Summary: The Property & Casualty industry will continue to represent a relatively small percent of hospital utilization, but it is continuing to pay a growing disproportionate share of the total cost. Even if driving never perks up again, as the cost shift grows a tipping point nears where premiums become too high.
A big decline in both auto accident and severe injury frequency has not produced a corresponding decline in loss costs. The slack has been taken up by inflated soft tissue injury claims fueled by hospital cost shift. Financially savvy hospital administrators and new software that "enhances" billing techniques have overcome claim deterrents so effectively that the industry seems unaware. There is an answer, but the industry may be satisfied with the status quo for now.
A 2008 report by the Insurance Research Council (IRC) provides empirical evidence that since 2000, a significant decrease in auto claim frequency has been mysteriously offset by an equally significant rise in severity, leaving loss costs essentially unchanged. Of particular note, the Insurance Research Council report points to a study by the National Safety Institute showing that improved automobile safety engineering has been lowering the frequency of serious injuries and deaths. This makes the rise in bodily injury and personal injury protection claim severity particularly vexing.
The graph below is taken from the Insurance Research Council report and it depicts the described trends:
This paper is the result of research that was aimed at discerning the root causes of the three simultaneous trends and whether their relationships are coincidental or causal.
In summary, the findings were as follows:
The Root Cause Of Medical Cost Shifting
The decline in claim frequency and the rise in property damage severity were considered transparent enough not to warrant further elaboration in this article. This turned our focus to unraveling the seemingly mysterious rise in bodily injury and personal injury protection severity, especially in light of the decline in the rate of severe injuries that can be causally related to the property damage severity rise.
Our findings in this regard are a confluence of causally related phenomena as follows:
Understanding Diagnostic Upcoding
The rise in bodily injury and personal injury protection severity is the manifestation of the growing cost shift from hospitals and other medical providers that are passing a progressively greater percentage of the total cost of national medical costs to the Property & Casualty industry.
In many ways, this shift is an unintended consequence of a financial stalemate between the government and private health insurers on one side and hospitals and other medical providers on the other. Hospitals and other providers turned increasingly to upcoding to offset the steadily decreasing reimbursements from the government and private health. But the Property & Casualty industry, which accounts for only about 10% of hospital utilization, was subjected to those same programmed upcoding schemes, seemingly without awareness, or at least without taking mitigating actions.
The following are direct quotes from the IRC (emphasis added):
"We use the following indicators and more: extent of disability, rate of hospitalization, days unable to perform duties. And we see that injuries are not becoming more serious nor have they changed much. But, it is still evident that something is driving the rise in severity. Since injuries do not appear more serious, medical usage and treatment costs are driving the increase in medical care expenses."
"Low reimbursements from public health insurance programs, such as Medicare and Medicaid, have prompted hospitals to shift costs to automobile insurance companies — raising auto injury claim costs. Cost shifting in 2007 resulted in $1.2 billion in excess hospital charges. The full impact of hospital cost shifting, including that occurring in other insurance coverage, is likely much greater."
Medical Coding 101
The medical profession has a well-established regimen of coding to describe both the nature of injuries and illnesses as well as the therapies utilized to treat them. The coding classification that defines the nature of pathology, the diagnosis, is referred to as "ICD-9 codes." For therapies, the codes are referred to as "CPT and HCPCS codes."
ICD-9 codes form the basis for CPT and HCPCS codes because the diagnosis precedes the selection and introduction of the appropriate therapy or therapies. So if in the same instance the ICD-9 code indicated a bruised hand but the CPT/HCPCS code reflected a coronary bypass, software programs employed by the government, private health care providers and the Property & Casualty industry can detect the mismatch and prevent the payment.
The government and private health insurers tie their reimbursement rates to the CPT/HCPCS codes. When the therapy code is correct for a particular diagnostic code, the software can discern the appropriate payment amount based on a programmed fee schedule. With such a system, it is easy for the government to institute an across the board fee reduction of 10% or to apply the reduction in a variable way and accurately estimate its aggregate impact.
The Property & Casualty insurance industry is able to follow government fee schedules in some instances (mainly Workers' Compensation) but in most states relies on "usual and customary" charges for auto, the aggregate average of what medical providers bill for each CPT/HCPCS code. There has been significant controversy and litigation related to the sources of the "usual and customary" data.
Overall the government, private health care and the Property & Casualty industry all use software programs to vet medical billing that start by insuring that the CPT/HCPCS coding for each therapy match the ICD-9 diagnostic code and then, checking the amount charged for each therapy against a fee schedule or, for the Property & Casualty industry, the "usual and customary" charge.
From "Patient Centered" to "Profit Center"
The belief that doctors would not falsely inflate a diagnosis, outside of outright fraud, was common at the outset of the electronic vetting system, and with good reason. But the confluence of government fee reductions and the decline of private health care created significant financial duress for hospitals and providers. Something had to give, and turning away the uninsured was not an option, although more and more providers are opting out of Medicare and Medicaid.
That answer came in the form of savvy hospital administrators and slick new software that added efficiency but even more so, drove up revenues. It did so by making certain that the highest legitimate diagnostic code was being selected. It also provided upfront audits to spot instances such as a therapy that overshot the initial diagnosis so that "coding corrections" could be made before the billing process was invoked. Increasingly, such corrective activity was administered by support personnel who lacked medical knowledge and sought only to satisfy the systems requirements.
The Impact Of Diagnostic Upcoding
The medical coding system is logical and it lends itself well to automation, which vastly increases efficiency for everyone. But its cornerstone is the ICD-9 diagnostic code and while expert systems can aid a doctor in making a diagnosis, the ultimate decision (at least for now) still rests with the doctor's judgment.
With enough information, a system could flag potential upcoding in certain instances. Gradually such a system will evolve and become increasingly effective, but for now, expert human intervention is required to decide whether the reported ICD-9 diagnostic code is reasonable in light of numerous data points derived from a forensic examination of the mechanism of injury.
This chart reflects a huge shift in ICD-9 supported CPT coding from 2002 to 2008:
Most Doctors Are Victims Not Perpetrators
It should be noted that hospitals and other providers were likely losing legitimate revenues by not paying sufficient attention to billing practices in the past. Therefore, some of the change in the above chart is likely justified. But like a pendulum that may have swung too far in one direction in the past, there is ample evidence of over-compensation on its way back.
A Few Recent Headlines
7-21-2011: Prime Healthcare Accused of Medicare Fraud
8-31-2011: Alleged Fraud Uncovered During EMR Training
9-21-2011: Doctors Protest CEO at Knapp Medical Center
This is not meant to suggest that all hospitals and providers, or even the majority, cross the line, but a systemic change has occurred and one manifestation is the alarmingly frequent allegations of billing related maleficence.
Examples Of Recent Articles From Hospital Industry Publications:
The Property & Casualty Industry Response
Had cost shifting not occurred in parallel with the significant decline in accident frequency, loss costs would have dropped and companies would have utilized the capital windfall to lower their prices and gain market share. That would have led to a significant decline in premiums accompanied by expense reductions significant enough to maintain underwriting and claim expense ratios.
Many of the financial incentives in the industry are determined as a percentage of premiums. Shrinking premiums produce shrinking companies, lower cash flow, weakening balance sheets and endangered financial ratings. None of those are desirable outcomes for carriers. Independent Agents and Brokers work on commission, a percentage of written premiums, so if they earn 15% on an $800 auto policy that without cost shifting may have shrunk to a $600 policy, they would have taken a 25% revenue cut.
There may be Nash equilibrium in play, with everyone being happy under the current circumstances. But as the Insurance Research Council points out, if accident frequency returned, first loss costs, and then premiums would spike. The longer and larger the cost shift is allowed to grow, the greater the potential market disruption becomes when the day of reckoning arrives. But for anyone who is not betting on a near term economic revival, and/or the significantly lowered gasoline prices that could fuel increased frequency, this may not be a burning issue.
Is Anybody Hurt By Cost Shift?
Auto insurance consumers are financing the cost shift through artificially high insurance premiums. To the extent that some of those same individuals consume more medical services than are paid for, there seems to be fairness. But for those who shoulder the full burden (or more) of their medical expenditures, "the affluent," this resembles income redistribution.
What Does This Portend For Claims?
As things stand, most claim department leaders either don't realize what has happened, or believe that their particular policies and practices have prevented this for their company. A benchmark comparison of company loss costs against like competitors would force one to choose to either disbelieve the phenomenon entirely or accept that they are as vulnerable as everyone else.
The standard industry claim deterrents for medical cost containment are two software programs, medical bill repricing and automated bodily injury evaluation. Both are highly susceptible to diagnostic upcoding, but few claim leaders understand the algorithms that drive these systems and imbue them with capabilities that they don't have. Those claim people far enough into the details to know better are not empowered to act.Efforts to inform claim leadership typically meet with stiff resistance, because they genuinely believe that they "have it covered." And even if they knew they did not, why would they want to have such significant leakage called out when loss ratios are stable, and nobody is pointing a finger in their direction? But acknowledging and addressing the issue would create more work on top of what already feels insurmountable.
This article was written for the purpose of calling out the significance of cost shifting to the industry. I do not believe that the industry is purposely allowing the cost shift, but when a bad situation creates comfort, a sense of urgency is elusive. The more entrenched the problem becomes, the more difficult the exit strategy.
The Property & Casualty industry will continue to represent a relatively small percent of hospital utilization, but it is continuing to pay a growing disproportionate share of the total cost. Even if driving never perks up again, as the cost shift grows a tipping point nears where premiums become too high.
Finally, there has been too much focus on automating claims over the past twenty years or more and far too little focus on basic claim handling. This is one example of numerous significant pockets of leakage that arose as a result.
Michael Rowe has over 30 years of experience in the Property & Casualty Insurance Industry, predominantly in claims. Mike has significant exposure to IT initiatives involving predictive modeling and rules-based intelligence, and he is a strong advocate for infusing a clear business objective and quantifiable ROI into every business activity.
More articles, videos, and podcasts by Michael Rowe:
One Foot In Healthcare: Property And Casualty Payer Integration
Automobile Appraisal Concentration
The CEO’s Guide to Medical Inflation: The Case for Measurement, Part 3
The CEO’s Guide to Medical Inflation: The Case for Measurement, Part 2
The CEO’s Guide to Medical Inflation: The Case for Measurement, Part 1
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