The Impact of Physician Fee Schedule Introductions in Workers Compensation: An Event Study

______________________________________________________________________________ Abstract Motivation. Quantifying the impact of the introduction of physician fee schedules in workers compensation is an integral part of NCCI legislative pricing. Although the vast majority of U.S. states have physician fee schedules in place, a small number of jurisdictions operate without such a legal provision. Several studies have attempted to measure the impact of fee schedule introductions on the price and utilization of medical services provided by physicians. None of these analyses delivered evidence of an aggregate utilization increase in response to fee schedule introductions, although some point to changes in utilization for isolated procedures. Further, this prior research established overwhelming evidence that fee schedules contribute to lower price levels and lower rates of price level increases. Method. This study analyzes the introduction of workers compensation physician fee schedules in two states: Tennessee (which adopted a fee schedule in July 2005) and Illinois (February 2006). Event study methodology is used to quantify the aggregate effect of these legislative actions. This aggregate effect is measured by a change in the severity index, which comprises both the price and utilization responses. Time series modeling is used to forecast the severity and utilization indexes that would have been observed absent the fee schedule introduction. The differences between observed (net of noise) and forecast severity and utilization indexes in the third month of fee schedule operation then serve as estimates for the impacts of the fee schedule implementation. The price response to this cost containment measure is backed out of the severity and utilization responses. In a sensitivity analysis, the price level response is obtained by comparing the price level of the third post-implementation month to the price level of the final pre-implementation month; the change in the price level thus measured is then combined with the estimated utilization effect to arrive at the severity response. Results. In both jurisdictions, the fee schedule introductions contribute to a marked decline in the price level of medical services provided by physicians, as well as a permanent weakening in the rate at which this price level subsequently increases. In Tennessee, the price level declines in excess of 7 percent, and the annual rate of inflation lessens by 0.3 percentage points. By comparison, in Illinois, the price level drops by slightly more than 5 percent and the annual rate of inflation decreases by 0.6 percentage points. In Tennessee, there is a negative utilization response, which may be related to a restriction on physician choice that was implemented prior to the fee schedule introduction. For Illinois, the utilization response is essentially nil. Availability. The statistical model was implemented in R (cran.r-project.org), using the R package forecast (cran.rproject.org/web/packages/forecast/index.html).