Tag Archives: utilization

Einstein’s Theory on Work Comp Outcomes

Over the last decade, I have been fortunate to grow a physical therapy company that has provided hundreds of thousands of workers’ compensation visits. I have learned a great deal about the good, the bad and the ugly in our industry during this time.

One lesson is most significant: The term “outcome” is among the most misused and misapplied phrases in workers’ compensation. Very few consultants, intermediaries and “experts” actually assess the value of their provider networks because they lack the ability to truly define an outcome.

A Lesson From Einstein

In 1905, Albert Einstein articulated the theory of relativity, including what must be the most recognizable formula in history: E = MC-squared. This theory has stood the test of time as an accurate reflection of the relationship between energy and mass. Similarly, in workers’ compensation, we have utilized a formula to allegedly explain the “theory of outcomes” as the relationship between cost and clinical performance. The problem is that our equation for outcomes is incomplete and inaccurate.

Ask your intermediary how they rank healthcare providers. Inevitably, most will articulate some iteration of:

Outcomes = Price x Utilization

Or, O = PU (ironic when you say it out loud). But this is a false promise. This formula uses data derived only from claims and has no capacity to reflect the quality of the clinical performance. An effective definition of outcome incorporates price and incorporates utilization but must balance that analysis with an understanding of functional improvement. Without incorporating functional improvement into the equation, you have a useless collection of letters and numbers masquerading as a mechanism for transparency and clarity. O = PU is to the “theory of outcomes” what E = C-squared would be to the theory of relativity – partially expressed and therefore completely wrong.

The Manipulation of O = PU

Price can be manipulated. Utilization can be manipulated. Both are manipulated every day in our industry and will continue to be. However, providers can’t manipulate the functional improvement (or lack thereof) of their patients. Functional improvement either happens, or it doesn’t… and is directly related to the ability of the provider and his attention to and effort with the patient. There are occasional anomalies in patient outcomes, but I can tell you with absolute confidence that the past decade has taught me that, when balanced for patient type and clinical environment, the best clinicians consistently achieve the greatest functional improvement with their patients.

I can also tell you that far too few “experts” seem to either understand or care about functional improvement. We live in an era now where many intermediaries ask providers to play “name that tune” when it comes to price and utilization. They guide providers to increase prices to offset discounts and manage utilization around a number (not the patient).

It is a game, and this game does not end well. Higher prices, bigger discounts, worse care, mismanaged utilization (unrelated to patient improvement), higher indemnity, animosity, deceit, ill will, poor communication and frustration. Sound familiar?

The True Formula for Outcomes – The True Recipe for Value

It really is this simple:

Outcomes =   Price X Utilization / Functional Improvement

If you truly want to evaluate outcomes, demand accountability and data regarding how patients improve functionally. Identify and benchmark what your injured patients could do before their injury and what they can do after their treatment. That analysis (and only that analysis) will lead you to truly identifying outcomes — and truly understanding value.

Everything else is a side show. Price and discount matter – if you know functional improvement. Utilization matters – if you know functional improvement. NONE OF IT matters without knowledge of functional improvement. Far too many “experts” have advised employers to “commoditize” the provision of healthcare through cost containment strategies that define outcomes through price and utilization only – and along the way have lost the battle for value.

The Real Question

Why do we so commonly resign ourselves to O = PU, when we know it is inaccurate?

Workers’ compensation affords us the greatest opportunity for transparency in all of healthcare. Our “experts” should lead with new practices and analysis – not cut and paste outdated processes sourced from commercial health. We have the HIPAA waiver. We have greater referral control. We often have access to the essential functions of the job (benchmarks for return to work) and the injured employee’s pre-existing conditions (benchmarks for maximum medical improvement) when effectively identified through job-site assessments and post-offer testing. Last, we have a truly invested payer with comprehensive exposure to both medical and indemnity cost. An actual, accurate formula for outcomes isn’t just important, it is essential… and it is achievable.

Almost as famous as Einstein’s equation is his quote that “the definition of insanity is doing the same thing over and over again and expecting a different result.”

I believe, if Einstein were alive today, he would say, “If you are happy with the outcomes you are seeing in workers’ compensation, keep doing the same thing. However, after years of increased medical costs, rising negativity between employers and their injured employees, a tidal wave of provider frustration with payer rules and bureaucracy and a national increase in indemnity – my advice is to stop repeating the same ‘cost containment’ techniques that have never worked before. If you want more from your providers and intermediaries, O = PU is the definition of insanity.”

So What Is the Actuarial Value Of My Health Benefit Plan?

Now that health care reform is gradually rolling out into the market, the concept of the “actuarial value” of a specific set of benefits is increasingly important. The Patient Protection and Affordable Care Act of 2010 defines four metallic categories of benefit plans ranging from Bronze to Platinum. The actuarial value of these categories range from 60% for Bronze increasing by 10% for Silver, Gold and capping out at Platinum at 90%. The benefit plans offered through the public exchanges will be required to offer benefit plans that are valued within ±2% of each of the metallic levels. This limitation is critical to benefit plan sponsors as they evaluate their current benefit plans.

Actuarial Value Defined
The actuarial value of a specific health plan is the ratio of net value of the actual benefits to the value of these same benefits without copays, deductibles, limits, and/or coinsurance or other items paid for by the individual covered under that plan. For example, in the case of a plan with an actuarial value of 70% (i.e., the Silver plan), this suggests that 30% of the cost is the responsibility of the individual and 70% is paid for by the health plan or carrier involved. Similarly a Gold plan (i.e., 80%) would cover 80% of the cost with the individual responsible for 20%.

As long as the plan has an actuarial value within 2% of the metallic target it would qualify for that metallic level. For example, a plan with an actuarial value in the range of 68% to 72% would qualify as a Silver Plan. A plan with a value outside of the 2% range would not quality as a specific metallic plan and could not be offered. As a result, it is critical to be sure you know the actuarial value of your plan and what metallic plan it qualifies for.

Actuarial Cost Model
The primary tool used to derive the actuarial value of a specific set of benefits is the actuarial cost model. This is a tool used by actuaries which presents detailed utilization, unit cost information, Per Member Per Month cost information, value of copays/ deductibles/ coinsurance, etc. The actuarial cost model typically includes assumptions for each of the major service types which could include as many as 50 or 60 categories of service. The standard definition used by our company includes the following categories:

Hospital Inpatient
  Medical Stays
Surgical Stays
Pediatric Stays
Neonatal ICU
Behavioral Health – Mental Health
Behavior Health – Substance Abuse Detox.
Behavioral Health – Rehabilitation
Maternity – Mother (Vaginal)
Maternity – Mother (C-Section)
Maternity – Well Newborn
Maternity – Other than delivery
Skilled Nursing
Total – includes mat and snf
Hospital Outpatient
  Emergency Room
Outpatient Lab & Path Facility
Outpatient Surgery – Hospital Based
Outpatient Surgery – Free standing
Outpatient Surgery – Other
Home Health
Partial Day – Rapid Treatment Unit
Partial Day – < 24 Hour Observation Bed
Partial Day – Behavioral Health – Mental Health
Partial Day – Behavioral Health – Substance Abuse
Other Outpatient (PMPM)
Out-Of-Area (pmpm)
Radiology & Chemotherapy (Non-IP)
  CT/MRI/Nucl/Angio – Professional
CT/MRI/Nucl/Angio – Technical
Radiation Therapy
Other Radiology – Professional
Other Radiology – Technical
Chemotherapy Services – Facility
Chemotherapy Services – Other
Out-Of-Area (pmpm)
Physician Services – Primary Care
  Primary Care Surgery
IP Visits – Primary Care
Office Visits – Primary Care
Emergency Room Visits – Primary Care
Lab & Path – Primary Care Office
Consults – Primary Care
Immunization & Injection – Admin
Preventive Services
Cardiology – Primary Care
Pulmonology – Primary Care
Allergy – Primary Care
Behavior Health – Primary Care
Primary Care Management Fee
Physician Services – Specialist
  Inpatient Surgery
Outpatient Facility Surgery
Office Surgery
Anesthesia Services
Inpatient Visits – Specialist
Inpatient Visits – Behavioral Health (Psych/Sub Abuse)
Inpatient Visits – Newborn
Office Visits – Specialist
ER Physician Visits
Radiology – Inpatient Professional
Lab & Path – Specialist Office
Lab & Path – Inpatient Professional
Lab & Path – Outpatient Professional
Consults – Specialist
Immunization & Injections – Serum
Physical Therapy
Speech Therapy
Occupational Therapy
Obstetrics – Delivery (Vaginal)
Obstetrics – Delivery (C-Section)
Obstetrics – Other
Well Woman Exams
Cardiology – Specialist Services
Pulmonology – Specialist Services
Allergy – Specialist Services
Outpatient Behavioral Health – Specialist Services
Other Medicine
Out-Of-Area (pmpm)
Prescription Drugs
Formulary – Brand Name
Non-Formulary – Brand Name
Mail Order Drugs
Other Services
Appliances & Prosthetics
Chiropractic Services
Podiatry Services
Vision Services – Exam
Visions Services – lenses, frames, etc.

Categories are often modified based upon the needs of the actual situation. However, for each of the specific categories of service, the critical assumptions are presented. These assumptions are for a specific population, managed in a specific way, with specific demographics, assumed charge levels, assumed health status, and assumed benefits.

An example of a specific set of utilization and cost assumptions is shown in the following table:

Illustrative Cost Model For Hospital Patient Services

Hospital Inpatient Annual Admits Per 1000 Length Of Stay Annual Bed-Days Per 1000 Average Cost Per Day N/A Average Cost Per Stay PMPM Claim Cost
  Medical Stays 21.20 3.90 82.68 $4,522.82 N/A $17,639.01 $31.16
Surgical Stays 14.50 4.45 64.53 $8,308.59 N/A $36,973.24 $44.68
Pediatric Stays 7.50 4.20 31.50 $5,628.40 N/A $23,639.29 $14.77
ICU/CCU 4.50 4.30 19.35 $9,045.65 N/A $38,896.28 $14.59
Neonatal ICU 2.20 5.50 12.10 $4,116.77 N/A $22,642.26 $4.15
Behavioral Health – Mental Health 2.50 6.50 16.25 $3,483.58 N/A $22,643.26 $4.72
Behavioral Health – Substance Abuse Detoxification 1.10 5.40 5.94 $1,809.13 N/A $9,769.30 $0.90
Behavioral Health – Rehabilitation 0.30 10.50 3.15 $1,340.10 N/A $14,071.00 $0.35
Maternity – Mother (Vaginal) 11.60 2.35 27.26 $5,156.02 N/A $12,116.64 $11.71
Maternity – Mother (C-Section) 3.90 3.95 15.41 $6,030.43 N/A $23,820.20 $7.74
Maternity – Well Newborn 15.50 2.20 34.10 $1,356.85 N/A $2,985.06 $3.86
Maternity – Other than delivery 0.91 2.10 1.91 $6,017.03 N/A $12,635.76 $0.96
Out-Of-Area 4.30 3.50 15.07 $7,236.52 N/A $25,327.81 $9.08
Skilled Nursing 1.80 11.45 20.61 $1,742.12 N/A $19,947.32 $2.99
Total – includes mat and snf 91.81 3.81 349.85 $5,202.06 N/A $19.821.75 $151.66

The utilization is shown on a “Per 1,000” basis and the claims cost is shown on a PMPM basis. PMPM stands for per member per month. The total shown above for Hospital Inpatient suggests that the overall inpatient hospital cost per covered life would be $151.66 per month prior to any offsets for deductibles, copays, coinsurance, provider discounts, medical management, demographic adjustments, etc. Similar assumptions are available for the rest of the categories previously shown. This information was developed for a typical commercially insured under age 65 population.

Developing Actuarial Values
Once the benefit design is determined, the information from the actuarial cost model is adjusted for variation in benefit design with the overall value of the benefits determined. The ratio of the value of the benefits to the overall value of covered services is the actuarial value of the benefit plan.

This is a fairly complex process. The government has developed their version of this process and has published a Federal AV Calculator. The final version of this was released on February 20, 2013. Most consulting firms have developed their own calculator to help their clients understand the process prior to the release of the Federal AV Calculator. Since the final calculator was released, there continues to be some serious concern by health actuaries as to the reasonableness of the federal calculator. We continue to use our own AV Calculator in addition to the Federal AV Calculator to better help our clients understand what variations in benefits lead to various AV values. This is a dynamic process with varying opinions depending upon the various plan designs and resulting AVs.

The following chart shows an illustrative result using our firm's AV calculator. This was prepared for a specific plan design in a specific geographic region. It is illustrative only to show the various components of cost variation.

View Chart

The above table shows each of the key variables affecting the actuarial value. Each is important to appropriately incorporate into the calculation. The starting Claim Cost in the first column is determined from the actuarial cost model previously discussed and will be adjusted for:

  • Geographic region
  • Health status
  • Smoking/non-smoking
  • Medical management
  • Utilization and cost inflation trend
  • Demographics

The first adjustment reflects the overall nature of the health benefit plan. A richer plan is associated with higher utilization, a lesser benefit plan is associated with lower utilization. The copay/deductible adjustment either raises or lowers the starting claims cost. The next step eliminates any costs that are excluded from the eligible expenses.

This particular example excluded brand drugs.

The next step evaluates the value of various copays (i.e., office visit copays, pharmacy copays, etc.). These are deleted from the value of the benefit costs since they are paid by the individual. Next coinsurance and deductible values are deducted. This example was developed for a $1,750 deductible 80% coinsurance plan. The last two adjustments are for the value of a family deductible limit and the out-of-pocket limit yielding the final cost. In this situation the final cost was $218.30. This was compared to the net value of benefits after excluded benefits (i.e., $309.85) with a ratio of 70.45% or a “silver” plan per our model.

Assuming this was consistent with the “authorized AV calculator” this plan could become a qualified plan under the Patient Protection and Affordable Care Act.

As you can see there are many different steps in the process to determine the actuarial value of a benefit plan. There are even more assumptions that have to be made to obtain these estimates of value. Armed with this information the plan sponsor can make informed decisions as to what benefit plan is appropriate and what they want to offer, if any.

These calculations are frequently based upon considerable amounts of professional judgment. Not all actuaries think alike so there oftentimes can be professional differences of opinion. It is critical that the plan sponsor obtain professional input they can trust and rely upon.

The American Academy of Actuaries is the primary organization granting credentials that are relied upon in the industry. One approach to obtaining relevant and reliable input is to insist that your advisor is a qualified health actuary with credentials from the Academy. In most situations, this individual would have both an FSA and MAAA credential and be a recognized member of the Society of Actuaries Health Section. Others are qualified to provide this type of input but valid actuarial credentials provide increased assurance that good input is being offered.

Utilization Review A Tool for Controlling Costs, or a Cost Driver Itself?

Can there be too much of a good thing? The answer here is a definite “yes.” While Utilization Review can be used to ensure that medical treatment for injured workers is based on evidence-based protocols, it definitely comes at a cost — sometimes a very high cost. Too much Utilization Review can have several unintended consequences that impose “costs” — both monetary and otherwise. These include:

#1 — Delay In Treatment
Utilization Review is not instantaneous. Guidelines allow claims payers five days to turn around the Utilization Reviews. While five days is certainly reasonable in terms of the need for referral, review and approval/modification/denial, it is quite a long time when viewed through the lens of the waiting injured worker and the physician. It can mean five days of extra pain, and five days of added uncertainty.

#2 — Rising Costs
The cost of Utilization Review is not insignificant. Most range from $100 – $300 or more. Considering that this can be more than the cost of some therapies, it becomes evident that unnecessary UR reviews serve to drive up costs, rather than contain them.

#3 — The Wedge
This is likely the most serious of the consequences. Most of us have at some time experienced the frustration of being told by our physician that we need a procedure or a test, but that it has to first be approved by “the Insurance Company.” Although we may have become used to this, it certainly causes us to leave the doctor’s office uncertain about what the next steps will be.

In the case of Work Comp and Utilization Review, the regulations allows for up to five days for the UR process to be completed. Therefore, the Physician must wait before scheduling the procedure, diagnostic test or therapy session. And the irony is that in many cases, “the Insurance Company” selected the Physician or developed the network, and then is “second guessing” the network Physician, driving a wedge between the Physician and patient when we should be supporting the very relationship that is fundamental to returning the Injured Worker to pre-injury condition.

If I were an Injured Worker who visited a Network Provider at the direction of my Employer, and then was told by that provider that I’d have to wait for “the insurance Company” to approve the test, I might wonder why I should trust a Physician that “the Insurance Company” doesn’t even trust!