CSA
Summary
Read the report at California State Auditor ↗
California’s
Workers’
Compensation
Program:
Changes to the Medical Payment System
Should Produce Savings Although
Uncertainty About New Regulations
and Data Limitations Prevent a More
Comprehensive Analysis
January 2004
2003-108.2
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January 27, 2004 2003-108.2
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As required by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report
concerning the medical costs related to the workers’ compensation insurance system and the extent to which the
payment structure has resulted in unacceptably high reimbursement rates.
This report concludes that reforms to the workers’ compensation medical payment system mandated by
Chapter 639, Statutes of 2003, effective January 1, 2004, will produce substantial savings in the form of
lower payments for nonhospital outpatient surgical facilities (surgical centers) and pharmaceuticals if those
reforms are carefully implemented. Our analysis indicates that had similar reforms been in place during
2002, the State Compensation Insurance Fund (State Fund) could have saved anywhere from $7.8 million to
$8.9 million of the amount it paid to surgical centers for facility fees. These savings represent about 54 percent
to 61 percent (with a midpoint of $8.4 million, or 58 percent) of the payments we were able to analyze. We
also calculated that State Fund could have saved another $18 million (or about 24 percent) on the amount it
spent on prescription drugs. These conclusions are based on our review of State Fund payments to surgical
centers and payments for pharmaceuticals with sufficient detail to allow for analysis. Certain features of the
data contained in State Fund’s medical bill review file limited our review to $14.5 million of the $43 million
in identifiable payments to surgical centers made in 2002. Our analysis was limited because data entered into
State Fund’s medical bill review file were often incomplete or summarized without retaining unique identifiers,
and the database design prevented detailed analysis. Based on our analysis of State Fund’s data and the
results of an insurer survey conducted by the Division of Workers’ Compensation (division), the condition of
State Fund’s and other insurers’ data presents challenges to the division’s efforts to develop a comprehensive
database of workers’ compensation medical information that will allow it to monitor the workers’ compensation
insurance system and measure the effects of policy changes on the system’s performance and costs.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
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CONTENTS
Summary 1
Introduction 9
Chapter 1
Changes to the State’s Workers’ Compensation
Medical Payment System Will Cause Payments
for Outpatient Surgical Facility Services and
Prescription Drugs to Drop Sharply 19
Chapter 2
Savings Depend on the Careful Implementation
of the Medical Payment Fee Schedules and
Monitoring of the Medical Payment System 35
Recommendations 41
Appendix A
State Fund Payments to Surgical Centers
During 2002 Compared to 120 Percent
of Medicare’s Ambulatory Surgical Center
Fee Schedule 43
Appendix B
Results of the Division of Workers’ Compensation
Survey of Insurance Companies to Determine
Available Medical Data 47
Responses to the Audit
State Compensation Insurance Fund 51
California State Auditor’s Comment
on the Response From the
State Compensation Insurance Fund 53
California Labor and Workforce
Development Agency 55
SUMMARY
RESULTS IN BRIEF
Effective January 1, 2004, Chapter 639, Statutes of 2003,
brought major changes to the workers’ compensation
Audit Highlights . . . medical payment system. The new law requires that
payments for services performed in an outpatient surgical
Our analysis of medical claims
facility outside of a hospital setting (surgical center) or an
payment data from the State
outpatient surgical facility in a hospital not exceed 120 percent
Compensation Insurance Fund
(State Fund) to determine of the fee for the same procedure under Medicare’s ambulatory
the extent to which new payment classification (APC) facility fee schedule. The new
reforms would have
law also requires that for pharmacy services and drugs that
produced savings in workers’
Medicare’s APC fee schedule does not otherwise cover, payments
compensation medical costs
had they been in effect during be limited to 100 percent of the relevant Medi-Cal fee schedule.
2002 revealed that: To determine the extent to which these reforms would produce
þ Although data limitations savings in medical costs, we reviewed medical payments that the
constrained our analysis, State Compensation Insurance Fund (State Fund) made in 2002.
the data we were able Although data limitations constrained our analysis, the data
to analyze showed that
we were able to analyze showed that the recent reforms would
the recent reforms would
produce savings in the form of lower payments for fees for the
produce savings in the
form of lower payments use of facilities (facility fees)1 at outpatient surgical facilities and
for outpatient surgical pharmaceuticals.
facilities (surgical centers)
and pharmaceuticals.
As the Joint Legislative Audit Committee (audit committee)
þ Our analysis of the requested, in August 2003 the Bureau of State Audits released a
$14.5 million in surgical
report of the workers’ compensation medical payment system,
center payments resulted
titled California’s Workers’ Compensation Program: The Medical
in a range of potential
savings with a midpoint Payment System Does Not Adequately Control the Costs to Employers
of approximately to Treat Injured Workers or Allow for Adequate Monitoring of System
$8.4 million, or 58 percent.
Costs and Patient Care. That report describes how rising medical
þ Under the new reforms, costs are contributing to the increasing costs of the workers’
State Fund would have compensation medical payment system—costs that California’s
saved $18 million
employers are required to pay. Along with other findings, the
(24 percent) on its
report states that fee schedules intended to control the amounts
2002 payments for
pharmaceuticals that paid for medical services are outdated or nonexistent.
we were able to analyze.
However, if litigation
To address the audit committee’s request that we focus on
related to the pricing of
Medi-Cal pharmaceuticals payments for workers’ compensation medical services that
is successful, the savings hospitals and surgical centers provided and insurance companies
would be $14.6 million
(19 percent).
1 According to the new reforms, payments for outpatient surgeries that take place in a
hospital or surgical center are based on a payment system used by Medicare. Under
continued on next page Medicare rules, the payment made for outpatient surgeries compensate providers for
the use of the facilities and any supplemental supplies and other services directly related
to the medical procedures performed, and are known as facility fees.
California State Auditor Report 2003-108.2 11
þ Our analysis was limited (insurers) paid for, we relied on medical payment data from
because the data entered State Fund, which paid more than a quarter of the medical costs
into State Fund’s medical
related to California’s insured employers in 2002. Although
bill review file were often
State Fund provided the information we needed to determine
incomplete, individual
items were summarized that increases in workers’ compensation medical costs were
without retaining their being driven more by an increase in the number of services that
unique identifiers, and the
medical service providers (providers) were performing than by
database design prevented
certain detailed analysis. an increase in the average cost of services, State Fund was not
able to provide us with other information we sought in order to
þ The savings we identified
analyze facility fees paid to surgical centers and pharmaceutical
depend on the careful
payments for our August 2003 report. As a result, we are
implementation of the
newly legislated reforms. presenting our analysis of payment data in this follow-up report.
However, according to
the Division of Workers’
For this second report, we obtained medical claims payment
Compensation’s (division)
administrative director, data from State Fund to determine the extent to which the new
his efforts to implement legislative reforms would have produced savings in workers’
reforms have been
compensation medical costs had they been in effect during
hampered by hiring freezes
2002. We limited our analysis to data in the medical bill review
and budget shortfalls.
files that State Fund provided us, and we did not attempt to
þ The division continues trace the recorded payments to supporting documents. However,
to lack a comprehensive
because of limitations in State Fund’s data, we were able to
database to monitor
workers’ compensation analyze only $14.5 million of the $43 million in identifiable
medical payments. facility fee payments to surgical centers that State Fund
processed through its medical bill review database during
2002. State Fund’s management contends that its databases
were designed not for research purposes but rather to provide
accurate reimbursement payments that comply with state law.
Because these limitations precluded a comprehensive analysis
of the data, we used for our analysis Medicare’s ambulatory
surgical center (ASC) fee schedule, which has only nine groups
of procedure classifications, rather than Medicare’s APC fee
schedule, which has 569 procedure groups. Because the APC fee
schedule is more generous overall than the ASC fee schedule, the
potential savings would have been less if we had used the APC
fee schedule.
Our analysis of the $14.5 million in surgical center payments
resulted in a range of potential savings with a midpoint of
approximately $8.4 million, or 58 percent. The payments State
Fund made to surgical centers was to compensate providers for
the use of the facilities and to pay for the supplemental supplies
and other services related to medical procedures performed.
The physicians who perform the medical procedures are
compensated according to a separate fee schedule. Because of
the limitations in State Fund’s medical bill review database, we
had no basis for calculating whether this level of savings would
22 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 33
have been possible in the remaining $28.5 million in payments
State Fund made to surgical centers or in the unknown amount
of settlements it paid to surgical centers as a result of litigated
payments. Therefore, we cannot reliably conclude that the
payments we analyzed are representative of State Fund’s total
payments to surgical centers or that the savings we found
are representative of the savings possible in all of State Fund’s
payments to surgical centers. However, we were able to analyze
approximately $76 million, which represents 83 percent of the
total $91.7 million paid for prescription drug purchases in 2002 for
which State Fund recorded sufficient information and estimated
that it would have saved $18 million, or 24 percent, had the new
reforms been in place during that year.2
Our analysis was limited for three reasons: (1) the data State
Fund entered into its medical bill review database were often
incomplete, (2) individual items were summarized into general
categories and entered into the system without retaining their
unique identifiers, and (3) the database design is such that
certain detailed analysis is impossible. We could not make a
comprehensive estimate of the potential savings associated with
the change in the maximum facility fee payments to surgical
centers that the new law called for because of the manner in
which State Fund collects and classifies facility fee payments it
makes to surgical centers for supplemental items such as drugs
and supplies in addition to the fee it pays for using the facility.
Also, although State Fund often pays surgical centers less than
the amounts billed when it considers the amounts excessive, it
neither tracks the additional litigated settlement payments it
makes—payments that arise from its capping these charges—nor
links such payments to the original payment amounts in the
medical bill review database to reflect the total amount State
Fund pays the surgical centers. We also encountered limitations
in the data related to payments for pharmacy services and drugs.
Lacking such data, we could not compute all of the potential
savings that would have resulted had the new law already been
in effect during 2002.
Although the condition of the data in State Fund’s medical
bill review file limited our analysis of individual payments
to surgical centers, and to a lesser degree payments for
pharmaceuticals, State Fund contends that its data meets its
2 Savings are based on a formula that includes a 5 percent reduction in Medi-Cal
payments effective January 1, 2004, that a preliminary injunction partially blocked.
Without the 5 percent reduction, savings are estimated at $14.6 million, or 19 percent,
for 2002.
22 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 33
business purposes and the needs of other research entities.
According to State Fund’s management, “The State Fund’s
databases were designed to allow the State Fund to carry
out our mission to provide workers’ compensation coverage
to California employers and to provide those benefits
due to their injured employees under California’s workers
compensation law. Our databases were not designed for public
policy research purposes. As we recognize the importance of
accurate information to further research and study the workers
compensation system we provide data as well as financial and
manpower support to the California Workers Compensation
Institute, the Workers Compensation Insurance Rating Bureau
and the Workers Compensation Research Institute. Our data has
been consistently and successfully used by each organization in
their studies and reports. State Fund databases are fully sufficient
to the task of making and recording accurate compensation
and medical benefit payments. Difficulties encountered in
completing public policy research must be differentiated from
the process of making accurate benefit payments. We are
currently implementing two major claims systems development
initiatives. Upon completion of these initiatives we will realize
a number of business efficiencies. These improvements will
include improved data capture at the detail level that, while not
altering reimbursement amounts, will further increase the value
of the data for research analysis purposes.”
Under the new legislation, the California’s workers’
compensation system may realize additional savings in the
form of reduced litigation and reduced amounts in individual
insurer’s spending to contain spiraling medical costs. For
example, during 2002 State Fund paid a preferred provider
organization almost $27 million in cost containment fees
to gain access to a network of medical providers who were
under contract to provide services at negotiated rates. Because
provisions in the new law provide similar cost containment,
State Fund could largely avoid such fees in the future.
In our analysis of State Fund’s payments to surgical centers
during 2002, we found a number of instances in which a fee
schedule would have standardized payments and resulted in
savings. For example, the average amount State Fund paid
to individual surgical centers for the use of their facilities
sometimes exceeded 300 percent of the Medicare ASC rate,
adjusted to reflect the highest California wage index. In
addition, the State’s official medical fee schedule in place
during 2002 required that State Fund pay a reasonable fee for
44 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 55
a broad range of items, such as drugs and supplies, associated
with outpatient surgical procedures. In some instances, these
supplemental payments far exceeded the facility fees involved.
Medicare’s APC and ASC fee schedules include such items in the
facility fee and do not require separate payment.
However, unless the administrative director of the Division
of Workers’ Compensation (division) ensures that the new
reforms are promptly and effectively implemented, the
savings may not be fully realized. On December 30, 2003,
the division’s administrative director posted on the division’s
Web site proposed emergency regulations to implement the
medical fee schedules that the law required. On the same day,
the administrative director submitted the proposed emergency
regulations to the Office of Administrative Law for review and
approval. These proposed regulations attempt to address the issues
we identify in this report relating to implementing the newly
mandated payment system for services that surgical centers
performed, including capping payments at fee schedule amounts
and bundling the amounts that insurers pay for drugs and
supplies into the facility fee.
Nonetheless, the emergency regulations that the administrative
director proposed do not assure the permanent successful
implementation of the workers’ compensation payment
system that the new law mandated. Assuming that the Office
of Administrative Law accepts the regulations as written, the
emergency regulations will remain in effect for only 120 days.
Prior to their expiration, the administrative director must either
provide permanent regulations, along with a statement that
the regulations comply with all regular rule-making procedures,
to the Office of Administrative Law or request that it approve the
readoption of the emergency regulations. Therefore, the savings
that will result from the payment system that the new law requires
will remain unknown until the Office of Administrative Law
finalizes and approves the emergency regulations and providers,
insurers, and claims administrators who participate in the workers’
compensation program interpret and implement them.
Having adequate and reliable medical payment data is critical
to any attempt to analyze and monitor how well the workers’
compensation system delivers quality care to injured workers at
costs that the law allows, as well as to efforts to track the effect
of policy changes on the system’s performance and costs.
However, based on the findings in our first report on California’s
workers’ compensation medical payment system and the
knowledge we gained regarding State Fund’s medical bill review
44 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 55
database during this review, we found that California does not
have a database of workers’ compensation medical payments
that can provide detailed and reliable data for such analysis and
monitoring. The division’s administrative director told us that
the State’s hiring freeze and budget shortfalls have hampered his
efforts to implement workers’ compensation reform.
The division is currently developing a workers’ compensation
database, the Workers’ Compensation Information System,
intended to provide the type of information the division needs
to analyze and monitor system performance. However, both the
division’s survey of insurers and our own analysis of the medical
payment data that State Fund provided revealed that both State
Fund’s and the other insurers’ data files appear to be incomplete
or the data in the files are inaccurately and inconsistently
classified. Therefore, neither the insurers nor the division—once
these data are reported—will be able to use the data to make
informed decisions.
RECOMMENDATIONS
To fully realize the savings from the new reforms to the workers’
compensation medical payment system, the division’s
administrative director must continue to provide the workers’
compensation community with the ongoing education and
guidance that will ensure that the reforms are promptly
and effectively implemented.
The division should ensure that the medical payment data it
collects in the Workers’ Compensation Information System
provides the specific information the division needs to
adequately monitor medical payments for compliance with the
payment system and for the effectiveness of policy decisions.
Specifically, the division should first clearly define the data
elements it requires from insurers and claims administrators;
second, it should obtain the medical payment data using a
standardized reporting instrument, which will ensure that
insurers and claims administrators consistently and completely
report the data in such a way that it will be useful for the
division’s analysis and monitoring.
66 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 77
AGENCY COMMENTS
The Labor and Workforce Development Agency (agency)
cited the administration’s overall goal of reducing costs.
Keeping that in mind, the agency stated that the Department
of Industrial Relations’ Division of Workers’ Compensation
(division) is working with insurers and claims adjusters to
develop a cost-neutral method to transmit electronic medical
payment information to the division’s Workers’ Compensation
Information System. The agency also stated that the audit
confirms that the 2003 workers’ compensation reform package
will provide some cost relief to California’s employers while
citing the administration’s belief that more reform is needed.
The State Compensation Insurance Fund (State Fund) stated that
its databases are constructed in a manner that is consistent with
the current state of the art within the workers’ compensation
industry. State Fund also acknowledged that using a workers’
compensation carrier’s large medical and compensation
databases for public policy research is very labor intensive
and demanding. State Fund believes its databases are fully
sufficient to make and record accurate compensation and
medical benefit payments, and that difficulties encountered in
conducting public policy research must be differentiated from
the process of making accurate benefit payments. State Fund is
currently implementing two major claims systems development
initiatives that it stated will improve data capture at the detail
level and increase the value of the research analysis while not
altering reimbursement payments. State Fund looks forward
to the opportunity of working with the administration and
the Legislature to make the improvements still required in the
workers’ compensation system. n
66 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 77
Blank page inserted for reproduction purposes only.
88 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 99
INTRODUCTION
BACKGROUND
California’s workers’ compensation program requires
employers to compensate workers for work-related injuries
and illnesses. Injured workers are entitled to receive all
medical care that is reasonably required to cure or relieve the
effects of the disability. Additionally, workers who are temporarily
or permanently unable to return to work are entitled to receive
disability benefits to partially replace lost wages; they may also be
entitled to grants to pay for vocational rehabilitation if they are
unable to return to the same line of work.
No single government or private entity administers the workers’
compensation program. Rather, employers, insurance companies
(insurers), claims administrators, medical service providers
(providers), and others all have roles in processing workers’
claims for benefits. When providers disagree with payers (that
is, insurers or claims administrators) on benefits, payments, or
necessary medical services for injured workers, the parties settle
their disputes through proceedings before workers’ compensation
administrative law judges or the Workers’ Compensation
Appeals Board.
The workers’ compensation system requires employers to
pay the costs of workers’ compensation benefits through a
financing system that includes three methods: (1) large, stable,
or government employers may pay for benefits directly through
self-insurance; (2) employers may purchase insurance from any
of the insurers that the Department of Insurance has licensed
to offer workers’ compensation insurance in California; or
(3) employers may purchase workers’ compensation insurance
through the State Compensation Insurance Fund (State Fund).
State Fund is a state-operated entity that exists solely to provide
workers’ compensation insurance on a nonprofit basis. It
actively competes with private insurers for business, and it also
provides workers’ compensation insurance to employers that
cannot secure the coverage from other insurers.
Until recently, California’s workers’ compensation medical payment
system consisted of a combination of fee schedules, payment
formulas, and payments to providers based on the providers’
88 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 99
usual, customary, and reasonable charges for
medical services. Prior to the legislative reforms
Medical Services for Which No Fee
Schedule Limited Charges Prior to that took effect on January 1, 2004, the workers’
January 1, 2004 compensation medical payment system used the
Official Medical Fee Schedule (OMFS) in part, to
• Services at outpatient surgical facilities in
determine reimbursement rates for some medical
a hospital.
services provided under the workers’ compensation
• Services at outpatient surgical facilities
program. Although the OMFS provided control
outside of a hospital setting.
over the costs of some medical services, such as
• Home health care services. physician fees and hospital inpatient services, it
• Ambulance services. had no control over the costs of the services shown
in the text box or over services covered under other
• Emergency room services.
payment systems, such as Medicare.
FINDINGS FROM OUR AUGUST 2003 AUDIT
This is the second Bureau of State Audits’ report related to
an audit that the Joint Legislative Audit Committee (audit
committee) originally requested. The first report, titled
California’s Workers’ Compensation Program: The Medical Payment
System Does Not Adequately Control the Costs to Employers to
Treat Injured Workers or Allow for Adequate Monitoring of System
Costs and Patient Care (Report 2003-108.1) and released in
August 2003, was an audit of the workers’ compensation medical
payment system. That report describes how rising medical
costs are contributing to the increasing costs of the workers’
compensation system—costs that California’s employers are
required to pay. Along with other findings, we concluded that
fee schedules intended to control the amounts paid for medical
services and products are outdated or nonexistent. In addition,
we reported that the state entity responsible for administering
and monitoring the workers’ compensation program, the
Department of Industrial Relations’ Division of Workers’
Compensation (division), lacks a data collection system that
allows it to monitor medical costs and measure the effectiveness
of reforms made to the system.
We recommended that the division, when determining the
future structure of the medical payment system, consider the
costs and practicalities of maintaining such a complex system
and consider adopting a payment system that is based on
models already in use, such as a variation of Medicare’s resource-
based payment system, which the federal Centers for Medicare
and Medicaid Services maintains. We also recommended that
the division develop a time line for completing its new data
1100 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1111
collection system, the Workers’ Compensation Information System,
and ensure that the data it collected would provide the information
necessary to adequately monitor medical costs and services.
In addition to a general review of medical costs and the payment
structure of the workers’ compensation insurance system, the
audit committee requested that we focus on payments that
workers’ compensation insurers made to outpatient surgical
facilities. Insurers pay outpatient surgical facilities outside of a
hospital setting (surgical centers) for the use of the facilities and
supplemental supplies and other services related to the medical
procedures performed. (The physicians who perform the medical
services are compensated in accord with a separate fee schedule.)
To address this request, we obtained medical payment data from
State Fund, the workers’ compensation insurer with the largest
market share in the State. We were able to analyze the data to
determine that increases in State Fund’s workers’ compensation
medical costs were being driven more by an increase in the
number of services performed than by an increase in the average
price per service. However, State Fund was not able to provide
us all the information we needed in order to analyze payments
to outpatient surgical facilities and for pharmaceuticals in time to
present the results in our August 2003 report.
STATE FUND’S ROLE IN WORKERS’ COMPENSATION
According to the data State Fund reported to the Workers’
Compensation Insurance Rating Bureau (rating bureau), a
nonprofit association of insurers that serves as the statistical
agent for the State’s insurance commissioner, State Fund’s
operations represented approximately 37 percent of California’s
workers’ compensation insurance premiums earned during
2002 (55 percent when insurers’ earned premiums are shown
net of deductible credits), and State Fund paid 27 percent of the
medical costs related to insured employers during that year.
The rating bureau reported that insurers paid workers’
compensation costs for injured employees of more than
$17.9 billion in 2002, with medical costs, including
pharmaceuticals, representing approximately $4.1 billion, or
23 percent of the total. Figure 1 on the following page shows
the proportionate costs of the workers’ compensation program
that insurers, including State Fund, paid. Figure 2 on page 13
shows the paid medical costs State Fund reported to the
rating bureau compared to the medical payments that other
insurers reported.
1100 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1111
FIGURE 1
Insurers’ California Workers’ Compensation Costs for 2002*
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Source: The Workers’ Compensation Insurance Rating Bureau’s 2002 Annual Report.
*Total costs for insurers were over $17.9 billion. Some large, stable, or government
employers may pay for employees’ benefits directly through self-insurance.
Included in its reports to the rating bureau is an amount of
$144.7 million that State Fund paid for the following three
reasons: (1) to settle disputed medical bills, (2) to pay injured
workers directly, and (3) to pay cost containment expenses
such as access fees to a preferred provider organization to
gain access to a network of providers who perform medical
services at negotiated rates. The remaining amounts shown in
Figure 2 consists of about $880 million for medical costs and
$91.7 million for prescription drugs that State Fund processed
and paid through its automated medical bill review system
during 2002.
Included in the $880 million State Fund made in medical
payments is about $203 million it paid to health care facilities
in 2002. Payments to these facilities are broken out as follows:
• $56 million to physical rehabilitation facilities, such as
long-term care facilities and home health care.
• $34 million to inpatient hospital facilities when the medical
procedure performed required an overnight hospital stay.
1122 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1133
FIGURE 2
Comparison of Medical Payments Reported by State Fund
and Other California Workers’ Compensation
Insurers in 2002*
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Source: The Workers’ Compensation Insurance Rating Bureau and the State
Compensation Insurance Fund.
* Medical payments by all insurers totaled $4.1 billion.
• $70 million to outpatient surgical facilities in hospitals when
they perform surgical procedures that do not require an
overnight stay (outpatient surgeries).
• $43 million to surgical centers when they perform
outpatient surgeries.
This audit focuses on the $43 million State Fund paid to surgical
centers and the $91.7 million it paid for drugs in 2002. These
amounts make up 12 percent of State Fund’s total medical costs
for that year.
RECENT LEGISLATION CHANGES THE WORKERS’
COMPENSATION MEDICAL PAYMENT SYSTEM
Effective January 1, 2004, Chapter 639, Statutes of 2003,
addresses many of the findings in our August 2003 audit report
and brings major changes to the workers’ compensation medical
payment system. Regarding workers’ compensation medical
costs, the new law generally sets requirements for medical fee
schedules and establishes more control over the use of medical
1122 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1133
and professional procedures in treating injured workers. Specific
to this audit, the new law requires that payments of fees for
the use of facilities for services performed in an outpatient
surgical facility, whether in a hospital or nonhospital setting,
not exceed 120 percent of Medicare’s ambulatory payment
classification (APC) facility fee schedule. Payments to surgical
centers and hospital outpatient surgery departments under
Medicare are intended to compensate the provider for the use
of the facility and any supplemental supplies and other services
directly related to the outpatient surgical procedures performed
(facility fee). (The physicians who conduct the outpatient
surgical procedures are compensated separately in accord with
another fee schedule.) The new law also requires that payments
for pharmacy services and drugs that are not otherwise covered
under Medicare’s APC fee schedule be limited to 100 percent of
the relevant Medi-Cal fee schedule.
The federal Medicare program uses payment systems that base
their fee schedules on the resources determined necessary
to provide medical services. In simplified terms, under these
systems, Medicare determines payments to outpatient surgical
facilities using a schedule that indexes each medical service or
service group as a value in relation to the value of a common
service or service group that the federal program uses as a
baseline. These values are determined based on the resources
considered necessary to provide the medical services. Because
these payments are derived from the estimated resources
required to provide the services, they are tied more to the cost
to provide the services than to the amounts that providers
customarily charge for them, and they are intended to control
payment inflation.
Medicare pays facility fees for outpatient surgeries under two
systems: the Hospital Outpatient Prospective Payment System
and the ambulatory surgical center (ASC) fee schedule. The
schedule Medicare uses depends on whether the provider
performs an outpatient surgical procedure in a hospital setting
or in a surgical center. For the former, Medicare uses the Hospital
Outpatient Prospective Payment System, which categorizes
services into 569 procedure groups, called APCs. Services that are
grouped within the same APC are similar and require a similar
level of resources. For outpatient surgical procedures performed
at a surgical center, Medicare uses the ASC fee schedule, which
consists of nine groups of similar procedures that require
similar resources, each with its own payment rate. For both
the APC and ASC payment systems, Medicare calculates the
1144 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1155
payment for a specific service group by adjusting the rate using
a geographic adjustment factor to compensate for the varying
costs of providing medical services in different geographic zones.
Medicare identifies 25 different geographic zones in California.
The Department of Health Services (Health Services) is
responsible for administering the Medi-Cal program, which
contains a prescription drug benefit. Health Services controls
the cost of pharmaceuticals under Medi-Cal in part by using
a drug formulary—a list of drugs, known as the contract drug
list, that a physician can prescribe and for which a pharmacy
can seek reimbursement without first obtaining approval from
Health Services. Medi-Cal pays for drugs using the lowest
of three predetermined reimbursement rates or the actual
charge. According to Health Services, Medi-Cal pays for most
of the drugs at the average wholesale price less 10 percent,
plus a dispensing fee and less any rebates from the drug’s
manufacturer. The average wholesale price is the price that
its manufacturers assign to the drug and that commercial
organizations such as First DataBank compile. Because of the
State’s budget deficit, beginning January 1, 2004, Medi-Cal
reduced most of its payments for services by 5 percent, including
payments for prescription drugs.3 The reduction will remain in
effect until January 1, 2007.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
requested that we review the medical costs related to the
workers’ compensation insurance system and the extent to
which the billing structure has resulted in unacceptably high
reimbursement rates. The audit committee specifically requested
that we focus on medical services provided by hospitals
and outpatient surgical facilities and paid for by workers’
compensation insurers.
In August 2003 we issued our first report, titled California’s
Workers’ Compensation Program: The Medical Payment System
Does Not Adequately Control the Costs to Employers to Treat Injured
Workers or Allow for Adequate Monitoring of System Costs and
Patient Care (Report 2003-108.1).
3 A preliminary injunction partially blocked the 5 percent reduction.
1144 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1155
To arrive at that report’s findings, we performed extensive
procedures to understand the governance structure and the
issues surrounding the medical payments made in the workers’
compensation system, as well as to identify sources of available
billing and payment data. In addition, we reviewed numerous
research reports on workers’ compensation in California and
other states and conducted a survey of 10 other states that
had implemented workers’ compensation payment systems
patterned on Medicare’s resource-based payment system.
Finally, we obtained medical claims data from State Fund and
determined, for all the employees it covers, the extent to which
increases in workers’ compensation medical costs were being
driven by increases in the average price per service or by an
increase in the number of services performed. We requested
data from State Fund because it paid more than 25 percent of
all California’s workers’ compensation medical costs related to
insured employers in 2002. However, State Fund was not able
to provide us with other information we sought at that time.
Therefore, we were unable to analyze State Fund’s payment
data on payments to outpatient surgical facilities and payments
for pharmaceuticals in time to present the results in our
August 2003 report. As a result, we are presenting our analysis of
payment data in this follow-up report.
For this report, we analyzed payments State Fund made to
surgical centers and for pharmaceuticals that were included in its
medical bill review system for 2002; we sought to determine the
extent to which employers and insurers could achieve savings in
workers’ compensation medical costs by adopting a fee schedule
based on the Medicare ASC fee schedule and a pharmaceutical
fee schedule similar to Medi-Cal’s. Although new legislation
requires the Department of Industrial Relations’ Division of
Workers’ Compensation (division) to adopt a fee schedule for
outpatient surgical facilities’ facility fees that equals 120 percent
of Medicare’s APC fee schedule, for reasons we will explain
more fully below, we calculated the potential savings by using
120 percent of Medicare’s ASC fee schedule. Because limitations
in State Fund’s data precluded a comprehensive analysis, we
used Medicare’s ASC fee schedule, with its nine groups of
procedure classifications, for our analysis, rather than Medicare’s
APC fee schedule, with its 569 groups. Medicare makes a single
payment to surgical centers to compensate for the use of the
physical space as well as for any supplies or services that directly
relate to the surgical procedure performed.
1166 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1177
Because of the limitations in State Fund’s data, we were unable
to analyze 66 percent of the $43 million in payments to surgical
centers made in 2002. The transactions we were unable to
analyze lacked specific information. For example, because
State Fund’s bill review system cannot calculate payments for
transactions that are not covered by a fee schedule, such as
facility fees paid to surgical centers, its bill reviewers calculate
those payments outside the system and manually enter them
into the medical bill review system. In some instances, the
reviewers entered only summary information that precludes
detailed analysis; and in others, State Fund’s data did not
directly link individual payments to individual procedures. In
addition, the individual payment records from State Fund’s data
did not contain codes identifying the specific procedures it paid
for. We partially overcame this obstacle by linking the payments
State Fund made to the surgical centers to the payments it
made to physicians for the same procedure and using the
physician procedure code to identify the facility procedure
code. Nonetheless, we were able to analyze only 34 percent of
State Fund’s 2002 payments to surgical centers. We limited our
analysis to the data contained in the medical bill review files
State Fund provided us and did not attempt to trace the recorded
payments to supporting documentation.
We identified significant savings associated with the payments
for which State Fund’s medical bill review system contained
sufficient detail for analysis. We also identified those surgical
center providers who rendered services at prices not controlled
by contract and who received the highest average payments
for facility fees and services during 2002. However, because we
could not determine the nature of the payments for which State
Fund maintained insufficient data, we cannot know whether
the payments we did analyze are representative of all the
medical payments State Fund provided. As a result, we cannot
reliably project the size of possible savings for all of State Fund’s
payments to surgical centers. We planned on presenting
information regarding medical providers that received
payments in 2002 that significantly exceeded Medicare’s rates
for similar services; however, State Fund asserted that such
information was confidential.
To calculate the potential savings from adopting a fee schedule
for prescription drugs, we compared State Fund’s average
payments for prescription drugs in 2002 to the amount
California’s Medi-Cal program would have paid for the same
drugs. Medi-Cal pays for prescription drugs using the lowest
1166 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1177
among the actual charge or one of three predetermined
payment methods. We used the payment method that Health
Services, which administers Medi-Cal, told us the program
uses most commonly. After January 1, 2004, this method is
95 percent of the sum of a drug’s average wholesale price minus
10 percent, plus a $3.55 dispensing fee.4 Of the $91.7 million
State Fund paid for pharmaceutical purchases, we were able
to analyze approximately $76 million for potential savings.
Of the remainder, records of $2.8 million in payments for
pharmaceuticals lacked sufficient detail for further analysis,
and $2.9 million in payments were for drugs we were unable to
match with a list of drug wholesale prices that Health Services
provided us. State Fund also paid $10.1 million for supplies
and injections for which the data did not allow us to identify
the location where they were administered so as to identify
whether the new reforms would have applied to these items.
As a result, we did not include these payments in our price
comparison analysis.
Finally, we asked the division about its plans for implementing the
new legislation’s fee schedule requirements and completing the
implementation of the new data collection system, the Workers’
Compensation Information System. n
4 A preliminary injunction partially blocked the 5 percent reduction, which was to
become effective on January 1, 2004.
1188 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1199
CHAPTER 1
Changes to the State’s Workers’
Compensation Medical Payment
System Will Cause Payments for
Outpatient Surgical Facility Services
and Prescription Drugs to Drop Sharply
CHAPTER SUMMARY
California’s workers’ compensation system will benefit
from recent legislation that requires the adoption of
fees based on Medicare and Medi-Cal fee schedules.
Legislation that became effective on January 1, 2004, limits
payments of fees for the use of outpatient surgical facilities
(facility fees), whether medical services were rendered in
a hospital outpatient surgery department or an outpatient
surgical facility outside of a hospital setting (surgical center), to
120 percent of Medicare’s ambulatory payment classification
(APC) fee schedule.5 It also limits payments for pharmaceuticals
to 100 percent of the Medi-Cal fee schedule.
Our analysis indicates that had similar reforms been in place
during 2002, the State Compensation Insurance Fund (State Fund)
could have saved anywhere from $7.8 million to $8.9 million
(with a midpoint of $8.4 million) of the amount it paid to surgical
centers for facility fees. These savings represent about 54 percent
to 61 percent, respectively (with a midpoint of 58 percent), of
the payments in State Fund’s medical bill review database that
contained sufficient detail for analysis. In some cases, the average
amount State Fund paid a surgical center for the facility fee
exceeded 300 percent of the rates in the Medicare ambulatory
surgical center (ASC) fee schedule. We also calculated that State
Fund could have saved another $18 million (or about 24 percent)
on the amount it spent on prescription drugs.6
5 In the emergency regulations proposed on December 30, 2003, by the administrative
director of the workers’ compensation program, the facility fees for outpatient surgical
facilities are calculated at 122 percent of the Medicare APC fee schedule. The 2 percent
in excess of the 120 percent of Medicare’s fees required by new legislation is intended
to compensate providers for more costly “outlier cases” in lieu of the Medicare
calculation of payments for outlier cases, which requires determining cost-to-charge
ratios for outpatient surgical facilities.
6 Savings are based on a formula that includes a 5 percent reduction in Medi-Cal
payments effective January 1, 2004, which a preliminary injunction partially blocked.
Without the 5 percent reduction, we estimate savings at $14.6 million, or 19 percent,
for 2002.
1188 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 1199
Because of the way State Fund collects and classifies medical
payment data, we were able to analyze only $14.5 million (or
34 percent) of the $43 million in identifiable payments that
State Fund made to surgical centers during 2002. Our analysis
was limited for two reasons: (1) the medical payment data were
incomplete, inconsistent, or too general; and (2) features of
the database design made detailed data analysis impossible.
Although we believe that, had we been able to fully analyze the
data related to facility fees and drug supplies, we could have
identified even more savings, we cannot reliably conclude that
the level of savings we found in the payments we reviewed is
representative of all State Fund’s payments.
According to State Fund’s management, its databases
were designed to carry out its mission to provide workers’
compensation coverage to California employers and to provide
the benefits due to their injured workers according to the law; the
databases were not designed for public policy research purposes.
State Fund’s management nonetheless stated that it recognized
the importance of accurate information to further research and
study the workers’ compensation system. Management further
stated that, although not affecting the accuracy of its bill reviews
or reimbursement payments, the manner in which State Fund
currently collects and classifies its data does not always allow for
an extensive detailed analysis. Lastly, State Fund’s management
indicated it was upgrading its medical bill review system and
was concurrently involved in a project to allow electronic filing
of claims, thus consolidating and automating many of the
claims-processing functions, including streamlining the bill
review and payment processes and ensuring a more complete,
accessible, and accurate database.
Once California implements the reforms to the workers’
compensation medical payment system, State Fund may be
able to reap additional savings by reducing its cost to litigate
medical claims and avoiding what it now spends to contain its
spiraling medical costs. In addition, it could save on the cost of
supplemental payments for a broad range of items, such as drugs
and supplies, associated with outpatient surgical procedures.
Neither one of Medicare’s facility fee schedules for outpatient
surgeries pays these items separately. In some instances, State
Fund’s supplemental payments far exceeded the facility fees
involved. Unless the workers’ compensation reforms are
carefully implemented by all stakeholders, such supplemental
payments could circumvent the controls intended to contain
these costs.
2200 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2211
OUR REVIEW OF STATE FUND’S PAYMENTS TO
SURGICAL CENTERS SHOWS THE POTENTIAL
FOR SAVINGS
California’s workers’ compensation system will benefit from
recent legislation that requires the adoption of fees based on
Medicare fee schedules for surgical center services. Reviewing
the 2002 payments to surgical centers for those outpatient
surgical services from State Fund’s medical bill review system
that contained sufficiently detailed information for our analysis,
we calculated the savings that would result from adopting a fee
schedule that limits payments to 120 percent of the Medicare
ASC fee schedule. For reasons we discuss later in this chapter,
we were able to analyze individually only $14.5 million of
Of the $14.5 million in the $43 million (or 34 percent) that State Fund’s medical
payments to surgical bill review system recorded as payments to surgical centers
centers that we for facility use and payments for supplemental services and
analyzed, State Fund supplies. Nonetheless, we calculated that State Fund would
would have saved have saved between $7.8 million and about $8.9 million, using
between $7.8 million the geographic index for the highest- and lowest-cost areas in
and $8.9 million had California, respectively, and limiting payments to 120 percent
the recent reforms been of Medicare’s ASC fee. These savings represent about 54 percent
in place. to 61 percent, respectively, of the payments in State Fund’s
medical bill review database that we were able to analyze.
However, because we do not know the nature of the payments we
could not analyze, we cannot know whether the transactions
we did analyze are representative of all the medical payments
State Fund made. As a result, we cannot reliably conclude that
the savings we found reflect the savings possible in all of State
Fund’s payments.
State Fund makes payments to two types of surgical centers:
(1) independent surgical centers and (2) surgical centers that
contract with a preferred provider organization (PPO) that, in
turn, contracts with State Fund to provide services through its
network of medical service providers (providers) at negotiated
rates. Although State Fund contracts with the PPO with the
intent of controlling rising medical costs through negotiated
rates, we found that adopting Medicare-based fee schedules
would result in lower payments to both the surgical centers
under contract with the PPO and the independent surgical
centers. We found that for the payments to surgical centers
that State Fund made through a PPO during 2002, State Fund
would have saved $5.4 million to $6 million (or 58 percent
to 65 percent) if it had limited payments to 120 percent
2200 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2211
of Medicare’s ASC fees for high-cost and low-cost areas,
respectively. For independent surgical centers, State Fund
would have saved $2.4 million to $2.9 million (or 46 percent to
54 percent).
Our analysis shows that the savings appear to be greater for the
We found that adopting payments to surgical centers associated with the PPO because
Medicare-based fee the nature of these payments is different than that of payments
schedules would result made to independent surgical centers. State Fund’s payments to
in lower payments to surgical centers through the PPO are at rates that the provider
both the surgical centers and the PPO negotiated; such payments do not result in disputes
under contract with between the parties over the appropriate payment for the
the preferred provider services rendered. In contrast, in the absence of predetermined
organization and the fees for outpatient surgical services, State Fund attempts to
independent surgical control costs that independent surgical centers charge by
centers. unilaterally imposing limits on the fees it will pay them.
According to its management, State Fund caps payments at
200 percent of what Medicare would pay for a similar procedure.
This cap may result in a dispute that can lead to additional
payments by State Fund. However, when State Fund makes
additional payments to surgical centers to settle billing disputes,
it does not link those additional payments to the original claims
in its medical bill review database. As a result, the payments
State Fund ultimately makes to independent surgical centers
may be even higher than the payments we analyzed from the
medical bill review database because State Fund does not include
additional payments already made or to be made to these
providers to settle disputes that arise from State Fund’s practice
of capping these payments.
Our Analysis Reflects Savings Using the Medicare ASC
Payment System
For our analysis, we compared the amounts State Fund actually
paid surgical centers to the amounts that it would have paid
using 120 percent of the Medicare ASC fee schedule, rather
than 120 percent of the Medicare APC payment system,
which is the maximum payment level in the new reform
legislation. Medicare uses the APC payment system to pay for
services performed in outpatient surgical facilities in a hospital
setting, and it uses the ASC payment system to pay for services
performed in surgical centers. Because the APC fee schedule is
more generous than the ASC fee schedule, the potential savings
would have been less if we had used the APC fee schedule. However,
because limitations in State Fund’s data precluded a comprehensive
2222 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2233
analysis, we used Medicare’s ASC fee schedule, which has only nine
groups of procedure classifications, rather than Medicare’s APC
fee schedule, which has 569 procedure groups.
Like Medicare’s APC payment system, the ASC payment system
uses geographic wage adjustments in calculating payment
levels for facility fees. Medicare currently uses 25 different
geographic wage indexes to compute surgical center facility
fees in California, and thus the amount of a payment for a
given service will depend on the facility’s location. Rather
than applying the appropriate geographic wage index to
each payment we analyzed to determine potential savings,
we calculated a range of savings using California’s lowest and
highest wage index. In Appendix A, we present the savings by
Medicare ASC procedure group using Medicare’s lowest and
highest wage index in California.
When we compared State Fund’s 2002 payments to surgical
centers to 120 percent of Medicare’s ASC rate for similar surgical
Under the 2002 rules procedures, we included all of the services related to the surgical
for California’s workers’ procedures performed on a particular day. This methodology
compensation program, closely reflects Medicare’s payment method, which bundles
providers received a fee those services together with the charge for use of the facility
for the use of the surgical under the facility fee. Under the 2002 rules for California’s
center itself; and could workers’ compensation program, providers received a fee for the
charge supplemental fees use of the surgical center itself; and could charge supplemental
for services related to the fees for services related to the surgery performed, such as
surgery performed, such providing necessary drugs and supplies. Without a fee schedule
as providing necessary in place, in certain circumstances State Fund paid for these
drugs and supplies. services and supplies in addition to the amount it paid for the
use of the surgical centers’ facilities. Medicare rules for both the
APC and ASC fee schedules include supplemental supplies and
services in a single facility fee and do not pay them separately.
Therefore, we calculated our savings using the bundled payment
method that Medicare uses. Of the $7.8 million in savings
we calculated using the geographic wage index for high-cost
areas, we found that State Fund could save $1.1 million (or
14.1 percent) by using Medicare’s rules for bundling the charges
for facility services and supplemental services and supplies into a
single payment.
Savings From the Surgical Center Fee Schedule Required by
New Legislation Will Differ From Our Calculations
Although our comparative analysis using 120 percent of
Medicare’s ASC fee schedule indicated significant savings
associated with the surgical center payments we reviewed, the
2222 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2233
savings that State Fund ultimately realizes will
probably not be as great under the new legislation
Similarities and Differences in the
Medicare APC/ASC Fee Schedules that became effective on January 1, 2004. That is
because the new legislation calls for a payment
• Medicare uses the APC fee schedule, which rate not to exceed 120 percent of the Medicare
has 569 procedure groups, to determine
APC payment system. Although the Medicare APC
payments to hospitals for outpatient
surgical procedures. and ASC rates have similarities, the ASC payment
system is much less complex for the calculations
• Medicare uses the ASC fee schedule, which
has nine procedure groups, to determine we performed for this report because it contains far
payments to surgical centers for outpatient
fewer medical procedure groups used to identify
surgical procedures.
specific fees than does the APC payment system.
• Both the APC and ASC fee schedules Because Medicare recognizes that hospitals generally
use a payment-bundling approach and
have higher operating costs than do surgical centers,
geographic wage index to calculate facility
fee payments. the APC payment system contains higher fees for
similar outpatient surgical procedures in the ASC
• Both the APC and ASC fee schedules have
rules for bundling services and supplies. payment system. As a result, our analysis using the
ASC payment system showed a greater savings on
each payment we analyzed than State Fund could
realize under the APC payment system.
The percentage of savings we calculated by using the Medicare
ASC payment system is similar to the percentage that researchers
for the Commission on Health and Safety and Workers’
Compensation (commission) calculated. In its April 2003
report (updated in July 2003), the commission projected that
the workers’ compensation system would save 66 percent
on payments for outpatient surgical facility costs in 2004 by
adopting a fee schedule equal to 120 percent of the Medicare
ASC payment system. This is similar to the 54 percent to
Similar to the 61 percent range we found that State Fund could have saved
Commission on Health in 2002 by using Medicare’s ASC payment system to pay
and Safety and Workers’ for surgical center facility services. In the same report, the
Compensation’s commission projected that the workers’ compensation system
projection that the would save 41 percent on payments for outpatient facility costs
system would save in 2004 by adopting a fee schedule equal to 120 percent of the
66 percent on payments Medicare APC payment system. However, as we discussed in
for outpatient surgical our August 2003 report, the commission based its estimates of
centers, we found that savings on broad assumptions and projections using findings
savings would range from other research studies that we could not independently
from 54 percent to verify because the commission’s researcher did not maintain
61 percent for surgical the source data used to calculate the savings. In addition, just
center facility services. as we could not with certainty identify the universe of all State
Fund payments to outpatient surgical centers, neither could
the commission with certainty identify the universe of all
payments made to outpatient surgical centers on a system-wide
2244 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2255
basis. Therefore, we offer no opinion as to the validity of the
commission’s estimated savings from implementing the changes
the new legislation requires in the medical payment system.
POTENTIAL SAVINGS ALSO EXIST IN PHARMACEUTICALS
Working with a much larger segment of payments than we were
able to use for our comparison for surgical center payments, we
Under the new reforms, determined that State Fund could have saved $6.2 million (or
State Fund could have 15 percent) on name-brand prescription drugs and $11.8 million
saved $6.2 million, or (or 33 percent) on generic prescription drugs in 2002, for a
15 percent, on name total savings of $18 million (or 24 percent).7 We calculated these
brand prescriptions savings by comparing State Fund’s payments for prescription
and $11.8 million, or drugs during 2002 to the payments it would have made for
33 percent, on generic the same prescription drugs using a maximum payment rate
prescriptions in 2002, equal to 100 percent of the amount resulting from the payment
for a total savings method Medi-Cal uses most frequently.
of $18 million, or
24 percent. State Fund paid $91.7 million for pharmaceutical purchases
during 2002. Of this amount, $75.9 million was for prescription
drugs we found on a list of drug wholesale prices that the
Department of Health Services (Health Services) uses in its
Medi-Cal program; $10.1 million was for supplies and injections
we could not verify would be affected by the new reforms;
$2.8 million was for items for which the data did not allow for
further analysis; and $2.9 million was for drugs whose names
did not appear on Health Services’ list of drug wholesale prices.
Of the approximately $76 million State Fund paid for listed
prescription drugs, $41 million was for name-brand drugs and
$35 million was for generic drugs.
Under California’s Official Medical Fee Schedule (OMFS) in
effect during 2002, payers compensate for drugs that a physician
prescribes at the lower of two rates: the amount the provider
charges or a predetermined rate for name-brand and generic
drugs. For name-brand drugs, the payment is at a maximum rate
of 110 percent of the average wholesale price plus a $4 dispensing
fee; for generic drugs, the reimbursement is at a maximum
rate of 140 percent of the average wholesale price plus a
$7.50 dispensing fee. The new legislation calls for paying for drugs
at a maximum rate similar to one that the Medi-Cal program
7 Savings are based on a formula that includes a 5 percent reduction in Medi-Cal
payments effective January 1, 2004, which a preliminary injunction partially blocked.
Without the 5 percent reduction, we estimate savings at $14.6 million, or 19 percent,
for 2002.
2244 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2255
uses. The Medi-Cal program pays the least among the drug’s
actual cost or three predetermined methods, most commonly
the average wholesale price less 10 percent plus a dispensing fee.
Beginning January 1, 2004, Medi-Cal reduced most payments
by an additional 5 percent, including payments for prescription
drugs.8 The reduction is effective until January 1, 2007. As
a result, we based our comparison on the most commonly
used payment method, adjusted for the January 1, 2004,
reduction—the average wholesale price less 10 percent plus a
$3.55 dispensing fee, less an additional 5 percent.
THE CONDITION OF THE MEDICAL PAYMENT DATA
LIMITED OUR ANALYSIS
For payments for medical services not covered by fees
established under California’s OMFS, such as facility services at
outpatient surgical facilities, State Fund’s data posed problems
that limited our analysis. Using the medical payment data
According to State included in the bill review system that State Fund provided for
Fund’s management, 2002, we attempted to analyze the approximately $43 million
its databases were we were able to identify as payments it made to surgical
designed to carry out centers. However, due to various problems we encountered
its mission to provide with these data, we were able to analyze just over $14.5 million
workers’ compensation of the $43 million (or 34 percent) State Fund paid to surgical
coverage to California centers. According to State Fund’s management, its databases
employers and to provide were designed to carry out its mission to provide workers’
the benefits due to their compensation coverage to California employers and to provide
injured workers according the benefits due to their injured workers according to the law;
to the law and were not they were not designed for public policy research purposes.
designed for public policy
research purposes. Figure 3 shows the portions of those payments that we could
not analyze individually because of problems with State Fund’s
data, as well as the portion of the data on which we were able to
perform a detailed analysis of individual payments.
State Fund’s medical bill review database lacks several features
in its design that made our detailed data analysis difficult and
labor-intensive. One of the difficulties we encountered was
that the data State Fund provided did not consistently identify
the type of facility in which a procedure was performed. For
example, its payment data does not distinguish between
8 A preliminary injunction partially blocked the 5 percent reduction, which was to become
effective on January 1, 2004.
2266 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2277
FIGURE 3
Only a Portion of State Fund’s Payment Data for
Surgical Centers During 2002 Could Be Analyzed*
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����������������������������
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������������������������������ �������������������������
����������������������������������� ���������������������������
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Source: The State Compensation Insurance Fund’s medical bill review file.
* Segments total $43.1 million. We rounded this amount to $43 million when discussing it throughout the report.
inpatient and outpatient surgical facilities.9 To identify and
remove inpatient hospital services from the medical payment
data, we used the OMFS evaluation and management codes for
physician inpatient services and the dates of service; this left
only the outpatient services. To isolate payments State Fund
made to surgical centers from payments it made to all other
types of facilities, we relied on lists of provider identification
numbers that State Fund provided, lists that it created outside
the medical bill review database.
Another difficulty with State Fund’s payment data is that records
of payments to surgical centers do not contain information
about the type of surgical procedure performed. Without
specific information on the types of surgical procedures
performed in the surgical centers, we could not complete our
price comparison. To overcome this deficiency in the data and
9 An inpatient is a hospital patient who receives lodging and food as well as treatment; an
outpatient is a patient who is not hospitalized overnight but who visits a hospital, clinic,
or similar facility such as a surgical center, for diagnosis or treatment.
2266 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2277
identify the surgical center services that State Fund paid for, we
used physician payment data to link physicians’ surgical services
to surgical center services. Then, using the specific surgical
procedures that physicians reported they had performed, we
identified the services State Fund paid to the surgical centers.
Additionally, when no fee schedule exists for certain services,
According to State State Fund does not use its automated system to calculate
Fund’s management, it payment levels for those services. Instead, bill reviewers calculate
expects its upgrade of all payments to outpatient surgical facilities outside State
the bill review system to Fund’s medical bill review system and manually key summary
both promptly and fully information into the system. State Fund told us that it will continue
implement the newly to process all of its facility bills manually until it completes the
legislated fee schedule implementation of a new bill review system, scheduled to have
and associated rules. occurred by December 31, 2003. State Fund’s management
expects its upgrade of the bill review system to promptly and fully
implement the newly legislated fee schedule and associated rules.
State Fund’s management acknowledged that the manner
in which State Fund currently collects and classifies its data,
although not affecting the accuracy of its bill reviews or
reimbursements, does not always allow for an extensive detailed
analysis. Because State Fund inconsistently uses certain data
elements, and because bill reviewers regularly aggregate the
sometimes numerous payments to a provider for multiple
services performed during a single visit and key them into the
system using a single category, the cost information for some
specific services is not individually available from the medical
bill review system. The condition of the data prevented us from
analyzing portions of State Fund’s payments to surgical centers
for the following reasons:
• State Fund’s payment system did not always link its payments
to surgical centers to the individual services it paid for. For
example, State Fund sometimes pays facility fees for multiple
procedures performed during a patient’s single visit to a
surgical center. However, the data did not tie the individual
payments to the individual services State Fund paid for,
preventing us from comparing the individual payment’s
price. This condition occurred in individual payments totaling
$2.3 million (or 5 percent) of State Fund’s total $43 million in
payments to surgical centers.
• For payments totaling $11.8 million (or 27 percent) of State
Fund’s total $43 million in payments to surgical centers, the
outpatient surgical procedure code we identified from State
2288 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2299
Fund’s data did not correspond to any of Medicare’s nine
ASC procedure group numbers. As we discussed previously,
State Fund’s data did not contain specific surgical codes that
identified the procedures performed at surgical centers. As a
result, we used the procedure codes from the physician’s bill
associated with the facility charge to identify the outpatient
surgical procedure code. However, for this group of payments,
we could not match the procedure code associated with the
facility charges to a Medicare ASC procedure group number
in order to compute the potential savings. Many of the codes
we ultimately identified were related to the administration
of medication by a physician—a service that does not qualify
as a separate compensable surgical center charge under the
Medicare ASC payment system rules.
• We could not identify the type of procedure performed in
$12.2 million (or 28 percent) of State Fund’s $43 million
in payments to surgical centers because State Fund paid
the facility fee in a different calendar year than it did the
We could not identify the associated physician’s fee. As a result, State Fund’s database
type of procedure being did not allow us to use the services that physicians performed
performed in 28 percent, to identify the facility service that State Fund paid for.
or $12.2 million of the Therefore, we could not determine which Medicare ASC
$43 million in surgical procedure group these facility fees belonged in and could not
center payments because compare State Fund’s payment to a corresponding Medicare
the facility fee was not ASC fee. In mid-December 2003 State Fund’s management
paid in the same calendar asserted that, time permitting, the facility fees and physician
year as the associated fees can be linked across data sets. However, the files provided
physician’s fee. us for years prior to 2002 did not contain an important data
field necessary to make this linkage. We agree we could have
made this linkage if the bill review system files for years prior
to 2002 provided us in June 2003 had contained a key data
field for making this linkage that was contained in the 2002
bill review system files. Although unknown, if we possessed
this key data field, we would anticipate that many of these
payments could be analyzed while others could not because
the facility fee would not match Medicare payment codes or
multiple payments would not be specifically linked to the
multiple procedures performed.
• For payments we linked to surgical centers, totaling
$2.3 million (or 5 percent) of State Fund’s $43 million in
payments to those facilities, we were unable to determine
whether the payments were actually for a surgical center
facility fee. As we discussed previously, because State Fund’s
payment data did not identify the type of facility it paid,
we used a list of surgical centers that State Fund gave us
2288 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 2299
to differentiate payments it made to surgical centers from
payments to other types of facilities. However, we found
that other types of providers, such as physicians, also owned
surgical centers and received payments for facility fees; in
those cases, our methodology grouped payments to those
providers for other services along with payments for surgical
center facility services. Because of this aspect of State
Fund’s database design, we were unable to distinguish State Fund
payments to physician-owned surgical centers for facility
services from those for other types of medical services.
Because of these missing features in State Fund’s data, we were
unable to compute the savings that it could have realized from
approximately $28.5 million (or 66 percent) of the $43 million
in surgical center payments it made in 2002. However, based on
the savings we identified from the payments to surgical centers
that we were able to analyze, we believe it is likely that, had the
reforms already been in place, significant savings would also
have occurred in the payments we were unable to analyze.
We also encountered problems with State Fund’s data on
pharmaceutical payments. Figure 4 shows how we broke down the
$91.7 million that State Fund paid for pharmaceuticals in 2002
into those we could analyze for savings and those we could not.
FIGURE 4
State Fund’s Payments for Pharmaceuticals During 2002
����������������
�������������������������� ���������������������
��������������� �����������������
���������������������������
�������������������������
�������������������������
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�����������������
���������������
������������������������
�������������������������
�����������������
Source: The State Compensation Insurance Fund’s medical bill review file.
3300 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3311
Although State Fund’s medical bill review system identified
payments State Fund made for pharmaceuticals totaling
$91.7 million, in transactions worth more than $10 million (or
11 percent of the pharmaceutical payments State Fund made
in 2002), the data indicated that the items purchased were for
supplies or injections. Because the data precluded identifying
where all the supplies and injections were administered, we
were unable to determine if the new reforms would have
applied to these items. Therefore, we did not include these
payments in the comparison.
In addition, State Fund’s bill reviewers inconsistently interpreted
the data element indicating the quantity of a drug purchased.
Further, some payments were for dispensed quantities so small
that they caused us to question the accuracy of State Fund’s
data. Because of these inconsistencies and questionable data,
we could not analyze $2.8 million of the amount State Fund
paid for pharmaceuticals in 2002. In some instances, the bill
reviewers incorrectly entered as the drug quantity purchased the
package quantity from manufacturers or wholesale suppliers; or
entered a code of 999, which the system reserves for a different
data element altogether, the transaction type. These errors
prevented us from calculating the average price State Fund paid
for each drug and comparing that average price to the amount it
would have paid for the same prescription drugs in the Medi-Cal
payment system. In addition to finding these errors, we could
not compute potential savings associated with drug payments
totaling $2.9 million for which we could not match the
identification codes—the national drug classification codes—in
Although we identified the State Fund’s data to the codes in the list of wholesale prices that
potential for significant Health Services provided us.
savings through our
comparative analysis of
the amounts State Fund
THE PAYMENT SYSTEM THAT THE NEW LEGISLATION
paid for surgical center
REQUIRES SHOULD PRODUCE SAVINGS IN ADDITION
facility services and the
TO THOSE WE IDENTIFIED
amounts it would have
paid using the limits Although we identified the potential for significant savings
contained in the new through our comparative analysis of the amounts State Fund
legislative reforms, other paid for surgical center facility services and the amounts
aspects of the reforms it would have paid using the limits contained in the new
will allow State Fund to legislative reforms, other aspects of the reforms will allow
realize additional savings. State Fund to realize additional savings. Savings could increase
because proper implementation of a Medicare-based fee schedule
will set a firm ceiling for payments for surgical center facility
3300 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3311
fees and should define the supplemental services that State
Savings could increase Fund will now compensate under a facility fee, thus reducing
because proper costly litigation and settlements that arise from ambiguities in
implementation of a the former system. However, until the administrative director
Medicare-based fee of the Division of Workers’ Compensation (division) finalizes
schedule will set a firm the rules associated with the new reforms, the magnitude of the
ceiling for payments for savings that would come from bundling supplemental services,
surgical center facility supplies, and drugs into the facility fee are impossible to predict.
fees and should define In addition, the Medicare-based fee schedule will also avoid the
the supplemental services time and resources needed to contract for reasonable facility fees
that are compensated for outpatient surgical facilities or negotiate the payment levels for
under a facility fee, thus individual services.
reducing costly litigation
and settlements that arise Standardized billing and fee schedules will bring consistency
from ambiguities in the and an upper limit to payments for what had been unregulated
former system. medical services, such as services performed at surgical centers,
and will eliminate negotiations over individual billings. As
we mentioned previously, in an effort to contain costs, State
Fund staff has set a cap on payments for outpatient surgeries in
hospitals and independent surgical centers (that is, those not
associated with a PPO), at 200 percent of Medicare’s payments
for similar services. When State Fund uses its cap, the unpaid
amounts that providers charged often result in disputes that
require litigation to resolve. These hospitals and surgical centers
usually file liens with the Workers’ Compensation Appeals
Board for the difference between their charges and State Fund’s
payments. The payment data included in the medical bill
review files that State Fund provided us do not include the
cost to settle disputed medical bills, payments made directly to
injured workers, or cost containment expenses such as access
fees paid to a PPO to gain access to a network of providers who
perform medical services at negotiated rates. According to State
Fund management, although recorded in other databases, this
data is not available within the medical bill review database
that houses payment data for medical service providers. State
Fund’s management told us that State Fund does not itemize or
segregate the administrative costs of litigation related to surgical
centers, nor does it separately itemize and track payments to
settle liens in these cases in its medical bill review system. As a
result, our analysis of data from the medical bill review system
did not identify the additional savings State Fund will likely
realize from adopting the Medicare-based payment system
and eliminating these litigation costs, liens, and settlement
payments in the future.
3322 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3333
Our analysis of State Fund’s payments indicated that it did not
always adhere to its surgical center payment cap of 200 percent
of Medicare’s fee schedule. For 2002, we found that for 8 percent
of the approximately 3,900 payments we analyzed, State Fund
paid independent surgical centers solely for the use of the
facility an average amount that exceeded 300 percent of the
Medicare ASC rate, using the highest wage index in California.
In fact, in one instance, State Fund paid a surgical center
$13,705 when 120 percent of the corresponding Medicare ASC
rate would have been only $631. Although we did not review
the individual claim transactions to determine the cause for the
higher payments, we expect that most of these instances will no
longer occur once payments to surgical centers are limited to
120 percent of Medicare’s rate.
In addition, unlike surgical center facility fees under Medicare,
California’s payment system in 2002 required State Fund to pay
Unlike surgical center surgical centers a reasonable fee for supplies, drugs, and other
facility fees under services connected with outpatient surgical procedures—in
Medicare, California’s addition to the fee it paid for the use of the facility. We found
payment system in 2002 a number of instances in which the amount State Fund paid
required State Fund to to a surgical center for supplies, drugs, and other services
pay surgical centers that Medicare would normally bundle as part of the facility
a reasonable fee for fee greatly exceeded the amount that State Fund paid for the
supplies, drugs, and facility fee alone. For example, State Fund paid one surgical
other services connected center a facility fee of $1,126 and an additional $10,303 for
with outpatient surgical drugs and supplies. Using a fee schedule based on 120 percent
procedures—in addition of Medicare’s ASC payment system, State Fund would have paid
to the fee it paid for the no more than $631 for the same service. In another example,
use of the facility. during 2002 State Fund paid a surgical center an average facility
fee of $920 and separately paid the same surgical center an
average additional amount of $12,721 for supplemental supplies;
Medicare would allow a maximum payment hundreds of dollars
less than the payment State Fund made for the use of the facility
alone. These examples show the savings that could result from
adopting the Medicare rules that bundle facility fees together
with the supplemental services related to a single procedure into
a single payment. However, until the administrative director
finalizes the rules associated with the recent reforms, we cannot
know how much, if any, of these supplemental payments State
Fund might reduce or avoid altogether. For example, final rules
could provide direction to State Fund on what is appropriate for
compensating amounts such as the $11.8 million in facility fees
that did not match Medicare procedure groups that we discussed
in the previous section.
3322 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3333
We also identified that during 2002, State Fund paid a PPO
almost $27 million for bill review, care management, utilization
services, and access to the PPO’s network of contract providers.
These payments are included in a cost containment file that
is not part of the medical bill review system. State Fund uses
a PPO network in an effort to better control medical costs
by taking advantage of the contracts that the PPO network
administrator has negotiated with individual providers.
According to State Fund staff, the network access fee is based
on savings achieved from using the PPO network. Under the
outpatient fee schedule that the new legislation requires, State
Fund management says that much of this almost $27 million
could be avoided and added to potential savings. However,
State Fund management said it cannot responsibly predict the
extent of these potential savings. n
3344 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3355
CHAPTER 2
Savings Depend on the Careful
Implementation of the Medical
Payment Fee Schedules and Monitoring
of the Medical Payment System
CHAPTER SUMMARY
Thorough implementation of the new legislative reforms
will be key to realizing savings. Assuring a successful and
uniform implementation of the Medicare ambulatory
payment classification (APC) payment system for services
from outpatient surgical facilities will depend on educating
and guiding the workers’ compensation community on the
applicable rules for adapting Medicare’s APC payment system to
workers’ compensation medical claims.10 For example, uniformly
implementing the service-bundling and pricing features of the
Medicare APC payment system is central to preventing added
costs for services performed and achieving all the savings
the Legislature intended the reforms to provide. However,
the administrative director for the Division of Workers’
Compensation (division) in the Department of Industrial
Relations stated that the State’s hiring freeze and budget
shortfalls have hampered his efforts to implement reforms.
Another aspect critical to fully implementing the reforms is
having access to adequate and reliable medical payment data.
Such data are necessary for two reasons: (1) to monitor the
performance of the workers’ compensation system in delivering
quality care to injured workers at a reasonable cost to employers
and (2) to track the effect of the reforms and other policy
changes on the system’s performance.
The division is currently developing a workers’ compensation
database, the Workers’ Compensation Information System,
that is intended to provide the level of information necessary
to analyze and monitor system performance. However, as we
10 Medicare uses the APC fee schedule, which has 569 procedure groups, to determine
payments to hospitals for outpatient surgical procedures. However, legislative reforms
that took effect January 1, 2004, uses the APC fee schedule to determine payments for
outpatient surgical procedures that take place in a hospital or nonhospital setting.
3344 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3355
concluded in our August 2003 report, this database, which
eventually will collect workers’ compensation injury and
medical payment data from insurance companies (insurers) and
claims administrators, has suffered extensive delays because
of slow implementation, inadequate resources, and technical
hurdles. As a result, we have serious reservations that—once the
division can convince them to submit it—the information that
insurers and claims administrators report will be of a quality
necessary to permit the type of analysis and monitoring the
division must carry out.
MEDICAL PAYMENT FEE SCHEDULES MUST BE
PROPERLY IMPLEMENTED TO PRODUCE THE
DESIRED SAVINGS
A properly implemented Medicare-based fee schedule for
outpatient surgeries will produce savings. In fact, as we discussed
in Chapter 1, a 2003 report by the Commission on Health and
The law that took Safety and Workers’ Compensation (commission) estimates
effect January 1, 2004 that the workers’ compensation system as a whole could save
(Chapter 639, Statutes 41 percent of the 2004 costs for outpatient surgical facility
of 2003), requires the services by adopting a fee schedule limiting payments for these
division’s administrative services to 120 percent of Medicare’s APC payment system,
director to adopt and adjusted using an average wage index.
periodically revise an
official medical fee Using the State Compensation Insurance Fund (State Fund)
schedule that establishes medical payment data that we were able to analyze and a fee
reasonable maximum fees schedule equal to 120 percent of Medicare’s ambulatory surgical
to be paid for a variety center (ASC) payment method,11 we calculated that, had the new
of services, including legislative reforms been in effect during 2002, State Fund could
outpatient surgical have reduced the amount it paid for services from outpatient
facility services. surgical facilities outside of a hospital setting (surgical centers)
by 54 percent when adjusted by the index for geographic areas
with the highest wage costs and by 61 percent when adjusted by
the index for geographic areas with the lowest wage costs.
However, before the workers’ compensation system
can fully realize such savings, the new reforms must be
properly implemented. Specifically, the law that took effect
January 1, 2004 (Chapter 639, Statutes of 2003), requires the
11 Medicare uses the ASC fee schedule, which has nine procedure groups, to determine
payments for outpatient surgical procedures in outpatient surgical facilities outside of a
hospital setting. However, legislative reforms that took effect January 1, 2004, uses the
APC fee schedule to determine payments for outpatient surgical procedures that take
place in a hospital or nonhospital setting.
3366 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3377
division’s administrative director to adopt and periodically
revise an official medical fee schedule to establish reasonable
maximum fees for a variety of services, including outpatient
surgical facility services. The maximum payment the new
law prescribes for these services cannot exceed 120 percent
of Medicare’s APC payment amount.12 Although we used
120 percent of Medicare’s ASC payment system for our analysis
and the new legislation limits payments to surgical centers to
120 percent of Medicare’s APC payment system, we believe that
State Fund has paid for many outpatient surgical facility services
that would not be covered had Medicare’s APC payment system
been in place.
In addition, both the Medicare APC and ASC payment systems
include rules for bundling into a single payment the primary
medical services the outpatient surgical facility provides along
with supplemental facility services. Our analysis of payments
that State Fund made to surgical centers during 2002 frequently
Although allowable identified services that would not be compensable under
under the workers’ Medicare’s rules. Also, in conducting our analysis of potential
compensation medical savings, we could not match the procedure code description
payment system at the in State Fund’s data to a corresponding procedure group in the
time, our analysis of Medicare ASC fee schedule for payments totaling $11.8 million
payments State Fund of the $43 million State Fund paid to surgical centers in 2002.
made to surgical centers Many of the codes we ultimately did identify related to services
during 2002 frequently that Medicare’s ASC rules do not regard as compensable charges.
identified that it paid for For that reason, the new legislation requires the division’s
services that would not administrative director to establish maximum fees for those
be compensable under items that Medicare does not cover, provided they do not exceed
Medicare’s rules. 120 percent of the fees that Medicare pays for services requiring
comparable resources. However, if the administrative director is not
prompt and diligent in providing the ongoing guidance needed to
implement these reforms effectively, insurers may not fully realize
the savings. As we discuss below, the administrative director stated
that the State’s hiring freeze and budget shortfalls have hampered
his efforts to implement workers’ compensation reforms.
In late October 2003, we asked the division’s administrative
director how he planned to implement the new legislation’s
requirements, which were to become effective on
12 In the emergency regulations proposed on December 30, 2003, by the administrative
director of the workers’ compensation program, the facility fees for outpatient surgical
facilities are calculated at 122 percent of the Medicare APC fee schedule. The 2 percent
in excess of the 120 percent of Medicare’s fees required by new legislation is intended
to compensate providers for more costly “outlier cases” in lieu of the Medicare
calculation of payments for outlier cases, which requires determining cost-to-charge
ratios for outpatient surgical facilities.
3366 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3377
January 1, 2004. He indicated that he has made it a priority to
give the public guidance on the new workers’ compensation
medical payment system requirements. He told us he was
hoping to post information on the division’s Web site as far in
advance of January 1 as possible in order to guide the public to
the appropriate Medicare and Medi-Cal materials. He further
stated he expected he would need to develop regulations to
interpret some of the provisions contained in the new statutes
as he implements their changes in the medical payment system
and that he was seeking the services of an expert on Medicare to
assist in his efforts.
On December 30, 2003, the administrative director posted on
the division’s Web site a set of proposed emergency regulations
to implement the medical fee schedules the new law requires.
On the same day, the administrative director submitted the
proposed regulations to the Office of Administrative Law for
review and approval. These proposed regulations attempt to
address the issues we identified relating to implementing the
new payment system for surgical center services, including
capping payments at fee schedule amounts and bundling
into the facility fees the amounts that workers’ compensation
insurers would pay for supplemental drugs and supplies.
However, the emergency regulations the administrative
director proposed do not assure the permanent successful
The emergency implementation of the workers’ compensation payment system
regulations proposed that the new law mandated. Assuming that the Office of
by the administrative Administrative Law accepts them as the division wrote them, the
director do not assure emergency regulations will remain in effect for only 120 days.
the permanent successful Prior to their expiration, the administrative director must either
implementation of the provide permanent regulations, along with a statement that the
workers’ compensation regulations comply with all regular rule-making procedures, to
payment system the Office of Administrative Law or request that it approve the
mandated by the new law. readoption of the emergency regulations. Therefore, the savings
resulting from the payment system that the new law required
will not be known until the regulations are finalized and
approved by the Office of Administrative Law and the medical
service providers (providers), insurers, and claims administrators
who participate in the workers’ compensation program interpret
and implement them.
The administrative director pointed out that shortages in staffing
and other resources continue to be an obstacle in implementing
the new legislation’s reforms as well as in implementing
legislation from prior years. For example, although funding
3388 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3399
for 64 positions to implement the requirements contained in
The administrative legislation that passed in 2002 (Chapter 6, Statutes of 2002),
director pointed out that is included in the division’s fiscal year 2003–04 budget, the
shortages in staffing and administrative director stated that he cannot fill the positions
other resources continue until he is able to obtain an exemption to the State’s current
to be an obstacle in hiring freeze. In addition, the administrative director stated
implementing the reforms that the current year’s budget does not include any funding
required in this latest to implement the reforms from the most recent legislation
legislation, as well as in (Chapters 635 and 639, Statutes of 2003). According to the
implementing legislation administrative director, there are no administrative means to
from prior years. obtain any additional funding in fiscal year 2003–04 to carry out
the implementation of the new legislation, and the Legislature
did not provide any funding in the enabling legislation. As a
result, current staffing and funding limitations present a big
challenge in promptly implementing the reforms.
THE DIVISION MUST RELY ON INSURERS FOR RELIABLE
MEDICAL PAYMENT DATA
In our August 2003 report, we indicated that the division is
developing an information system, the Workers’ Compensation
Information System (WCIS), to collect medical payment and
other types of data from insurers and claims administrators to
provide the division with useful and accessible information for
overseeing the system and making necessary policy decisions.
Such a data source could be useful for tracking the effects of
policy and legislative changes to the workers’ compensation
program and allow the division to monitor and identify areas that
may require additional legislation or regulation to further define
program parameters to control costs and ensure access to care.
However, we also reported that the WCIS has been under
development for years and was still unable to provide the
medical payment data that could be useful to program
evaluators or other decision makers. We concluded that the
division had not assured us that the WCIS data would provide
the detailed medical payment history the division would need to
meet its oversight responsibilities and provide the statistical data
for the research necessary to guide policy decisions. Although
the division had identified the data elements it believed it
needed to oversee the medical payment system, it was still
negotiating in August 2003 the types of data elements that
insurers, including State Fund, and claims administrators would
report and the division would then use to analyze and monitor
3388 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 3399
medical payment transactions. According to the administrative
director, once all the parties agree on the data elements the
division will collect, data reporting will be mandatory.
During this review of the workers’ compensation medical
payment system, we found that the way in which State Fund
collects and stores medical data limits their usefulness in
monitoring the workers’ compensation payment program.
Although State Fund’s management assured us this did not affect
the accuracy of payments, we found that State Fund frequently
provides incomplete data, maintains the data at a summary
level without identifiers that would allow analysis at the
transaction level, and uses a database design that makes certain
detailed data review impossible. For example, State Fund’s
medical bill review system does not identify the specific medical
procedure performed at a facility or the type of facility where
the procedure was performed. In addition, the summary data
entered into State Fund’s system did not always include the
specific identities and costs of individual pharmaceuticals and
supplies that providers used in performing outpatient surgical
procedures that, together with a fee for the use of the facility,
composed the total payment to the providers. The division needs
this type of information in order to analyze and monitor medical
billing practices and their associated payments. In Chapter 1 we
discuss more fully the types of challenges we encountered in
attempting to analyze State Fund’s data.
The division conducted a survey of seven insurers, which
The division conducted a revealed that their databases, like State Fund’s, appear to lack
survey of seven insurers, the ability to extract the detailed data that the division called
which revealed that their for; in some cases, the insurers reported that they did not
databases, like State even collect important data. By January 2003 the division
Fund’s, appear to lack had gathered the results of its survey and concluded that the
the ability to extract sampled insurers could provide most of the 78 medical data
the detailed data called elements that the division had proposed to collect. We present
for, and in some cases, a summary of the division’s survey in Appendix B. However, our
important data was not analysis of the division’s survey indicates that all seven insurers
even collected. in the survey sample are collecting only seven of the 78 medical
data elements. In addition, the survey respondents reported
mixed efforts at collecting data for other important medical
data elements. For example, only five of the seven respondents
sampled reported that they collect the diagnosis-related group
code, which identifies the treatment to address a worker’s injury
or illness. Furthermore, only four of the seven respondents
reported that they collect facility codes, indicating the type of
facility where medical treatment was provided. The division
4400 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4411
believes that these data are useful for utilization reviews, audits,
and statistical analysis. As a result, we have serious reservations
that once the division can convince them to submit it, the
information that insurers and claims administrators provide
will be of a quality necessary to permit the type of analysis and
monitoring the division must carry out.
RECOMMENDATIONS
To fully realize the savings from the new reforms to the
workers’ compensation medical payment system, the division’s
administrative director must continue to provide the workers’
compensation community with the education and guidance
that will ensure that new reforms are promptly and effectively
implemented.
The division should ensure that the medical payment data it
collects in the WCIS will provide the specific information the
division needs to monitor the medical payments adequately
and measure the effectiveness of policy decisions. Specifically,
the division should clearly define the data elements it requires
from insurers and claims administrators, and it should obtain
the medical payment data using a standardized reporting
instrument, which will ensure that insurers and claims
administrators consistently and completely report the data so
that it will be useful for the division’s analysis and monitoring.
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: January 27, 2004
Staff: Doug Cordiner, Audit Principal
Norm Calloway, CPA
Randal S. Russell
4400 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4411
Blank page inserted for reproduction purposes only.
4422 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4433
APPENDIX A
State Fund Payments to Surgical
Centers During 2002 Compared to
120 Percent of Medicare’s Ambulatory
Surgical Center Fee Schedule
The tables in this appendix compare the amounts the
State Compensation Insurance Fund (State Fund) paid
nonhospital outpatient surgical facilities (surgical centers)
in 2002 to what State Fund would have paid for the same
services if a fee schedule limited to 120 percent of Medicare’s
ambulatory surgical center (ASC) facility fee schedule had been
in place. Medicare’s ASC facility fee schedule consists of nine
procedure groups. Each of these procedure groups represents
outpatient surgical procedures that require a similar level of
resources to perform. Medicare’s ASC facility fee is also adjusted
using a geographic wage index to compensate for the varying
cost of providing the service in different geographic regions.
Instead of applying one of the 25 different wage indexes used
by Medicare in California to each payment, we used the lowest
and highest state geographic wage indexes to present a range
of potential savings. Therefore, each table consists of a subset
labeled “Low End” representing California’s lowest wage index
and one labeled “High End” representing California’s highest
wage index. The source of the data is State Fund’s medical bill
review system.
Table A.1 on the following page represents payments to
independent surgical centers—those that do not provide medical
services under State Fund’s agreement with a preferred provider
organization (PPO). The savings presented in Table A.1 represent
the difference between State Fund’s actual payments to these
independent surgical centers and the amount it would have
paid using a limit of 120 percent of Medicare’s ASC rates, broken
down by procedure group. As we discussed in Chapter 1, we
did not include a large portion of the payments to independent
surgical centers in our price comparison analysis due to the
limitations of State Fund’s medical payment data. We calculated
the savings in Table A.1 using $5.3 million, or 25 percent of the
approximately $21 million in payments State Fund made to
independent surgical centers during 2002.
4422 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4433
TABLE A.1
Savings on Payments to Independent Surgical Centers in 2002
Amount
Medicare Average 120 Percent of Total Medicare
Procedure Number of State Fund Medicare State Fund Would Have
Group Facility Fees Paid Payment ASC Rate Paid Paid Savings
Low End
1 666 $ 875 $ 397 $ 583,076 $ 264,402 $ 318,674
2 895 1,230 532 1,100,625 476,140 624,485
3 1,158 1,472 609 1,704,073 705,222 998,851
4 986 1,535 752 1,513,318 741,472 771,846
5 83 1,504 856 124,839 71,048 53,791
6 0 NA 986 0 0 0
7 124 2,041 1,187 253,112 147,188 105,924
8 0 NA 1,161 0 0 0
9 0 NA 1,598 0 0 0
Totals 3,912 $5,279,043 $2,405,472 $2,873,571
High End
1 666 875 471 583,076 313,686 269,390
2 895 1,230 631 1,100,625 564,745 535,880
3 1,158 1,472 721 1,704,073 834,918 869,155
4 986 1,535 891 1,513,318 878,526 634,792
5 83 1,504 1,014 124,839 84,162 40,677
6 0 NA 1,168 0 0 0
7 124 2,041 1,407 253,112 174,468 78,644
8 0 NA 1,376 0 0 0
9 0 NA 1,894 0 0 0
Totals 3,912 $5,279,043 $2,850,505 $2,428,538
Source: State Fund’s medical bill review file and Medicare’s ASC rates.
NA = Not applicable.
Table A.2 represents surgical center services paid through
State Fund’s agreement with a PPO. State Fund has attempted
to contain costs by contracting with a PPO that, in turn, has
contracted with surgical centers to furnish services at negotiated
rates. We calculated the savings in Table A.2 using $9.3 million,
or 42 percent, of the approximately $22 million in payments
State Fund made to surgical centers through the PPO during
2002. Again, limitations in the data discussed in Chapter 1
prevented us from analyzing all of the payments made through
the PPO.
4444 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4455
TABLE A.2
Savings on Payments to Surgical Centers Paid
Through a Preferred Provider Organization in 2002
Amount
Medicare Average 120 Percent of Total Medicare
Procedure Number of State Fund Medicare State Fund Would Have
Group Facility Fees Paid Payment ASC Rate Paid Paid Savings/(Loss)
Low End
1 338 $ 963 $ 397 $ 325,576 $ 134,186 $ 191,390
2 1,212 1,212 532 1,468,917 644,784 824,133
3 1,592 2,236 609 3,559,788 969,528 2,590,260
4 1,419 2,036 752 2,888,690 1,067,088 1,821,602
5 147 2,297 856 337,587 125,832 211,755
6 1 1,016 986 1,016 986 30
7 267 2,506 1,187 669,095 316,929 352,166
8 8 1,855 1,161 14,839 9,288 5,551
9 0 NA 1,598 0 0 0
Totals 4,984 $9,265,508 $3,268,621 $5,996,887
High End
1 338 963 471 325,576 159,198 166,378
2 1,212 1,212 631 1,468,917 764,772 704,145
3 1,592 2,236 721 3,559,788 1,147,832 2,411,956
4 1,419 2,036 891 2,888,690 1,264,329 1,624,361
5 147 2,297 1,014 337,587 149,058 188,529
6 1 1,016 1,168 1,016 1,168 (152)
7 267 2,506 1,407 669,095 375,669 293,426
8 8 1,855 1,376 14,839 11,008 3,831
9 0 NA 1,894 0 0 0
Totals 4,984 $9,265,508 $3,873,034 $5,392,474
Source: State Fund’s medical bill review file and Medicare’s ASC rates.
NA = Not applicable.
Our analysis shows that the savings appear to be greater
for the payments to surgical centers made through the PPO
because of the different nature of these payments compared
to the payments made to independent surgical centers. State
Fund’s payments to surgical centers through the PPO are at
rates negotiated between the provider and the PPO and do
not result in disputes between the parties over the appropriate
payment for the services rendered. In contrast, in the absence of
predetermined fees for outpatient surgical services, State Fund
attempts to control costs charged by independent surgical
4444 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4455
centers by unilaterally imposing limits on the fees it will pay
them. According to State Fund’s management, it has set a
benchmark that caps payments at 200 percent of what Medicare
would pay for a similar procedure. This cap may result in a
dispute that can lead to additional payments. However, when
State Fund makes additional payments to surgical centers to
resolve disputes, it does not link those additional payments
to the original claims in its medical bill review database.
As a result, the payments State Fund ultimately makes to
independent surgical centers may be even higher than the
payments we analyzed from the medical bill review database
because they do not include any additional payments already
made or to be made to these providers to settle disputes that
arise from State Fund’s practice of capping these payments.
4466 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4477
APPENDIX B
Results of the Division of Workers’
Compensation Survey of Insurance
Companies to Determine Available
Medical Data
The Division of Workers’ Compensation (division) in
the Department of Industrial Relations is currently
developing a workers’ compensation database that
is intended to provide the level of information necessary
to analyze and monitor system performance. Although the
division has identified the medical billing data elements that it
believes it needs to monitor the medical payment system and
conduct research, it is still working with insurers and claims
administrators to determine what data elements they will
ultimately submit to the Workers’ Compensation Information
System (WCIS).
Table B.1 on the following page shows the results of a May 2002
survey of seven insurers in which the division and its WCIS
Advisory Committee asked insurers about the practicality of
collecting 78 selected medical data elements. By January 2003,
the division had gathered the results of the survey and
concluded that the sampled insurers could provide most of the
medical data elements that the division proposed to collect.
However, as we discuss in Chapter 2, we question whether the
collection of these data will be sufficient to meet the intended
objectives for the WCIS because of the inconsistencies in the
data reported as being collected. Our analysis of the survey
results indicates that only seven of the 78 medical data
elements are being collected by all of the insurers in the sample.
Hence, we have serious reservations that, once the division
can convince them to submit it, the information reported by
insurers and claims administrators will be of a quality necessary
to permit the type of analysis and monitoring needed.
4466 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4477
TABLE B.1
Division of Workers’ Compensation Survey of Insurers
Data Element
Data
Collected?
Element No
Number Data Description No Yes Response
5 Jurisdictional claim number 0 7 0
14 Claim administrator mailing postal code 1 5 1
15 Claim administrator claim number 1 5 1
31 Date of injury 0 7 0
187 Claim administrator federal employer identification number 1 5 1
188* Claim administrator name 1 4 1
208 Managed care organization identification number 3 3 1
209 Managed care organization name 2 4 1
501 Total charge per bill 0 7 0
502* Billing type code 2 4 0
504 Facility type code (inpatient or outpatient) 3 4 0
507 Provider agreement code 4 3 0
508 Code indicating the reason for bill submission/resubmission 3 4 0
509 Service bill date(s) range 0 7 0
510 Date of bill 1 6 0
511 Date insurer received bill 0 7 0
512 Date insurer paid bill 0 6 1
513 Admission date 2 5 0
514 Discharge date 2 4 1
516 Total amount paid for bill 0 6 1
518 Diagnostic related group code 2 5 0
521 Principle diagnosis code 1 6 0
522 Clinical modification diagnosis code 1 6 0
524 Date procedure performed 1 6 0
527 Date prescription billed 2 5 0
528 Billing provider/group name 1 6 0
534 Gatekeeper indicator 5 1 1
535 Admitting diagnosis code 1 6 0
537 Billing provider primary specialty code 2 5 0
542 Billing provider postal code 1 6 0
544 Bill adjustment reason code 2 5 0
547 Bill line number 1 6 0
552 Total service charge per line item 1 5 1
557 Diagnosis code(s) 2 5 0
561 Prescription line number 4 3 0
563 Drug name 2 5 0
564 Cost basis determination code 5 2 0
565 Total per line rental charge 3 4 0
566 Purchase price of durable medical equipment 3 4 0
567 Billing frequency for durable medical equipment 6 0 1
4488 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4499
Data Element
Data
Collected?
Element No
Number Data Description No Yes Response
570 Drugs/supplies quantity dispensed 1 6 0
571 Drugs/supplies number of days 5 1 1
572 Drugs/supplies billed amount 0 7 0
574 Total amount paid per line 1 5 1
579 Drugs/supplies dispensing fee 4 2 1
586 Entity providing care federal employer identification code 2 4 1
589 Name of entity providing care 2 5 0
595 Specialty code of entity providing care 2 5 0
599 State license number of entity providing care 3 4 0
600 Place where service performed 1 5 1
604 Date prescription filled 1 6 0
624 Initial amount paid 0 6 1
626 Principal procedure billed code 1 5 1
629 Billing provider identifier code 1 6 0
630 Billing provider state license number 3 4 0
638 Name of group/entity providing all services on this bill 1 6 0
642 Federal employer identification number for group/entity rendering this bill 1 6 0
643 State license number of group/individual rendering this bill 3 4 0
649 Specialty license number of group/entity rendering this bill 5 1 1
651 Primary specialty code of group/entity rendering this bill 2 5 0
678 Facility name 0 7 0
679 Facility federal employer identification number 1 6 0
680 Facility state license number 3 3 1
681 Facility Medicare number 3 4 0
688 Facility postal code 1 6 0
704 Managed care organization federal employer identification number 3 3 1
712 Managed care organization postal code 2 4 1
715 Jurisdictional procedure code billed 3 4 0
717 Billed procedure code modifier 2 5 0
718 Jurisdictional modifier for procedure billed code 4 3 0
721 National drug code billed 2 5 0
726 Procedure paid code 1 6 0
727 Paid procedure code modifier 1 6 0
728 National drug code paid 1 5 1
729 Jurisdictional procedure paid code 2 5 0
730 Jurisdictional modifier for procedure paid code 3 4 0
732 Code indicating reason service adjustment made 2 5 0
737 Bill procedure code 2 5 0
Totals 147 373 24
Source: The Department of Industrial Relations’ Division of Workers’ Compensation.
Note: Lines shown in bold indicate the seven data elements (out of a possible 78) that all seven surveyed insurers collect.
* One of the seven insurers surveyed was not asked to respond regarding this data element.
4488 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 4499
Blank page inserted for reproduction purposes only.
5500 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5511
Agency’s comments provided as text only.
State Compensation Insurance Fund
1275 Market Street
San Francisco, CA 94103-1410
January 12, 2004
Elaine M. Howle, State Auditor*
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, California 95814
Dear Ms. Howle:
The State Compensation Insurance Fund was approached in connection with the charge given the
Bureau of State Audits by the Joint Legislative Audit Committee to study costs, and in particular to
study medical costs within the workers’ compensation system. On August 27, 2003, the Bureau
of State Audits issued your report entitled “California Workers Compensation Program: The
Medical Payment System Does Not Adequately Control the Costs to Employers to Treat
Injured Workers or Allow for Adequate Monitoring of System Costs and Patient Care”.
The charge to the Bureau of State Audits was a review of the workers compensation system. We
were given assurance by the Bureau of State Audits that this was not an examination of the State
Fund. The results of this audit cannot be viewed as an audit of the State Fund, our data systems,
our claims or payments processes. The State Fund’s involvement in this audit was voluntary. The
State Fund was asked to participate in order to identify data from our databases that the Bureau
of State Audits believed would be helpful in completion of your tasks. To our knowledge no other
underwriter of workers compensation insurance was approached to assist the Bureau of State
1
Audits in this endeavor. The State Fund agreed to fully participate and voluntarily allow full access
to our databases with regard to this assignment in order to further your work in what we regarded
to be a significant public policy examination of the workers compensation system. However in
providing access to the Bureau of State Audits, at all times, the identities of injured workers and
their medical information were maintained in strict confidence and were never disclosed.
Over the past six months the State Fund has met with and provided data to the Bureau of State
Audits on numerous occasions. Our staff and consultants have spent many hundreds of hours
to provide answers and data to the Bureau of State Audits. We congratulate the Bureau of State
Audits on the professionalism and the quality of your August 27, 2003 report. Many of your findings
are consistent with the legislative intent for workers compensation reform found in the recently
passed AB 227 and SB 228. We, at the State Fund believe our unique cooperation in your study
contributed to the fuller understanding of the need for effective workers compensation reform.
* California State Auditor’s comment appears on page 53.
5500 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5511
Page 2 of 2
January 12, 2004
The State Fund databases are constructed in a manner that is consistent with the current state
of the art within the workers compensation industry. However, the process of using a workers
compensation carrier’s large medical and compensation databases for public policy research is
very labor intensive and demanding. The issues encountered by the Bureau of State Audits are
consistent with the experience of others such as the California Workers Compensation Institute,
Workers Compensation Insurance Rating Bureau and the Workers Compensation Research
Institute who regularly aggregate workers compensation carrier data.
The State Fund’s databases were designed to allow the State Fund to carry out our mission to
provide workers compensation coverage to California employers and to provide those benefits
due to their injured employees under California’s workers compensation law. Our databases were
not designed for public policy research purposes. As we recognize the importance of accurate
information to further research and study of the workers compensation system we provide data
as well as financial and manpower support to the California Workers Compensation Institute,
the Workers Compensation Insurance Rating Bureau and the Workers Compensation Research
Institute. Our data has been consistently and successfully used by each organization in their
studies and reports.
State Fund databases are fully sufficient to the task of making and recording accurate
compensation and medical benefit payments. Difficulties encountered in completing public policy
research must be differentiated from the process of making accurate benefit payments. We are
currently implementing two major claims systems development initiatives. Upon completion of
these initiatives we will realize a number of business efficiencies. These improvements will include
improved data capture at the detail level that, while not altering reimbursement amounts, will further
increase the value of the data for research analysis purposes.
The State Fund appreciates and congratulates the Bureau of State Audits for your contributions
to the understanding of the depth of the failure of the workers compensation system in California
to adequately insure appropriate health care for injured workers at an affordable cost to California
employers. The enactment of AB 227 and SB 228 was a positive step in the right direction. The
State Fund looks forward to the opportunity to work with the administration and the legislature to
make the improvements still required in our workers compensation system.
Sincerely,
(Signed by: Lisa Middleton)
Lisa Middleton
Claims/Rehabilitation Manager
5522 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5533
COMMENT
California State Auditor’s Comment
on the Response From the State
Compensation Insurance Fund
To provide clarity and perspective, we are commenting
on the State Compensation Insurance Fund’s (State
Fund) response to our audit report. The number below
corresponds to the number we placed in the margin of State
Fund’s response.
1
While we appreciate the cooperation shown by State Fund staff
in providing the data we requested for this audit, because State
Fund is a publicly created entity our statutes provide for full
access to such data.
5522 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5533
Blank page inserted for reproduction purposes only.
5544 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5555
Agency’s comments provided as text only.
California Labor and Workforce Development Agency
801 K Street, Suite 2101
Sacramento, CA 95814
January 12, 2004
Elaine M. Howle, State Auditor
Bureau of State Audits
555 Capitol Mall
Sacramento, CA 95814
Dear Ms. Howle:
The Labor and Workforce Development Agency (Labor Agency), as part of its oversight of the
Department of Industrial Relations (DIR), Division of Workers’ Compensation (DWC), reviewed the
draft report of the Bureau of State Audits (BSA) titled California’s Workers’ Compensation Program:
Changes to the Medical Payment System Should Produce Savings Although Uncertainty About New
Regulations and Data Limitations Prevent a More Comprehensive Analysis (Report 2003-108.2).
The purpose of the audit was to assess the amount of medical savings that may be achieved as a
result of new medical fee schedules for outpatient surgery centers and pharmaceuticals, pursuant
to workers’ compensation reforms that were included in Senate Bill 228 (Alarcon) (Chapter 639,
Statutes of 2003).
Senate Bill 228 significantly revised the existing medical payment system by repealing the existing
Official Medical Fee Schedule language in Labor Code § 5307.1 and replacing it with new language
that provides, as of January 1, 2004, for reimbursement of pharmaceuticals at 100 percent of the
Medi-Cal rate, inpatient hospital reimbursement at 120 percent of the Medicare rate, and hospital
outpatient and ambulatory surgery center reimbursement at 120 percent of the Medicare rate.
BSA discovered there were some limitations in the data made available by State Compensation
Insurance Fund (SCIF) for use in the analysis. SCIF’s data was not designed for these research
purposes; however, by making their data available and assisting BSA in manipulating the data,
SCIF made it possible to complete this analysis and make information available to policymakers
and the workers’ compensation community overall.
BSA concludes that if the new fee schedules had been in effect in 2002, SCIF could have saved
between 54 and 61 percent of the billings it paid for surgical center facility fees and could have
saved 24 percent of the billings it paid for prescription drugs. In addition, SCIF’s costs to litigate
medical claims and to provide medical cost containment services may be reduced since use of a
mandatory fee schedule should reduce disputes. However, BSA states that it cannot reliably con-
clude that these savings reflect the savings possible in the entire population of SCIF payments, due
to data limitations.
5544 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5555
Elaine M. Howle
Bureau of State Audits
January 12, 2004
Page 2
BSA recommends that DWC continue to provide the workers’ compensation community with the
education and guidance that will ensure that the reforms are promptly and effectively implemented. In
addition to promulgating emergency fee schedule regulations (effective 1/2/04) and making Medi-Cal
payment rates available on its website, DWC is conducting educational conferences in both Northern
and Southern California and keeping the workers’ compensation community apprised through an
electronic newsline. Although the current regulations are emergency regulations that will remain in
effect for 120 days, DWC expects the final regulations to closely mirror those already in effect.
The BSA report emphasizes the importance of having adequate data that will allow policymakers to
make system changes that will have the potential for enormous savings. The findings highlight the
fact that it is likely that carriers do not currently collect and maintain data sufficient for policy research
purposes. The adoption of standardized billing forms and electronic billing will be a key component
of facilitating the data collection needed for policy decisions. While these changes may entail some
initial costs for the payer and provider community, they will also bring substantial efficiencies and
overall reduction in costs. BSA recommends that DWC ensure that the medical payment data it
collects in its Workers’ Compensation Information System (WCIS) provides the specific information it
needs to adequately monitor medical payments for the effectiveness of policy decisions. Keeping in
mind that the Administration’s overall goal is to reduce costs, DWC is working with insurers and claims
administrators to develop a cost-neutral method to transmit electronic medical payment information to
the WCIS. A policy committee comprised of both payers and providers is working to answer the policy
and logistical questions posed by collecting consistent information from approximately 600 different
payers in the workers’ compensation system. DWC will be working with payers and providers to
develop standardized electronic billing forms, which would allow the data elements to accompany the
billing, relieving the payer from the necessity to re-enter the information in a different data format.
As confirmed by this audit, the reforms in the 2003 workers’ compensation reform package will
provide some cost relief to California’s employers. However, workers’ compensation costs in
California still remain the highest in the nation. On November 17, 2003, Governor Schwarzenegger
called the Legislature into a special session on workers’ compensation and proposed a reform
package that builds on the reforms enacted in AB 227/SB 228. Two major elements of the
Governor’s proposed reforms would further address medical costs in the workers’ compensation
system: using proven methods of delivering medical care so that injured workers receive faster,
more consistent treatment; and providing the option of “Door-to-Door” coverage so that employers
can maximize the benefits of the group health model, while ensuring adequate coverage to
employees. As the Legislature debates the Governor’s proposed reforms, DWC will continue to
work to fully implement the 2003 reforms and the other programs described in this letter.
Sincerely,
(Signed by: Victoria L. Bradshaw)
Victoria L. Bradshaw
Undersecretary
Labor and Workforce Development Agency
5566 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5577
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
5566 California State Auditor Report 2003-108.2 California State Auditor Report 2003-108.2 5577