The Commissioner of Workers' Compensation (Commissioner), Texas Department of Insurance (Department), Division of Workers' Compensation (Division), adopts amended §134.1 and new §§134.2, 134.203, and 134.204 concerning the Medical Fee Guideline (MFG) with changes to the proposed text published in the October 5, 2007, issue of the Texas Register (32 TexReg 6966) and error corrections published in the October 12, 2007, issue of the Texas Register (32 TexReg 7329).

In accordance with Government Code §2001.033, the preamble contains a summary of the factual basis of the rules, a summary of comments received from interested parties, names of those groups and associations who commented and whether they were in support of or in opposition to adoption of the rules, and the reasons why the Division made changes based on the comments or disagreed with the comments and proposals.

The Texas workers' compensation law was enacted in 1913, and revised in 1917 to include state regulation of medical fees. In July 1987, the Legislature created the Joint Select Committee on Workers' Compensation Insurance. The Committee Report issued in December 1988, concluded that workers' compensation medical costs were high in relation to those in other states and that they had increased faster than medical costs outside the system and faster than indemnity costs. In other words, the Committee Report concluded that workers' compensation had been subsidizing the provision of non-workers' compensation medical care.

The overhaul of the workers' compensation law with the enactment of the "new law" in 1989 resulted in the addition of a statutory mandate that the medical fee guidelines enacted by the Industrial Accident Board (IAB) (the precursor of the Texas Workers' Compensation Commission (Commission)) be designed to also achieve effective medical cost control. This was the first time that Texas workers' compensation law specifically mandated that a state agency work to control medical costs within the workers' compensation system, and sent a strong message that the steps taken by the Commission in this area must differ markedly from those of the IAB in the past.

As noted by the Texas Supreme Court in Texas Workers' Compensation Comm'n v. Garcia, 893 S.W.2d 504, 512 (Tex. 1994), "In 1989, the Legislature enacted a new Workers' Compensation Act (hereinafter the "Act") restructuring the workers' compensation law in Texas. The new Act replaced the old system that had become increasingly expensive and was suffering from a loss of public confidence. Medical costs for injured workers within the workers' compensation system began increasing at a much higher rate than similar costs outside the system. These increases, in part, caused workers' compensation insurance premiums to more than double between 1984 and 1988."

In response to these mounting costs, the Legislature gave the newly created Commission sweeping new powers. One of these powers was in the area of medical costs and reimbursement. See Labor Code §413.011. Pursuant to that section, the Legislature directed the Commission to set new guidelines for reimbursements to healthcare providers treating injured workers. Labor Code §413.011(a)(1). In so doing, the Legislature assigned the Commission the daunting task of designing a guideline that provides fair and reasonable reimbursements, ensures the quality of medical care, and simultaneously achieves effective medical cost control. Labor Code §413.011(b).

An extensive research program and review of the relevant literature and §134.200 (concerning Medical Fee Guideline) (1991 MFG) was undertaken by the Commission to assist in evaluating the strengths and deficiencies of the 1991 MFG, prior to the development of §134.201 (concerning Medical Fee Guideline for Medical Treatment and Services Provided Under the Texas Workers' Compensation Act) (1996 MFG).

The objectives for the 1996 MFG were to move Texas MFG reimbursements toward a median position in comparison with other states, away from a charge-based reimbursement structure, and more toward a market-based system. Consequently, to accomplish these objectives, and because no reference point or benchmarking against market based charges was done during the development of the 1991 MFG, in developing the 1996 MFG, the Commission determined that it was appropriate to obtain data from outside sources to use in evaluating what changes in reimbursements were necessary. The Commission also elected to switch from the California Relative Value System, to the more widely used and recognized McGraw-Hill Relative Values for Physicians. Commercial market data was supplied from an outside source and included conversion factors based on charges for every 10th percentile starting at the 20th percentile and ending at the 90th percentile. This revealed that the lack of benchmarking in 1991 resulted in some medical services groups being reimbursed around the 10th percentile when compared to the commercial market data, while other groups were reimbursed above the 90th percentile. In addition, some of the individual codes within each group were reimbursed far above or far below the median of the data. As noted in Congressional Budget Office testimony: a charge-based reimbursement system gives physicians the incentive to increase their charges from year to year to boost their revenues; this leads to spiraling expenditures. (Statement of Dan L. Crippen, Director, Congressional Budget Office, Testimony Before the Subcommittee on Health of the House Committee on Ways and Means, Hearing on Physician Payments, February 28, 2002.)

The conversion factors for the 1996 MFG were derived by dividing the sum of all charges for each American Medical Association (AMA) Current Procedural Terminology (CPT) category group by the sum of the relative value units for each charge in the same group. At this point in developing the 1996 MFG the Commission was concerned that a full shift away from the 1991 MFG could destabilize the system. Therefore, the goal of establishing a 1996 MFG that produced the same level of total expenditures as the 1991 MFG was identified as an alternative to a fully market based system. Thus, the move to a fully market based system was restricted by Commission goals to maintain the same level of expenditure overall, and as much as possible in each individual service category. Adjustment restrictions per procedure were also established to avoid extreme changes. Conversion factors for service categories ranged from the 20th to the 60th percentiles. In essence, this methodology retained the reimbursement relationships established in the 1991 MFG so that the 1996 MFG still did not reflect median or average commercial reimbursements.

In developing the 1996 MFG, the Commission's expenditure goals included keeping reimbursements for medical services in Texas relatively stable so that over time the effects of inflation and changes in other states' medical fee guidelines would help move Texas towards a median position. The 1996 MFG was thus a transitional step to the Commission's stated intent to review and revise the MFG on a regular basis in developing a market-based system. These assumptions were not fully realized because medical inflation during the late 1990's was much less intense than in the previous decade, there was significant realignment in reimbursement structures in both the commercial and Medicare systems, and other states' compensation systems began to adjust their fee schedules accordingly.

These factors, in addition to the transitional implementation of the McGraw-Hill relative value system and the overall restriction in total system reimbursement, would result in a significant realignment and significant reduction of reimbursements for some services in the 2002 MFG.

After the adoption of the 1996 MFG, several research reports showed that Texas workers' compensation medical costs continued to exceed those in other states and other health care delivery systems.

* Policy year 1995 data show that the average medical cost per claim in Texas exceeded the national average by almost 80 percent. (Texas Research and Oversight Council (ROC) on Workers' Compensation and Med-FX, LLC., Striking the Balance: An Analysis of the Cost and Quality of Medical Care in the Texas Workers' Compensation System, A Report to the 77th Texas Legislature, January 2001, citing National Council on Compensation Insurance (NCCI), Annual Statistical Bulletin, 1999.)

* The average medical payment (paid and incurred) per claim with more than seven days' lost-time in Texas was the highest of the eight states analyzed (California, Connecticut, Florida, Georgia, Massachusetts, Minnesota, Pennsylvania, and Texas). Together these states account for at least 40 percent of the nation's workers' compensation benefits. (Workers' Compensation Research Institute (WCRI), Benchmarking the Performance of Workers' Compensation Systems: CompScope Multistate Comparisons, July 2000.)

* When similar types of injuries were compared in the group health and workers' compensation systems, Texas had higher than average medical costs for the top five types of injuries. (ROC, January 2001.)

* When compared with group health (a State of Texas employee Preferred Provider Organization (PPO) group health plan), average workers' compensation medical costs for State of Texas injured employees were approximately six times higher per worker ($578 per worker in this group health system compared to $3,463 per worker in the Texas workers' compensation system, 18 months post-injury). (ROC, January 2001.)

* In general, the amount of medical treatment (often called treatment utilization) and the length of medical treatment (often called treatment duration) provided to Texas injured workers accounted for the majority of these cost differences between other state workers' compensation systems and other health care delivery systems. Additional differences between Texas workers' compensation and Texas group health systems also widened the cost gap. These differences included the lower cost of many individual medical treatments in group health (due to the PPO or other negotiated discounts), the existence of pharmaceutical formularies in the group health system, and in the case of workers' compensation, the inclusion of costly and questionable medical services (e.g., work hardening/conditioning). (ROC, January 2001).

The January 2001 ROC report concluded that Texas policymakers and system regulators should consider developing a comprehensive plan to address:

* the amount of medical care provided to injured employees;

* the price of individual treatments and services in workers' compensation;

* the method by which the system resolves disputes; and

* the method by which the system regulates doctors and insurance carrier utilization review agents.

With this background of information and reports, the 77th Texas Legislature enacted House Bill 2600 which amended §413.011 of the Labor Code to address reimbursement policies.

Prior to the revisions of House Bill 2600, §413.011 required that guidelines for medical services fees be fair and reasonable and designed to ensure the quality of medical care and to achieve effective medical cost control.

Section 413.011 also stated that the guidelines may not provide for payment of a fee in excess of the fee charged for similar treatment of an injured individual of an equivalent standard of living and paid by that individual or by someone acting on that individual's behalf. The commission was to consider the increased security of payment afforded by the Texas Workers' Compensation Act (the Act) in establishing the fee guidelines.

In addition to the previous requirements, the revised statute also required that the commission:

* use health care reimbursement policies and guidelines that reflect the standardized reimbursement structures found in other health care delivery systems with minimal modifications to those reimbursement methodologies as necessary to meet occupational injury requirements;

* adopt the most current reimbursement methodologies, models, and values or weights used by the federal Health Care Financing Administration (HCFA) to achieve standardization, including applicable payment policies relating to coding, billing, and reporting, and may modify documentation requirements as necessary to meet the requirements of §413.053 of the Act (relating to Standards of Reporting and Billing);

* develop conversion factors or other payment adjustment factors in determining appropriate fees, taking into account economic indicators in health care; and

* provide for reasonable fees for the evaluation and management of care as required by §408.025(c) and commission rules.

Section 413.011(b) stated that this section of the law does not adopt the Medicare fee schedule, and the commission shall not adopt conversion factors or other payment adjustment factors based solely on those factors as developed by the HCFA.

On April 25, 2002, the Texas Workers' Compensation Commission adopted §134.202, (concerning Medical Fee Guideline) (2002 MFG), to be effective for professional medical services provided on or after September 1, 2002.

On July 10, 2002, the Texas Medical Association and Texas AFL-CIO filed a lawsuit against the Commission. Texas Medical Assoc., et al. v. Texas Workers' Compensation Commission, Cause No. GN 202203 (126th Judicial Dist., Travis County, Texas) (TMA v. TWCC I), which challenged the 2002 MFG on various statutory authority grounds and also alleged that it was adopted without substantial compliance with the reasoned justification requirements of notice-and-comment rulemaking under Government Code §2001, subchapter B. After a temporary injunction hearing, the district court judge issued a Temporary Injunction and Remand Order, pending trial on the merits.

The temporary injunction order included a remand to the Commission, under amendments added to the Government Code's provisions for challenges to agency rules in 1999. These amendments make a court's decision after trial on the merits that a rule's adoption was not in substantial compliance with reasoned justification requirements voidable, rather than void, and confirm that a trial court may allow a rule to go into effect pending efforts to revise the preamble to satisfy reasoned justification standards. The Court in this case made a number of statements from the bench identifying the Commission's decision to adopt a multiplier as the focus of its concerns and shedding further light on the nature and extent of the Court's concerns with the reasoned justification for the 125 percent multiplier as stated in the preamble for the 2002 MFG, published in the May 10, 2002, issue of the Texas Register (27 TexReg 4048).

The Commission clarified the reasons for the 125 percent multiplier issue with particular focus on TMA's challenges and the Court's concerns. In addition to the parties' briefs, testimony and exhibits in the temporary injunction hearing, the Commission's Executive Director invited stakeholders to a September 16, 2002 meeting and requested further input, in particular on the extra administrative burdens of the workers' compensation system, the appropriate conversion factor, and the access to care issue. On September 19, 2002, the Commissioners directed the Executive Director and staff to review any additional stakeholder input and all other relevant information and to make reports and recommendations to the Commission at the October or another future meeting. The Commission's staff reviewed the input received in that process, and relevant new publications. Staff also reviewed the Commission's previous statement of factual and legal analyses as reflected in the existing preamble in light of additional staff analysis. Based on its review, the staff prepared and the Executive Director submitted for the Commission's consideration a supplemental order/preamble.

The Commission adopted the "Supplemental Preamble" on December 12, 2002 and readopted the 2002 MFG with no textual changes to the rule. The 2002 MFG was republished in the December 27, 2002, issue of the Texas Register (27 TexReg 12304).

In April 2003, the district court held another hearing, this time on the appellants' request for a permanent injunction and on the merits of the rule's validity. After hearing evidence and argument, the court determined that the Commission's Supplemental Preamble substantially complied with the reasoned-justification requirement and issued an order declaring the 2002 MFG valid in all respects, effective August 1, 2003. The appellants filed a motion for rehearing, which the district court denied. The appellants then brought an appeal, reasserting their arguments urged to the district court and the Third Court of Appeals upheld the district court's findings in Texas Medical Assoc. v. Texas Workers' Compensation Commission, 137 S.W.3d 342 (Tex. App. - Austin 2004, no pet.). (TMA v. TWCC II).

The new sections and the amendments to the 2002 MFG build on the prior history and prior court decisions, and address statutory changes that have come into effect subsequent to the 2002 MFG.

The Commissioner adopts amended §134.1 and new §§134.2, 134.203, and 134.204 to comply with Labor Code §413.012, which directs fee guidelines to be reviewed and revised to reflect fair and reasonable fees and to reflect medical treatment or ranges of treatment that are reasonable and necessary at the time the review and revision are conducted. In response to written comments received from interested parties and testimony at a public hearing held on November 5, 2007, the Division has changed some of the language in the text of the proposed rules as adopted. These changes, however, do not introduce new subject matter or affect persons in addition to those subject to the proposal as published. Other changes are made for consistency.

The amendments to §134.1 are necessary to address rule name changes and the addition of the new §§134.2, 134.203 and 134.204, to clarify when fair and reasonable reimbursement applies, to correct grammatical inconsistencies in the section, to add a definition of maximum allowable reimbursement (MAR) as requested by one commenter, and to renumber the subsections to accommodate the added definition.

Adopted §134.2 is added pursuant to Labor Code §408.0252, which allows the Commissioner to identify areas of the state in which access to health care providers is less available and to adopt appropriate standards, guidelines, and rules regarding the delivery of health care in those areas. The text in the adopted section provides an incentive reimbursement of 10 percent over the regular reimbursement amount to encourage health care providers to provide services to injured employees in areas identified by the Division as being underserved. In specifying workers' compensation underserved areas, the Division utilized three criteria simultaneously: a ZIP Code that was not in a designated Medicare Health Professional Shortage Area (HPSA), a ZIP Code that had at least one Division approved request for a case-by-case exception to the appointment of a provider who was not on the Division's Approved Doctor List (ADL), and a ZIP Code that had no ADL provider listed. Using those three criteria, the Division has designated 122 of the 4,254 Texas ZIP Codes as eligible for the 10 percent incentive payment. The Division determined that 10 Cont'd...