Report 2003-108.1 Summary - August 2003

California's Workers' Compensation Program


The Medical Payment System Does Not Adequately Control the Costs to Employers to Treat Injured Workers or Allow for Adequate Monitoring of System Costs and Patient Care


Our review of the workers' compensation medical payments system revealed that:


Established in 1911, the California workers' compensation system requires that employers pay the costs to treat workers who are injured on the job and partially compensate them for lost wages. The Workers' Compensation Insurance Rating Bureau (rating bureau) reported that the workers' compensation total system costs for employers that purchase workers' compensation insurance were more than $17.9 billion in 2002, with medical costs, including pharmaceuticals, representing approximately $4.1 billion, or 23 percent. Using a commonly accepted factor of 1.4 to convert costs for insured employers to include the costs for all self-insured employers in the State, we estimate the total workers' compensation cost for the system in 2002 to be approximately $25.1 billion, about $5.7 billion of which was paid for medical costs.

A recent survey reveals a widespread belief among California's businesses that workers' compensation costs are the biggest single cost issue facing businesses today. The costs of the State's workers' compensation program to employers are spiraling upward, and numerous studies point to the rising medical costs of treating injured workers as a major contributor to the problem. The rating bureau reported that the average total estimated medical cost per workers' compensation claim involving lost work time increased by 254 percent from 1992 to 2002. The insurance premiums charged to employers to provide workers' compensation coverage increased from $5.8 billion to $14.7 billion between 1995 and 2002.

Unpredictably rising costs may have also affected the insurance companies that sell workers' compensation policies. According to the insurance commissioner, 27 of those insurers have become bankrupt, and the State Compensation Insurance Fund (state fund), with 50 percent of the California market, is in serious financial condition. The insurance commissioner predicts that the system will collapse if legislative reforms are not enacted to control the costs related to providing medical treatment to injured workers.

The medical costs of the workers' compensation system are rising in part because the State has not taken the necessary steps to ensure that the costs of treating injured workers are within reasonable limits. According to a study conducted by the Commission on Health and Safety and Workers' Compensation (commission), the system for administering medical payments (medical payment system) is unnecessarily complex, costly, and difficult to manage. The administrative director of the Department of Industrial Relations' (Industrial Relations) Division of Workers' Compensation (division) is responsible for administering and monitoring the workers' compensation system. However, the administrative director has not maintained or fully developed the medical payment system. Despite mandates to biennially update the medical fee schedules for professional services, inpatient hospital facilities, and for medical products—such as pharmaceuticals and durable medical equipment—other than for minor adjustments, these schedules have not been updated since 1999, and they are essentially a patchwork of prior fee schedules.

In addition, costs for services performed at facilities such as outpatient surgical centers and emergency rooms are not covered by fee schedules but are paid on the basis of what are known as usual, customary, and reasonable charges for such services. Health care experts consider this basis for payment to be inflationary, and thus these charges may be contributing to the escalating costs in the workers' compensation system.

The system also lacks a process that would allow doctors to use a uniform set of treatment guidelines as a standard for treating similar workplace injuries and illnesses. Researchers point to inadequate controls over treatment utilization as a primary cause of escalating costs in the workers' compensation system. Overall, they report that in the area of professional medical services, California's average payment amount per claim is typical of other states, but the number of treatments per claim provided to injured workers is far above the average. A study of workers' compensation claims by the Workers' Compensation Research Institute revealed that overall utilization is 71 percent higher in California than in the other states profiled and that injured workers in California have 49 percent more visits with physicians and 105 percent more chiropractor visits. These conclusions align with analyses we conducted of medical claims data we obtained from the state fund, which shows that the recent increases in medical costs stem more from the increase in the number of medical services rendered than from the increase in the prices paid for medical services.

The Industrial Medical Council (medical council) has developed treatment guidelines and it recently voted to review the medical evidence on treatment and utilization and to update its guidelines. The medical council's executive medical director stated that the medical council's guidelines have an advantage in that they cover all physician groups that practice in the workers' compensation system. However, the law requires that the medical council be made up of members of the medical community that would be subject to the treatment guidelines and maintain liaisons with the medical, osteopathic, psychological, and podiatric professions. As such, we question whether the medical council is the entity that can most effectively develop treatment guidelines without giving the appearance that it could be influenced by the extent to which the guidelines might adversely affect the financial interests of the medical community.

Despite the research pointing out the absence of utilization controls, California's system is without an effective process that would make treatment utilization review standards consistent among insurers. As a result, according to a study conducted by the division, there is little consistency in the processes or criteria used by insurers and claims administrators to determine the necessity of treatments proposed by physicians. In fact, one-third of the claims administrators included in the study reported using more than one set of criteria but did not provide a methodology for selecting which one they used for a particular case.

A primary cause of the lack of effective utilization controls is that under the current law, utilization reviews are usually not admissible in judicial proceedings to resolve disputes between medical providers and claims administrators. To be admissible as evidence, a decision reached through a utilization review would need to be supported by a report from a physician performing an examination of the injured worker—a level of review not typically used by insurers and claims administrators when approving payment for treatment. Therefore, utilization reviews prepared by claims administrators have no weight in judicial proceedings.

The absence of an effective utilization control process leads to disagreements between medical providers and claims administrators over proposed treatments for injured workers. However, the system does not have an effective process for resolving those disputes. Under the current dispute resolution structure, unresolved disagreements are finally settled by the Workers' Compensation Appeals Board after going through the judicial process within the workers' compensation system. Lacking a more efficient intermediary process, nearly 20 percent of the workers' compensation cases end up going through this judicial process. This lengthy process of resolving disputes can prolong the duration of workers' compensation cases.

Numerous studies have pointed to opportunities to improve cost control in the system; however, the division has not built upon those studies to implement corrective actions. The division's administrative director states that the division has not been able to dedicate more effort to improving the medical payment system due in part to staff reductions, indicating that he has lost almost 17 percent of his authorized positions and 19 percent of his filled positions since fiscal year 1999-2000. He added that when he was appointed in 1999, he was instructed to place a greater priority on improving the workers' compensation judicial process. In addition, he said that he does not believe that the law provides him with the authority to address cost controls by compelling insurers to adhere to standardized treatment guidelines.

Further, the Legislature and administration have sometimes responded to the needs of the system with measures that impede improvement, such as requiring the use of data not currently being collected to develop a new fee schedule for outpatient surgical facility charges and reducing the funding for tasks critical to improving cost control.

While the Legislature is currently studying options for improving the workers' compensation medical payment system, the administrative director and the commission have presented two different proposals for improving medical cost controls using variations of Medicare-based fee schedules. The Medicare payment system for physician services is founded on a valuation of the resources needed to provide each service. This system is known as the resource-based relative value scale (RBRVS) system. The administrative director expects to complete a study of implementing an RBRVS-based fee schedule only for physician services by September or October 2003, with plans to actually implement a new schedule for physician services by July 2004. However, according to the administrative director, the implementation of a fee schedule to better control the costs of services provided by outpatient surgical facilities is on hold because the law requires the fee schedule be developed using data to be collected by the Office of Statewide Health Planning and Development—a data collection project that may not be completed for several years.

The commission has proposed a total conversion to a payment system based on the Medicare payment system for medical services and products, and a Medi-Cal-based payment system for pharmaceuticals. The commission estimates that this conversion would save the State's workers' compensation system at least $964 million in 2004, with increasing savings in the following two years. However, its estimates are based on assumptions and projections that use findings from other research studies. We could not independently verify the commission's estimates because the commission's researcher did not maintain the source data to calculate the savings. Therefore, we offer no opinion on the validity of the commission's estimated savings from implementing its proposed medical payment system.

Basing part or all of the workers' compensation system on the Medicare RBRVS system would have several advantages, among them the values on which payments are based would be derived from the amount of resources needed to perform services, rather than on customary charges. In addition, Medicare updates its schedules regularly, and so the values would remain current. Health policy experts believe resource-based systems to be less inflationary than charge-based ones. However, because the payments are resource based, it is projected that for some medical specialties, such as surgery and anesthesia, the payment amounts would be reduced from the traditional charge-based payments, and payments for evaluation and management services would be increased. This redistributive effect of the RBRVS system is a major point of controversy among providers of these affected medical specialties, in spite of the RBRVS system's ability to contain costs.

More work is needed to ensure that injured workers have access to quality care at reasonable costs to employers. If the State adopts a payment system that is based on indexed values, such as the RBRVS, it will need to determine how to adjust the RBRVS to arrive at payments that will meet this objective. There is no universal way to make these adjustments. Other states that have implemented a payment system based on the RBRVS have used a variety of approaches in adapting the system to fit their needs. Some considerations the State must weigh include the need to balance adequate access to care against overutilization and whether a transition strategy may be needed to mitigate the effects of the payment redistribution that would be caused by an RBRVS payment system.

Once these decisions have been made, the division will need to monitor the effect of these policy decisions on the quality and availability of care to injured workers. However, the division does not currently have a data collection system that will allow it to perform the necessary research. Although legislation that took effect in 1993 mandated the development of a data collection system, the Workers' Compensation Information System (WCIS) is still incomplete. According to the division, intense opposition to data collection from insurers, a shortage of knowledgeable and experienced staff, and technical difficulties in installing the proper hardware and software infrastructure have delayed the implementation of the WCIS. The division still has not identified a projected completion date for the system.

The WCIS consists of three components: two are used to collect information on the nature and duration of workplace injuries, and the third collects data on medical treatments and payments. The first two components are complete and operational, but the division is still working to identify the types of medical data it needs to collect to provide useful information for monitoring the performance of the medical payment system. However, the division has not provided us with any assurance that the medical data it collects will generate the information required to meet the statutory objectives for the system. According to the administrative director, identification of the needed medical data has been slow due in part to the effort required to work through the concerns the insurers have about the cost of reporting the data.


Regardless of how the State modifies its workers' compensation medical payment system, it will need to improve its controls to allow it to better administer the system. As part of this effort, it will need to monitor the effects of policy changes so that it can respond more quickly to changing conditions in the system, including pressures on the costs of providing medical services and injured workers' access to care. Therefore, the administrative director and the Legislature should consider the following:

When determining the future structure of the workers' compensation medical payment system, the administrative director should consider the costs and practicalities of maintaining such a complex system and should give consideration to adopting a payment system that is based on models that are maintained by other entities, such as a variation of the RBRVS maintained by the federal Centers for Medicare and Medicaid Services, as he has done with his current proposal for modifying the physician fee schedule. If the administrative director decides to continue modifying the current workers' compensation payment system, he should consider pursuing a variety of activities, including the following:


The undersecretary and acting secretary for the Labor and Workforce Development Agency believes that our report, with its extensive analysis of options for reducing workers' compensation medical costs, provides an important framework for the legislative conference committee on workers' compensation to use as it undertakes the difficult task of examining ways to significantly reduce system costs while still providing access to care and high quality benefits to injured workers.