Florida Weighs Workers’ Comp Hike, Cost of Doctor-Dispensed Drugs

Florida employers could have to pay more in workers’ compensation premiums if regulators go along with a proposed statewide average 8.9 percent rate hike. The rate change may also trigger legislative action to clamp down on doctor-dispensed drugs and the check cashing industry’s role in construction fraud.

The National Council on Compensation Insurance recommended the rate hike, which follows a 7.8 percent increase last year. Florida’s rates have dropped dramatically following a 2003 comprehensive rewrite of the state’s workers’ compensation law. Even with this year’s proposed increase, the state’s rates have fallen by a total of 58.6 percent since 2003.

NCCI State Relations Executive Lori Lovgren told regulators at a hearing that this year’s proposed increase shouldn’t be read a sign the system is failing. Instead, she said, it reflects a normal variance in rates, given that the savings from the 2003 reforms have now been fully realized.

“This is not a sign that the system is slipping toward a crisis,” she said. “It is more of an effort to find a new normal, a new baseline in Florida.”

NCCI Actuary Tony DiDonato said that no one expected that the 2003 reforms would continue to have a positive effect on the system as long as they have. After three years of declines in indemnity loss ratios and medical loss ratios, starting in 2006 those loss ratios largely leveled off.

“No one knew we would have this flat period,” said DiDonato.

However, there are signs that those trends may be heading upward, however slightly. As a result, DiDonato said, there is a need for the higher rate. “It’s the bare minimum,” he said about the proposed rate increase.

One point is clear and that is the current economy is making itself felt throughout the system. Since the housing bubble burst, the construction industry alone has seen its workforce drop by over 42 percent since 2007. Direct written workers’ compensation premiums fell 12 percent in Florida in 2010 alone, down to $1.6 billion, according to A.M. Best. The workers’ compensation loss ratio in the state went from 53.5 in 2009 up to 66.7 in 2010, also according to A.M. Best.

“There is a significant premium decrease due to declining payroll given the tough economic times we’ve been experiencing,” said Lovgren.

In another sign that the economy is having an impact on the system, the state’s claims frequency is on the rise after a nine year decline. In 2009, the state’s claim frequency jumped by 6.5 percent, a trend that is likely to continue.

If approved as filed, manufacturing classes would see an average 9.6 percent increase, construction classes 8.7 percent, office and clerical 7 percent, goods and services 9.9 percent, and miscellaneous classes 8.5 percent. No individual class would see rate increases or decreases of more than 15 percent. The new rates would take effect Jan. 1, 2012.

Drug-Dispensing a Target

At the public hearing, one issue that was on everyone’s mind was the ability of physicians to dispense and repackage drugs.

Florida’s workers’ compensation law specifies that pharmacies are to be reimbursed at a drug’s average wholesale price, plus $4.18. However, the law is silent when it comes to doctors who sell and repackage drugs in their office. As a result, there has been an explosion of physician-dispensed drugs, with markups as high as 600 percent or more.

“You can pay 54 cents for a pill at a pharmacy and if you go to the doctor’s office for that same pill it can be $4.21,” said Lovgren.

NCCI calculated that in 2003, only nine percent of drugs were dispensed by doctors. That number has risen to over 50 percent, making Florida the highest of 40 states.

Experts say the impact on rates is considerable.

Lovgren said it accounted for 2.5 percent of the 8.9 percent rate filing, representing $62 million in additional costs to the state’s workers’ compensation system.

Insurance Commissioner Kevin McCarty noted that the ability of physicians to repackage drugs had effects beyond price. He said injured workers could very well be receiving more drugs than they need for a longer period of time.

“We are not only talking about costs,” he said. “This is potentially detrimental to the health of workers’ compensation patients.

In 2010, lawmakers passed a law limiting the reimbursement for physician-dispensed drugs only to see it vetoed by then Gov. Charlie Crist. Another attempt to pass the bill this year ended when the Florida Medical Association and other physicians successfully lobbied against the measure.

Industry experts say the issue will certainly come up next year.

But National Federation of Independent Business-Florida Chapter representative Bill Herrle warned lawmakers may sidestep the issue entirely rather than entertain an issue that pits the powerful drug lobby against businesses. “It’s a food fight,” he said. “It’s going to be ugly.”

McCarty made clear, however, that without legislative action, things will only get worse. “If we can’t get our arms around the drug repackaging, we are going to continue to see upward pressure on rates,” he said.

Check Cashing Schemes

Another area that could find its way to the legislature is the use of check cashing companies in facilitating fraud in the construction industry.

Florida’s Insurance Consumer Advocate Robin Westcott, who is part of a working group on the issue, said that various check cashing schemes have become endemic around the state as contractors look around for ways to avoid paying premiums.

She said the schemes involve individuals who set up a shell company that purchase a minimal workers’ compensation policy in order to obtain a certificate of insurance. Then they in effect rent out that certificate to subcontractors who use it to show general contractors they have insurance.

Once the construction job is complete, the general contractor writes a check to the fake subcontractor, which in turn is cashed by the check cashing company for a fee. The subcontractor and their employers are then paid in cash with the shell company taking a fee for the use of the certificate.

Westcott said it is difficult to break the schemes since the shell companies rarely exist for long periods of time. “They appear quickly and then cancel the policy by month nine to avoid the first payroll audit,” she said.

As a result, she said¸ the state may have to rethink how it polices the construction industry. Describing the paper certificates as “antiquated,” she said it is time to look for other ways to monitor subcontractors’ compliance with the law.

“It’s time to explore the technology we have to move from audits to real-time monitoring,” Westcott said.

While law enforcement officials estimate that the check cashing schemes translate into hundreds of millions of dollars in evaded premium, NCCI representatives said it is hard to measure in terms of rates without premium audits.

McCarty noted it will likely be an issue for state lawmakers when they meet early next year. “The legislature has been very vigilant when it comes to addressing fraud and any money that is seeping out of the system,” he said.

Topics Florida Legislation Workers' Compensation Construction