American Journal of Law & Medicine

The future role of managed care and capitation in workers' compensation.(Health Care Capitated Payment Systems)

A patient of mine, Mrs. Lopez, suffered a lower back injury while lifting heavy equipment. She sustained the injury while working in the housekeeping department at a local college. I telephoned her supervisor and asked him about Mrs. Lopez's injury. He assured me that he had forwarded an accident report to the benefits department. He said he was unaware of any employer policies or training programs governing heavy lifting. The college did not have an employee health service, but instead relied on a local law firm to handle the administration of its workers' compensation. When I informed the supervisor that I thought Mrs. Lopez might be able to return to a restricted duty job soon, he said that he did not want Mrs. Lopez to return until "she was 100%." I told him that this employee would benefit medically from returning to a restricted duty job as soon as it was reasonable rather than waiting until she could perform heavy lifting again. However, the supervisor replied "Don't you worry about returning her to work so soon. Workers' compensation will pay for it."

Because of her employer's policies, Mrs. Lopez did not return to work for more than two months. She became deconditioned from the lack of normal daily exercise--which could have been avoided by providing restricted work--and the delay hampered her return to employment. Mrs. Lopez also became depressed, in part from being isolated from her workplace, and required antidepressant drug treatment. Although Mrs. Lopez appeared leery about returning to restricted duty when I initially broached the subject, she expressed a wish to return to work at later visits, especially when she felt able to perform the bulk of her regular job. Despite my repeated overtures to her supervisor, the supervisor did not allow Mrs. Lopez to return to work until she was completely recovered, even when she had recovered to the point of being able to perform almost all of her usual functions at work. Her employer paid for all of her medical treatment, including office visits and physical therapy, and did not have a utilization review agent--as is required by Massachusetts regulations--who should have contacted me to check on the appropriateness and necessity of treatment. I later learned that the college's legal counsel on workers' compensation issues questioned the legal basis for the state's utilization review regulations and advised its clients that it was not necessary to comply with them.

The approach taken by Mrs. Lopez's employer typifies a more general view. It assumes that the medical care provided injured employees should not differ from that given to other patients. This view also maintains a separation of medical care from the legal and administrative aspects of workers' compensation. Mrs. Lopez's employer viewed the medical care component simply as a health care financing problem and did not link it to other programs devoted to workplace safety or personnel policies. This separatist approach fails to establish the kinds of incentives that are essential to reduce the economic and human costs of workplace accidents.(1) It prevents applicable medical knowledge from being implemented into practice. In the above example, the employer probably incurred greater costs than it otherwise would have by not implementing return-to-work and injury-prevention programs.


Mrs. Lopez's story illustrates a significant structural flaw in the workers' compensation system. Employers tend to view medical care, including injury prevention and rehabilitation, solely as the responsibility of the medical sector. At the same time, health care providers have failed to educate employers about the benefit of return-to-work programs and injury-prevention approaches. In the foregoing story, returning the employee earlier to restricted work duties would have reduced the total cost of productivity reductions arising from her employment absence and medical expenses.

Commentators have heavily criticized the workers' compensation system for failure to provide sufficient incentives to reduce the costs of workplace accidents.(2) Legislatures and the public view workers' compensation as too expensive and as providing inadequate deterrence to workplace injuries.(3) Medical expenses account for as much as half of all workers' compensation costs.(4) During the past decade, medical costs associated with workers' compensation increased more than one and one-half times faster than general health expenditures.(5) Because of the high costs of the health care component of workers' compensation, commentators have recently made a vigorous call for the implementation of managed care.(6) Unlike other health care financing programs, workers' compensation provides complete medical care for work-related injuries and diseases without deductibles or copayments.(7) In the past, state regulators used fee schedules as the major device to limit medical costs.(8) Historically, these rates were low relative to other health financing systems and thus encouraged the participation of a relatively small proportion of health care providers.(9) Because managed care has lowered payments to providers in regular health care delivery, however, an increasing number of providers and medical organizations have become interested in treating workers' compensation patients.(10) At the same time, an increasing number of states are considering ways to implement managed care in workers' compensation.(11)

Many assume that states may implement managed care in workers' compensation in the same way states have implemented it in the regular health care delivery system: by emphasizing the reduction in the amount of treatment given to injured employees.(12) Yet, managed care is an ambiguous term, and it describes reliance on several different kinds of private regulatory systems. The most common form of current managed care in workers' compensation involves reliance on treatment guidelines and utilization review.(13) State regulators adopt treatment guidelines and require insurers to use them to determine the necessity and appropriateness of treatment.(14) This approach requires approval from utilization review agents before treatment continues after the initial visit(15) A second major form of managed care relies on health maintenance organizations (HMOs) and preferred provider organizations (PPOs) to provide care based on contractual relationships with employers or insurers.(16) Because HMOs and PPOs operate on a fixed financial rate based on the size and characteristics of the employee group, they have a direct financial incentive to establish ways to minimize costs.(17) The third form of managed care, capitation, establishes a direct financial incentive for treating physicians to minimize the costs of treatment.(18) A portion of the treating physician's income may vary depending on the costs of the treatment or referrals to specialists by the physician group to which he or she belongs.(19) Thus, managed care may encompass one or all of these major kinds of mechanisms aimed primarily at reducing treatment costs.

This Article describes how the workers' compensation system created a structural separation between the legal/administrative system that governs the workplace and the medical delivery system that treats injured employees. This structure creates incentives that encourage the legal/administrative system to concentrate primarily on compensating employees for work-related illnesses, rather than reducing work-related health costs through mitigation and prevention of work-related injury and disease with the input of medical expertise. Similarly, the medical care delivery system emphasizes taking care of work-related illnesses by treating the individual patient, rather than also changing workplace practices. In Part II, this Article describes the legal and health care components of the workers' compensation legal system. Part III analyzes the workers' compensation system's failure to encourage the optimal reduction of workplace cost. The rising costs of workers' compensation have not stimulated investments by employers in programs which prevent or mitigate workplace accident costs.

Part IV hypothesizes that this phenomenon results from the independence of the legal/administrative system from the health care delivery system. Here, I trace the separation of these systems within workers' compensation to traditional beliefs held by employers, health care providers, and employees. Part IV also discusses why business managers developed a general tendency to view workers' compensation as a social welfare program, rather than as an incentive to reduce the costs of workplace-related illness. Business managers have tended to rely on regulatory compliance with health and safety standards as the major means of controlling the incidence of workplace-related illness. Similarly, employees have tended to view workers' compensation as an entitlement due to them if they suffer from a work-related illness. Part IV furthermore describes how the medical care delivery system has traditionally dealt with work-related illness. Health care providers viewed workers' compensation as a health care financing system, and have generally taken a traditional patient-centered approach, rather than reforming workplace practices.

In Part IV, I analyze the potential role of managed care and capitation in workers' compensation. Managed care may not optimally lower the overall costs of workplace accidents if it primarily emphasizes reducing the amount of health care provided to injured employees. Reduction in the amount of treatment per injured employee may further encourage provision of health delivery on a high-volume and low-quality basis. Such an approach would likely result in higher indemnity costs, which cover lost wages if employees cannot return to work on a timely basis because of inferior medical treatment. Furthermore, if managed care confines itself to affecting only treatment decisions, then neglect of preventive strategies will continue. Alternatively, however, managed care may represent an opportunity to restructure the delivery of health care in a manner that improves quality and efficacy of treatment, encourages the prevention of workplace injuries, and provides for a timely return to work when medically reasonable. This optimal implementation of managed care and capitation in workers' compensation requires a paradigmatic shift to a community commitment based on a public health imperative to ensure quality medical care.

In Part V, I propose that the focus shift to a public health paradigm that emphasizes prevention and mitigation of injuries and disease in addition to quality of care. Such a community commitment to public health would be consistent with implementing occupational medicine principles through managed care. The practice of occupational medicine may serve to reduce the costs of accidents in workplaces by emphasizing--in addition to effective and efficient treatment--prevention and mitigation of work-related injuries. Indeed, the practice of occupational medicine may be particularly compatible with managed care because physicians in this specialty have developed pragmatic approaches to accommodate the tensions created by owing duties to both employee-patients and employers. This expertise has not yet been implemented on a widespread basis, however. Occupational medicine principles should provide a basis for a managed care approach that better optimizes a reduction in workplace accident costs. Part VI demonstrates how an emphasis on this public health imperative advances interests shared by employers, employees, and physicians.


Workers' compensation constitutes the first and most enduring tort reform measure in the United States. States initiated the idea at the turn of this century to provide an exclusive remedy for work-related injuries and diseases.(20) The remedy consists of indemnity and medical payments.(21) Thus, this innovation created a health care payment system within the legal structure of workers' compensation.


State legislatures established workers' compensation systems holding employers strictly liable to their employees for injuries and diseases caused by the workplace.(22) To qualify for benefits, the employee must show three major elements: (1) the existence of an injury or illness; (2) that the injury or illness arose from and in the course of employment; (3) and the resulting harm to the employee in lost wages, disfigurement, medical, or rehabilitation costs.(23) The amount of recovery depends on the degree of impairment and disability.(24) The determination of impairment is a medical judgment focusing on the functional limitations of the injured employee.(25) In contrast, the determination of disability is a legal judgment about the effect of the impairment on the ability of the injured employee to work.(26) Workers' compensation provides lower benefits than those traditionally available under tort law.(27) Typically, employees recover only about two-thirds of lost income.(28) Workers' compensation does not provide payments for pain and suffering.(29) Workers' compensation provides the sole remedy for employees who qualify and, generally, they are barred from suing their employers in tort law.(30)

Workers' compensation systems rely primarily on an administrative system to resolve disputes over claims. Prior to administrative adjudication, the system allows insurers in many states to have independent medical examiners (IMEs) evaluate claimants to determine whether the insurer should initiate or continue payments.(31) The IMEs, who are physicians paid by insurers, determine such issues as: whether the claimant's injury or illness falls within the jurisdiction of workers' compensation; whether the claimant is presently impaired and disabled; and whether the medical treatment rendered has been necessary and appropriate.(32) If an insurer decides not to initiate or continue payment to the claimant based on the IME report, the claimant may still present the claim to an administrative judge for a legal decision on the above issues.(33) While the original purpose motivating the establishment of workers' compensation systems was to provide an administrative claims system more efficient and speedier than the tort system, litigation before a claim is decided may cause substantial delays.

Workers' compensation requires the employer to obtain insurance or to self-insure, thus shifting the costs of workplace injury from the employee to the employer.(34) The employer's insurance premium rates depend on the hazardous risks of the particular workplace and the employer's experience.(35) From an economic perspective, therefore, workers' compensation should ideally internalize the costs of workplace accidents that injure employees by passing the costs on to consumers of the employer's products and services.(36) If the costs of workplace accidents exceed the costs of prevention, then a rational employer would ideally invest in improving workplace safety.(37)


Unlike other health care financing programs, workers' compensation provides complete medical care for work-related injuries and diseases without deductibles, copayments, or other limits.(38) In essence, employees who suffer from work-related injuries or illnesses have a right to health care as part of their workers' compensation benefits.(39) These health care benefits may include provider fees, physical therapy, medications, medical devices, rehabilitation services, and vocational training.(40) The workers' compensation system usually relies on fee schedules to determine the amount of the payment provided for these various benefits.(41)

Health care providers serve as the gatekeepers to workers' compensation health care delivery, and they also provide important information to the attorneys and adjudicators of legal claims.(42) Insurers and IMEs rely on information in the medical record which indicates whether the injury is work-related and thus within the purview of workers' compensation.(43) Attorneys frequently request that treating providers assess the degree of impairment and disability in addition to whether the injury is work-related.(44) IMEs may serve as a check on health care providers by determining whether a particular injury is work-related and the degree of impairment and disability.(45) Insurers may stop or fail to initiate payment for medical services if an IME decides either that an injury is not work-related or that a employee is medically ready to return to work.(46)


The workers' compensation system presently fails to encourage optimal reduction of workplace accident costs.(47) This failure currently manifests itself in the rising workers' compensation costs and a lack of a corresponding increase in investment in improving workplace safety.(48) Because the managed care approach dominates mainstream health care delivery systems, this approach will also likely be implemented in the workers' compensation system to reduce medical treatment costs.


Despite the rising costs of workers' compensation, there has been no corresponding reduction in workplace injuries and diseases. …

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