1. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Workers’ Compensation Institute www.cwci.org California Workers’ Compensation Reform Public Policy Research Implications CLRS September 14, 2004

2. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved CWCI’s research: Focuses on the real costs in the system Helps establish consensus about problems Assists in establishing an agenda for improving the system Specific areas of research: System-wide cost drivers Medical utilization Claims adjudication Fraud & abuse Litigation VR PD Reform Activities

3. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Workers’ Compensation Reform “Self-Executing” Changes --AB 749 (2003) SB 227/228/899 (2004) -- Removal of PTP Presumption of Correctness OMFS & Medicare & 5% Reduction Outpatient Surgery Facility Fee Schedule ACOEM 2 nd Opinion for Back Surgeries Utilization Review 1st Medical Pay Apportionment Expansion of ADR 2-yr Cap on TD

4. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Workers’ Compensation Reform Agenda Part 1: Medical Utilization Part 2: Benefit Delivery

5. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM & The California Workers’ Compensation System Areas of Research – Part 1: Medical Utilization 1.Actual – to – ACOEM utilization comparisons 2.Incremental effects of medical services beyond ACOEM recommended levels

6. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Estimated Ultimate Medical Per Indemnity Claim (Reflecting the Impact of AB 227 & SB 228) Source: WCIRB Results as of 12/02 & 12/03 18% Reduction

7. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Labor Code, Section 4600 Provide all treatment “reasonably necessary to cure and relieve from the effects of injury,” Presumption of Correctness (1994) Confers a presumption of correctness to the injured worker’s primary treating physician; intended to neutralize the multiple and conflicting medical- legal evaluation reports Minniear Decision (1996) The injured worker’s primary treating physician’s presumption expands beyond medical-legal evaluation to encompass “all issues” including clinical treatment. Workers’ Comp Public Policy—Legislative History

8. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Medical Treatment Average Monthly Paid (All Professional Fees) The Effect of 1993 – 1996 Legislative Reform Activity C C V V I 76% Increase Source: CWCI 2003

9. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved The Effect of 1993 – 1996 Legislative Reform Activity Source: CWCI 2003 Medical Utilization

10. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved How Safe Is Health Care? (Leape 2002) HealthCare Mountain Climbing Bungee Jumping Driving Chemical Manufacturing Chartered Flights Scheduled Airlines European Railroads Nuclear Power Number of encounters for each fatality 1 10 100 1,000 10,000 100,000 1101001,00010,000100,0001,000,00010,000,000 Total lives lost per year DANGEROUS (>1/1000) ULTRA-SAFE (<1/100K)

11. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Utilization Review as Part of System Reform: -- AB 749 (2003) SB 227/228/899 (2004) -- New emphasis on evidence-based medicine New definition of “reasonable care” to cure & relieve American College of Occupational & Environmental Medicine (ACOEM ) Presumption of Correctness DWC to review guidelines

12. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM Guidelines Provide medical providers: –Information on “best practices”; i.e., what is known to work –Reflect the state of the science –Need to assess applicability to workers’ compensation

13. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM: Impact on Workers’ Comp System Claim TypeClaimsTotal PaidMedical Paid Indemnity Paid Indemnity 361,242 $8.132B $3.619B $4.514B Med-Only 665,354 $.434B Total 1,026,596 $8.567B $4.053B $4.514B Claim Sample: Data compiled from ICIS database DOI Jan 1997 – Dec 2000; benefits valued at June 2002 ACOEM treatment category assigned Actual utilization levels compared to ACOEM recommendations

14. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Six Medical Service Categories 1. X-Rays 2. CT/MRI 3. Physical medicine visits 4. Chiropractic visits 5. Back surgeries (Fusions & Laminectomies) 6. TD days Actual-to-ACOEM-Recommended Utilization Comparison: ACOEM Injury Categories Low Back – Soft Tissue Complaints (N=168,885 claims) Low Back – Nerve Involvement (N=10,416 claims) Utilization Comparison Actual: Derived from ICIS claim and MBR data ACOEM: Recommended utilization, from ACOEM Guidelines, 2 nd Edition

15. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM Category Pcnt Claims ACOEM Category Pcnt Claims 1 Low Back - Soft Tissue Complaints16.5% 9 Knee - Soft Tissue Complaints2.9% 2 Neck - Soft Tissue Complaints4.7% 10 Ankle, Foot - Soft Tissue Complaints4.5% 3 Shoulder - Soft Tissue Complaints4.5% 11 Elbow - Soft Tissue Complaints1.9% 4 Other ACOEM Categories2.7% 12 Knee - Internal Derangement0.6% 5 Low Back – Spinal Degeneration0.6% 13 Neck – Nerve Root Compression0.4% 6 Forearm, Wrist and Hand - Soft Tissue Complaints6.2% 14 Shoulder - Impingement Syndrome0.2% 7 Forearm, Wrist and Hand - Nerve Compression1.4% 15 Shoulder - Complex Soft Tissue Trauma0.1% 8 Low Back – Nerve Involvement1.0% 16 Knee – Ligament Tear0. 1% Incidence of 16 ACOEM Treatment Categories

16. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Percentage of Claims Covered by ACOEM Guidelines Source: CWCI 2004 Actual – to – ACOEM utilization comparisons

17. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Non-ACOEM Categories Pcnt Claims Trauma Diagnoses21.6% Non-Specific Diagnoses30.2% Injury Categories Not Included in ACOEM Guidelines

18. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Claims Total Paid Total Medical Total Indemnity 195990 – Injury –Site NOS15.2%14.8%14.1%15.60% 2 95980 – Injury Multiple Site/Site NEC12.0%18.1%17.2%19.0% 37998 - Ill-Defined Condition NEC4.9%6.9%5.9%7.9% 471946 – Joint Pain-Lower Leg1.7%2.9%2.7%3.1% 5959 - Injury NEC/NOS*1.6%2.4% 695910 – Trunk Injury NOS1.6%3.8% 795970 – Lower Leg Injury NOS1.2%2.7%2.5%2.8% 87295 - Pain In Limb1.0%1.1%1.0%1.1% 98488 – Sprain NEC1.0%0.3% 10 7262 - Shoulder Region Dislocation NEC0.8%3.2%3.1%3.3% Top 10 Sub-total: 41.0%56.2%53.0%59.3% Top 10 Non-Specific Diagnosis Codes

19. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved X-Rays Not recommended by ACOEM Strains and other causes of non-specific pain cannot be visualized on plain x-ray films with enough detail to be clinically useful Actual utilization: Pcnt of ICIS claims with x-rays - Low back / soft tissue claims:56.2% - Low back / nerve involvement claims:74.8% Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

20. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved N/A N/A: Test or service not recommended by ACOEM Guidelines X-Rays Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI N/A

21. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Computer Axial Tomography (CT) Scans & Magnetic Resonance Imaging (MRI) Recommended only to confirm clinical findings and clarify the anatomy prior to surgery 1 If surgery is not contemplated, imaging will not affect the course of treatment or recovery Actual utilization: Pcnt of claims with CTs/MRIs - Low Back / Soft Tissue:15.9% - Low Back / Nerve Involvement:45.7% 1 ACOEM Occupational Medicine Practice Guidelines, ed.2, p. 303 Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

22. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved N/A N/A: Test or service not recommended by ACOEM Guidelines CTs & MRIs Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI

23. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM Occupational Medicine Practice Guidelines, ed.2, p. 299. Physical Medicine Comprises one-third of all outpatient medical costs ACOEM-recommended number of visits is two or fewer, for teaching a home exercise program There is insufficient evidence of effectiveness for traction, ultrasound, massage, diathermy, biofeedback, TENS, magnet therapy, acupuncture, neuroreflexotherapy or lumbar supports Actual utilization: Pcnt of claims with Physical Medicine visits: - Low Back / Soft Tissue:60.2% - Low Back / Nerve Involvement:78.3% Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

24. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Physical Medicine Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI

25. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM Occupational Medicine Practice Guidelines, ed.2, p. 299. Chiropractic Manipulation ACOEM-recommended number of visits equals a maximum of 12 visits in first 30 days for Low Back / Soft Tissue claims Not recommended for Low Back / Nerve Involvement claims Actual utilization: Pcnt of claims with chiropractic visits: - Low Back / Soft Tissue: 10.7% - Low Back / Nerve Involvement: 32.5% Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

26. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Chiropractic Manipulation Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI N/A N/A: Test or service not recommended by ACOEM Guidelines

27. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Back Surgery (Spinal Fusions & Laminectomies) ACOEM recommends only patients with severe disc disease, spinal stenosis or thoracic/lumbar disc displacement Fusions have a very low success rate in the absence of serious conditions Surprisingly high surgical rate for backache NOS (5.2%) and sprain of sacrum (4.0%) Actual utilization: Pcnt of claims with specified surgery: - Low Back / Soft Tissue: 1.4% (n=2,374) - Low Back / Nerve Involvement: 9.3% (n=968) Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

28. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Back Surgeries (Fusions & Laminectomies) Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI N/A N/A: Test or service not recommended by ACOEM Guidelines

29. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Paid Temporary Disability Days Average Length of Paid TD : Low Back / Soft Tissue: 63.9 days Low Back / Nerve Involvement:113.0 days NHIS study showed averages of 6 to 10 days for comparable injuries Actual-to-ACOEM-Recommended Utilization Comparison: Medical Service Categories

30. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Paid Temporary Disability Days Comparison of Actual to ACOEM-Recommended Utilization Source: CWCI

31. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved N/A N/A: Test or service not recommended by ACOEM Guidelines Summary of ACOEM-Recommended Utilization: Percentage of Tests & Services Recommended by ACOEM, Based on the Evidence, for Two Low Back Conditions Source: CWCI

32. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Actual-to-ACOEM-Recommended Utilization Comparisons A common response to conservative nature of ACOEM: “The absence of high-grade evidence is not conclusive proof of lack of value to the injured worker.” So, what and where is the value to the injured worker?

33. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM: Impact on Workers’ Comp System Issues: 1.Actual–to–ACOEM-Recommended Utilization Comparisons 2.Incremental Effects of Medical Services Beyond ACOEM-Recommended Levels

34. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM-Recommended Levels Low Back – Soft Tissue Complaints 5 Medical Service Categories 1. X-Ray Films 2. CT/MRI 3. Physical Medicine 4. Chiropractic 5. Back Surgeries (Fusions & Laminectomies) Incremental Effects on Claim Development for Treatment Beyond ACOEM: Preliminary Results on: Total Claim Costs Medical Costs Overall Length of Treatment Length of Disability (TD days)

35. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM: Preliminary Results Low Back - Soft Tissue Complaints Average Cost per Service Visit Note: average surgery fees are for professional component only

36. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM : Preliminary Results Low Back - Soft Tissue Complaints Additional Payments Per Indemnity Claim Per Service Beyond ACOEM $2,738 $18,162 $81,422

37. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM : Preliminary Results Additional Treatment & Temporary Disability Days Per Indemnity Claim Per Service Beyond ACOEM

38. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM : Preliminary Results Physical Medicine & Chiropractic Manipulation: Percent of Claims Above & Below ACOEM Levels >2 Visits >12 Visits In 1 st 30 days

39. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM : Preliminary Results Low Back - Soft Tissue Complaints Incremental Cost Per Indemnity Claim By Services Visits Beyond ACOEM ACOEM Phy Med ACOEM Chiro

40. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Incremental Effects Beyond ACOEM : Preliminary Results Summary of Incremental Effects on Claim Development - Phys Med & Chiro Services - Low Back - Soft Tissue Complaints 29.8% 119.9155.6 8.7% 92.1100.1 TD Days 75.3% 427.4749.3 14.3% 391.2447.1 Treatment Length 59.0% $17,849 $28,377 12.8% $17,509 $19,742 Indemnity 53.5% $13,559 $20,815 11.9% $11,482 $12,844 Medical 56.6% $31,408 $49,192 12.4% $28,991 $32,586 Total Claim Cost Pcnt Diff Within ACOEM Above ACOEM Pcnt Diff Within ACOEM Above ACOEM ChiropracticPhysical Medicine

41. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved ACOEM: Impact on Workers’ Comp System Summary: 1.Significant differences between current and ACOEM-recommended utilization patterns 2.Significant variation in treatment selection, intensity and duration 3.Excess utilization beyond ACOEM is not associated with: Overall lower medical costs Shorter treatment Faster return-to-work 4.Physical medicine & chiropractic utilization at or below ACOEM is associated with positive claim outcomes

42. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Issues in Estimating ACOEM’s Impact Implications for: 1.Injured Worker 2.Providers & MCOs 3.Payors & Claims Administrators 4.Labor Code, Rules & Regs & Legal Interpretation Difficultly in Estimating Savings 1.Workers Comp is not Group Health 2.Double-Counting Util Mgt. Savings - ER vs. EE PTP - Network Effects - PT/Chiro Visit Caps

43. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Areas of Research – Part 2: Benefit Delivery 1.Alternative Dispute Resolution 2.2-Year Temporary Disability Cap 3.1 st Medical Pay

44. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Alternative Dispute Resolution Data Sample ClaimsTotal BenefitsMedicalIndemnity ADR 2,230 $ 33,547,649 $ 12,835,963 $ 20,711,686 Statutory9,591 $ 175,123,851 $ 67,555,187 $ 107,568,665 Total 11,821 $ 208,671,500 $ 80,391,150 $ 128,280,351 Significant expansion to new industries Little outcomes data

45. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Alternative Dispute Resolution: Rate of Attorney Involvement

46. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Alternative Dispute Resolution: Average Benefit Costs MedicalIndemnityTotal Benefits Attorney Involvement ADRStatutoryADRStatutoryADRStatutory NO $ 5,330 $ 1,788 $ 8,191 $ 1,745 $13,520 $ 3,533 YES $14,600 $ 16,270 $36,710 $31,586 $51,309 $ 47,856 Total $ 6,161 $ 6,444 $10,928 $10,698 $17,089 $ 17,142 No Significant Difference

47. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Alternative Dispute Resolution: Employer-level Outcome Variation Top 3 Governing Classes ADR ER #1 ADR ER #2 ADR ER #3 Statutory System Electrical $19,321 $20,865 $15,976 $16,283 Wallboard Application $14,967 $17,452 $20,021 $20,413 Carpentry--Private Residence $14,286 $10,518 $18,231 $17,370

48. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved 2-Year Temporary Disability Cap ( LC §4656) Pcnt of Claims & Benefits >2Yrs of TD by Timeframe Injuries o/a 4/19/04 TD cap -- max. of 104 weeks

49. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Acute & Chronic Hepatitis B & C0.0% Amputations1.3% Severe Burns0.9% HIV0.0% High-Velocity Eye Injuries0.3% Chemical Burns to Eyes0.1% Pulmonary Fibrosis0.0% Chronic Lung Disease0.4% Exempt Injuries: 2.9% of TD Claims 5.3% of TD Pmts 88.7% Higher Benefits 2-Year TD Cap: Exempt Injuries

50. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Measuring First Medical Pay ( LC §5402) Payors cover medical benefits prior to accept/reject decision $10K Cap on Initial Medical Payments Timeframe not defined

51. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved Measuring First Medical Pay Initial medical payout patterns: Future Issues: Denial Rates Claim Utilization Utilization Recovery

52. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Workers’ Compensation Reform “Self-Executing” Changes --AB 749 (2003) SB 227/228/899 (2004) -- Removal of PTP Presumption of Correctness OMFS & Medicare & 5% Reduction Outpatient Surgery Facility Fee Schedule ACOEM 2 nd Opinion for Back Surgeries Utilization Review 1st Medical Pay Apportionment Expansion of ADR 2-yr Cap on TD Coming Attractions… New PD Schedule New UR Protocols Medical Networks

53. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved 1.Operations: Get up to speed on new rules Medical Indemnity Rules & Regs 2.Data & analysis & benchmarking Tracking internal operations & external vendors - Networks - Fee Schedules - Utilization - Claim Operations Strategies for Payors

54. C C V V I CLRS – September 2004 Copyright 2004, CWCI All rights reserved California Workers’ Compensation Institute www.cwci.org Public Policy Research Implications & California Workers’ Compensation System Reform September 14, 2004