FECA Shortfall Answer in West Virginia Model?

As the federal government's largest single employer with more than 560,000 employees, the US Postal Service (USPS) as you might imagine has a large workers' compensation bill, and a disproportionate impact on the federal work comp system.

So much so that its possible default on a pending payment to the US Labor Department could affect benefits for all injured federal workers.

The USPS makes "chargeback" payments to the Labor Department's Office of Workers' Compensation Programs (OWCP) to cover the costs of injured workers' benefits under the Federal Employees' Compensation Act (FECA). The chargebacks are assessed to each participating agency based on that agency's share of claims costs.

The USPS is responsible for 40% of all FECA benefits paid in a given year.

Currently it is projected that the USPS is in the red by $5.6 billion and could run out of cash in October without supplemental income from the government. This includes not making its $1.2 billion chargeback payment to OWCP on October 15.

According to Brian V. Kennedy, assistant labor secretary for Congressional and Intergovernmental Affairs, in an Aug. 1 letter to U.S. Rep. Darrel E. Issa, R-Calif., chairman of the U.S. House Committee on Government Oversight and Reform, "If USPS fails to make its Oct. 15, 2011, chargeback payment, but all other federal agencies participating in the FECA program paid their obligations to the fund, OWCP estimates that there would not be enough money in the fund to pay any benefits during the last four months of the fiscal year."

The federal fiscal year runs from Oct. 1 to Sept. 30, which means the default could occur as soon next June.

There are several "reform" plans floating in Congress to "fix" FECA, generally tampering with cash benefits paid to federal injured workers - this is contrary to the trend in state governments where reforms tend to focus on the cost of medical care.

This is because, unlike most states, FECA's indemnity benefits far exceed the cost of providing medical care.

According to Congressional testimony, FECA paid out $1.88 billion in wage-loss compensation, impairment and death benefits during the fiscal year ended June 30, 2010, and $898.1 million to cover medical treatment, rehabilitation and the cost of supplies.

FECA gives injured federal workers with at least one dependent 75% of their gross salary at the time of injury, while claimants with no dependents receive 66 2/3% of gross salary, tax free and paid for life if employees opt to receive workers' compensation benefits instead of federal retirement. Retirement benefits are taxed.

Federal labor unions oppose tinkering with this nice perquisite, but it is obvious from the numbers that this is not a sustainable program, and has not been for some time.

Perhaps the model for fixing this mess is just a few hundred miles away from D.C. in the state of West Virginia, which faced a similar issue with its program just a few years ago before privatizing its system in 2005 when faced with a $3.2 billion shortfall. Since conversion to a competitive market place the state has seen a 40% reduction in the cost of its system, infusion of about 160 carriers, and significant shrinkage of its "Old Fund" liabilities.

FECA and the USPS can be fixed if Congress has the political will to do so.

TDABC - Understanding Where the Money Flows Can Fix Comp

Walking through the airport in Orlando, FL last week I was looking for something to read on the flight and happend upon the September issue of Havard Business Review (HBR) with the headline story, "How to Solve the Cost Crisis in Health Care."

Whoa! A scholarly, high-level, business oriented analysis of the health care management system!

The real surprise of this discovery was that I had just listened the day before to Dr. David Deitz give his lecture at the 2011 FWCI conference on the problem with focusing on costs in the work comp medical delivery system as opposed to focusing on the value provided.

For anyone that is interested in controlling medical costs in workers' compensation, I highly recommend reading the HBR article, and related articles by the authors, Robert S. Kaplan and Michael E. Porter.

Kaplan and Porter argue that the problem with the expense of medical delivery in the United States is that we focus on the wrong element: cost. Focusing on cost, they argue, drives total costs in the wrong direction, providing incentive to deliver the wrong care at the wrong times thus increasing overall costs at the expense of incremental savings.

For example, a unit of surgery is more highly compensated than a unit of office time, thus the incentive is to provide surgery.

The authors argue that the analysis must be on the total value provided the consumer - i.e. a global assessment of the totality of procedures that result in a given outcome. In the medical world this is expressed in the deceptively simple equation of value = outcome/cost, not the number of services provided (as we now measure health care in workers' compensation).

Kaplan and Porter primarily focus on the provider of services and how the provider can cost out incrementally the actual delivery of services to completely understand what each element of service costs, then using that data to drive the best outcomes.

They use case studies where care providers have used a simple, but involved, costing technique from the business world known as Time Driven Activity Based Costing (TDABC).

TDABC requires that each step of the care delivery process be carefully analyzed to determine exactly what that component actually costs. This process requires that many steps of the care delivery process be flowcharted to ensure that all steps are accounted for.  There are only two parameters that are actually measured: the cost of each resource in the process and the quantity of  time the patient spends with each resource.

A resource can be medical hardware, a service location (e.g. emergency room or x-ray facility), a health provider (e.g. nurse, doctor, physical therapist), pharmaceuticals, etc. etc.

As you can see, while the process itself is simple, it requires drilling down to minute details to examine all elements provided in the care delivery equation.

Case studies are provided in the article where care delivery systems that thought they were delivering the most cost effective care were astonished to find that in fact care was being mis-directed because of reimbursement incentives AND that their profits were being marginalized because money was being wasted.

Oh, and of course those case studies also found that patient outcomes were much, much better when processes were subjected to TDABC.

The question in my mind while reading this article was how can this apply to workers' compensation?

1. Get rid of fee schedules - fee schedules have the perverse effect of providing incentives that drive the wrong outcomes. First measure the cost of care delivery using the TDABC process.
2. Define desired outcomes and start measuring them - this is what Deitz was saying in Florida: we have tons of data but none of it is used or analyzed properly to drive decision making relative to cost control in the right direction.
3. Pay medical providers for the TOTALITY of services as a whole, based on diagnosis, rather than on a per procedure basis. Only when you step back to take a look at the complete care delivery package, and provide reimbursement for the expected outcome, can you change direction in health care costs.

Before you comment on this post and accuse me of oversimplifying medical care in workers' compensation, consider that we have been doing the same thing now for nearly 100 years - and the inflation of medical delivery costs continues to be the single biggest component of workers' compensation costs. To continue doing things the same way as in the past and expecting changes is illogical.  

This blog post is way too limited for a complete review and analysis of the work of Kaplan and Porter - but if you're a health care executive, an insurance executive OR, perhaps more importantly, a state administrator, you owe yourself to at least consider the arguments and examples that Kaplan and Porter set forth.

The way medical care is delivered in workers' compensation must be changed in order to keep the system viable for the future. The only way to do that is to change the motivations in the system, and the only way that can happen is to completely understand where the money flows.

KY Rejects Ban on Benefits to Illegal Aliens

I was happy to see that the Kentucky Supreme Court on Thursday had the good sense to reject an employer's argument that an undocumented immigrant worker was not entitled to indemnity benefits. To have done otherwise would not only compromise the social safety net that has been established with workers' compensation, but would expose any unwitting but otherwise lawful employer of undocumented workers in that state to civil damages.

Before I get into the social pragmatism of the court's ruling, here's a quick primer on the case.

The case is Abel Verdon Construction v. Rivera, 2010-SC-000744-WC, 08/25/2011.


Miguel A. Rivera was 15 in July 2005 when he was hired to work part time cleaning up Verndon's construction site and carrying supplies for carpenters on a framing crew. A Verndon foreman testified that he had promised to pay Rivera $50 a day in cash.

Rivera had worked approximately five days when he fell through a hole in the roof of a two-story home and landed in the basement, causing severe head injuries that put him in a coma and landed him in the hospital for two months. Rivera returned to high school after recovering to take special education classes, but suffered "significant physical and mental impairments that were permanent," according to the court's opinion.


An administrative law judge found Rivera to be Verndon's employee and awarded benefits.


Verdon Construction appealed the decision, arguing that Rivera was not its employee, that the Constitution bars benefits to him because he is an illegal alien.


The Court of Appeals affirmed much of the judge's findings including that Rivera was entitled to benefits regardless of his illegal alien status.


"We do not view eligibility for workers' compensation benefits as being a realistic incentive for an individual to enter the United States unlawfully," the Kentucky Supreme Court said in its unanimous opinion. "Moreover, we view a decision to exclude unauthorized aliens from the application of Chapter 342 as contravening the purpose of the [Immigration Reform and Control Act of 1986] by providing a financial incentive for unscrupulous employers to hire unauthorized workers and engage in unsafe practices, leaving the burden of caring for injured workers and their dependents to the residents of the Commonwealth."


On Friday I posted about a Texas case where the employer decided to deny benefits until a civil suit for negligence landed on its doorsteps. I have to presume that Verdon would have the same sentiments as that Texas employer had a civil suit for negligence landed in the hands of Verdon's lawyers.

The one unwavering aspect of the social responsibility of our workers' compensation system is that if you work, you are protected - at least that's the concept. We have disagreements about whether in fact those concepts are upheld in specific case situations, but the overall basis of this system can not be dismantled through discrimination based on immigration status.

The flip side of the coin is immunity to civil suit. Verdon is not facing the unpleasantness of a difficult civil suit - especially going before a jury to explain why a 15 year old was placed in a dangerous situation that ultimately resulted in a coma and mental disabilities.

Kentucky joins the U.S. 5th Circuit Court of Appeals, and appellate courts in California, New York, Illinois, Kansas, Maryland, Connecticut, Georgia, Minnesota and Florida in upholding the protections of workers' compensation for undocumented workers.

Work Comp Isn't Relevant, Until It's Needed

I've opined in the past as to whether workers' compensation was relevant any longer, and a case came down in Texas yesterday that clearly provided the relevancy of work comp to an employer who otherwise had apparently thought that they could obfuscate, deny, bully and attempt to keep an injured worker off its experience modification.

The 1st District Court of Appeals issued a new ruling in the case of Warnke v. Nabors Drilling USA on Thursday, after granting the employer's request for rehearing. At issue was whether the injured worker could sue the employer in civil courts after the employer told the employee that they did not have workers' compensation until a civil negligence action landed on their doorsteps, then all of a sudden remembered that they were in fact covered for work comp.


Warnke, a worker for Nabors Drilling, was injured in 2006 when a pipe broke free and crushed his hand. He filed for workers' compensation benefits, but Nabors Drilling denied that he was an employee for eight months.  


Citing the fact that Nabors denied he was an employee, Warnke sued Nabors for negligence, negligent misrepresentation, and fraudulent misrepresentation. He also filed a negligence claim against his co-worker, Bruce Wilkerson, who had attached the faulty pipe that had crushed his hand.

Eight months after the accident, and three months after filing the suit, Nabors' workers' compensation carrier began providing workers' compensation benefits. 


Nabors' months of denials created an economic injury that was distinctly different than Warnke's crushed hand injury, the 1st District Court of Appeals said, as it concluded that exclusive remedy did not bar Warnke's misrepresentation claims. 


After Thursday's decision in the Warnke case, the negligent and fraudulent misrepresentation claims are the sole causes of action that survived the 1st DCA's application of exclusive remedy on rehearing. The court determined that exclusive remedy barred Warnke's negligence claims against Wilkerson and Nabors, because Nabors had [finally] admitted that Warnke was an employee.


The lesson to be learned - if you're insured for work comp, then use it.

Paduda Answers Questions Relevant to Upcoming Webinar

WorkCompCentral Education is hosting the first of what is planned to be a monthly series of educational webinars, free to the public, on Thursday September 1st.

This first webinar is presented by Joe Paduda, well known for his blog on the medical and work comp industry, "Managed Care Matters" and principal of Health Strategy Associates, a national consulting firm specializing in managed care for workers’ compensation and group health. 

In preparation for the webinar I asked Joe some questions about the upcoming webinar topic, Prescription Drug Abuse in Workers' Comp:

Q   The title of your upcoming webinar makes a pretty strong statement. What about this rises to the level of Rx abuse?

There's ample evidence of overuse of drugs in workers comp, especially narcotics.  About a quarter of the dollars spent on drugs are for narcotics, the majority of that is for opioids such as OxyContin and other powerful painkillers.  Yet there's very little evidence that opioids are useful in treating chronic musculoskeletal pain and some evidence they are not helpful. If drugs are being prescribed, and dispensed, and used, and paid for, yet aren't effective, then something's very wrong.

Q.  Has anybody sounded an alarm about narcotics for chronic pain, or is this a silent problem in the states?

I'd have to say the alarm has been sounded multiple times by various individuals and organizations.  NCCI's December 2009 report, the analyses and studies done by Alex Swedlow et al at CWCI, especially earlier this year, and the seminal work of Gary Franklin MD and Lee Glass MD in Washington State have all brought much-needed attention to this issue.

Q:   Do you see any way to fix the "abuse" of painkillers for treatment injured workers? 

Absolutely.  A combination of regulatory authority to ensure the appropriate use of narcotics is allowed and inappropriate use limited; education of stakeholders especially claims personnel and treating physicians, implementation of strong Prescription Drug Monitoring Programs with interstate reach, and proactive efforts to identify and treat claimants at high risk for addiction or dependence will all help reduce abuse.  These steps will also reduce claim duration and claim cost as well. 

Q:   What downsides have been documented with long-term narcotic use for chronic pain? 

Gary Franklin and others have reported increased risk of death associated with long term use of narcotics in workers comp.  Other studies have shown most patients don't see an improvement in functionality or pain levels over time.  Many patients require several other drugs to address the side effects of opioids, such as constipation, sleeplessness, sexual dysfunction.  That's not to say some patients don't do very well with appropriate long term use of narcotics, however that does not appear to be the norm.

Q:   Can workers' comp carriers and employers implement their own policies to prevent Rx drug abuse on claims?

Yes, and some are.  Working with their PBMs, payers can develop methods to track and identify potentially problematic situations involving specific claimants, pharmacies, or physicians.  Data mining enables payers to find patterns that may indicate elevated risk of abuse, diversion, or inappropriate prescribing or dispensing.  Promoting the use of narcotic 'contracts' between physicians and their patients taking narcotics can help establish expectations and ground rules, especially if they include random urine drug testing.  Data mining to identify claimants with elevated risk for addiction or dependence can also be quite helpful, but only if it is tied to treatment and follow up.

Finally, payers need to understand addiction is a disease - not a failure of will or character flaw.  Payers also need to understand that there are well-documented, proven methods of weaning claimants off opioids and other narcotics, thereby dramatically improving the claimant's quality of life and reducing medical spend - and reserves.

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To register for the free webinar go to http://www.workcompcentral.com/signup/index.php?fa=wcs_seminars&id=690&flag=true, or call 805-484-0333 x113 or x133. 1 hour CLE is available for attending this webinar for legal and claims professionals. Enrollment is limited to 100.

The 5 Stages of Work Comp Death

Dr. David Dietz, VP, National Medical Director for Liberty Mutual Group, asked the audience at the 66th Annual FWCI Workers' Compensation conference in Orlando, FL yesterday how many would choose workers' compensation for their health care over their general health insurance.

No hands went up.

None.

That is a sad statement on the perceived value of workers' compensation medical - and it is a statement that is recognized by the people that are responsible for making the system work.

How can we, as an industry, justify our expense, our existence, when even those of us who are intimately familiar with, and answerable for the operation of workers' compensation?

Dr. Dietz hit the nail on the head - what is the value that we are delivering as an industry?

How do you define value? Is it providing services that are proven through scientific methodology (i.e. repeatable processes) to simultaneously provide medical services, indemnity AND increase injured worker return to work statistics?

Is it delivering health care and a positive experience for both the employee AND the employer so that they can see the big picture and work towards a mutually beneficial resolution of a bad situation (i.e. a work injury)?

One thing is certain - the evolution of workers' compensation has transcended its intended goals to a complex system that fails to deliver value to either the employer or employee. I believe that Dietz again hit the nail on the head by noting in his speech that workers' compensation systems have through the years become a perverse set of incentives that promote the wrong outcomes.

What are these wrong outcomes? Surgery without scientifically established clinical findings that end up creating greater disability for the injured worker than doing nothing at all; rewarding disability so well that for many (and not necessarily injured workers by the way) find it more financially beneficial to ensure greater levels of disability; system checks and balances (such as utilization review or medical fee schedules) that had the good intention of keeping costs in check but which unwittingly shift treatment choices to more destructive and costly alternatives.

How do we get out of this? With apologies to Elizabeth Kubler-Ross, whose award winning 1969 book, On Death and Dying, gave us her brilliant 5 stages of dying, Dr. Dietz gave attendees a path towards some sanity, in order:

1. Denial - we in workers' compensation have LOTS of data about our system and we use some of that data to make decisions, but is it the right data?
2. Anger - when we really look at the data and analyze it, we believe that our data stinks and this makes us angry.
3. Bargaining - after coming to terms with the fact that our data stinks, we look at it from a different light, in a different way, and come to an understanding that the data might be okay but that it doesn't really apply to "me" (i.e. us as individual participants in the industry).
4. Depression - okay, maybe this data which we have determined isn't that bad after all does in fact apply to "me".
5. Acceptance - yes, death is inevitable and so is the realization that we can not only accept that the data applies to "me" but that it is measurable and that all of us can work together to make the system better.

Perhaps this is a bit of a simplistic view of the troubles we face as an industry, but it is a start. We are in the first stage of the five stages - denial. Sure, we all complain that certain aspects of workers' compensation doesn't work, but we are all in denial that the systems don't work as a whole. 

We all complain of individual elements, and we always seek to correct the elements that we believe require fixing, without looking at the "big picture" to really appreciate and understand how individual elemental changes can affect the overall system - where are the holes, what are the perverse incentives, how will changes affect other elements, just what is the human behavioral components that will be triggered by any particular system change?

The answer to these questions is the mind set of those of us in the workers' compensation delivery system, whether you are a physician, an attorney, a claims examiner, a broker/agent, an executive, risk manager, case manager - whatever. The answer is VALUE. 

Stop focusing on COSTS. What is the value that we deliver to the employee and employer?

Value, Dr. Dietz correctly notes, is quality divided by costs. Quality is the health outcome of the injured worker.

We have the data, but we don't use it effectively and when we do use it we measure the wrong components. Understanding the value proposition requires states to invest in analyzing the data and understanding the outcomes. Only then can one deliver value.

Group health has its own problems which the Federal government, and some state governments, seek to improve. But ask yourself - would you rather get medical treatment through workers' compensation or your group care?

My bet is that you prefer the latter. 

FL Rate Filing Reflects Hard Economy

The National Council on Compensation Insurance (NCCI) latest Florida rate filing is consistent with a national trend precipitated by the recessionary economy and portends more difficult times to come for everyone in the workers' compensation industry.

While the Florida Workers' Advocates (FWA) challenge NCCI's conclusion that there has been a reversal in claims frequency, the data that was provided WorkCompCentral demonstrates the more serious issue - that there is basically no underwriting profit for carriers in the state which means that in these times of declining stock market returns and low bond yields carriers need some financial hat tricks to make a profit on this line.

NCCI reported that lost-time claims adjusted for wage growth dropped from 17.1 per million dollars of on-level premium in 2005 to slightly less than 15 claims per million of dollars of premium in 2008, but climbed back to 15.2 in 2009.

The key here is the measure against premium. There is significantly less premium coming in over this period of time.

NCCI reported that the total workers' compensation premium dropped by more than half during the past five years: $5.2 billion in 2005 compared to an estimated $2.3 billion last year.

Driving this 50% reduction in premium is lower employment, lower wages, and a competitive marketplace.

The Office of Judges of Workers' Compensation is also seeing a decline in claims filed by nearly a third over the same time frame: fewer people are at work to get hurt and those that do get hurt are feeling lucky they even have a job so they don't rock the boat with a litigated claim.

The stark reality of financial dysfunction in Florida's work comp market would not seem apparent to any observer at the state's big annual FWCI Conference, which I am attending in Orlando, FL. The turnout for the conference appears normal and there are well over 300 exhibitors in attendance as well. 

But that doesn't mean people aren't concerned. I asked several people yesterday how they felt things were going and I wasn't getting positive feedback.

Instead most that I talked to about the state of the industry were cautiously pessimistic, holding on to some hope that austerity management will get them through these tough times.

The question that was almost universal on everyone's mind that I talked to was, when is this bad economy going to end?

To that I could offer only my non-expert outlook, which is, not for a while.

This economy has quite a ways to go before we see it reverse course, the markets return to a growth pattern, consumers returning to confidence, businesses rehiring, buildings getting built, labor being employed.

Until that happens though belt tightening is the order of the day. The financial underpinnings of the work comp system depend on reasonably reliable returns on investments to generate the cash flow and capital returns necessary to meet long-tail obligations and provide a profit to investors.

Workers' compensation, when taken down to its basics, is a financial services industry. Its lifeblood is the economy and its ability to grow. When growth is stunted, or in our present situation, receding like my hairline, reverberations move through every sub-sector.

I don't recall much from my MBA education. But the one thing that stuck with me from my finance classes was the basic rule: Cash Is King. In these times there are no truer words. Hold on to it - cash is what pays the bills...