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RAND Releases Study on Alternative Payment Models for California’s Workers’ Compensation System

September 21, 2023 (6 min read)

By Hon. Susan V. Hamilton, Former Assistant Secretary and Deputy Commissioner, California Workers’ Compensation Appeals Board

Industrially injured workers in California are entitled to receive all reasonable and necessary medical care to cure or relieve the effects of a work-related injury, potentially for life. The employer is responsible for the costs of providing such medical care. Notwithstanding numerous legislative efforts over the years to improve health care in the workers’ compensation setting, there continue to be concerns about the costs and quality of medical care provided to injured workers. Of equal concern is the availability of medical care and timely access to such care. Those concerns prompted the California Legislature to direct the Division of Workers’ Compensation (DWC) to provide the Legislature with a report that compares medical treatment payment alternatives that could help reduce medical costs, discourage overtreatment, and incentivize quality care. Toward that end, DWC contracted with RAND Corporation to conduct a study on Alternative Payment Models (APM) for California’s Workers’ Compensation System. That study has now been released. It recommends the implementation of a pilot program that aims to increase provider participation in the workers’ compensation system while simultaneously improving worker access to quality care.

What are APMs? Traditionally, the predominant payment model in health care systems in the United States has been “fee for service.” Fee for service payment models have been criticized for lack of fiscal accountability in that they may incentivize physicians to overprovide care to increase their income. Some patients end up getting too much care, while others may not receive enough care. Additional criticisms of the fee for service paradigm include a lack of focus on prevention and health care outcomes. APMs have been implemented in some health care settings to rein in costs, discourage over treatment, and incentivize quality improvements.

The study examined five different APMs and assessed their feasibility in the workers’ compensation setting: Pay for Performance, Value-Based Programs, Bundle-Based Programs, Accountable Care Organizations, and Global Budgets. While each of these APMs share the common goal of providing high quality, efficient and necessary care, their standards are different.

  • Generally, in Pay-for-Performance Programs providers receive additional payments or other rewards when they reach specified benchmarks for quality and other goals. Such programs are intended to encourage improved performance on specified measures.
  • Value-Based Programs assess providers’ performance on quality measures, while simultaneously holding providers accountable for costs and quality of care.
  • Under Bundle-Based Programs, a provider is given a single, comprehensive payment that is intended to cover all services provided during an episode of care, with the goal of encouraging the provider to control costs.
  • An Accountable Care Organization is a group of physicians, hospitals and other providers who voluntarily partner to deliver coordinated care to a group of patients. The goal of such a model is to reduce duplicative and low-value care. If the ACO achieves spending and quality targets set by the payor (e.g., insurer), it receives a portion of the savings achieved.
  • Global Budgets provide a set dollar amount for a facility to spend to provide all necessary services to the patients served.

At the outset, the study acknowledges that implementing an APM in the workers’ compensation setting presents some important challenges that must be factored into the selection and development of a pilot project. Among those challenges are provider reluctance to treat injured workers due to administrative burdens encountered in providing treatment combined with reimbursement that does not compensate the provider for the time spent meeting workers’ compensation administrative requirements. California’s Official Medical Fee Schedule (OMFS) is said to provide among the lowest reimbursement amounts of similar fee schedules. Another challenge is delays in treatment either due to claims denial, utilization review/independent medical review, or both. Litigation, especially over compensability issues is another factor that contributes to delay in both the provision of medical care to the worker and reimbursement to the provider. Additionally, some Medical Provider Networks (MPN) do not have adequate numbers of physicians, especially specialists. MPNs in rural parts of California seem to have the most difficulty in recruiting specialists. There are other obstacles to the implementation of an APM in California’s workers’ compensation system such as the fact that many providers only treat a small number of injured workers, which might reduce the effectiveness of incentives. Another obstacle is the very nature of California’s system, which has a competitive insurance market rather than an exclusive state fund.

The study also considered the factors that distinguish medical treatment within a workers’ compensation system and other large health care systems like Medicare, where APMs have been thoroughly evaluated. For example, the patient population mix in a workers’ compensation system has a much larger share of orthopedic, physical medicine, pain management and musculoskeletal treatments than the Medicare case mix. Hospitalization within workers’ compensation programs account for a much small percentage of patients than in the Medicare system. Compared to Medicare, a state workers’ compensation program is a very small player. Changes made within a large system, like Medicare, can have a systemwide impact and elicit meaningful change from providers. Another distinction is litigation, which is a big part of workers’ compensation programs. The study suggests that these challenges and concerns must be taken into consideration when planning and designing a pilot program.

Fortunately, the study identified two states—Washington and Ohio—that have implemented APMs in their workers’ compensation programs. Both states have implemented pay-for-performance programs aimed at achieving multiple goals: improving the quality of patient care, improving patient outcomes, improving return-to-work, incentivizing timely reporting, and reducing costs. Among the incentives offered are increased payments based on the adoption of best practices. Non-financial incentives include an abridged UR process. Ohio has also implemented an APM within vocational rehabilitation with the goal of expediting an injured workers’ return to work through a hybrid payment model. Under this model, vocational rehabilitation providers are paid 90% of the standard fee for service payment. They can earn additional payments, however, if the injured worker returns to work within a specified time and maintains work for a period of 30 days. The experience and results seen in Washington and Ohio assisted the study in formulating its recommendations.

The study also received input from key stakeholders in California’s workers’ compensation system. Those stakeholders consisted of providers, insurers, employers, unions, and applicant attorneys. These stakeholders generally endorsed the concept of incentives specifically targeted at health care providers. Such incentives might include giving the designation of “preferred provider” to providers who achieve specified quality benchmarks for patient care. It was suggested that the “preferred provider” designation could enable a provider to forgo UR/IMR altogether or receive expedited approvals. Another suggestion was reduction in paperwork requirements for preferred providers. A further suggestion included increased payments, especially for specialists in those specialties with few provider participants in the workers’ compensation arena.

Ultimately, the study concludes with the recommendation that pay-for-performance is the most promising alternative to California’s OMFS. It recommends the implementation of a pay-for-performance pilot program for health care providers that can be expanded overtime. The study recommends that initially participation in the program should be voluntary and should focus on a provider specialty, such as orthopedic practitioners, that delivers a large amount of health care in the workers’ compensation setting. The study also recommends that the pilot program be centrally managed by DWC with the initial goal of improving provider participation in workers’ compensation by measures that could ease some of the administrative burden associated with reporting, UR and IMR, as well as financial incentives for providers that achieve quality and timeliness benchmarks. To learn more about the study, its findings and recommendations, see

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