WC Outpatient Payments Run 60% Higher Where States Lack Fee Schedules

From building state-specific WC medical severity trend assumptions across dozens of filings, the single largest source of model error is treating national WCWMI data as though it applies uniformly to every state. It does not. WCRI's May 2026 release of the Hospital Outpatient Payment Index, 2026 Edition (WC-26-20), quantifies a structural cost bifurcation that has been widening for at least 13 years: hospital outpatient facility payments for workers' compensation procedures are at least 60% higher in most states without fixed-amount fee schedules than in states with them.

This is not a minor variation. Hospital outpatient care carries roughly 28% of the weight in NCCI's Workers' Compensation Weighted Medical Index (WCWMI). When that component runs at 4% to 5% in a charge-based state and 1% to 2% in a fixed-amount fee schedule state, the resulting difference in the aggregate medical severity trend is large enough to move the entire loss cost filing indication by two or more points. The WCRI data, combined with NCCI's April 2026 WCWMI report showing national WC medical price growth at 1.8%, gives pricing actuaries the tools to decompose the trend assumption into fee-schedule-driven price and underlying utilization components at a level of granularity that was not previously available.

WCRI's 36-State Payment Benchmark

The WCRI Hospital Outpatient Payment Index covers 36 states representing 88% of all U.S. workers' compensation benefit payments. The 2026 edition benchmarks facility payments for common procedures, including knee arthroscopies and shoulder surgeries, against Medicare fee-for-service rates and across three fee schedule regimes: fixed-amount schedules (where the state sets a specific dollar amount per procedure), percent-of-charge schedules (where the reimbursement is calculated as a percentage of the provider's billed charge), and no-fee-schedule states (where payments are determined by negotiation or usual and customary rates).

The headline finding: in most states without fixed-amount fee schedules, hospital outpatient payments per procedure are at least 60% higher than in states with fixed-amount schedules. In several charge-based states, the gap exceeds 100%. For a knee arthroscopy, a procedure commonly associated with workplace injuries, the difference between the lowest-cost fixed-amount state and a high-cost charge-based state can exceed $5,000 per claim on facility charges alone, before accounting for physician fees, anesthesia, or post-surgical rehabilitation.

WCRI's data spans 2005 to 2024, providing enough history to distinguish between one-time adjustments and structural trends. The 2026 edition documents that from 2011 to 2024, hospital outpatient surgery payments grew at roughly double the rate in charge-based and no-fee-schedule states compared to states with fixed-amount fee schedules. Over 13 years, this differential has compounded into a cost gap that no national average can meaningfully represent.

Fee Schedule Regime	Payment Relative to Medicare	2011-2024 Growth Rate	Representative States
Fixed-amount	1.3x to 1.8x	~2% annually	FL, TX, CA, NC
Percent-of-charge	2.0x to 3.0x	~4% annually	IL, WI, PA
No fee schedule	2.5x to 4.0x+	~4-5% annually	IN, NJ, VA

Source: WCRI Hospital Outpatient Payment Index, 2026 Edition (WC-26-20). Relativities approximated from WCRI benchmarking data for knee and shoulder surgery facility payments.

NCCI WCWMI: The National Number That Masks State-Level Divergence

NCCI's April 27, 2026 WCWMI report showed year-over-year WC medical price growth at 1.8% in March 2026. That headline figure stood below both the one-year rolling average of 2.2% and the five-year average of 2.6%. For context, consumer medical CPI (CPI-M) ran at 4.0% over the same period, meaning WC medical cost growth was less than half the rate of consumer medical inflation.

The divergence between WC and consumer medical trends is itself a fee schedule story. In states with well-maintained fee schedules, WC reimbursement rates are capped at or near a fixed amount, regardless of what providers charge. The fee schedule acts as a structural ceiling on price inflation. Consumer medical prices face no equivalent ceiling, which is why CPI-M runs higher. But this moderating effect only applies in states that have fee schedules, creating a two-tier trend environment that the national WCWMI composite obscures.

The WCWMI's component weights tell the story of what drives the aggregate number and where the state-level variation hides:

WCWMI Component	Approx. Weight	Mar 2026 YoY	Longer-Term Annualized
Physician services	~35%	~1.5%	~2.0%
Hospital outpatient	~28%	~1.2%	~3.5%
Pharmacy	~12%	-1.0%	~0.5%
Hospital inpatient	~10%	~2.0%	~2.5%
Physical medicine	~8%	~3.0%	~3.0%
Other services	~7%	~1.8%	~2.2%
Composite (WCWMI)	100%	1.8%	2.6%

Source: NCCI Medical Inflation Insights, April 2026. Component weights and trends are approximate.

The hospital outpatient component merits specific attention. NCCI flagged that recent monthly increases in hospital outpatient care are consistent with a longer-term annualized trend of approximately 3.5%, well above the current WCWMI composite of 1.8%. The component's 28% weight means that when hospital outpatient reverts to its longer-term trend, it pulls the WCWMI higher by roughly 65 basis points on its own (0.28 × [3.5% − 1.2%]). NCCI's data suggests this reversion is likely, making the current 1.8% composite a trough reading rather than a new baseline.

For a pricing actuary selecting a prospective medical severity trend, this creates a two-layer problem: the national trend is suppressed by a hospital outpatient component currently running below its own long-term average, and even the long-term national average masks the structural divergence between fee schedule regimes documented by WCRI.

Constructing a Fee-Schedule-Adjusted Medical Severity Trend

The core pricing challenge is that an actuary building a state-level loss cost filing needs a medical severity trend reflecting three distinct elements:

Price trend: the rate of change in per-unit reimbursement, dominated by the state's fee schedule regime.

Utilization trend: the rate of change in the number of procedures per claim.

Intensity trend: the shift toward higher-cost procedures or treatment modalities.

The total medical severity trend is the product of these three components:

Severity Trend = (1 + Price Trend) × (1 + Utilization Trend) × (1 + Intensity Trend) − 1

In practice, the utilization and intensity components are often combined into a single "utilization/intensity" factor because they are difficult to separate in most data sources. NCCI's WCWMI primarily captures the price component; the utilization/intensity component must be estimated from claims data or external sources.

The fee schedule regime determines the price component almost entirely. In a fixed-amount state with annual fee schedule updates tied to a medical CPI index, the price trend is approximately the lesser of the fee schedule update percentage and the provider cost growth rate. In a charge-based or no-fee-schedule state, the price trend is unconstrained and follows provider billing patterns, which WCRI's data shows running at roughly double the fixed-amount rate.

Credibility-weighted trend formula. For a state-specific loss cost filing, the medical severity trend can be expressed as a credibility-weighted blend:

T_state = Z × T_state-own + (1 − Z) × T_{national-adjusted}

Where Z is the state's credibility weight (a function of claim volume and data stability), T_state-own is the state's own medical payment trend from direct observation, and T_{national-adjusted} is the NCCI WCWMI adjusted for the state's fee schedule regime.

The critical adjustment is on the national complement. Using the raw WCWMI of 1.8% as the complement for a no-fee-schedule state would understate the expected trend, because the national average includes the dampening effect of fixed-amount states. The actuary must reweight the national complement by substituting the hospital outpatient component with the regime-specific growth rate from WCRI's index:

T_national-adj = WCWMI + 0.28 × (T_{outpatient-regime} − T_{outpatient-WCWMI})

For a charge-based state where hospital outpatient runs at 4.5% instead of the national 1.2%:

T_national-adj = 1.8% + 0.28 × (4.5% − 1.2%) = 1.8% + 0.92% = 2.72%

For a fixed-amount state where hospital outpatient runs at 1.0%:

T_national-adj = 1.8% + 0.28 × (1.0% − 1.2%) = 1.8% − 0.06% = 1.74%

The nearly one-point spread between the adjusted national complements (2.72% vs. 1.74%) is the minimum fee-schedule regime effect. The actual state-specific trend, incorporating the state's own data with credibility, will typically produce an even wider spread. From working through filings in both types of states, the selected medical severity trend in a no-fee-schedule state routinely runs 1.5 to 2.0 points above the selected trend in a comparable fixed-amount state, and that spread is growing as the WCRI cost divergence compounds year over year.

Worked Example: Modeling a Fee Schedule Transition

Several states transitioned between fee schedule regimes during the WCRI study period (2005 to 2024). These transitions provide a natural experiment for pricing actuaries who need to model the effect of a regulatory change on medical severity trends.

Consider a state moving from charge-based billing to a fixed-amount fee schedule for hospital outpatient services:

Pre-reform trend (observed from WCRI data): hospital outpatient payments growing at 4.5% annually, total medical severity running at approximately 4.0%.

Post-reform trend (estimated from comparable fixed-amount states): hospital outpatient payments expected to converge toward 1.5% to 2.0% growth within three to five years of fee schedule implementation.

The actuary's task is to model the transition path. The fee schedule does not produce an immediate drop to the new regime; provider billing practices, grandfathered rate exceptions, and litigation over fee schedule application create a multi-year convergence period. A three-phase model fits the observed data:

Phase 1 (Year 1): Implementation year. The fee schedule takes effect but prior authorizations and grandfathered cases mute the impact. Hospital outpatient trend drops from 4.5% to approximately 3.0%. Total medical severity trend declines from 4.0% to approximately 3.5%.

Phase 2 (Years 2 to 3): Convergence period. Provider networks adjust, billing patterns normalize, and the fee schedule binds on most claims. Hospital outpatient trend moves from 3.0% to approximately 2.0%. Total medical severity trend declines to 2.5% to 3.0%.

Phase 3 (Year 4 forward): Steady state. The fee schedule fully constrains outpatient price growth. Hospital outpatient trend stabilizes at 1.5% to 2.0%, consistent with the fixed-amount regime observed in comparable states. Total medical severity trend settles at 2.0% to 2.5%.

For the loss cost filing during the transition, the actuary should select a trend assumption reflecting the phase of convergence for the prospective policy period. Using the pre-reform trend would overstate costs; using the steady-state trend would understate them during the transition. A filing covering the first 18 months after implementation should use a blended assumption weighted toward Phase 1, with a sensitivity test showing the range between Phase 1 and Phase 2 assumptions.

The credibility weight (Z) on the state's own data during a transition should be lowered, because the state's historical trend is no longer representative of the prospective environment. ASOP No. 25 guidance on credibility allows the actuary to reduce the weight assigned to historical data when a material change in the data-generating process has occurred. A fee schedule regime change is exactly this type of structural break.

Why This Matters for Pricing Actuaries

The WCRI and NCCI data together establish three principles that should inform every WC medical severity trend selection in 2026 and 2027:

The national WCWMI is not a trend; it is an average of structurally different regimes. Using 1.8% as the medical severity trend for a charge-based state introduces a systematic bias of at least one full percentage point in the wrong direction. Over a three-year loss cost filing period, that compounds into a meaningful premium shortfall.

The hospital outpatient component's reversion toward 3.5% is a timing question, not a conditional one. NCCI's own data shows the current suppression is likely temporary. A pricing actuary selecting a trend as of mid-2026 should weight the five-year average (2.6%) or the longer-term hospital outpatient rebound (3.5%) more heavily than the current 1.8% reading, with the exact weight depending on the filing's prospective period.

States contemplating fee schedule reforms can use WCRI's data to quantify the cost impact of inaction. The 60% payment gap is not an abstract regulatory finding; it is a direct input to the legislative risk adjustment that an actuary might build into a prospective trend assumption for a state where reform is under active consideration. If a state is likely to adopt a fixed-amount fee schedule within the filing's effective period, the trend assumption should reflect the expected transition path rather than the pre-reform trajectory.

From tracking loss cost filings across multiple NCCI states, the trend selections that produce the most defensible indications are those that explicitly decompose medical severity into price and utilization components, document the fee schedule regime assumption, and sensitivity-test the selection against both the national WCWMI and the regime-specific WCRI data. Regulators increasingly expect this level of granularity. The WCRI Payment Index, combined with NCCI's component-level WCWMI decomposition, gives actuaries the data infrastructure to support it. The methodological gap is no longer data availability; it is whether the filing actuary takes the additional step of building the fee schedule regime into the medical severity trend decomposition.