Cases Under $500WC Still Has Higher Costs 32 of 41

33. WC/GH Cost Relativities by Condition • All the 12 medical conditions show a similar pattern of relative costs across the 5 states • Inguinal hernia (INH), degenerative disk disease (HID), and carpal tunnel (CTS) have cost relativities that are both the largest and the most variable by state of the 12 conditions studied • Fractures, cuts, and knee injuries (FSA, FDS, FDH, ILR, IUE, and IKL) exhibit the lowest and the least variable cost relativities by state 33 of 41

34. WC/GH Cost Comparison by Injury GroupWithin Three Months of InjuryGH = 100% Percent Five-State Average 34 of 41

35. WC/GH Cost Comparison by State • All the states show a similar pattern of relative costs across the 12 medical conditions • Illinois and Tennessee, the two states without workers compensation medical fee schedules, have the highest relativities for workers compensation above group health • Georgia and Kentucky have somewhat more moderate (but still high) relativities 35 of 41

36. WC/GH Cost Comparison by State • Florida workers compensation costs are moderately higher than group health • One would expect Florida to have a lower cost relative to group health based on it’s price advantage for physician services • Recent legislation in Florida, effective last year, established a hospital fee schedule (SB 50A) 36 of 41

37. WC Costs Are ConsistentlyGreater Than GH CostsWithin Three Months of InjuryGH = 100% Percent 37 of 41

38. WC/GH Cost Comparison by State and Injury GroupWithin Three Months of InjuryGH = 100% Percent 38 of 41

39. Cost Comparisons Show Small Decline as Time Window Is Increased 39 of 41

40. Summary • Prices paid by WC and GH for medical services are roughly comparable • WC costs are higher than GH; differences are due to utilization • WC costs for injuries where surgery is a likely option and chronic or pain-related injuries are significantly higher than those for GH • The cost difference between WC and GH is lower in states with fee schedules than in states without 40 of 41

41. Questions? 41 of 41