The 2011-2012 legislative session saw the passage of one of the largest reforms to Workers’ Compensation law in nearly a decade, Senate Bill 863 (SB 863).

The reforms, supported by a coalition of labor and business representatives, increased permanent disability benefits while also instituting a number of cost-saving reforms. The intent was that the cost savings would balance out the cost of the increased disability benefits.

Senate Labor & Industrial relations committee members recently held a hearing on the challenges and opportunities that have come to light in the process of implementing SB 863. Testimony came from more than a dozen representatives of industry, labor, and research institutes tasked with monitoring and tracking the Workers’ Compensation insurance system. Over four hours, participants outlined lessons learned and opportunities for improvement.

One of the biggest “misses” of the reform, according to participants, was the prediction of how many Independent Medical Reviews would be conducted. The Independent Medical Review (IMR) process replaced a lengthy and more complicated system in which attorneys and judges determined the medical necessity of specific treatment programs, saving costs by establishing a bureaucratic administrative process based on input from medical professionals. The expectation was that 100% of cases formerly addressed through litigation would convert to the IMR process (roughly 50,000 cases.) Instead, the simplified and less costly IMR process actually resulted in nearly 150,000 requests!

Thankfully, IMR costs account for only 0.3% of all Workers’ Compensation costs – so the error in prediction has not had too dramatic a financial impact. However, the over-utilization of the system provides important information for future reforms. Claims administration represents more than 30% of all workers’ compensation costs, so a certain number of reform proposals focus on simplifying the claims administration process. However, the IMR reform experience highlights that making processes simpler also lowers the bar to participating in those processes. Attempts to simplify claim administration may be offset by increased numbers or complexity of claims.

Another “miss” of the reforms – though it is difficult to see how this could be avoided – is that the process of establishing fee schedules for various services is a slow one. Even today, a full two years into the process, certain fee schedules have not been completed. Because there is the expectation that the schedules will be completed at some point in the future, insurers have been delaying payment to providers in order to wait and use the established fee schedule (rather than risk overcompensating providers.) This has caused a significant amount of friction in the system, and has ultimately increased costs by increasing the administrative time spent dealing with irate providers attempting to collect bills.

The general consensus of hearing participants was that there were a number of small, near-term legislative tweaks that could improve the functioning of the reforms. They felt, however, that it was too soon in the process to definitely declare SB 863 a success or failure, and that legislative efforts to dramatically reorganize the reforms were premature. We will continue to monitor the Workers’ Compensation legislative landscape as it develops throughout this legislative session.