Health-care inflation is becoming a larger part of the workers' comp equation. And that is fundamentally changing the way companies manage and control this expense.

Over the past 10 years or so, medical cost inflation hasaltered the makeup of workers' compensation costs from about 60 percent indemnity (payments for lost wages) and 40 percent medical expenses to 45 percent indemnity and 55 percent medical costs. As a result, organizations' ability to manage medical outlays has become a major driver of their success in managing and controlling their overall workers' comp budget.

"Health-care cost inflation is even greater in workers' compensation than in general health insurance," says Joseph Paduda, principal with Health Strategy Associates, a Madison, Conn.-based consultancy. Several factors are driving the trend. Workers' comp requires no deductible; it covers the first dollar and every dollar of a claim, so it offers no incentive for workers to control costs, for example by choosing generic drugs over name-brand products. "The [insurance] industry has done a terrible job of managing medical expenses in workers' compensation," points out Paduda. "At 10.5 percent, health-care inflation in workers' compensation is two to three percentage points higher than regular health-care cost inflation.

"Insurance executives do not understand what is driving medical costs," Paduda adds. "They look at the health-care costs in workers' compensation as a monolithic 'blob,' " he says, rather than examining each component of medical care to gauge its impact on overall costs and finding ways to rein in those expenses. For example, in many cases, managing the cost of physical therapy requires a focus on controlling utilization -- not price. "The problem is the frequency and volume of service," Paduda explains.

Overutilization is a key driver of cost inflation in workers' comp. According to Paduda, research has shown that workers who are treated by physicians who are experienced at treating workers' comp cases return to work faster and generate lower claims costs overall. That's because these physicians understand that their function in a workers' comp case is to treat the work-related injury so that the patient can quickly return to functionality.

"These physicians do not focus on what the individual can't do, but on what that person can do with appropriate medical care," says Paduda. "Most physicians don't work that way and end up doing too much to treat the patient."

Some states, including California, Texas, Oklahoma and Missouri, have enacted workers' comp reforms designed to give employers broad opportunities to ensure that employees receive appropriate care. For example, California now allows employers to establish medical provider networks that consist primarily of occupational medicine specialists.

"Companies cannot change the benefit structure," says JoAnn Ralph, managing consultant and principal with Rothstein Kass Insurance and Risk Management Group, a consulting firm based in Roseland, N.J. "But they can use existing laws to manage claims, get people back to work and get some empathy into the process" by showing injured employees that they care about them and want them back on the job as soon as possible.