INTRODUCTION

On April 25, 2002, the Texas Workers' Compensation Commission (the Commission or TWCC) adopted §134.202, the Medical Fee Guideline (2002 MFG), to be effective for professional medical services provided on or after September 1, 2002. The adopted preamble and rule were published in the May 10, 2002, issue of the Texas Register (27 TexReg 4048). For ease of reference the April 25th order adopting the rule, including the preamble and the rule, will be referred to as the "April 2002 preamble."

On July 10, 2002, the Texas Medical Association and Texas AFL-CIO (TMA) 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). As authorized under Government Code §2001.038, TMA 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. TMA requested a temporary injunction to delay implementation of the rule. The Judge Dietz presided over the temporary injunction hearing held on August 19, 20, and 21, 2002.

During the court hearing, Judge Dietz noted that he had expected more of a "connect the dots" explanation in the preamble, and stated that the Commission may choose to "fix up" the reasoned justification and bring the preamble back before the court. After the temporary injunction hearing (TI Hearing), the Hon. John Dietz issued a Temporary Injunction and Remand Order, pending trial on the merits, stating that "based on the evidence adduced at the hearing, the Court is unable to conclude that the facts and data necessary to provide a reasoned justification for the rule are now in existence." Temporary Injunction and Remand Order, p. 2. The Court scheduled trial on the merits for December 9, 2002, later changed to a January 6, 2003 trial date.

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 125% 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% multiplier as stated in the April 2002 preamble.

The Commission decided to clarify the reasons for the 125% 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 has 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 this supplemental order/preamble. The Commissioners adopted this supplemental order/preamble at the public meeting on December 12, 2002, by a vote of 6 for - 0 against. The Commissioners also readopted §134.202 as adopted on April 25, 2002 by a vote of 4 for - 1 against - 1 abstention.

In developing the 2002 MFG, the Commission conducted thorough review, research, and analysis, and the Commission believes that the Commission's April 2002 preamble clearly and exhaustively explains the Commission's reasons for enacting the 2002 MFG as it was adopted. The Commission also strongly believes that the April 2002 Preamble standing alone, and as supplemented, demonstrates in a relatively clear and logical fashion that the rule is a reasonable means to a legitimate objective. Based upon the district court's ruling, however, the Commission afforded stakeholders an additional opportunity to present data and analysis. The Commission has revised and adopted the preamble to include this Supplemental Preamble, to offer further explanation. The adopted rule has not changed.

This document entitled "Supplemental Order/Preamble" is exactly that - a supplement to the April 2002 preamble, which is incorporated into the April 2002 order and preamble. The Supplemental Preamble further addresses the Commission's decisions in two ways. First, the Commission has restated the factual basis and reasoned justification for the conversion factor using the comments and other submissions, publications, and staff work considered as of April 2002. Although the Court's concerns concentrated on the Commission's decision as to the exact conversion factor adopted, an explanation of that decision requires discussion and explanation of other areas relevant to the choice of a conversion factor, as was done in the April 2002 preamble. In the Supplemental Preamble, the Commission has attempted to avoid reiterating details from the April 2002 preamble by cross-referencing them where appropriate, but repeating them as necessary to further "connect the dots".

Second, the Supplemental Preamble addresses issues raised by the parties in the court case, and issues, data, information, and arguments raised and/or provided to the Commission by stakeholders subsequent to issuance of the Temporary Injunction on August 28, 2002. It analyzes and concludes that all of this supports the 2002 MFG adopted by the Commission in April 2002, including the 125% multiplier and the single conversion factor.

This Supplemental Order/Preamble is added to the adoption preamble of the 2002 MFG and in particular the adoption of a single Texas workers' compensation conversion or payment adjustment factor at 125% of Medicare's conversion factor. The Commission here supplies additional explanation of the reasoned justification based on data and publications previously available but not as fully discussed, input received since the April 2002 adoption, additional publications, and additional data and analysis by staff.

LEGAL STANDARDS

Under the Government Code, as amended in 1999, an agency must provide a summary of the rule's factual basis, a reasoned justification that demonstrates in relatively clear and logical fashion that the rule is a reasonable means to legitimate statutory objectives, and responses explaining why the Commission disagrees with the comments of interested persons. TEX. GOV'T CODE §2001.033.

Only one round of notice and opportunity for comment is required. The agency may entertain other input, including ex parte input because rulemaking is legislative, not adjudicative like a contested case. The agency may adopt a rule that differs from the rule proposed, without a new notice and new opportunity for comment, unless the change in the rule ignores the proposed rule and affects "other subjects" or "persons" not fairly included in the scope of the proposed rule. State Board of Ins. v. Deffebach, 631 S.W.2d 794, 801 (Tex. App.--Austin 1982, writ ref'd n.r.e.). Patient Advocates of Texas v. Texas Workers' Compensation Commission, 80 SW3d 66 (Tex.App. - Austin 2002).

Here, the Commission is responding to a remand as a part of a temporary injunction delaying implementation of the rule pending an "improved" reasoned justification. The Commission is making no change in the rule text. The Commission is supplementing the preamble to address specific criticisms of the existing justification, made post-adoption in the litigation that resulted in the temporary injunction and remand. Under such circumstances, it follows a fortiori from the Government Code and Deffebach that the Commission may supplement on the basis of additional materials, as anticipated by the Court in its remand.

RESTATEMENT OF APRIL 2002 FACTUAL BASIS AND REASONED JUSTIFICATION

I. Medical Costs Within The Texas Workers' Compensation System Have Historically Been And Continue To Be, Excessive.

A. Joint Select Committee on Workers' Compensation Insurance.

The Texas workers' compensation law was enacted in 1913, and revised in 1917 to include state regulation of medical fees. In July of 1987, the Legislature created the Joint Select Committee on Workers' Compensation Insurance. The Committee Report (an excerpt is quoted in the April 2002 preamble) 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, 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) 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.

B. Recent Third Court of Appeals Decision.

This has more recently been recognized by the Third Court of Appeals of Texas. In a decision upholding the 1996 MFG, issued on the same day the Commission adopted the new 2002 MFG, the appellate court noted the following (Patient Advocates of Texas v. Texas Workers' Compensation Commission, 80 SW3d 66 (Tex.App. - Austin 2002)):

"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 helped cause workers' compensation insurance premiums to more than double between 1984 and 1988. See Texas Workers' Compensation Comm'n v. Garcia, 893 S.W.2d 504, 512 (Tex. 1994)."

"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 Tex. Lab. Code Ann. §413.011 (West 1996). Pursuant to that section, the Legislature directed the Commission to set new guidelines for reimbursements to health-care providers treating injured workers. Section 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. Section 413.011(b). (emphasis added)"

C. Medical Fee Guidelines - In General.

In the case before the court now, the Court has recognized how tough it is to wrestle with and reconcile the competing economic interests and statutory goals and policy considerations that are at play in the enactment of fee guidelines within the Texas workers' compensation system. TI Hearing, p. 58. The court also recognized that HB 2600 was a clear sign with respect to the guidance it contains, and stated "the benchmark of Medicare is here, and unless there is a change in the will of the legislature, it is the foreseeable future for the providers of Texas." TI Hearing, p. 60.

The Commission has always taken this daunting task very seriously, understanding the ramifications of medical costs and reimbursements for the workers' compensation system. It is because of these very ramifications that most of the Commission's efforts to establish medical fee guidelines that meet statutory requirements have been challenged with lawsuits. The most recent Medical Fee Guideline adopted by the Commission prior to the 2002 MFG, was adopted in 1996 and is still being litigated.

D. The 1991 MFG.

An extensive research program and review of the relevant literature and §134.200 of this title (the 1991 MFG) was undertaken by the Commission to assist in evaluating the strengths and deficiencies of the 1991 MFG, prior to the development of the 1996 MFG, as detailed in the April 2002 preamble pp. 4049-4051.

In short, data and analysis revealed that the lack of benchmarking in 1991 resulted in some medical services groups under the 1991 MFG 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.

The 1991 MFG had two more important defects. First, it resulted in substantial total medical overpayments, and thus did not achieve effective medical cost control. Second, it was not based on relative values, and thus created economic incentives for over-utilization of some services, including surgery, and underutilization of others.

E. The 1996 MFG.

The commercial market data secured by the Commission to develop the 1996 MFG, and the methodology of that fee guideline are detailed at 27 TexReg 4049 - 4050 in the April 2002 preamble. In essence, the methodology for the 1996 MFG retained the reimbursement relationships established in the 1991 MFG. The 1996 MFG took a partial step toward implementation of a relative value system, in which payments for all services are based on study of the relative costs and burdens of each CPT (Current Procedural Terminology) code, instead of on what various types of physicians had been able to charge in unregulated or less or differently regulated settings. The 1996 MFG used a private relative value system rather than the Medicare Resource Based Relative Value (RBRVS) approach that the Legislature mandated in 2001. The 1996 MFG took only a partial step toward implementation of relative value, limiting the changes to reduce impacts as a transitional measure. As a result, the 1996 MFG left in place a large portion of the relative value distortions of prior fees. As an example, the average Texas workers' compensation 1996 surgical fee varied from 113% to 193% of managed care reimbursement and from 222% to 261% of Medicare reimbursement. (Texas Workers' Compensation Commission Rate Comparisons, April 16, 1997, Health Care Solutions, Inc., Greg Guidroz) (April 2002 preamble 27 TexReg 4050)

The 1996 MFG was 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. (April 2002 preamble 27 TexReg 4049 - 4050)

F. Post-1996 Studies and Reports.

Since adoption of the 1996 MFG, several nationally recognized research reports (detailed with source references in the April 2002 preamble) have shown that Texas workers' compensation medical costs continue to exceed those in other states and other health care delivery systems (detailed in the April 2002 preamble 27 TexReg 4050). For example:

* the average medical cost per claim in Texas exceeds the national average by almost 80% (policy year 1995 data)

* the average medical payment per claim with more than seven days' lost-time in Texas was the highest of the eight states analyzed, which together account for at least 40% of the nation's workers' compensation benefits.

* the average medical payment per claim in Texas was 35% higher than the states' average (for 1996 claims).

* the average of medical payments in Texas for all claims was 47% higher than the states' average and 53% higher than the states' median.

* of nine states analyzed, Texas has the highest average medical costs per claim (more than 20% higher than the second-highest state, and more than 2.5 times higher than the lowest-cost state).

* when compared with a group health plan, average workers' compensation medical costs for State of Texas injured employees were approximately six times higher per worker.

In 1999, the Legislature enacted HB 3697, which required that the Legislative Research and Oversight Council on Workers' Compensation (the ROC) employ consultants to conduct interim studies of medical costs, among other things. Striking the Balance: An Analysis of the Cost and Quality of Medical Care in the Texas Workers' Compensation System by the ROC and Med-FX, LLC, was published by the ROC in January 2001. The major findings of that study include:

* In a comparison of nine other states' workers' compensation systems, Texas had the highest or second highest utilization rate for surgery, physical medicine and diagnostic testing. p. 29.

* In a comparison of treatment of Texas state employees and treatment for the same injury mix in group health, the state employees treated through workers' compensation had higher surgery, physical medicine and diagnostic testing utilization than those in group health." p. 34

The January 2001 ROC report (April 2002 preamble p. 4051) concluded that Texas policymakers and system regulators should consider developing a comprehensive plan to address:

* the amount of medical care provided to injured workers;

* 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. Striking the Balance, p. 94.

In February 2001, the Commission signed a professional services agreement with Milliman & Robertson, Inc., now Milliman USA (Milliman). See April 2002 preamble, 27 TexReg 4052 and 4054. Milliman conducted a market analysis of reimbursements from the 1996 MFG, reimbursements by commercial payers in Texas, reimbursements in workers' compensation systems from other states, and 2001 Medicare allowed fees in Texas, comparing the reimbursement level for corresponding services. Milliman provided the Commission with written reports of their findings and recommendations: