Monday, August 27, 2012

Guest Editorial: PD Benefits by Politics, Not Data

On occasion I post opinions by others that I think have merit and should be shared. This editorial was authored by Stephen Schneider, CEO of MedLegal, LLC.

************Guest Editorial************

In 2004, SB899 established what should have been the nation’s first empirically based permanent disability system for injured workers. California had a chance to stop setting PD benefits through a political tug of war that either underpaid or overpaid injured workers, depending on which way the legislature leaned politically at the time. For once, injured workers would be compensated according to an exact empirical estimation of their losses over time. The RAND Institute for Civil Justice designed this system for the state after years of expensive study. All this research and effort is about to be thrown away by SB863 and, if passed, we are going back to setting benefits according to political bias, rather than empirical evidence and fairness. 

Unfortunately for injured workers, the Administration of the DWC failed to ever implement a PD Schedule that fully complied with the RAND findings and AMA Guides based empirical rating data. Instead, the Schwarzenegger administration kept in place their under-performing formulas and obsolete data tables that reduced impairment ratings by 28%-40% (according to a report by UC Berkeley and RAND researchers presented in January 2012 at the CHSWC public meeting). Because of the accelerated increase in benefits to impairment caused by LC 4658, and other factors in SB899, the overall reduction in PD benefits turns out to be 58%, or 2.6 billion dollars per year. 

The reason the 2005 Schedule fails to realize the RAND vision is because the Administrative Director of the DWC in 2004 had no average rating data based on the AMA Guides from which to build a proper AMA-based Schedule. Rather than perform a dubious “crosswalk” study to match estimated AMA Ratings to the existing RAND data on the previous rating system, the AD chose to make up her own compression formula and Table A that “fudged” the obsolete rating data into what we still have today. The compression formula found on page 1.6 of the Schedule has no basis in the RAND findings referred to in LC 4660(b)(2), and neither does Table A. The “empirical data” in Table B of the Schedule is from the obsolete pre-SB899 rating system, which has no correlation or scale in common with the AMA Guides impairment ratings. The Schedule was a temporary “kludge” hastily put together in the last few months between the passage of SB899 and the mandated Schedule adoption date of 1/1/2005. It served a purpose, but it should have been revised years ago and integrated with actual AMA rating data compiled by the DEU. 

Getting back to SB863, it’s flat rate FEC multiplier of 1.4 is based on the same faulty compression formula and invalid tables as the original 2005 Schedule, and doesn’t come close to restoring the benefits that injured workers have been missing for the last 7 years. In fact, it does much worse than that… it stops any chance of paying benefits empirically and fairly as designed by RAND, and instead changes the whole concept of diminished future earning capacity (FEC) to a single, unempirical, non-rebuttable and politically biased number: 1.4.  

In 2006, one of the authors of the 2003 RAND report [referenced in LC 4660(b)(2)] wrote a paper for CHSWC that was presented to the Legislature and outlined how to apply AMA-based average rating data from the DEU to the RAND findings and empirical data. This paper offered updated Future Earning Capacity (FEC) adjustment factors that were based on AMA Guides ratings, rather than the obsolete data from the previous system used in Schwarzenegger’s Schedule. These corrected adjustment factors would have increased overall PD dramatically from the 2005 Schedule, and set PD fairly, empirically, and in full compliance with Labor Code 4660. Some examples of the corrected FEC modifiers in this report are: Spine: 2.17, Shoulder: 2.93, Wrist: 2.82, Hand 1.71, and Knee: 2.35. Unfortunately, the suggested revisions were never implemented. 

SB863 proposes a Future Earning Capacity adjustment factor for ALL injuries of a single value: 1.4. We know from both RAND and the 2006 CHSWC study on PD that accurate FEC values must be unique (not a flat rate) by body part. So, by using such a flat rate, California would be calculating losses inaccurately under SB863 for nearly every injured worker. In other words, the impairment percentage calculated using a 1.4 modifier would almost always be either too low or too high compared to the correct value formulated empirically using the RAND method. 

Still, proponents of the bill might argue that using a flat 1.4 modifier in Labor Code 4660.1 raises impairment ratings adequately from the existing Schedule, which ranges from 1.1 to 1.4. We know from the RAND study that the back/spine is by far the most common impairment body part, representing the majority of the cases in the system. The FEC in the 2005 Schedule for the back/spine is 1.27, so SB863’s 1.4 FEC would provide about a 10% increase in impairment ratings. That raise compares poorly with the data presented by the researchers in January 2012 to CHSWC that shows impairment ratings have been reduced by the 2005 PDRS by 28%-40%. In other words, not only is the flat 1.4 FEC found in SB863’s proposed 4600.1(b) going to be inaccurate for most injuries from an empirical DFEC expectation, it’s also going to be a whole lot less than restoration to previous levels.

Proponents of SB863 also might argue that impairment ratings prior to SB899 were too high in the first place, so we should not be restoring average impairment rating to previous levels. RAND answered the adequacy question in their 2003 Interim Report on PD, which was that replacement benefits overall were actually lower than other states studied (because of our low return to work rates).  The problem, according to RAND, was the inconsistency of the impairment ratings across body parts, and with which party chose the physician writing the report. Adequacy of the benefits was not a problem, and was not addressed in the recommendations or findings of the report. 

If the legislature intended to reduce benefits with SB899 they would have done so in Labor Code 4658, which is the benefit payment section. In fact, minor changes to LC 4658 were made. What we are talking about here is impairment ratings (LC 4660), and not benefits paid (LC 4658).  The average impairment ratings overall should not have been reduced by the change to the AMA Guides and the corresponding RAND-based PD Schedule required by SB899… they just would have become more objective and equitable across body parts. Therefore, any reduction in average impairment ratings caused by the 2005 PD Schedule should be corrected and restored – in full.  

SB863 contains some interesting ideas and solutions to the problems we are facing in California, but it’s not ready for prime time yet. If this bill is passed and signed by the Governor “as is”, we will have missed a huge opportunity to pay benefits accurately and free of political bias. 

Stephen Schneider
Med-Legal, LLC

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