TAW and the Real Cost Driver

Recently appointed California Department of Industrial Relations (DIR) head, Christine Baker, says that an increase in permanent disability indemnity benefits is forthcoming, but not until a corresponding offset in either frictional or medical costs have been identified and dealt with.

The increase in permanent disability will likely come from the SB 899 mandate passed in 2004 that the PD rating schedule be amended every 5 years to ensure parity with actual wage loss measurements. The Division of Workers' Compensation (DWC) had proposed an amended schedule, but the law was basically ignored by the Schwarzenegger Administration because doing so, they said, would jeopardize the economy.

There are many frictional costs in the present workers' compensation system, and most of those frictional costs are the product of its mind-numbing complexity.

For instance, the entire process of soliciting, choosing and obtaining medical-legal opinions for use in benefit disputes not only takes too much time, but adds a layer of gamesmanship that previously did not exist.

Spinal surgery requests has an entirely different medical-legal process. The original reason was to expedite the process for getting approval for surgery, but the complexity, attendant extra paperwork, utilization review, appeal process just increased the time and expense rather than make the system more efficient.

When things are taken to the basics, there really are only two major areas where costs to employers can be positively affected: medical costs, and time away from work costs.

Medical costs are always under attack - just see my columns on the RVRBS debate. In my opinion medical costs are more the product of frictional costs than the actual cost of providing services - indeed most physicians would agree with that position based on the surveys that I have reviewed in the past couple of weeks.

Time away from work (TAW) costs are more broad and are inclusive of indemnity. But indemnity is a sub-cost in the broader context.

TAW affects more seriously the employer's experience modification factor - a real driver in the employer's premium. The hidden TAW costs are things like lost production, hiring temporary help, shifting employee resources to make up for the injured worker's absence, increased health insurance costs, over-time for other workers to maintain production, etc.

How can the state legislate or regulate TAW? This is a huge challenge because workers' compensation has evolved over the years with layer upon layer of complexity added to address various sub-issues raised in response to outlier abuses.

The average indemnity claim, according to the California Coalition on Workers' Compensation, now tops $60,000. But the amount of permanent disability indemnity to injured workers has gone down. This suggests that frictional costs - costs associated with the complexity of getting from injury to claim closure - have increased ... dramatically.

The friction in processes that affects TAW also affects medical costs - paperwork, receivables collection, reporting requirements, etc.

TAW and medical costs can be positively affected by taking the system back to basics, in my opinion. A hard look needs to be taken at the law and regulations that govern the process of claims - the amount and context of paperwork, the procedures for getting medical attention, the back and forth debates concerning legal minutiae, i.e. frictional costs - all need to be looked at relative to the ultimate question: how do these laws and regulations affect TAW?

If the industry can focus on TAW and how laws and regulations impact TAW we may find more savings than previously thought.