31 Mar 2013

Successes and Failures of Fee Schedules: How Medical Providers Circumvent Fee Schedule-Related Revenue Losses

By John Stahl, Esq.

Any first-semester political science major can tell you that government regulation is a common method for controlling what a business can charge for goods or services. Fee schedules provide this price control regarding workers’ compensation medical costs. Like most forms of government intervention into the free market, this approach has limited effectiveness.

Understanding fee schedules requires comprehending the distinction between the “price” and the “cost” of workers’ compensation medical services. The “price” refers to the reimbursement that a medical service provider can receive for a treatment; the “cost” refers to the amount that a workers’ compensation insurer or other entity that is liable for workers’ compensation claims actually spends regarding the services that the claimant ultimately receives.

Fee Schedules Overview

Fee schedules are a significant part of the reforms that have addressed the alarming increases in the costs of providing workers’ compensation claimants the “reasonable and necessary” medical care to which they are legally entitled. A simplistic way of looking at fee schedules is that they reflect the amount that the state has determined is appropriate for those medical services.

A panel of economists at the Workers’ Compensation Research Institute (WCRI) discussed the effectiveness of this form of regulation during a session at WCRI’s February 27-28, 2013 annual conference. That presentation was titled “Unnecessarily High/Low Medical Prices and Fee Schedules.”

WCRI economists Olesya Fomenko, Ph.D., and Rebecca Yang, Ph.D., discussed how effectively fee schedules addressed the economic burden of providing workers’ compensation claimants the medical services to which they were legally entitled. Additionally, WCRI executive director Richard Victor, Ph.D., provided an off-the-record sneak peek at the preliminary results of a study that WCRI is releasing soon.

The handouts for this session included the relevant Montana law as an example of a typical fee schedule. Mont. Code Ann. § 39-71-704(b)(i) limits reimbursement for medical services within the workers’ compensation system to no more than “a rate greater than 10% above the average of the conversion factors used by up to the top five insurers or third-party administrators providing group health insurance coverage within this state who use the resource-based relative value scale to determine fees for covered services. To be included in the rate determination, the insurer or third-party administrator must occupy at least 1% of the market share for group health insurance policies as reported annually to the state auditor.”

This regulation reflects the primary challenge regarding establishing fee schedules that requires striking the tough balance between setting workers’ compensation reimbursement rates at a reasonable level while not setting them so low that medical professionals will not participate in the system. An illustration of this is that a surgeon who receives $5,000 from a general health insurer for a simple knee operation will operate on very few claimants if the applicable fee schedule provides for a $2,000 reimbursement for that procedure.

Claimants who require the knee surgery described above fare better if the fee schedule calls for a $4,500 reimbursement for that procedure. Additionally, the workers’ compensation insurer for the claimant’s employer benefits at least a little by paying $500 less per knee surgery than it likely would absent the fee schedule.

A proper fee schedule should also reflect a “big picture” perspective regarding both the prices for individual services and the consequences of claimants not receiving those services. Using the example provided above, a fee schedule that allows $2,000 for a procedure that generally reimburses a surgeon $5,000 saves a workers’ compensation insurer $3,000 for each such procedure. However, the numerous claimants who cannot find a surgeon who is willing to work for the authorized amount may well amass far more than $3,000 in additional reimbursable physical therapy and related expenses that the surgery would have avoided.

The good news is that the state public servants who develop fee schedules generally get it at least mostly right. As shown below, this tool typically achieves its twin objectives of lowering workers’ compensation medical expenses without causing claimants much pain of any type.

Fee Schedule Variations

In addition to a general discussion of fee schedules, the WCRI economists addressed the effectiveness of reducing the prices of medical services. The tremendous variation in fee schedule reimbursement rates among states was a theme of this presentation.

One comparison related to fee schedules for non-hospital services that used the Medicare reimbursement rate as a benchmark in 2012. California, which has enacted widespread workers’ compensation reform, is at the low end of the scale with a fee schedule that is slightly below the Medicare reimbursement rate.

The fee schedule for many states hovers around 50 percent above the Medicare reimbursement rate. For example, Minnesota’s fee schedule rate is approximately 52 percent of that rate.

Illinois is at the other end of the spectrum from California. That state’s reimbursement rate under its fee schedule is just over 130 percent of the Medicare rate. That anomaly sends a message regarding both the competitiveness of the Medicare rate in Illinois and the related ease of obtaining medical services at that reimbursement level.

Fee Schedule Effectiveness

Additional WCRI research clearly showed that workers’ compensation medical prices were typically lower in states with fee schedules compared to states that lacked that price control. Illinois, which had the aforementioned unusually high fee schedule, was a notable exception to that rule.

California came in at the low end of the states in the WCRI study. The 2011 prices for non-hospital services that claimants received were roughly 30 percent lower than the median for the 25 states in the study. Arizona and Georgia both had fee schedules and hit the median price perfectly according to the WCRI graph. The prices in Wisconsin, which did not have a fee schedule, were almost twice the national median.

WCRI obtained similar results regarding an analysis of the average payment per claim for medical services. That conclusion was based on findings regarding those expenses in 25 states for claims from 2010 and 2011 that required more than 7 days of lost time.

Massachusetts, which had a fee schedule, beat California for the distinction of having the lowest average payment. The Massachusetts amount was $6,000, and the California amount was just below $8,000.

Indiana’s average payment of just over $16,000 was the highest amount for a non-fee schedule state. The fact that Illinois had a slightly higher average payment amount reflected that state’s unusually high fee schedule.

Circumventing Fee Schedules

WCRI concluded that the data summarized above and related findings illustrated that “fee schedules lower prices [for medical care] and reduce the rate of growth [of those expenses] in most states.” The less positive news was that WCRI’s research also showed that medical care providers often revised their billing or treatment practices to offset fee schedule-related revenue losses.

As illustrated below, the medical care providers’ responses to fee schedule changes reduced the desired savings that motivated the schedule. This practice is akin to entrepreneurs bottling “medicines” that contained alcohol in the 1920s in response to the federal government enacting prohibition.

The revised practices described above illustrate a reason, in addition to ensuring that claimants received appropriate care, that fee schedules must be reasonable. An analysis that WCRI conducted of statistics from Florida supported that theory.

WCRI reported that workers’ compensation reforms Florida enacted in 2003 reduced the fee schedule rates for many hospital outpatient physical medicine services from 75 percent of the charges for those services to 110 percent of the amount that Medicare authorized for the same treatment. This reduced workers’ compensation prices for the affected services approximately 50 percent.

Examples of the saving included the following reductions in the average price for the following services:

Therapeutic procedures falling from $53 to $25
Manual therapy services falling from $54 to $28
Therapy activities falling from $41 to $25

Another consequence of Florida’s new fee schedule was that the percentage of claimants with compensable harm who required more than seven days of lost time and who received hospital outpatient physical medicine services declined by eight percent in the post-reform period between 2003 and 2009. This was not surprising considering the aforementioned statistic that the reimbursement rate for those services fell by roughly 50 percent during that period.

The better news for claimants was that non-hospital providers took up some of the slack regarding the reduction in hospital-provided physical medicine services. WCRI discovered that non-hospitals increased the physical medicine services that they provided claimants by six percent in the same period that hospital reduced those services by eight percent.

WCRI discovered as well that physicians in several states with fee schedules further diluted those schedules’ impact by increasing the frequency of classifying (and billing) office visits as requiring more complex care than those doctors likely would have absent the fee schedule. These results also showed that the actual various reimbursement rates for services that were classified as more routine also affected the extent to which physicians classified care as more complex.

Final Analysis

The numerous statistics related to fee schedules prompted the WCRI economists to conclude that those schedules reduced workers’ compensation medical prices. The results regarding the actual costs for those services was that the fee schedules did reduce them “but by less than one might expect because [medical service] providers change billing and treatment practices to partially offset revenue loss.”