Workers' comp by the numbers

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Newest version of AMA Guides closes worker's claim

In Arizona, a physician should rate an injured worker's impairment using the AMA Guides most recently published before the worker's impairment.

Case name: Gutierrez v. Industrial Commission of Arizona, No. CV-10-0285-PR (Ariz. 04/21/11).

Ruling: The Arizona Supreme Court held that a worker's claim should be closed since the most recent edition of the American Medical Association's Guides did not provide a permanent impairment rating for resolved radiculopathy.

What it means: In Arizona, a physician should rate an injured worker's impairment using the AMA Guides most recently published before the worker's impairment.

Summary: A worker injured his back while working for a framing company. His claim for workers' compensation was accepted, and he underwent medical treatment. His treating physician later released him to return to work with physical restrictions. The company's insurer concluded that the worker was not permanently impaired and closed the claim.

The worker challenged the determination of no impairment. The worker's treating orthopedic surgeon relied on the fifth edition of the AMA Guides and rated the worker's resolved radiculopathy as a 5 percent permanent impairment. The insurer's doctor relied on the sixth edition, which provided no impairment rating for a resolved radiculopathy. The Arizona Supreme Court held that the worker's claim should be closed.

A rule provides that a physician should rate an injured worker's impairment using the standards in the "most recent edition" of the AMA Guides. The court said that the words "most recent" show that an evolving standard was intended. If use of the fifth edition was intended, the rule would likely have identified that edition by number. Historical practice also suggested that the newest version at the time of the impairment rating should be used. The court explained that its interpretation led to the more sensible result and allowed consideration of medical advancement.

The court also pointed out that use of the AMA Guides in rating impairment is discretionary.

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Questions about company's testing of workers for legal drugs head to trial

According to the U.S. District Court, Middle District of Tennessee, urinalysis and similar testing -- outside of testing for illegal drugs -- may constitute a medical examination under the ADA.

Case name: Bates v. Dura Automotive Systems, Inc., No. 1:08-0029 (M.D. Tenn. 03/30/11).

Ruling: The U.S. District Court, Middle District of Tennessee denied summary judgment to an automotive manufacturing company and several workers on the workers' claims under the Americans with Disabilities Act of 1990 related to the company's drug testing for legal prescription drugs.

What it means: Under the ADA of 1990, an employer may not require a medical examination unless it is job-related and consistent with business necessity. According to this court, urinalysis and similar testing -- outside of testing for illegal drugs -- may constitute a medical examination under the ADA.

Summary: An automotive manufacturing company became concerned that legal and illegal drug use by workers was leading to workplace accidents. Because of this, the company began a drug testing program for certain substances, including some found in legal prescription drugs. Workers who failed the test had to provide a list of all prescription medications they were taking. If any of the medications carried warnings about impaired mental alertness or the operation of equipment or machinery, the worker was placed on a leave of absence to transition to different medication. Several workers who failed the test due to legal prescription drugs sued under the ADA of 1990. The District Court ruled that the workers' claims could go forward even though only one had a viable claim that she had a disability under the ADA. The court denied summary judgment to the company and the workers, sending the case to trial.

The company argued that even if the workers were subjected to an impermissible medical examination, the test was not the proximate cause of harm to the workers. The court found this argument "without merit," explaining that the workers were placed on unpaid leave of absence, which a reasonable jury could consider an "injury." Additionally, the court explained that federal law suggests that testing for drugs other than illegal drugs constitutes a medical examination under the ADA. Whether the test was job-related and consistent with business necessity was a question for jury consideration in the court's view. The existence of these triable issues defeated the employees' motion for summary judgment.

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Workers Memorial Day highlights 40th anniversary of federal agencies

Workers Memorial Day highlights 40th anniversary of federal agencies

Both OSHA and the National Institute of Occupational Safety and Health are 40 years old this year. NIOSH Director Dr. John Howard took the occasion of Workers Memorial Day on April 28 to focus on safety and health challenges facing the country as it recovers from the economic recession.

Howard addressed what he called the emerging challenges of the 21st century, including:

The increasingly diverse workforce. Howard said there are increasingly more immigrant, contingent, temporary, and contract workers who are more likely to hold inherently hazardous jobs and have unique challenges.New technologies. Howard said we must couple the development of beneficial new products or processes with responsible risk assessment and control.Threats of large-scale disasters. Emergency preparedness and response has become an "inherent function for occupational safety and health professionals," Howard said.Dramatic changes in work organization, scheduling, and resource allocation that result in faster, more physically demanding, and more irregularly scheduled work requires identifying and addressing risk factors for work-related stress and fatigue.

With the economic realities, Howard said we need to meet the challenges strategically and collaboratively. "By reducing the toll of injury and illness, businesses can reduce the costs of workers' comp, disability, hours of work missed, and other losses that amount nationally to billions of dollars every year," he said.

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Winning a Workers' Comp Stare Down

A truck driver and his employer do not see eye to eye over a corneal injury. Is the worker a "total fake," or does he deserve compensation?

A truck driver received a minor abrasion to the cornea of his right eye when drilling mud splashed under his goggles. An optometrist treated him and released him to restricted duty for two days. The driver continued to complain of pain. He received treatment and medical releases to return to full duty from several doctors, but the driver failed to return to work for more than one month. A neuro-ophthalmologist concluded that the driver was malingering and described him as "a total fake." The employer subsequently terminated him for absenteeism.

The driver was denied unemployment benefits by an administrative law judge. The driver then filed for workers' compensation benefits, alleging that he was also entitled to penalties and attorney's fees.

The employer did not contest that the driver sustained a work-related abrasion to his eye. The employer argued that the medical evidence showed the abrasion healed quickly and the driver's complaints were related to a preexisting condition for which he made false statements in order to obtain benefits.

Medical records showed that the driver visited an eye doctor four times in the weeks immediately prior to the alleged incident with similar eye complaints, including blurred vision, eye pain and throbbing. The last time he visited the eye doctor was two days before the incident.

In his deposition, the driver stated that he only visited an eye doctor once since he was hired by the employer. The driver also denied having previous eye problems. The driver asserted that he did not understand the deposition question due to his diminished mental capacity. The driver submitted proof that he did not receive a high school diploma but a diploma for an alternative program of study.

The trial court denied benefits to the driver, finding that he made false statements for the purpose of obtaining workers' compensation benefits.

Was the trial court correct in denying benefits for the driver's eye injury?

A. No. The driver's diminished mental capacity excused his false statement in his deposition.

B. No. The driver's preexisting eye problems were aggravated by the abrasion he sustained at work.

C. Yes. The evidence showed that the driver had pre-existing eye problems, which were not connected to the work incident.

How the court ruled: C.

The Louisiana Court of Appeal held that the worker was not entitled to benefits. Johnson v. Pinnergy, Ltd., No. 46,188-WCA (La. Ct. App. 04/13/11).

The court explained that penalties, including a forfeiture of benefits, can be imposed for making a false representation in connection with a workers' compensation claim. The court agreed with the trial court that the driver intentionally made false statements regarding his prior eye symptoms and prior medical treatment.

A is incorrect. The court explained that there was no evidence that the driver suffered from diminished mental capacity. No evidence showed that the diploma he submitted indicated that he was a special education student.

B is incorrect. The driver did not show his symptoms were aggravated by the work incident. The court pointed out that the driver had similar eye complaints before and after the work-related incident.

CHRISTINA DIFONTE is the legal editor of the WorkersComp Forum.

This feature is not intended as instructional material or to replace legal advice.

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Workers' comp waiver shows adverse employment action

According to the 6th Circuit, requiring an employee with a disability to waive workers' compensation benefits otherwise available to employees without disabilities "smacks" of the type of discrimination the ADA seeks to protect.

Case name: Baker v. Windsor Republic Doors, No. 08-6200/09-5722/09-6553 (6th Cir. 03/08/11, unpublished).

Ruling: In an unpublished decision, the 6th U.S. Circuit Court of Appeals affirmed a jury verdict in favor of a door manufacturer under the Americans with Disabilities Act of 1990. The 6th Circuit also affirmed the District Court's rulings on post-verdict motions by the parties.

What it means: According to the 6th Circuit, requiring an employee with a disability to waive workers' compensation benefits otherwise available to employees without disabilities "smacks" of the type of discrimination the ADA seeks to protect.

Summary: A forklift operator for a door manufacturer had an enlarged heart, which required him to have a pacemaker installed. When he sought to return to work, concerns were raised about whether the work environment might affect the pacemaker. A doctor opined that the operator could return to work if he wore an alarm that indicated the presence of high electromagnetic fields. The manufacturer notified the operator that it did not consider the alarm a reasonable accommodation because he would have difficulty hearing it in the facility. Pursuant to state law, the manufacturer proposed that the operator waive his rights to workers' compensation benefits arising from injuries caused by his heart condition. He sued under the ADA of 1990. The 6th U.S. Circuit Court of Appeals held the operator was not entitled to a reasonable accommodation.

The court found the manufacturer regarded the operator as disabled. The manufacturer was not simply relying on the operator's doctor's medical advice but was giving effect to its own motivations.

The court also rejected the manufacturer's argument that making the operator sign the workers' compensation waiver -- pursuant to pre-ADA state law -- was not an adverse employment action. It was not unreasonable for a jury to conclude that the action was precipitated by the operator's insistence on an accommodation. However, precedent bound the court to conclude that a "regarded as" disability precluded the manufacturer's obligation to reasonably accommodate the operator. The court explained that imposing liability on employers who fail to accommodate nondisabled employees who are regarded as disabled would lead to bizarre results.

The court also held the operator was subjected to retaliation. The court said a reasonable jury could conclude that the true motivation for the manufacturer's action was to save the company medical payments from its self-insured workers' compensation plan. The court upheld the awards of damages and fees to the operator.

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Top Four Fixes for Workers' Comp

We tap into the collective wisdom of the crowd of workers' comp professionals on LinkedIn's Work Comp Analysis Group to answer the following question: How can we improve the workers' comp system?

By MARK WALLS, assistant vice president of claims for Safety National, the leading provider of excess worker's compensation coverage for self-insured employers. He is also the founder of the 9,000+ member Work Comp Analysis Group on LinkedIn.

Editor's note: Welcome to the first in a series of articles highlighting the busiest and most relevant discussions in the Work Comp Analysis Group (WCAG) on LinkedIn. For those of you who may be unfamiliar with the group, it is the largest online discussion group focusing exclusively on workers' compensation issues. It currently has more than 9,000 members who represent a wide variety of industry professionals, including employers, carriers, third-party administrators (TPAs), brokers and attorneys. These articles will be an attempt to distill the collective wisdom and experience of the group members.

Over the last 100 years, workers' compensation has evolved into the complex system that it is today. In some respects, this has led to creating a more difficult process for everyone involved. As a person who has been handling workers' compensation claims for over 21 years, I know firsthand the frustrations that are associated with our business.

The 100 year anniversary of workers' compensation provides an opportunity for reflection on the past with an eye toward the future. What can we learn about past problems to improve the workers' compensation system in the future?

A couple months ago, I asked the members of the WCAG to offer their suggestions on how to improve the workers' compensation system. Not surprisingly, this discussion generated more than 115 comments.

Group members replied with many thought-provoking suggestions on this issue. The following are some highlights of topics discussed. I would like to stress that these summaries are a reflection of the views expressed in the group and do not necessarily coincide with my personal opinions. You can also view the entire discussion at the Work Comp Analysis Group site.

SUGGESTION NO. 1: Limit political influence on the workers' compensation process.

It's no secret that there is significant political influence exerted in the workers' compensation process. Political appointees range from regulators overseeing the system to hearing officers and judges reviewing claims and making case law. Often times, these appointees have very limited prior exposure to workers' compensation issues. This creates a substantial learning curve when new appointees take office, which inhibits regulators' and hearing officers' ability to improve the system.

Too often, the political nature of the workers' compensation system also leads to inconsistent application of statutes and tends to expand workers' compensation coverage well beyond its intent.

SUGGESTION NO. 2: Create a platform for true data sharing in the worker's compensation industry.

In most states, primary workers' compensation carriers report data to NCCI. Some states, including California, New York, Texas and Pennsylvania, have their own data agency. Four states have no private carriers from which to collect data. In addition, self-insureds make up a significant percentage of the total workers' compensation payroll, yet their data is not collected in any centralized location.

Without industrywide data sharing, it is impossible to accurately compare the performance of different states, carriers and TPAs. It is also more difficult to accurately indentify industry trends and cost drivers and take the steps necessary to address issues in the workers' compensation system.

This is something that can be done, but it takes a willingness on the part of the entire industry to share its data for the greater good of everyone. Right now, too many entities are protective of their data and refuse to consider any type of data-sharing pool.

SUGGESTION NO. 3: The workers' compensation system needs to be simplified.

The basic concept of workers' compensation is to provide wage replacement and medical treatment to employees who are injured on the job. Twenty years ago, adjusters took recorded statements, scheduled medical appointments, reviewed bills and negotiated settlements. Today, an army of vendors performs many of those duties.

Is the system more efficient and less expensive than it was 20 years ago? Have we made progress, or just added complexity?

In addition, the administrative side of workers' compensation has become more complex over the years. An endless supply of forms must be filed with state agencies, and additional reporting on claims and medical data is necessary.

Another complexity that the industry is facing is the Section 111 reporting to Centers for Medicare & Medicaid Services (CMS). None of these administrative complexities contribute to the basic goal of providing benefits to injured workers, but they add significant administrative costs to the system.

SUGGESTION NO. 4: Focus on outcomes.

The goal of the workers' compensation system is to return the injured worker to their pre-injury state and to the workforce. Yet the system consistently works against this goal. A poor outcome for the injured worker means higher fees for their attorney and more payments to the treating clinicians.

Is there a way to change this? Should medical providers be compensated at a higher rate if they consistently produce better outcomes? Should clinicians who consistently produce bad outcomes be removed from the workers' compensation system?

In addition, should permanent partial disability (PPD) be tied to the outcome? Some states provide for a reduction in PPD if the injured worker returns to their regular job. That gives financial incentive for the employer to provide post-injury employment. Returning an injured worker to long-term gainful employment is far more important than providing a lump-sum settlement. Perhaps the focus on PPD settlements should be diminished.

These are just a sample of the many suggestions made by members of the Work Comp Analysis Group for improving the workers' compensation system. Most of these suggestions could be implemented, although some more easily than others.

Over the last 100 years, workers' compensation has evolved significantly, to the point where it barely resembles its original intent. While some of this change has been positive, much of it has simply added complexity and costs to the system without improving on the basic tenets of returning the injured worker to employment and their pre-injury state. It is time for the entire industry to reflect on where we are, and to focus on how we can improve the workers' compensation system for the greater good of all involved.

(Join the WCAG and participate in this and other daily discussions with thousands of other workers' comp professionals. Please click here to reach LinkedIn.)

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Failure to pay worker's benefits spells trouble for employer

An employer acts in bad faith when it knowingly or recklessly refuses to pay a claim without a reasonable basis, fraud, malice, oppression, or reckless disregard of the rights of a party.

Case name: Hernandez v. Dillards, Inc., No. 30,278 (N.M. Ct. App. 07/26/10, unpublished).

Ruling: In an unpublished opinion, the New Mexico Court of Appeals held that an employer acted in bad faith when it discontinued payments of a worker's benefits. The court increased the worker's benefits by 25 percent.

What it means: An employer acts in bad faith when it knowingly or recklessly refuses to pay a claim without a reasonable basis, fraud, malice, oppression, or reckless disregard of the rights of a party. When an employer knows a worker suffered from an aggravation of a preexisting injury due to a work-related incident and it refuses to pay benefits, the employer is acting in bad faith.

Summary: A dock worker fell while working and landed on his left side. He had a preexisting condition of severe osteoarthritis of his left hip. The fall aggravated this condition. The employer paid his medical bills and indemnity benefits for a period, but then ceased all payments. The worker filed an unfair claim practices and bad-faith claim against the employer. The New Mexico Court of Appeals held that the employer acted in bad faith, and it increased the worker's benefits by 25 percent.

Evidence showed that the employer was aware that the worker had been diagnosed with an aggravation of a preexisting condition as a result of his fall at work. The employer argued that the law requiring an employer to pay for the aggravation of a long-standing preexisting condition should be overturned. The court mentioned that it was bound by precedent. The court stated that the employer could have filed a claim to resolve the dispute while paying benefits under protest.

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Defense Attorney Reveals Strategies to Cut Legal Expenses in Workers' Comp

The number one way to reduce your legal expenses is not to incur them in the first place. That blatantly obvious suggestion comes from someone who makes his living as an attorney.

Richard Lenkov has focused his practice on defending companies in workers' comp cases since joining the Illinois bar 14 years ago. He's not worried that business will dry up if employers and insurers are wiser in their approach to the legal aspects of the system.

"Let your adjusters adjust and your attorneys practice, and keep their roles separate," is one of Lenkov's top tips to reducing legal expenses. "Often attorneys are asked to perform basic investigative tasks, which is OK, but it's cheaper for claims handlers to do so."

Lenkov outlines specific ways to reduce legal expenses by employers, insurers, and other system participants.

Attorney involvement boosts claim costs by 12 to 15 percent and attorneys are involved in 5 to 10 percent of all workers' comp claims in most states, according to the Insurance Information Institute. With these costs continuing to rise, Lenkov offers insights to help eliminate waste, cut through legal jargon, and get to the bottom line as quickly as possible.

Understand state differences. While there are universal issues, every state handles some elements of workers' comp differently. Claims handlers should be empowered to make decisions on their own. By communicating internally and holding round-table discussions on difficult issues, you can exhaust your internal resources before hiring counsel.

"Many adjusters handle multiple states, and it's tough to keep track," Lenkov said. "But to the extent you can, you're going to save money rather than sending it to counsel."

Communication is essential. Where there are undisputed benefits, Lenkov recommends paying them as soon as possible. For other claims, understanding the fine art of negotiating is vital.

"My overall theme for negotiations is to try to avoid any conflict to the degree you can because that costs money," he said. "On the other hand, sometimes you want to take a different approach and be more aggressive. For example, a claim with a lot of issues in dispute."

The more complex the claim, the larger the bill. One way to avoid a claim becoming more complicated is through good communication. As Lenkov points out, "vinegar is more expensive than honey. Good communication between the claims handler and claimant and with the claimant's attorney is key."

Lenkov makes it a point to stay in touch with the plaintiff's attorney regularly to make sure he's not missing anything. "Having that five-minute phone call rather than getting surprised is well worth it," he said. "The bottom line is plaintiff lawyers who are angry are going to cost the claim money."

Likewise with claimants themselves. "Check in with the claimant every couple of weeks," he said. "If you're not communicating, people aren't going to be happy, and the case is going to stagnate."

Out-of-the-box strategies. Waiting for the claimant to make the next move can be costly and is unnecessary, Lenkov said. He suggests various options for moving a case forward, such as settlement days.

"You have a bunch of cases brought up in one day, and have the decision-makers for the employer invite the claimants to settle," he said.

Another idea is to file motions to dismiss. "Instead of waiting for the claimant to respond, if they're not responding or not attending treatment file a motion to dismiss the case," he said. Pretrials are another option to get the case in front of a judge and dispose of it quicker rather than waiting for the trial to begin.

He also suggests not waiting to make an offer. "There's nothing wrong with making an offer before you get a demand," he said.

Lenkov also recommended:

Reading all vendors' bills carefully.Demanding accurate budgets from day one, as well as periodic updates.Considering records review versus a full-blown IME.

Read more at the WorkersComp Forum homepage.

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Thwarting Workers' Compensation Bad Faith Claims

How to obtain a summary judgment based on an administrative law judge's agreement with the carrier's claims position.

By TIM STRONG, a partner in Steptoe & Johnson LLP's Phoenix office, and KEVIN FINCEL, a litigation associate with the firm

Why do workers' compensation bad faith cases appeal to plaintiffs' lawyers? The simple answer: "better" injuries. Workers' compensation bad faith cases often involve a serious or even disabling injury that may not be fully compensated under workers' compensation laws. The plaintiff's attorney who can persuade a jury that the carrier exacerbated her client's industrial injury or regarded it callously can also play to the anti-insurer, don't-question-my-doctor sentiments of many jurors. The carrier's reasonable exercise of legal rights to have the claim reviewed by an independent medical examiner or utilization-review process--or its efforts to help get the claimant back to work--will be portrayed as overreaching despite the broad public and private benefits of such cost-control processes.

So how does an insurer avoid unpredictable jury trials in workers' compensation cases? Another straightforward answer: Wherever possible, win on summary judgment.

Easier said than done, some may say, but in many cases, the administrative structure of the workers' compensation system may offer the carrier unique arguments for summary adjudication of a case. Unlike in the typical casualty insurance setting, a workers' compensation carrier's claim decisions are routinely reviewed by a state administrative officer or administrative law judge (ALJ). A highly effective summary-judgment argument is that a claims-handling or coverage position that an ALJ approved cannot be bad faith, as a matter of law.

Showing that an administrative law judge or other neutral arbiter accepted the carrier's position as either correct or reasonable is a particularly compelling method of establishing the carrier's good faith. After all, if an impartial arbiter informed by adversarial presentation has agreed with the insurer's position, it is hard to argue that the insurer acted unreasonably.

For example, a neutral arbiter's decision that an insured is not entitled to certain benefits necessarily means that the insurer did not act in bad faith by challenging those benefits. Numerous courts have held this to be true even if the arbiter's decision is later reversed on appeal. In Aetna Casualty & Surety Co. v. Superior Court, for example, both the trial and intermediate appellate courts agreed that Aetna's denial of the insured's claim was proper, but the state supreme court disagreed. On remand, the trial court granted (and the intermediate appellate court affirmed) summary judgment on the insured's bad faith claim based on the fact that two courts had agreed with Aetna's position:

"Even if ultimately wrong, if a reasonable basis existed for denying the claim, the insurer cannot be liable for bad faith," the judges wrote in decision.

This principle that a carrier cannot have acted in bad faith if a neutral arbiter agreed with it is well suited to use in workers' compensation cases because of the routine involvement of administrative law judges, who review and decide disputes over carriers' benefits positions. For instance, in a recent case in the Superior Court of Arizona, a workers' compensation claimant alleged that his employer's carrier breached the covenant of good faith and fair dealing when it challenged multiple claimed benefits based on evidence including the opinions of the claimant's physicians and surveillance video showing the claimant functioning at a higher level than exhibited during physician visits. In the separate underlying workers' compensation proceeding, an administrative law judge of the Industrial Commission of Arizona agreed with the carrier that the claimant was not entitled to a majority of the challenged benefits; among other things, the ALJ ruled that the claimant was not totally disabled as he claimed.

When the Arizona Court of Appeals vacated the ALJ's disability ruling, the claimant argued that the carrier "lost" that issue and was liable for bad faith because its position was arbitrary and primarily intended to increase company profits. Citing Aetna, the carrier argued that the ALJ's agreement with its benefit positions showed that it acted reasonably and required summary judgment in the carrier's favor. The claimant argued that the appellate court's decision precluded summary judgment. The trial court agreed that the ALJ's decision demonstrated the carrier's reasonableness even if its position ultimately proved to be incorrect.

This method of obtaining summary judgment should be of interest to all lines of insurers, but particularly those (like workers' compensation carriers) whose claims are commonly reviewed by administrative law judges, arbitrators, or umpires. A decision by a neutral arbiter that is even partially favorable to the insurer may be used to defeat or substantially limit the scope of a bad faith suit. It should work no matter what state court system you're involved in. This strategy is a function of the definition of the bad faith tort, which, in virtually every state that recognizes the tort, requires at a minimum proof of unreasonable conduct.

As for the carrier whose position is rejected by the neutral arbiter, there are numerous other potential avenues for obtaining summary judgment. Because the touchstone of the bad faith tort is intentional unreasonableness, any evidence that convincingly establishes the insurer's reasonableness can support a favorable summary adjudication.

Thus, a workers' compensation carrier that reasonably bases a claim decision on information provided by the claimant's own physician can hardly be said to have acted in bad faith, even if an ALJ later disagrees with the carrier's decision. This principle has been applied in numerous cases, including Montoya Lopez v. Allstate Ins. Co. and Knoell v. Metropolitan Life Ins. Co.

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Workers' Comp In-Depth Series (Part 2): The Test of Time?

Reforms enacted in California in 2004 worked, there's no question. But there are forces that would undermine them and constant vigilance is required.

By DAN REYNOLDS, senior editor of Risk & Insurance?

One thing to never forget in discussing the consequences of workers' compensation reform in California is that when reform worked, it worked incredibly well. It was a game changer.

Before Senate Bill 899 was passed and became law in 2004, California's medical costs per workers' comp claim were approaching the $15,000 mark, according to the Cambridge, Mass.-based Workers' Compensation Research Institute.

Overutilization was a problem and employers were having little luck curtailing the number of visits injured and recovering workers were racking up for such services as chiropractic and physical therapy.

The 2004 bill, championed and signed into law by California's Gov. Arnold Schwarzenegger, called for return-to-work incentives and clearer definitions of permanent disability.

The bill also allowed for the creation of medical provider networks by employers. Those networks were important because they allowed employers to compile a list of effective doctors they knew weren't going to rake payers over the coals with unnecessary office visits.

"One of the things that we are looking at is the quality of care, rather than just looking for discounts," said Don F. Sloan, an executive vice president and director of managed care services for Memphis, Tenn.-based third-party administrator Sedgwick CMS, which has created medical provider networks for clients that have saved money and maintained quality of care.

"We are trying to locate and identify the providers that have the best outcomes based on the trends that they provide us in controlling those costs," he said.

While that was achieved, other issues have arisen, such as how prescriptions are mixed and dispensed, that threaten to reverse the progress made by the landmark legislation six years ago.

Since the 2004 bill that enabled those provider networks, California has slipped below the middle of the pack in its medical costs per claim of the 15 states that the institute benchmarks in its annual medical benchmarks study. The Golden State now has an average medical cost per claim closer to $10,000.

That's substantial progress and the man who runs the state's workers' compensation fund doesn't want us to forget it.

"The reforms as a package in 2004 were tremendously effective. They were more beneficial to the market than the market understood," said Tom Rowe, who was named the president of the California State Compensation Insurance Fund in July.

Rowe, a veteran of underwriter Fireman's Fund and broker Arthur J. Gallagher & Co., oversees a state fund with more than 180,000 policyholders and $1.6 billion in annual premium.

It's not just Rowe saying this. According to the National Academy of Social Insurance based in Washington, D.C., medical costs per claim in California fell 30 percent between 2002 and 2005.

But no sooner had the state substantially regulated some of its workers' comp cost control problem centers when other problems sprung up.

Physicians, thwarted in some of their revenue streams, found ways to make up the difference by dispensing workers' compensation pharmaceuticals from their offices. They were able to charge higher prices for those drugs by repackaging them and circumventing the state's fee schedule.

"In any environment where there is regulation and there is an active market, regulation will set the stage and then the market will react to it," is how Rowe described the phenomena. That's one way of putting it.

It didn't take long for the issue of physician dispensation to be tracked by carriers.

The Boston-based Liberty Mutual Co. started seeing physician dispensation costs creeping into its cost analysis data in those post-reform years, or around 2006 and 2007.

"There were intended consequences," said Dr. David Dietz, Liberty Mutual's National Medical Director said of the reform effort. "We saw some changes in treatment, in excess chiropractic and excess physical therapy," Dietz said.

Then came those spikes in pharmaceutical costs.

Liberty Mutual started showing its data on the increased pharmacy costs to legislators and in 2007 the state passed legislation limiting the costs of physician-dispensed pharmaceuticals to the state's pharmacy fee schedule.

And that helped, to a degree. But two years after Liberty Mutual was bringing the issue of physician dispensation to the attention of lawmakers, other changes took place that would take their own toll on efforts to control costs.

ALMAREZ, GUZMAN AND OGILVIE

In 2009, workers' comp applicant's attorneys received a set of rulings from the state's Workers' Compensation Appeals Board that amounted to attacks on the piece of the 2004 reforms that mandated that physicians be limited to the American Medical Association guidelines when determining permanent disability.

The decisions, known by the applicant's last names, Guzman, Almarez and Ogilvie, allowed for more liberal interpretations of the guidelines. Under Almarez and Guzman, a back injury, for example, could be linked to a sleeping disorder or to a sexual dysfunction for the purposes of calculating permanent disability.

"It basically gave them permission to go outside the AMA guides without providing a heck of a lot of direction on how you were going to do that," said Dan Dawson, an attorney in the Fresno, Calif.-based Law Offices of Javier Alabart.

The Ogilvie ruling made the diminished future earnings capacity piece of a permanent disability ruling rebuttable, giving applicant's lawyers leverage and adding to the cost of litigating workers' compensation claims. The three rulings, along with increases in physician dispensation and pharmaceutical compounding, have combined to jack up costs.

California is an attractive place and it attracts a lot of talented, ambitious people. That's how it's gotten such a reputation for innovation. That can be a good thing and a bad thing.

It was in California where physician dispensation, the practice of doctors selling drugs from their offices instead of writing a prescription to be filled at a pharmacy, was first identified as a problem in workers' comp.

Its widespread use was first noticed there and then the practice spread east to other states. Florida is another sizable state that is now struggling to contain the costs of physician dispensation.

COMPOUNDING THE PROBLEM

California is where compounding as a workers' compensation cost outlier first reared its head. According to Liberty Mutual's Dietz, compounding has been with the industry as long as pharmacy has been around. There is nothing wrong with it inherently.

Simple stated, compounding involves the practice of combining one medication with another to better meet the medical needs of a patient. But this modern version and how it has been used first in California, then Arizona, Florida and other states has proven troublesome.

Pharmacists are repackaging and combining painkillers with "neutraceuticals," a vitamin, for example, and doctors are charging much higher prices for the repackaged combination than the two elements in the compound would have cost if purchased separately.

Compounding is having a measurable impact on costs and it's not a good one. According to data from Westerville, Ohio-based pharmacy administrator Progressive Medical, narcotics as a percent of total drug spend are at 36.9 percent in California, that's more than three percentage points higher than the national average.

"Utilization is up overall ... and we are seeing compounded medications are up ... physician dispensing is up," said Tron Emptage, Progressive's executive vice president of business development and clinical services.

"It is a little bit like 'whack a mole,' you close the operation here and it pops up somewhere else and that is what we're seeing ... it pops up with compound drugs," said Mark Sektnan, a Sacramento-based vice president with the Association of California Insurance Companies.

Liberty Mutual's Dietz is even more blunt. "It is another way to get around the fee schedule," he said. "We are seeing that in California in these types of creative pharmacy behaviors, and we are now seeing this exported to other states."

Compounds, when measured as an overall percentage of workers' comp pharmacy, represent a small percentage, Rowe said. But their use is exploding.

"We have seen in the state of California a dramatic increase in the use of compound medications but you need to recognize that compound medications in 2006 for example were less than one percent of billed prescription and less than one percent of the paid prescription dollars in the state," Rowe said.

Since that time and up to the end of the first quarter of 2009 Rowe said the use of compounds in California has increased 722 percent on billed pharmacy costs and 800 percent on paid prescription dollars.

"That still only takes into a little over 6 percent of the pie," said Rowe. OK, but don't forget, California by itself is the world's eighth largest economy. That represents a very big pie.

According to Sektnan, data from the State Fund showed that for the nine-month period between April and December of 2009, the fund was billed $27.9 million for compounded medications.

In the first seven months of 2010, from January 1 through July 1, the State Fund was billed $29.5 million for compound medications.

"So they are noticing that this is a big issue and this was just for compounds," Sektnan said.

It may be a small percentage of a big pie now, but it is growing fast and Sektnan for one doesn't want to wait around until compounds become an even bigger part of workers' compensation pharmacy spend in California.

"Part of the problem we are having is because compounding is a relatively new phenomenon," Sektnan said. "So we are just beginning to understand the implications and from what we understand they are significant," Sektnan said.

Legislation (AB 2779) was hatched this year in California that would have placed limits on compound medication use in workers' compensation.

"What the bill would have tried to do is to try and maintain some kind of control over these types of compound drugs," Sektnan said.

Similar to what occurred this year in Florida with legislation that would have limited physician dispensation pharmacy costs, the bill didn't quite make it in the 2010 legislative session.

"When the bill was introduced it would have required prior authorization. It would have required that the drug be proven to be medically beneficial and there had to be some proof that they had tried some other type of treatment. You don't want the most expensive option to be the first option," Sektnan said.

Opponents argued, as they did in Florida, that there wasn't enough time to properly study the impacts of the bill.

The California Medical Association, which opposed the bill, said it would support the bill if it were amended to require the state's division of workers' compensation to create a fee schedule for compounded drugs.

"The bill's provisions limiting reimbursement for compounded drugs need to be more fully evaluated to ensure that all legitimate uses of compounded medications would be compensable were this measure to become law," wrote Carolyn Ginno, of the CMA's Center for Government Relations in an Aug. 10 letter to state Sen. Mark DeSaulnier, chairman of the Senate Labor and Industrial Relations Committee.

Sektnan said a bill addressing compounding in California will resurface and risk managers who are seeing the practice creep into their states would do well to keep an eye on it.

California's workers' comp reforms have worked wonders in the main, but the state also provides a test case for just how complicated maintaining the benefits of reform can become.

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Worker's sleeping on job doesn't block vocational rehabilitation benefits

In Wisconsin, an injured worker cannot be denied vocational rehabilitation benefits when he is offered suitable employment after his injury and is subsequently terminated for just cause.
Case name: Oshkosh Corp. v. Labor & Industry Review Commission, No. 2010AP1219 (Wis. Ct. App. 02/23/11).
Ruling: The Wisconsin Court of Appeals awarded vocational rehabilitation benefits to a worker.
What it means: In Wisconsin, an injured worker cannot be denied vocational rehabilitation benefits when he is offered suitable employment after his injury and is subsequently terminated for just cause.
Summary: An assembler for a corporation injured both of his knees while working. After two surgeries, he continued working but with permanent restrictions imposed by his treating physicians. Eventually, the assembler's employment was terminated for allegedly sleeping on the job. After, he applied for retraining assistance, which was granted by his vocational rehabilitation counselor. Then, he applied for vocational rehabilitation benefits. The Wisconsin Court of Appeals held that the assembler was entitled to vocational rehabilitation benefits.
The corporation argued that the medical evidence did not show the assembler had permanent work restrictions. The court disagreed, stating that of the four physicians who examined the assembler, only one concluded that he did not require permanent restrictions.
The corporation next asserted that it offered the assembler suitable employment after his injury and later terminated him for just cause, so it should not be liable for vocational rehabilitation benefits. The parties agreed that the assembler was offered suitable employment. The court stated that an injured worker who is terminated is entitled to benefits because he continues to suffer his work-related injury. The injury, not the termination, caused the worker's economic loss. The court explained that the purpose of workers' compensation is to compensate workers who lost the ability to work due to a work-related injury, regardless of whether they are good or bad workers. Therefore, the assembler could not be denied benefits for allegedly sleeping on the job.
The court also found that the vocational rehabilitation counselor did not abuse her discretion when she allowed the assembler to take classes at a technical college before conducting a job search. An injured worker is not required to conduct a job search before he can apply for retraining benefits, and the assembler conducted his own job search.
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