I. The California Workers' Compensation
Instituted as part of Hiram Johnson's reforms in 1911, the workers' compensation system is charged with providing California workers and employers with a no-fault means of resolving claims resulting from on-the-job injuries. In exchange for the certainty of payments for medical, indemnity, and rehabilitation costs, workers waive most of their rights to sue employers. Employers, on the other hand, are provided with a means to spread risk, by having their possible exposure to injury loss capped.
A. Dispute Resolution
In basic form, a worker enters the workers' compensation system when he/she is injured. Both the worker and the employer are obligated to report injuries. The worker then may be evaluated by one or more specialists to determine legal issues related to the injury. Specialist exams may either be performed at the request of the worker, the employer, by both (an agreed medical evaluation) or on rare occasions an independent medical evaluation is requested by the Workers' Compensation Appeals Board (WCAB). An agreement may then be reached on the medical-legal issues, or if the finding is disputed, a variety of judicial and arbitration processes are used to arrive at a settlement. Cases are ultimately settled one of six possible ways:
Of these possible resolution methods, the least demanding on the
Division of Workers' Compensation (DWC) in terms of workload is
voluntary payment. The next two methods (Compromise & Release
and Stipulated Award) generally place the second least demand
on DWC resources solution, while the last three (Finding and Award,
Dismissal, and Take Nothing) involve high legal and preparation
costs regardless of outcome.
B. Medical-Legal Reports
Medical-legal reports are conducted to determine the following issues:
These reports are conducted at the request of the worker, the
employer, and on some occasions at the request of a DWC/WCAB referee/judge.
Under current law, reports are written by the injured worker's
treating physician(s) or a Qualified Medical Evaluator (QME) as
approved by the Industrial Medical Council (IMC). QMEs can be
acting as an Agreed Medical Evaluator (AME)/Independent Medical
Evaluator (IME) agreed upon by both parties or appointed by a
judge, a QME chosen by either the employer or the worker in a
dispute where the worker is represented by an attorney, or a QME
chosen from a panel when the worker is not represented. Prior
to the 1993 reforms, the evaluator chosen by parties in a disputed
case was not required to be a QME if the worker was represented.
II. Total cost of Medical-Legal Exams
The cost of medical-legal exams on PPD claims has declined considerably
since its peak during the 1991 accident year. For the insured
community, the total cost of medical-legal exams performed on
PPD claims at 40 months after the beginning of the accident year 1
has declined from a high of $394 million for the 1991 accident
year to an estimated $59 million for the 1995 accident year. This
is a decline of 85 percent in the cost of medical-legal reports
and represents a savings of $336 million on the accident year
(see Chart 1).
This decline in costs reflects changes in all the components of the cost structure. Consider medical-legal exam costs on PPD claims as composed of the following components:
Total Cost = Number of PPD Claims * Average
Cost/Exam * Average Number of Exams/Claim
Then, as Chart 2 displays, thirty-two percent of the decline in
medical-legal costs can be attributed simply to a decline in the
number of PPD claims. Thirty-five percent is due to a decline
in the average cost per exam. And the other thirty-three percent
of the savings results from a decline in the average number of
exams per claim.
The data for this report are drawn from the Workers' Compensation
Insurance Rating Bureau's Permanent Disability Survey. The survey
and our methodology are described in Appendix 2.
III. Number of PPD Claims
Table 1 shows the number of PPD claims for the 1989 through 1993
accident years based on WCIRB second level individual case reports. 2
Projections of PPD claim levels for the 1994 and 1995 accident
years at a similar level of maturity (30 months following the
beginning of the policy year) were made by UC DATA for comparison.
The frequency of claims is broken down by major and minor disabilities.
The decline in PPD claims is driven by a decline in the number
of covered workers, and the number of reported injuries. A substantial
portion of the decline in PPD claim frequency may be the result
of a steep drop in the number of claims with a psychiatric component,
efforts to reduce fraudulent claims, and restrictions on post-termination
As described above, the number of major and minor PPD claims in
the system for years 1989 through 1993 was obtained from second
level individual case reports. The data from these years have
been weighted to reflect the distribution of cases in the second
level individual case reports.
Accident year data on the frequency of PPD claims is not available
for years following 1993. The WCIRB has discontinued calculating
these data. The Rating Bureau feels that the calculation of these
data was required by legislation and regulation arising from the
1989 reforms. Since these reforms have been superseded by the
1993 reforms, the Bureau no longer feels compelled to make these
calculations. However, this report and the numerous valuable reports
issued by the WCIRB are testament to the value of these data.
Since most legislative changes are geared to the calendar year,
analysis of the impact of these changes is difficult and unreliable
when only policy year data is available. The Commission and Department
of Insurance should request that the WCIRB continue to calculate
accident year injury statistics for use in calculations of frequency
and rates by calendar year.
In the absence of accident year data, the frequency of major and minor PPD claims for the 1994 and 1995 accident years is estimated using Division of Labor Statistics and Research (DLSE) data on the frequency of disabling injuries for 1993, 1994, and 1995. The ratio of 1994 to 1993 and 1995 to 1993 disabling injuries was applied to the frequency of 1993 PPD claims as reported by the WCIRB from second level individual case reports to develop estimates of 1994 and 1995 PPD claims. Since the frequency of PPD claims has been falling more rapidly than the frequency of disabling injuries, this may slightly overestimate the number of PPD claims for 1994 and 1995. As an example, a similar procedure was used in our previous report to estimate the number of PPD claims for 1993 and 1994. This estimate (104,000 for 1993) overestimated the actual number by approximately 5%.
IV. Frequency of Exams
A) Number of Exams Per Claim
Chart 3 illustrates the decline in the number of exams per claim.
The 53 percent decline since 1989 is in part a reflection of changes
made that were meant to reduce the "dueling docs" syndrome.
Other changes include reestablishing the role of the treating
physician and establishing the treating physician's findings as
presumed correct except with a preponderance of evidence, limiting
the number of exams allowed per specialty in litigated cases,
cover-age of all issues in a single "comprehensive"
evaluation, actions against mills, and, as noted below, an aggressive
efforts against fraud and to reduce psychiatric exams.
The number of exams per claim at 40 months from the beginning
of the accident year for the 1989-1993 accident years were obtained
from the survey.
Projections for the estimated number of exams per claim for the
1994 accident year were obtained by calculating the historic growth
rate between 28 and 40 months in the average number of exams per
claim. This rate was then applied to the average number of exams
per claim obtained from the survey at 28 months after the beginning
of the accident year to obtain an estimate for expected average
number of claims at 40 months.3
1995 projections were obtained by first calculating a ratio of 1994 to 1995 average number of exams per claim using comparable claims (claims incepting from January through July, and valued at 16 months from the beginning of the accident year). This ratio was then applied to the estimate of the 1994 exams per claim projection for 40 months to obtain an estimate of exams per claim at 40 months for the 1995 accident year claims.
B) "Dueling Docs"
Reforms in 1989 and 1993 attempted to reduce the number of medical-legal
reports resulting from applicants and defense attorneys bolstering
cases with multiple reports by forensic doctors, often referred
to as the "dueling docs" phenomenon. The survey data
indicate that these efforts have been successful. The percent
of PPD claims with applicant and defense medical-legal exams by
doctors in the same specialty has declined by just over 1/3 from
the 1989 accident year to the 1993 and 1994 accident years. The
percent of claims with both applicant and defense exam requests,
regardless of the specialty, declined over the same period by
nearly half (48%). These data are shown in Chart 4.
C) Impact of Treating Physician
The reform legislation reestablished the role of the treating physician in writing evaluations of all medical issues concerning compensation and writing comprehensive medical-legal reports beginning in 1994. When treating physicians evaluations, paid under the treatment fee schedule, replace QME evaluations, the average number of medical-legal reports per claim is reduced. Also, the legal standing of the treating physician acts to discourage either party from disputing issues and obtaining a medical-legal report.
We analyzed this issue by calculating the percentage of PPD claims
resolved without any reported medical-legal exams. This was done
for the 1989-94 accident years and was calculated for claims resolved
within 28 months of the beginning of the accident year. These
data are shown in Chart 5.
The portion of claims closing with no recorded exams remained
steady at approximately 14-16% from 1989-93. For the 1994 accident
year, the portion of claims with no exams doubled to over 31%.
Alternately, specifying the time period as 28 months after the
date of injury gave identical results. It seems reasonable to
attribute much if not most of this change to the reintroduction
of the role of the treating physician. When the evaluation upon
which the case is resolved is a treatment report that would have
been produced and reimbursed in the usual process of patient care,
then this change represents a pure cost savings on medical-legal
costs. It does not, however, answer the question of the impact
of the quality of these reports on other aspects of case resolution
or the fairness, accuracy, or precision of the settlement.
V: Average Cost Per Exam
A) Average Cost
As seen in Table 2, the average cost per exam has declined from
a high of $987 for the 1990 accident year claims to the current
estimate of $518 for the 1995 accident year claims. This improvement
in exam cost is driven by at least three important changes. First,
the Medical-Legal Fee Schedule underwent several revisions. 4 The fee schedule in effect after August 3, 1993 attempted to substantially reduce the cost of exams by restructuring the schedule and reducing the level of acceptable charges. The schedule under which fees are set is determined by the service date of exams rather than the date of injury. Most 1993, and all 1994 and 1995 exams, have service dates in the period following August 3, 1993 when the
lowest fee schedule amounts were in effect. Only a fraction of
1991 and 1992 accident year claims have exams in this period,
and no exams in the WCIRB PD Survey of the 1989 and 1990 accident
years fell in this period.
Second, the average cost of exams is also determined by the mix of specialties of the reporting doctors. Some provider specialties have higher than average costs. The larger the proportion of costly exams, obviously, the higher the average cost of the claim. Psychiatric exams are substantially more expensive than exams by other specialties. The steep decline in the number of psychiatric exams is responsible for 19 percent of the decline in the average cost of all exams. If the proportion of exams that were psychiatric had remained steady at the 1991 accident year level, the average cost of medical-legal exams would have been $60 greater for the 1994 accident year.
Third, for injuries occurring after January 1, 1994, reform legislation
reestablished the role of the treating physician in writing medical-legal
reports. This issue is covered in the following section.
For survey years 1989 through 1993, average cost per exam was
obtainable from the survey itself, as all claims have been observed
for 40 months from the beginning of the accident year. For 1994
and 1995 claims, all exams occur in the period after the least
costly fee schedule went into effect. Accordingly, we assumed
the average cost per exam would remain constant at the current
level. It should be noted that analysis across all years, controlling
for the fee schedule in effect, did not reveal a change in the
average cost of exams as the claims matured from 16 months to
up to 64 months.
However, it should also be noted that the claims for the 1995 accident year had on average only 13 months of maturity before they were surveyed by the WCIRB. While claims from 1989 to 1993 did not show changes in average cost over time, the reintroduction of the treating physician may change this pattern for injuries after 1/1/94. If treating physician reports are substantially less costly and they represent a higher proportion of exams done within 16 or 28 months after the beginning of the accident year, the average cost estimates in Table 2 would underestimate the average cost of medical-legal reports over the life of the claim for accident years 1994 and later. The special panels drawn for 1994 and 1995 are too small for complete analysis of this issue.
B) Impact of Treating Physician on Average Cost
The reintroduction of the treating physician role in the medical-legal process affects the average cost of medical-legal reports in two ways.
1) When billed as a medical-legal report, the fee schedule sets reimbursement rates for treating physicians at 80% of those set for forensic specialists who are not also the treating physician.
2) Treating physician reports, paid under the Official Medical
Fee Schedule, may be incorrectly recorded on the WCIRB survey
as medical-legal exams, especially reports done shortly after
the new regulations went into effect. This would lead our figures
to underestimate the average cost of medical-legal reports.
The WCIRB PD Survey does not record the nature of the report writing
physician other than to identify the report as Applicant, Defense,
or AME 5. However, UC DATA examined a sample of several hundred
files at the Workers' Compensation Appeals Board with dates of
injury in 1994 that closed prior to Feb. 1, 1997. As indicated
in Table 3, of the medical-legal reports filed for resolution
of permanent disability issues on these claims, 36% were by treating
physicians. Thus, at a 20% discount, the treating physician scheduled
savings would account for, at most, only a third of the reduction
in the average cost per exam experienced between 1993 and 1994.
VI. Psychiatric Claims
A) Total Cost
Much of the decline in the average number and the average cost
of medical-legal exams per claim is the result of reductions in
the number and cost of psychiatric claims. Psychiatric claims
were subject to specific legislation that impacted these claims
separately from other types of claims.
As shown in Chart 6, the total cost of psychiatric exams has declined
from a high for the 1991 accident year of $93.8 million to an
estimated low of $5.8 million in 1995. This represents a savings
of $88 million, or 94 percent, in the cost of psychiatric related
medical-legal exams. This reduction accounts for 26% of the overall
reduction in all medical-legal costs between the 1991 and 1995
The decline in the total cost of psychiatric exams is due to both
a drop in the number of psychiatric claims and a decline in the
cost per exam. As shown in Chart 7, the number of psychiatric
claims (defined here as PPD claims with at least one psychiatric
medical-legal exam) has declined by 93 percent between accident
year 1991 and 1994. It should be noted that for injuries occurring
after January 1, 1994, the employer is required to pay for only
a single physician (or single physician for each side) to evaluate
all open issues. Consequently, for 1994 and later injuries, the
survey may no longer allow us to determine cases with a psychiatric
component. This will often be obscured when the evaluating physician
chosen is from another specialty.
B) Frequency of Psychiatric Claims
Part of this decline in number of psychiatric exams is driven by the overall decline in all types of PPD claims. In addition, as Table 3 indicates, the decline is driven by factors specific to psychiatric claims that reduced the portion of PPD claims that have a psychiatric component. Anti-fraud efforts, crackdowns on "mills," and similar efforts may be the most important factors in the declining frequency of psychiatric claims. Limits on post-termination stress claims introduced in 1993 and improvements in the California economy that reduced mass layoffs may also have played a role. The number of psychiatric exams per claim peaked in the period from 1990 through the first six months of 1991, even after passage of the Margolin-Bill Greene Workers' Compensation Act of 1989, which attempted to narrow the scope of compensability for psychiatric conditions 6, and went into effect for injuries occurring on or after January 1, 1990.
A second bill attempting to limit the number of psychiatric claims,
AB 971, went into effect in July, 1991. A noticeable decline in
psychiatric exams per claim occurred in mid-1991, but this decline
largely predated the implementation of AB 971, beginning in April
and May of 1991. This decline in psychiatric exams per claim beginning
in mid-1991 accelerated in 1992, and continued into 1993. Further
legislation requiring that work be the "predominant"
cause of a psychiatric complaint for injuries occurring on or
after July 16, 1993 has not drastically accelerated this decline
in psychiatric claims in data from 1994 and 1995.
Between 1991 and 1994, more than one-third (34%) of the reduction
in the average number of medical-legal exams per PPD claim is a result of a drop of 84% in the average number of psychiatric exams per PPD claim.
Unlike PPD claims in general, the recent decline in total medical-legal
costs on psychiatric claims is not due to a reduction in the average
number of psychiatric exams per psychiatric claim. Though the
1994 and 1995 samples are small and not yet complete for 40 months,
indications are that the average number of psychiatric exams on
psychiatric claims has not declined appreciably since 1992. The
number of psychiatric exams per psychiatric claim, when assessed
at 16 months after the beginning of the accident year, has remained
relatively constant at approximately 1.3-1.5 exams on each claim.
Similarly, at 28 months, 1993 and 1994 psychiatric claims show
little difference, on average, in the number of psychiatric exams
per claim than those in the previous year.
C) Source of Request for Psychiatric Exams
It is interesting to note that the rise in the proportion of all
claims with psychiatric exams from 1989-91 was accompanied by
only a small rise in the frequency of requests by workers. Chart
9 shows the distribution of exams by the source of request in
each of five periods. For this purpose claims were evaluated at
16 months after the accident date.
Requests by employers for psychiatric exams rose more rapidly
after 1989 than requests by workers. Moreover, they declined less
steeply after the reforms that went into effect in mid 1991. Consequently,
as indicated in chart 9, employers have replaced workers as the
predominate source of requests for these exams. However, the dramatic
decline in the number of psychiatric exams means that these requests
are occurring on a relatively small number of claims and the distribution
in the sample is likely to be subject to a good deal of variance.
VII. Adjudication and Claims Resolution
A) Improvement on represented claims
In this section of the report we use claims that have been resolved
within 40 months and 28 months after the beginning of the accident
year to further analyze trends in the number of reports requested
The choice to base this comparison on resolved claims was done to avoid the possibility that reforms sped up or slowed down the timing of exams on claims. For example, suppose the number of exams stayed the same, but they occurred earlier in the life of a claim. If we valued all claims at similar points in time, it would appear the number of exams was increasing. We avoid that problem in this analysis by only looking at claims that have been resolved. The number of exams which will occur is certain on closed claims.
When these data are further disaggregated, it is clear that the
decline in the number of exams is being driven primarily by the
improvement on the represented claims. Chart 10 and Chart 11 show
the data disaggregated by represented/unrepresented and major/minor
Regardless of whether the injury is major or minor, the represented cases in this period have had more exams than the unrepresented. This gap is, however, narrowing. While the frequency of exams on unrepresented claims has changed little, the change on represented cases has been substantial.
The introduction of mandatory settlement conferences (MSC) was
meant to reduce the need for hearings and decisions, and to speed
the resolution of cases. Have these new mechanisms accomplished
these goals? The data from the WCIRB survey suggest the answer
is no. Have the resolution mechanisms had unintended impacts on
the frequency of medical-legal reports? The data offer some support
that they have, albeit relatively weak support. Charts 12, 13,
and 14 show the resolution of cases at 40 months from the beginning
of the accident year 7.
These data reveal a decline in the percentage of cases where a voluntary agreement was reached without intervention by the DWC/WCAB, and an increase in the percentage of cases where the DWC has been involved. This is true for both major and minor injuries. Each of these subgroups exhibits the same pattern of little to no change in the rate of judicial settlements and a rise in the proportion of claims using dispute mechanisms. This is occurring despite the decline in stress claims, rules against post-termination claims, and other legislative changes that would be expected to have their greatest impact on the most disputed and difficult to resolve claims.
While the number of PPD claims has declined, the likelihood of DWC/WCAB intervention to resolve claims has actually increased, possibly as a result of the new resolution methods. Instead of reaching voluntary settlements that do not involve active involvement by the DWC/WCAB, parties are increasingly using one or more dispute resolution methods.
Some claims that would have been settled voluntarily are now using
at least one dispute resolution mechanism. The movement of cases
from voluntary settlement to dispute mechanisms has not been accompanied
by a reduction in the need for formal decisions to resolve claims.
The proportion of cases settled through formal hearings has not
These resolution methods may have had unintended impacts on the
frequency of medical-legal reports. While the frequency of reports
done on claims resolved within 28 months or 40 months has declined,
the apparent movement of cases from voluntary settlement to other
resolution mechanisms may be attenuating some of the savings to
the system. Claims using one or more resolution methods average
15-40% more medical-legal exams (see Chart 15). This gap has widened
even as claims have apparently moved from the voluntary processes
into dispute resolution.
C) Time to Case Resolution
There has been no significant improvement in the rate at which cases close. Hazard analysis was used to attempt to obtain a measure of the system's ability to process claims, independent of the type of claim, level of attorney involvement, etc. Based upon this analysis conducted as in our previous report, there are no significant differences in the time taken to case resolution in the 1990s. The system remains stubbornly resistant to attempts to speed up the resolution process. After controlling for injury severity, the number and type of specialty exams, and presence of employee legal representation, there is no statistically significant improvement in time to case resolution between 1990 and 1993, despite the variety of reforms which have been enacted during that time. Indeed, the only statistical difference between any particular accident years that we find is that cases following 1989 appear to be resolved more slowly than cases arising during the 1989 accident year. If anything, the 1993 claims show a disturbing trend towards slightly longer duration. The key will be when data on a full panel are available for 1994. This will allow hazard analysis to be performed for the first time on data for years following the 1993 reforms.
The 1996 report by the Commission evaluating the reforms to the
medical-legal process found dramatic improvements since 1989 in
the cost and frequency of medical-legal reports. Much of that
analysis required projections for the 1993 and 1994 accident years.
The current report, using more recent data, confirms those savings
and the accuracy of the projections.
These more recent data also suggest that the substantial savings,
especially for the 1993 and 1994 accident years, continue into
the 1995 accident year. The 1996 report found that a substantial
source of these savings resulted from changes in the Medical-Legal
Fee Schedule and the decline in psychiatric exams and claims.
These trends continue to be demonstrated in the 1997 report's
In addition, data for the 1994 and 1995 accident years suggests
an additional source of major cost savings, the reintroduction
of the role of the treating physician. This legislative change
is likely responsible for a substantial portion of the decline
in the average cost and frequency of medical-legal reports on
claims occurring after January 1, 1994. However, these data for
1994 and 1995 injuries come from special panels that are smaller
than the full panels drawn for 1989-1993. The survey conducted
during the current year, with a full panel of 3500 claims for
1994, will be important in analyzing this trend.
Finally, analysis of the time required to resolve PPD claims continues
to demonstrate the resistance of the system to more rapid claim
resolution. This is especially troublesome in view of the decline
in the number of PPD claims, which should have reduced workloads
and speeded resolution. The full 1994 panel, available late in
1997, will be critical to determining if the 1993 reforms have
finally been able to achieve the goal of speeding up the claim
Appendix 1: Summary of Legislative and Regulatory Changes
Appendix 2: Data and Methodology