HMOs Prescribe Cost-Cut Cure for Workers' Comp Ills : WellPoint, Health Net and CareAmerica are expanding into industrial injury field, touting lower employer premiums. Some see an awkward fit.

By GREG MILLER

Dec. 6, 1994 12 AM PT

TIMES STAFF WRITER

WOODLAND HILLS — Health-maintenance organizations, which in the past 10 years have dramatically changed medical care in California, are now focusing their cost-cutting skills on the state’s $11-billion workers’ compensation system.

Promising substantial savings for employers and higher-quality care for injured employees, three Woodland Hills companies have rushed into the workers’ comp business this year: WellPoint Health Networks, the managed-care subsidiary of Blue Cross; Health Net, the state’s second-largest HMO; and CareAmerica Health Plans, an HMO subsidiary of Burbank-based UniHealth America.

Each of the three companies has either bought a workers’ compensation insurer or formed alliances with insurers, and all three are busy assembling networks of workers’ comp doctors. Their strategy involves negotiating volume discounts with doctors and avoiding unnecessary medical procedures.

By supervising the medical treatment of injured workers, the Woodland Hills HMOs and others across the state say they can cut as much as 30% from the estimated $3.5 billion spent treating work-related injuries in California each year. In the process, HMOs hope to wrest business away from conventional insurance companies that have dominated the industry for decades.

But skeptics say HMOs will learn that the methods that worked well cutting private medical costs will be much less effective reforming the thorny workers’ compensation system. “We’re not worried in the least” about competition from HMOs, said Stanley Zax, chief executive of Zenith Insurance Co., a Woodland Hills insurer that collected $245 million in workers’ compensation premiums last year. “I don’t believe HMO competition guarantees the lowest net cost to buyers.”

Only a handful of HMO-like workers’ compensation plans are in place so far. Day Runner Inc., a Fullerton maker of calendar date books, was the first company to sign up for WellPoint’s workers’ comp plan last January. With 375 employees at its Fullerton facility, Day Runner cringed as its workers’ comp insurance premiums hit $440,000 in 1993 and were set to jump to $550,000 this year, said Personnel Director Lee Coffey.

Under its deal with WellPoint, Day Runner employees who strain their backs or sprain their ankles are sent to the same medical clinic as before, but WellPoint trimmed Day Runner’s medical costs 25% by negotiating cheaper rates at that clinic. WellPoint also reviews each case with an eye toward eliminating unnecessary treatments.

The result: Since switching to WellPoint, Day Runner’s workers’ comp premiums dipped to $350,000 this year. “It’s a remarkable change,” said Coffey, who added that his company expects to renew its policy with WellPoint at another 20% discount next year due to improved safety conditions at the plant.

So far, WellPoint has workers’ comp contracts with about 50 employers, ranging from grocery stores to auto wreckers. CareAmerica expects to begin selling its first workers’ comp plan early next year.

Health Net is still looking for the first direct sale of its workers’ compensation plan to an employer. But through alliances with four insurance companies, Health Net will be paid about $20 million next year for supervising medical costs on their workers’ compensation programs, said Tamara Watt, vice president of workers’ compensation at Health Net.

Industry experts across the country are watching the developments in California, where employers have long complained about skyrocketing workers’ comp insurance costs.

Last year, the state adopted a number of reforms designed to stop fraud and abuse in the state’s workers’ comp system, which requires employers to pay for the medical care and lost wages of employees who are injured on the job. But relatively little has been done to control actual medical costs, which account for about 40 cents of each $1 in premiums collected by insurers. The reforms and opportunities for further cost-cutting set the stage for the HMO invasion.

Last January, WellPoint spent $154 million to buy UniCare Financial, an Irvine workers’ compensation insurer with annual premium revenue of $135 million. In August, CareAmerica spent $95 million to buy Heath Cal, a San Francisco insurer with $130 million in annual revenues. Meanwhile, Health Net formed alliances with insurers including AIG Claim Services Inc., a New York-based firm that collected $545 million in premiums in California last year and is the largest privately owned workers’ compensation insurer in the state.

In making these deals, the Woodland Hills HMOs hope to pocket some of the savings they generate by cutting costs in existing workers’ comp programs. But some industry experts say combining HMOs’ methods and workers’ compensation objectives will be a difficult fit.

In order to avoid unnecessary expenses, HMOs often take weeks to review cases before authorizing patients to see medical specialists. But in workers’ compensation, such delays can be costly for employers, who have to hire replacement workers and reimburse injured employees for lost wages.

Indeed, a recent study by the California Workers’ Compensation Institute, a nonprofit entity funded by insurance companies, found that medical bills for similar injuries were 21% less in HMOs than under conventional workers’ compensation medical plans. But the study also found that conventional workers’ compensation injury treatments are concluded 44% faster than in HMOs.

HMOs “say what we’re trying to do is to get this person well at the lowest possible cost,” said Ed Woodward, president of the San Francisco-based institute. “Workers’ compensation goes for intensive services early on . . . because the total cost is cheaper that way.”

Another potential problem for HMOs is that state law allows employers to control where their injured workers go for treatment only for the first 30 days following an injury. After that, workers can go almost anywhere for treatment, and that leaves HMOs virtually powerless to control long-term medical costs.

Monte Horn, 35, works as a painter at Pharmavite Corp., a vitamin manufacturer in Mission Hills. After slicing his thumb last month while repairing a ceramic floor tile, Horn was whisked by his boss to a nearby clinic, where he received three stitches. Horn was happy with the care he received, and wasn’t even aware that his company’s insurance policy was a workers’ compensation plan supervised by WellPoint. But if the injury had been “something serious, I probably would have called one of those (workers’ compensation) attorneys, just to protect myself,” Horn said.

Under a newly created state program, insurers and HMOs can become certified “health-care organizations,” or HCOs, that are allowed to control where employees receive care for up to a year. But employees must voluntarily enroll in these plans, and some say there is little incentive for employees to do so. Of the three Woodland Hills companies, only WellPoint said it plans to apply for HCO certification.

To try to keep patients happy--and away from workers’ compensation attorneys--HMOs rely on case managers to make sure injured workers are treated well. And HMOs also pay doctors bonuses for keeping patients from leaving the HMO doctor network.

“If you deliver good quality medical care up front, you eliminate the need to have cases litigated and you cut down on the disability side,” said Russ Leatherby, chief executive officer of UniCare, the insurer acquired by WellPoint.

Despite the potential pitfalls for HMOs, their sheer size gives them a powerful weapon for controlling costs and winning more customers. HMOs already have group health insurance contracts with thousands of employers, and one in every three state residents is an HMO member. So HMOs can negotiate volume discounts with doctors and hospitals. And now, as HMOs pick and choose occupational health clinics to contract with, those clinics must agree to discounts or risk losing patients.

“In the good old days, individuals made the decision where to go for service,” said Jerry Torgerson, vice president in charge of workers’ compensation at CareAmerica. As HMOs move into workers’ comp, he said, “the patient volume will be increasingly channeled to networks of providers.”

To be part of the Health Net, WellPoint and CareAmerica workers’ compensation networks, Healthline Medical Group in Van Nuys agreed to reduce its fees by 15% and to adhere to so-called case rates that specify fees for the most common injuries.

For a finger injury, Healthline might bill a conventional insurance company $200 to more than $1,000, depending on the amount of treatment rendered. Under its workers’ compensation contract with Health Net, however, Healthline is paid $560 for every finger injury that does not require surgery, with no exceptions, said Dr. Emmett Berg, a medical director at the clinic.

Berg said there are at least five industrial medicine clinics within two miles of his location, but “most will be out of business” in a few years, he said, because they will be left out of the doctor networks being assembled by HMO and managed health care plans. “We will stay in business if we get the volume, but if we don’t, we’re out of business too,” Berg said.