Steven Fanaroff was baffled. As CFO of privately held Magruder Holdings Inc., a well-known grocery store chain in Virginia, Maryland and Washington, D.C., he had watched the premiums on the company’s workers compensation insurance jump in each year for the last several by 25%. The company had been maintaining a payroll of about 600, and it wasn’t as if there were significantly more claims. The problem Fanaroff found was that the average medical bill for each claim seemed to be rising dramatically. “We discovered a cut finger costs more to treat if it occurs at work than if it occurred at home,” says Fanaroff from his Rockville, Md., corporate headquarters.

Fanaroff is not alone in his discovery of how the system works. According to figures provided by Tillinghast Towers Perrin, the inflation in health care costs for workers comp has not only exceeded that for overall medical care–the gap between the two has been growing exponentially. For instance, in 1998-99, the growth in medical care costs for workers comp was not quite double the inflation in overall health care, but by 2000-01, the workers comp number was almost triple the growth in the nation’s medical bill. (See chart on page 30.)

How can that be explained? In the mid-1990s, the answer seemed clear to everyone: Health costs under workers comp were climbing at a rapid clip because most had been exempted, by law, from managed care controls. One need only look at the growth in costs between 1993 and 1998, the years in which managed care produced the biggest cost savings for corporate plans, to see what the absence of managed care meant for workers comp. (See chart on page 31.) “With group health care–a traditional employee benefit–a physician or hospital typically receives a fixed fee per employee of, say, $200 a year,” explains Robert Hartwig, chief economist at the New York-based Insurance Information Institute. “There is a strong incentive for the doctor to resist additional tests beyond what is necessary, otherwise his or her costs rise and profits diminish. If someone needs just a single X-ray as opposed to a CAT scan, for example, there’s more money left over for profit.”

Of course, some blame goes to unscrupulous doctors and pharmacists, aware of the less stringent monitoring of workers comp medical expenses. But there has also long been a suspicion among insurers and executives that two fee schedules for medical care exist–one for benefits provided under traditional corporate plans and another higher one for treatment provided under workers comp.

The evidence for this thesis is somewhat anecdotal and intuitive; medical costs for workers comp and corporate plans have not tended to be compared on such a granular level. And recognizing the similarity in growth rates for costs in 1999, 2000 and 2001 on traditional plans versus workers comp might lead one to dismiss the suspicions. However, if one takes into account that major drivers for corporate plans have tended to be from ongoing illnesses, such as diabetes, asthma, heart ailments and AIDS–conditions almost never covered under workers comp–one begins to wonder what the numbers would look like on a claim by claim basis.

A recent survey by workers compensation management firm GuilfordPare Ltd., however, would seem to reinforce the concept. According to the study which looked at data from the National Council on Compensation Insurance (NCCI), the U.S. Bureau of Labor Statistics and GuilfordPare’s own clients, while 70% of physicians in a managed care environment seeing patients with customary health insurance typically recommend less expensive generic drugs, only 10% seeing injured or ill employees for a claim covered by workers comp seem to recommend them. “Keep in mind that Celebrex for joint pain costs $725 for a 60-day supply, while Advil costs $12.95,” says Marcia DeWitt, CEO of Baltimore-based GuilfordPare. NCCI is planning to publish results from a similar study of pharmaceutical costs within and outside of workers comp sometime this quarter.

Not Just Prescriptions

Insurers claim the problem is hardly confined to prescription drugs. “If you break your leg at home, with traditional health insurance you go directly to an orthopedist to set it, versus in a work environment where there may be a series of other medical practitioners you see before you get the appropriate care provider,” says Ruth Erickson, managing director and national practice leader at insurance broker Marsh Inc.’s worker absence practice. “While employee benefits plans generally offer only a limited number of physical therapy visits, with workers comp occupational therapy visits are virtually unlimited.”

Additionally, Don Hurter, vice president of medical management services at New York-based insurer American International Group Inc., notes that in 18 states employees have free choice about which doctor or health care facility to use. “Employees incur a minor injury and go to expensive hospital emergency rooms or their own doctors,” he notes. “Costs mount alarmingly.”

And you can bet, GuilfordPare’s DeWitt quips, that the therapy will be more extensive, despite the absence of evidence that the workers comp injury is more severe. “A person with a leg broken at home may visit a physical therapist four times,” she says. “But if he or she broke it at work, rest assured four visits won’t scratch the surface.”

Another culprit is so-called alternative therapies. “With workers comp, you can receive such additional alternative treatments as faith healing,” Hartwig says. “Actually, most states permit a wide range of alternative healing therapies that are not available under standard employer-sponsored health insurance. You can get virtually unlimited massage and whirlpool treatments.”

The pricing may be a tad “alternative” as well. Take Zenith Insurance Corp., in Woodland Hills, Calif., for example. Zenith recalls when it paid through the nose for an employee’s injured back. “A California hospital sent us a $569,000 bill for a seven-day admission for an injured employee’s back surgery. Upon reviewing the bill, we notified the hospital through our attorney that it was excessive. The hospital eventually responded that it would accept $22,413 as payment in full–96% less than it tried to charge,” Zenith says in its literature.

“The reality is that medical care providers will essentially bill and invoice whatever charges they can reasonably justify,” says Tom Ryan, senior vice president at Marsh Risk Consulting in New York. DeWitt agrees: “There is a tremendous variation from state to state in what doctors charge for the same injury. In Texas, for the three top workers comp injuries–back injuries, muscle strains and eye damage–the costs are three times what they are in surrounding states. Similar cost variances used to occur in the traditional health care system, but the federal government’s clamp down on abusive charges has narrowed them–not the case with workers comp.”

Gaming the System

According to a three-year-old study of eight states that represent 40% of the workers comp benefits paid in the nation, medical payments per claim in Texas are more than double those in Massachusetts, and the average prices paid to Florida hospitals are more than 20% higher than in other states. The study, by the Workers Compensation Research Institute, indicates that chiropractic services are the major medical cost driver in Texas, with injured workers more than twice as likely to receive services from chiropractors than is typical in other states. Little wonder that Texas chiropractors receive fees 43% higher than other states, the study notes.

Then there’s the issue of fraud. Hartwig says employees try to “game the system,” particularly when they have soft tissue injuries like lower back pain. “Such ailments are the largest category of workers comp claims and the most problematic, since they’re hard to diagnose and treat properly,” he says. “Everyone can attest to some back pain at some point in their lives, but most of us live with it. Fraudsters favor them because … they know insurers will balk at spending $100,000 to contest a $50,000 claim.”

Indeed, fraud is a cottage industry in the workers comp arena, says Donna Klein, partner and head of the health care practice at McGlinchey Stafford, a New Orleans-based law firm. Klein is a registered nurse as well as a lawyer and is often hired by investigators and government agencies to ferret out cases of medical care fraud. “It’s a common occurrence,” she says. “There are syndicates of doctors, employees, therapists and lawyers who conspire together to stretch out worker injuries, pad the bill or just simply create fictitious claims. They know it’s tough to get caught. If someone goes to a physical therapist 10 more times than warranted, how do you prove it?”

While there have been attempts to migrate workers comp to a total managed care environment, the insurance institute’s Hartwig says, “most didn’t pan out. Comp remains a system where a worker can claim injury as frequently as he or she wishes. Benefits are unlimited, mandatory and statutorily prescribed. Physicians and hospitals know this and over-prescribe treatment to increase revenues.”

But aggressive monitoring and management can put a dent in runaway costs. Marsh’s Ryan suggests putting medical bills through a screening process, which gives a company the opportunity to have bills with inappropriate charges re-priced by the practitioner, and provides a data warehouse to build a cost-effective strategy for employee wellness. “We also support a three-point approach by the employer, employee and the medical care provider to address an injury or illness within 24 hours of occurrence,” he says, adding that an eye should focus on getting the employee back to work as soon as possible.

CFO Fanaroff was able to reduce medical care expenses at Magruder by hiring GuilfordPare, which put together a list of approved doctors, clinics and hospitals that employees must contact immediately after an injury. “I’m able to cut my costs by keeping my employees out of expensive hospitals,” he says. “Basically, I’m in control of whom they see, and once you’re in control you can manage costs.”

Each of the preferred providers has been briefed about Magruder’s return-to-work and light duty strategies. Says Fanaroff, “I want my employees to get proper medical care and return to their jobs as quickly as possible. If they can’t perform their old job, I can find another that they can.”

Costco Wholesale Corp. follows a similar strategy. “We have a contract with a third-party nursing service that works with injured workers to direct them to appropriate medical care providers,” says Janice Chamberlain, risk manager at the Issaquah, Wash.-based chain of superstores. “Our medical costs were skyrocketing, and the financial impact was horrendous. Instead of letting the system dictate, we’ve taken control, doing all we can to prevent losses in the first place and then managing them for quality care and cost-effectiveness once they occur.”