Soaring medical inflation is hammering workers' compensation buyers, increasing costs and further straining bottom lines already reeling from the worst economic downturn since the Great Depression.

Medical inflation exploded by 78 percent between 2000 and 2008–the most recent year for which fully adjusted data is available. Workers' comp insurance buyers, brokers and carriers have sought to soften the impact of rapid medical inflation through aggressive loss control and claims management.

While these efforts have been successful, many people think that slowing this upward trend and further controlling its impact on workers' comp buyers is unlikely.

I disagree. In spite of today's challenging environment, the future ability of buyers, brokers and insurers to better control workers' comp medical costs looks bright.

My optimism stems from the emergence of a host of new technologies and approaches that improve both the art and science of managing workers' comp claims, creating better outcomes for injured workers while controlling costs for employers.

First, the bad news: Today's environment is challenging.

Soaring health care inflation has caused medical spending to replace indemnity payments as the leading driver of total workers' comp claim costs. Medical costs as a percentage of total comp claims rose from 46 percent in 1988 to 58 percent in 2008, the last year for which fully adjusted data is available.

Demographics will cause this trend to continue. There are now more older workers than younger ones. As workers age, they are more prone to injuries and take longer to heal. This increasing demand for work-related medical care will drive the prices for these services higher, contributing to medical inflation.

Despite medical inflation's negative impact, there is no political will to bring to workers' comp systems the co-pays, deductibles, caps and other tactics that have proven successful in controlling group medical spending.

Now for the good news: Seven developments are helping buyers and insurers gain more control over workers' comp costs and better control their financial impact. They are as follows:

o New predictive and decision support models. Tools are emerging that use data to help insurers more quickly take action to improve the cost of individual claims and to better manage all claims.

Bringing to workers' comp the sophisticated medical cost analysis long standard in group health, Liberty Mutual was able to develop a range of tools to better manage comp costs–from algorithms that quickly spot the small portion of comp likely to drive total claims costs, to reports that identify medical providers with questionable billing practices.

These data-driven tools are having an impact. For example, our automated bill review process analyzed more than 5.5 million medical bills in 2009, producing an average savings of over 50 percent on each bill.

o An integrated approach. Increasingly, insurers are developing a continuous process of active case management, training and development, and quality assurance. All three disciplines are working more closely together.

Quality assurance identifies performance gaps. Training and development provides the skills needed to close those gaps. Frontline claim managers use that new knowledge to produce better outcomes, more cost-effectively.

o Evidence-based medicine. The recognition of the need for treatment guidelines based on medical best practices is slowly coming to workers' comp from group health. Liberty Mutual's medical directors have long helped control comp claim costs and improve outcomes for injured workers by reviewing proposed treatment plans and talking with providers when these plans strayed from standard approaches.

The use of widely accepted medical guidelines for treating work-related injuries will further strengthen these efforts. This approach played a key role in reforms that dramatically improved the California, New York and Texas workers' comp markets.

o Successful state workers' comp reforms. Reforming state workers' comp programs can improve the medical care provided injured employees while lowering the cost of that care. Adjusting fee schedules, adding evidence-based treatment guidelines and other reforms have been successful. In fact, reform efforts in California and Texas quickly slashed the average medical payment per comp claim.

But continued focus is needed. The average medical payment per claim in both states is growing as providers, claimants and lawyers find ways to work around the reforms.

o Advances in medical science. Many of today's now standard medical treatments were unknown 10- or 15 years ago. And tomorrow's best practices will reflect today's advancements, from stem cell research to improvements in treating spinal cord injuries. Progress will continue.

o Improved fraud detection. Ever greater amounts of data will help insurers spot suspicious activity, both from providers and claimants. For example, Liberty Mutual recently documented a sharp increase in the use of Therapeutic Magnetic Resonance (TMR)–an expensive and unproven pain management technique–among physicians treating Pennsylvania comp claimants.

Further research showed that three providers were responsible for over 80 percent of these services. Liberty Mutual medical directors spoke to these providers about the unproven value of TMR, explained our bill review process, and informed them that prior authorization of TMR service would be required.

o Declining workplace injury rate. The workplace is getting safer. Between 1995 and 2008, the number of work-related injures fell significantly, from approximately 1,750 claims per 100,000 workers in 1995 to roughly 1,000 claims per 100,000 workers in 2008. This decline is happening across all industries and sizes of employers.

So, the sky is dark, but it is far from falling. Controlling the impact of soaring workers' comp medical costs is as difficult as it is necessary. But a host of new developments–from data-driven tools that let insurers quickly identify and address claim trends and issues to declining workplace injury rates–will help insurance buyers, brokers and carriers bring about better outcomes for injured workers while protecting the bottom lines of employers.

Paul Rodliff is senior vice president and general manager for Commercial Professional Services at Liberty Mutual, the area of Liberty that improves loss results for commercial insurance buyers through managed care, loss control and other strategic tools. He may be reached at [email protected].