The Impact of Medical Inflation on California Workers’ Compensation Fee Schedules
Abstract
In California, maximum fees for medical services provided to injured workers are regulated by the Official Medical Fee Schedule (OMFS). Each of the OMFS sections uses distinct rules for payment calculation, as well as different inflation factors to update payment rates. For inpatient, outpatient facility, ambulatory surgical center, ambulance services, and DMEPOS, the California workers’ compensation fee schedule adopts the same inflationary factors as Medicare. Overall, the cumulative percentage increase in the OMFS inflationary factors for these fee schedules has been lower than economy-wide inflation. Since 2015, inflationary adjustments for the OMFS conversion factor in professional services have not aligned with Medicare, as Medicare stopped using the Medicare Economic Index (MEI) and shifted to statutory changes set by the U.S. Congress. In contrast, in California workers’ compensation the use of MEI remains mandated by statute. From 2015 to 2019, statutory adjustments to the Medicare conversion factor were minimal (0.5%), and the DWC did not adopt them. However, from 2021 to 2024, Congress mandated increases of 1.25% to 3.75% annually for Medicare, which the DWC incorporated in addition to the MEI adjustments. As a result, the OMFS conversion factor as a percentage of Medicare for professional services rose from 124.4% in 2017 to 145.7% in 2024. In addition to inflation adjustments, fee schedules rates (e.g., price levels) are affected each year by changes in factors such as Relative Value Units, DRG and APC weights, and geographic adjustment variables (like GPCIs and wage indexes). While a fee schedule rate sets the maximum reimbursable price for each service, in addition to inflation, average payments for physician services are also influenced by changes in utilization, service mix, and discounting practices.