A Costly Conundrum For Staffing Firms: Fewer Claims But Higher Medical Costs

by David Schek | Mar 27, 2015 | News, Workers Comp, Workers' Compensation Insurance

There is an interesting paradox within workers’ compensation. It’s both good news and bad news for the staffing industry. Because of automation and greater attention to safety, work injuries are decreasing. According to Peter Rousmaniere, a well-known consultant in risk management, they have dropped by 35% since 1993. But, as he points out, the cost of claims administration has increased as have medical benefits. Benefits currently cost $65 million a year. ¹A company can have 50 employees, but one injury, depending on the type, can cost an employer hundreds of thousands of dollars.

So why the rise in medical, if claims are dropping, and what does this mean for staffing firms? Staffing firms are employers too. In most states, staffing firms are jointly responsible for workers’ comp and must carry appropriate coverage for the different jobs classifications they provide. As such, they can pick and choose low risk categories. But supply and demand dictates that employers may require unskilled and semi-skilled workers with greater risk such as in some manufacturing and logistics jobs. They may also require skilled labor in risky services such as health care in correctional facilities.

The Occupational Safety and Health Administration is putting a microscope on temporary labor, which one hopes will lead to improvements in safety. The data show that regardless of the profession, claims will continue to decline over the next ten years. At the same time, the use of temporary workers is expected to increase by 13% according to Economic Modeling Specialists International and CareerBuilder. If these trends continue, staffing firms will benefit from the increase in temporary workers and fewer claims. But those claims will be more expensive.
For a small employer this drives workers’ comp rates up making it difficult to find workers’ comp coverage. For some staffing companies the only option is a state fund.

Causes of Increased Medical Costs

• The cost of workers comp reform. Despite attempts by numerous states to lower the costs of workers’ comp for employers, the results have been mixed. Many of the reforms include fee schedules, medical provider networks and medical treatment guidelines for work injuries, the latter of which can involve a utilization review process to determine the best treatment. Some states including Texas and Ohio have drug formularies for workers’ comp. Other states are considering formularies to control the cost and overprescribing of medication. California has gone through several rounds of reform and seen workers’ comp costs decrease in some areas. But the cost containment mechanisms create a bureaucracy that costs money in administration and compliance. As a result, third-party vendors have sprung up to provide these services. Claims adjusters have to be trained in the new regulations, which vary by state. What’s considered acceptable treatment in one state may not be so in another.
• Profiteering in pharmaceuticals. As workers’ comp reforms capped fees and limited treatment, many enterprising physicians turned to office dispensing of medications. Because the drugs were dispensed by the doctor directly, the markup would be three or four times the cost of the same medication at a pharmacy. This is lucrative business for physicians, but a major cost driver for employers. Eighteen states, including California, closed this loophole. While costs dropped in California, according to the Workers’ Compensation Research Institute, physicians found ways around the law. If a fee schedule is based on specific dosages, doctors change to a dosage outside the schedule and continue to charge above the average wholesale price. This practice also poses dangers to injured workers, as many of the medications are pain killers including opioids. Easy access and little oversight fuels addiction.
• Specialty drugs. They’re a breakthrough in treatment, but the cost of these drugs can be high. One such drug, Solvaldi, is used to treat Hepatitis C. Hepatitis C is most common in professions where the possibility of a needle prick can expose workers to blood borne pathogens, such as health care. They can be expensive costing $1,000 a day, according to Teresa Bartlett, senior vice president of medical quality for Sedgwick Claims Management Services Inc. ²Like many medications, as new brands and generics enter the market, costs may drop. A big unknown is whether, despite the cost, these drugs are effective. Insurers and employers—in particular staffing companies providing nurses or health care professionals– need to pay attention to the length of treatment and switch medications if necessary.
• Compound drugs. The use of compound drugs continues to plague the workers’ comp system, despite attempts to curtail it. Compounds are mixtures of different drugs sold at huge markups. Topical compounds are common and almost identical to off-the-shelf brands with added ingredients of dubious effectiveness such as wasabi. California placed fee schedules on compounds in 2012, but according to research by the California Workers’ Compensation Institute while this resulted in a decline in prescribed compounds, costs continued to grow, partly because of the addition of new ingredients, which increased the expense³. Future studies will determine if this is a trend and if more changes to the fee schedule will fix the problem.
• Improvements in medical care. This is a good thing for injured workers, but costly for employers. Thanks to breakthroughs in robotics and prosthetics, injured workers are able to regain mobility after catastrophic work accidents. Even those workers with brain injuries and quadriplegics can live longer lives. None of these technologies are cheap and with longer life spans, employers need to take into account the cost of Medicare Set Asides (MSA).
• Litigation. Litigation is a significant cost driver. Injured workers feel they have no choice, but to get a lawyer, if employers and insurance companies delay or deny treatment. In states such as California reforms over the last several years have limited treatment and permanent disability payments. Some laws are so convoluted that it takes a lawyer just to interpret it. The longer treatment is delayed, the more likely an injured worker will obtain counsel. Employers will also incur their own legal bills and may prefer to settle at some point, even if it means agreeing to treatment outside medically approved guidelines. These claims are usually the most expensive any may involve body parts that are difficult to treat such as backs and shoulders.
• Challenges to the no-fault system. Factors such as cumulative trauma and comorbidities such as weight or hypertension can aggravate injuries causing litigation. These injuries may also result in temporary or permanent disability. Payers may refuse to pay all or parts of a claim where the injury is aggravated by a pre-existing condition. California is considering legislation that would prevent discrimination against women injured at work, if a payer asserts an injury was caused, or aggravated by, pregnancy or menopause.
• Delayed Return to Work. Part and parcel of expensive claims is the impact they have on return to work. According to research by the Workers’ Compensation Research Institute, injured workers who feared for their jobs and distrusted their supervisors or claims adjusters were slower or less likely to return to work. This causes claims to linger and increase in costs as benefits continue to accrue. Employers need to do their best to accommodate injured workers, even if it means moving them to a different job. Communication is important, especially if an injured worker feels he or she may get fired or mistreated.
• Copy service fees. Litigators on both sides of a workers’ comp dispute say they’re being charged ridiculous amounts of money by copy services to make copies of documents related to workers’ comp cases. It is a relatively small cost driver, but whether a fee schedule for copy services is necessary is being debated, particularly in California. Recent legislation in the Golden State includes a requirement to come up with some sort of pricing scheme. Despite its relatively miniscule impact on the cost of a claim, it is one more example of a third party making money off the system.
• New types of claims. Many states are considering post-traumatic stress disorder as a work injury including Colorado and Connecticut. Connecticut’s bill, should it be signed by the governor, would apply only to firefighter, police and first responders, a cost that will be passed onto taxpayers. Because this a new trend, it is unknown whether it will increase claims, but it could increase in the cost depending on the treatment. It could also spark debates on whether it should apply to the workplace in general because of bullying or harassment. So far these proposals have faced an uphill battle in public safety because of budget constraints.

It is too soon to tell whether state reforms will drive down medical costs. Unfortunately, when one cost is contained another one opens, prompting a new discussion on how it should be addressed. The grand bargain of workers’ compensation is supposed to be between the employer and the worker. On the upside, fewer accidents and cutting edge medical care is getting workers’ back to work and improving quality of life. On the downside, abuse and profiteering by third parties and lack of communication between injured workers, employers and claims adjusters will continue to increase medical costs and poor outcomes for injured workers.

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¹ Rousmanieri, Peter. Seismic Shift: An Essential Guide for Practitioners and CEOs in Workers’ Comp. February 2015
² Goldberg, Stephanie. “Specialty, Compounded Drugs Driving Up Costs.” Business Insurance. March 12, 2015
³ Swedlow, Alex, Gardner, Laura B., Ireland, John, “Differences In Outcomes for Injured Workers Receiving Physician-Dispensed Repackaged Drugs in the California Workers’ Compensation System. California Workers’ Compensation Institute. February 2013.