CWCI Analyzes the Impact of Inflation on the California Workers’ Comp Medical Fee Schedule

Oakland - A new California Workers’ Compensation Institute (CWCI) analysis that examines how medical inflation impacts allowable fees under the California workers’ compensation Official Medical Fee Schedule (OMFS) finds that physician and non-physician practitioner service fees represent more than half of treatment payments in the system and that differences in inflationary factors used between OMFS and Medicare explain the growing differential between California workers’ compensation and Medicare rates for professional services.

The new analysis focuses on the price indices used to adjust various OMFS payment rates. Maximum fees for different types of medical services provided to injured workers in California are regulated by the OMFS, but each OMFS section uses distinct rules for payment calculation and different inflation factors to update payment rates. For example, the Inpatient, Outpatient Facility, Ambulatory Surgical Center, Ambulance Service, and the Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) sections of the fee schedule use Medicare’s inflationary factors, and the cumulative percentage increase in the OMFS inflationary factors for these fee schedules has been lower than economy-wide inflation. But over the past decade, inflationary adjustments for the OMFS conversion factor used to calculate fees in the Professional Services section of the schedule, which account for 53 percent of California workers’ compensation medical care payments, have not aligned with Medicare, as in 2015 Medicare suspended use of the Medicare Economic Index (MEI), a measure of inflation faced by physicians with respect to their practice costs and wage levels, and shifted to statutory changes set by the U.S. Congress.

In contrast, in California workers’ compensation, use of the MEI remains mandated by statute. From 2015 to 2019, statutory annual adjustments to the Medicare conversion factor were minimal (0.5 percent), and the state Division of Workers’ Compensation did not adopt them, but from 2021 to 2024, Congress mandated increases ranging between 1.25 percent and 3.75 percent per year for Medicare, which the state incorporated into the OMFS along with the MEI adjustments. As a result, the OMFS conversion factor as a percentage of Medicare for professional services rose from 124.4 percent in 2017 to 145.7 percent in 2024.

In addition to the inflation adjustments, each year fee schedule rates (e.g., price levels) are affected by changes in other factors including:

• the Relative Value Units used in the Resource-Based Relative Value Scale system to quantify the complexity and resources required for medical services;
• the weights assigned to Diagnosis-Related Groups which are used to classify patients based on their principal diagnosis, surgical procedure, age, presence of comorbidities, complications and other factors;
• the weights assigned to the Ambulatory Payment Classification for hospital outpatient services; and
• geographic adjustment variables (like Geographic Practice Cost Indices and wage indexes).

CWCI notes that while fee schedule rates set the maximum reimbursable fee for each service, average payments for physician services are also influenced by changes in utilization, service mix, and discounting practices.

CWCI has published its analysis of the impact of inflation on OMFS fees in a Report to the Industry which is available for free under the Research tab on the Institute’s website at www.cwci.org.