Managed Care Matters

There are few issues that do more to crystalize the balance between personal freedom and personal responsibility than motorcycle helmet laws.

Twenty states require motorcyclists to wear helmets, which means thirty do not. Opponents of helmet laws see it is a personal choice and often claim wearing a helmet increases visibility and situational awareness. Could be.

Proponents of mandatory helmet laws note that fatality rates appear to be higher in states without helmet laws; common sense indicates that falling off a bike onto one's head without a helmet is likely to cause a more serious head injury than if one was wearing a helmet.

And there is an ongoing back and forth debate on the merits of statistical analyses and the results thereof, a debate that leads nowhere and gets folks all wrapped up in numbers, thereby obscuring the real issue - ultimately wearing a helmet is a personal decision, until you get a traumatic brain injury, whereupon it becomes a societal issue.

Here's an idea.

Those who want to ride without a helmet have to buy insurance that reflects that decision. That insurance must provide comprehensive coverage for medical care for associated with the covered individual, including long term custodial care, with a really high limit - say $10 million, that is indexed to the medical CPI to account for inflation. Upon showing proof of coverage, they get a special license plate. Insurance companies take the risk, society does not get harmed due to the adverse consequence of a personal decision, and those who want to ride with their hair blowing in the wind are free to do so.

Oh, and they should be required to be organ donors as well.

Posted by at 8:18 AM | Permalink | Comments (5)

In yet another blow to the big health plans, giant UHC will be cutting 4000 positions as part of a restructuring plan. The plan involves ditching the Uniprise brand and putting all commercial products under the UnitedHealthcare banner.

The announcement comes at a time when UHC's stock has been battered by bad news throughout the sector, with UHC recently announcing it is projecting weaker earnings. On the heels of Coventry's missed forecast and following the CalPers settlement (see below), the bad news has driven UHC's stock price to less than half its 52 week high.

The company also will be paying a fine of just under $900 million to settle CalPers' lawsuit stemming from UHC's stock option manipulation - while admitting no wrongdoing. Got to love that last phrase - if there was no wrongdoing I kind of doubt UHC would have agreed to pony up $895 million.

Apparently United has decided to fix its finances by cleaning out its book of business by dumping less-profitable business and tightening underwriting. These moves, coupled with increased premiums, will cut the medical loss ratio, but at the cost of membership. Expect UHC's trend-neutral revenues to decline in 2008 and possibly 2009 (remember that all health plans have a built-in annual growth rate equivalent to medical trend; to accurately calculate growth one has to correct for that trend).

Over the long term, I don't like UHC's chances. This is not a company that invests in medical management - despite its trove of data, analytical expertise, participation in NCQA accreditation and inhouse capabilities, UHC has always been about managing reimbursement, not care. Their latest move to increase premiums is the way United has always reacted to bad financial results. And it may work for a while, but over the long term the winners in the health plan business will be those who actually understand how to manage care.

And United doesn't.

Posted by at 8:51 AM | Permalink | Comments (1)

Fiserv has sold 51% of its insurance business, including third party biller Third Party Solutions to a private equity firm. The buyer, Stone Point Capital, also owns workers comp managed care firm Genex and multiple other insurance-related companies, including brokerage, investment, distribution, reinsurance, technology, and claims services.

Fiserv will continue to own 49% of the new company, to be titled Fiserv Insurance Services (I'm hoping they didn't pay a naming consultancy a lot for that).

Close watchers of the work comp pharmacy business (both of you) will recall that TPS acquired WorkingRx last fall, at the time its sole competitor in the third party biller industry.

What does this mean for you?

Folks familiar with the industry are of the opinion that TPS was a throw-in; Fiserv sought to sell TPS eighteen months ago, and has been trying to sell it off every since. Don't be surprised if TPS is back on the market once this transaction closes later this month.

Posted by at 12:18 AM | Permalink | Comments (1)

GOP Senators better wear their cheap suits while marching in Independence Day parades this weekend, as it is tough to get tomato stains out of nice wool.

As Bob Laszewski pointed out, Republicans were boxed into a very tight corner by their Democratic colleagues after GOP Senators blocked a bill that would have prevented a drastic cut in physician fees. The maneuvering was ugly, as the Dems apparently backing out of an earlier deal that would have restored the cuts. Once the bill was overwhelmingly passed by the House, Senate Democrats were presented with a very big cudgel they could use to smack their Republican colleagues around. And with Congress heading out for the 4th of July recess, they have done so - publicly, loudly, and repeatedly.

Republican Senators now find themselves defending their vote to reduce physician fees by 10% (that's not exactly what happened, but close enough for politics) while refusing to reduce payments to big insurers. Payments that most view as far too generous.

Politically, the picture could not be better for Democrats. Republicans will be vilified for their vote to cut payments to Dr. Welby, everyone's kindly neighborhood physician while continuing to pay huge sums to big, faceless, bureaucratic insurers located far away staffed by nasty clerks who delight in forcing new moms to leave the hospital mere moments after giving birth.

And in an election year too.

There is a good bit of substance to the argument against continuing the massive subsidies for Medicare Advantage (MA) and Private Fee for Service plans (PFFS). These payments were supposed to be temporary, used to motivate health plans to set up alternative Medicare programs, to make it worth their while to get started. Now that many of these plans have been up and running for several years, they should be able to survive on their own.

And as far back as 2005, health plans in these programs were doing just fine. In an example of exquisite timing a GAO audit revealed health plans in the program made over a billion dollars more than they expected; $1.14 billion in extra profit.

Yet healthplans are fiercely lobbying to hold onto the subsidies, and their GOP allies are marching in lockstep - right off a cliff.

Health plans, and their Republican allies, now look like they won't pull their heads out of the public feedbag, even when it is obvious they are getting fat on taxpayer-funded subsidies.

Politically, both the GOP and health plans are being stupid. There's no other word for it. Not only is this politically suicidal, the longer term implications are obvious. Health reform is coming, and private health plans will want to play a major role. They will claim that the market is the solution (a point I have also been making).

Yet these free-market companies continue to argue they can't compete with the government-run Medicare program without massive subsidies.

Posted by at 7:24 AM | Permalink | Comments (4)

Opponents of universal care often cite awful stories of Canadians and Brits hurt, killed, or dead of neglect or bad care. And there's no doubt that people in Canada and Britain are the victims of poor medical care.

There is certainly some truth to the stories of bad Canadian and British medicine. It is also true that raising this issue doesn't help make the case against universal health insurance.

News flash - American patients often suffer pain, injury, or death from bad medicine. Here are a few examples. California hospitals recently disclosed hundreds of medical errors, "including wrong-organ surgeries, administration of incorrect drugs and neglect of serious medical conditions. This is a small percentage when weighed against the 4 million hospital admissions that occur in California each year, but still serious..." (quote from FierceHealthcare citation).

In Pennsylvania, wrong-site surgeries happen often - very often.

Nationally, between 48,000 and 98,000 Americans die each year due to medical errors. More people are killed by bad medicine than die in auto accidents or succumb to breast cancer.

A report on medical errors in the US blamed the system. Our system, one that does not offer universal coverage. According to the Institute of Medicine's 2000 report; "most of the medical errors are systems related and not attributable to individual negligence or misconduct. The key to reducing medical errors is to focus on improving the systems of delivering care and not to blame individuals. Health care professionals are simply human and, like everyone else, they make mistakes. But research has shown that system improvements can reduce the error rates and improve the quality of health care."

(I'd note that the IOM is a universally respected, highly regarded organization, unlike the agenda-driven think tanks typically cited by opponents of universal coverage).

Let's not forget the people without health insurance who die as a result of poor access to health care - late diagnosis of cancer, poor preventive care, and untreated hypertension, cardiovascular disease, asthma and diabetes.

And in the "did they even think about this before they wrote it" category comes this gem from biggovhealth.com; "Since 1997, the U.S. has made further improvements to the quality and accessibility of our health care, including the creation of Medicare Part D."

Uhh, folks, Part D is a government-run drug program that has resulted in many seniors getting access to pharmaceuticals, thereby potentially improving their health. Kind of like what universal coverage aims to do.

Contrasting the IOM's estimate that there are 18,000 excess deaths in America among uninsured adults to the anecdotal examples of poor care in Canada and Britain provides a much clearer picture of the 'dangers' of universal medicine. A picture of kids getting health screens, diabetics getting insulin, asthmatics receiving education and primary care, expectant mothers getting pre-natal care, and high-risk women getting mammograms.

Now that's a scary world.

Posted by at 6:38 AM | Permalink | Comments (6)

Last Thursday's post showed that workers comp is a huge money maker for hospitals, generating about 16% of their profits on less than 2% of revenue.

The attempts to date to control hospital costs have been to set WC reimbursement using primarily DRGs (Medicare Diagnosis Related Groups) (NY), a percentage discount below charges (as in Florida), or on the basis of the facility's cost to deliver that service (Connecticut).

But it is never as simple as setting rates at DRGs or a discount below charges.

For the latter, a hospital could charge a billion dollars for an epidural, and the payer would (conceivably) have to pay 60% or 75% of that rate. So states add language around that provision requiring payment to be based on 'usual and customary' charges - which sounds fine until you try to define usual and customary. Florida is in the midst of just such an effort, and the process has become pretty contentious.

Using Medicare as a basis is also problematic. DRGs were developed for Medicare patients - older with different conditions and often not working. The resources - procedures, services, therapies, setting, providers - employed in providing care to an 88 year old with herniated disk are likely quite different from those provided to a 33 year old with the same condition.

Yet these differences have never been evaluated. To my knowledge, there has never been any thorough study of how the inpatient or outpatient ospital resources used by workers compensation patients compare with resources used by Medicare patents per Medicare's inpatient MS-DRG groups or Medicare's outpatient APC groups.

Another option, and one I would argue is highly problematic, is to pay based on some multiple of Medicare. Several states use this methodology, including South Carolina (which has seen rapidly rising WC medical expenses). Texas recently announced that it is moving in this direction. The problem for payers, is that Texas is paying hospitals an extremely high multiple of Medicare. According to FairPay Solutions CEO VIncent Drucker (and HSA client); "This provides huge financial incentives for over-utilization of high cost hospital and hospital-based-specialist services [emphasis added]. Over utilization that Wennberg, for example, reports account for 25 percent of wasted dollars for Medicare chronically ill patients." (Drucker is referring to Dr John Wennberg's recently-published Dartmouth Atlas of Health Care.)

As a commenter noted last week, "TX and CA have a Medicare based system with a mark-up ranging from 25% - 100%. However most hospital contracts with group health insurers and PPO networks are below Medicare rates."

Why?

Why do workers comp payers consistently overpay for hospital services? Why can't comp networks deliver the kind of reductions that are commonplace among group health insurers?

And why do employers allow their payers and managed care firms to spend their dollars so carelessly?

Posted by at 7:08 AM | Permalink | Comments (7)

Bob Laszewski has a great post today debunking the myth of Medicare Advantage and Medicare private fee for service.

Both were supposed to help reduce Medicare's costs via a short-term subsidy enabling private insurers to get into the market, figure it out, and use their free-market skills to improve on a moribund, bureaucrat-run government health care program.

Instead it has turned into a gravy train for insurers, who have been getting fat on the subsidy. Meanwhile, physicians are facing a cut of 10% in Medicare reimbursement.

For once it would be nice if the so-called free market advocates would wipe the (taxpayer-subsidized) gravy off their multiple chins before they start spewing peans to capitalism.

Bob asks this key question:

"If the HMOs really want to effectively defend Medicare Advantage they need to demonstrate value. Where is the industry data showing that after five years in this recent version of Medicare Advantage, and 20 years all told in the program, the private sector delivers a better cost/quality result?"

I'd add they damn well better come up with a strong case and soon; health reform is coming. Between recissions, medical underwriting, and medicare advantage/pffs private insurers are making a compelling case - for single payer.

Posted by at 11:58 AM | Permalink | Comments (1)

Workers comp medical expenses account for less one-fiftieth of total US health care costs - $30 billion(see WC report pdf) out of $2 trillion.

Yet workers comp generates almost one-sixth of hospital profits.

Here's how the numbers work. About one-third of comp medical payments are issued to healthcare facilities. The average US hospital cost-to-charge ratio (what it costs the hospital to provide a service compared to what they bill for that service) is approximately 31.2%; in comparison workers’ compensation payers reimburse about 55% of hospitals' billed charges.

Thus workers comp payers pay hospitals 176% of their costs.

(There is another, very big argument over the methodology hospitals use to calculate their 'costs', my opinion is there is conclusive evidence that costs are exaggerated and overstated)

In dollar terms, in 2007 workers comp insurers and self-insured employers paid facilities roughly $9.1 billion. $3.9 billion of that $9.1 billion was profit for hospitals.

The entire US hospital industry generated profits of roughly $25 billion, workers’ compensation – which you will remember represents only about 1.5% of total hospital revenues – accounts for approximately 16 percent of all the profits for US hospitals.

Few dispute that workers comp insurers and SI employers should adequately reimburse hospitals. It is equally indisputable that under the current systems, comp payers are paying much more than their fair share.

How much should workers’ compensation payers pay? According to Vincent Drucker of FairPay Solutions, "something between what Medicare pays and the costs + twenty percent that group payers are reported to be paying." (FPS is an HSA client)

Why are comp payers overpaying hospitals? That's a subject for a later post.

Posted by at 7:53 AM | Permalink | Comments (2)

Health Wonks - get your cuppa and spend a few minutes catching up on the best and brightest in the virtual wonk world. Jaan Sidorov delights and amazes, and the list of blogs just keeps on growing.

Posted by at 8:04 AM | Permalink | Comments (0)

It is looking increasingly likely that the Democratic party will win big in November - with GOP strategists expecting a loss of 20 House and 6 Senate seats, along with the White House. Optimistic Dems are hoping for even more; it is possible they could win up to 11 Senate seats and another ten in the House. (for purposes of this post, we're assuming there is a Democrat in the White House in 2009)

Analyst Larry Sabato predicts 8-14 seats moving to the Democrats; given he accurately predicted the result of the 2006 midterm election his opinion bears consideration.

If we go with the Sabato midpoint, 2009 will begin with a 247-188 Democratic-Republican split in the House. But the House is not the key, the Senate and the White House are. In the Senate, look for the split to end up somewhere around 56 - 44.

House Speaker Nancy Pelosi (D CA) has been biding her time, building her power base and infrastructure while waiting for what she anticipates will be an increasingly Democratic House. If the numbers come in as expected, the Speaker will be able to deliver on her commitment to avoid the "dangerous narcotic of incrementalism."

But without a supermajority in the Senate, Pelosi, and Pres. Obama, will not be able to get much through Congress. That's the conventional wisdom; conventional, but when it comes to health care, wrong. Not only will there be a new political climate in Washington, there will be increasing pressure on both parties to deliver on their campaign promises. Moreover, there is bipartisan agreement on some of the thornier issues related to health, with broad support for incremental (increasing SCHIP funding) and major (overhaul of the health insurance system) changes. This agreement has been overshadowed by Bush's unwillingness to compromise on most issues, forcing members of his own party to craft legislation that will pass the President's requirements.

Add to the mix the likelihood that Sen Clinton will become majority leader of the Senate. Despite the demonization of Clinton by some on the right, she has a well-deserved reputation for working effectively with her Republican colleagues, a reputation that will serve her well in her new role.

While the Dems would love to begin with a huge overhaul of the entire health system, they've learned that doing really big things takes time, consensus, and foundation-building. Instead, the new year will likely start with fixes to current programs and 'corrective action' to address issues of little concern to the Bush Administration.

Expect the new political year to begin with incremental fixes to specific programs - SCHIP likely first out of the blocks. After the back and forth battles, marked by confusion and consternation from Republicans who felt Pres. Bush threw them under the bus by vetoing a bi-partisan bill to extend SCHIP earlier this year, enough Republicans are likely to cross the aisle to support funding of a somewhat-expanded program.

Also on the table will be reduced funding for Medicare Advantage, a program that has long struck Democrats as a giveaway to big healthplans. Foolishly. the insurance industry worked hard, and effectively, to block reductions in MA this year. As Bob Laszewski notes, with Congress and the White House changing hands, the bill they stopped this year will look great compared to what they'll get next. Expect MA subsidies to be slashed, in what could, and should, be seen as a shot across the bow of the insurance industry.

The FDA will also be under the microscope. Despite passage of the Food and Drug Administration Amendments Act of 2007, ostensibly fully funding the FDA and giving it the staff needed to do its job, the FDA continues to stumble. With a Democrat running the Administration, expect increasing oversight, much more post-approval monitoring, and much less tolerance for patent-extending gamesmanship.

The biggie will likely be Medicare physician compensation. With docs scheduled to see their reimbursement drop by around 15% in 2009, the caterwauling will be heard loud and clear inside the Beltway. Don't look for a major policy change, but rather something to satisfy the physician community and build a little equity for the future.

That future will likely begin in January of 2010, when the Congress and President will take on health care reform.

Posted by at 6:09 AM | Permalink | Comments (0)

The big question is this: is Coventry's screwup a symptom of a larger issue, or is it specific to Coventry?

As of now it looks like the problems are not industry-wide. This leaves one inescapable conclusion - mistakes by management. Everyone, and every company, makes mistakes at times; what makes this so noticeable is it comes from a company with a history of strong results and from management that is (or perhaps was) extremely self-confident.

Bob Laszewski went back and read Coventry's Q1 earnings report; here's his take:

* Their private fee-for-service (PFFS) problem should have been obvious to to their actuaries since Coventry had apparently not issued ID cards to new PFFS customers and claims weren't coming in as they should have been. The PFFS data had to be too good to be true and that should have been obvious.
* Their explanation for seeing their commercial trend jump by 200 bps is inadequate. They said they are seeing an increase in large claims and hospital claims generally. That is true of other health plans but not to anywhere near the same degree as Coventry. It is not clear to me that Coventry has really gotten to the bottom of all of this.

Bob also quoted extensively from Coventry's last earnings call. Looking back, the overweening self-confidence is breath-taking - here are a couple excerpts.

"We've said for the last three years that the core operating growth rate in a purely commercial business was not as high as some were suggesting. We took some flak for that...Variations in medical cost trends generally do not happen quickly [emphasis added] and given the progress in analytics within the industry, will be pretty closely anticipated in pricing. That doesn't suggest we will never make a mistake and miss it a little, but that's far from an underwriting cycle...don't look for the operating margins of our commercial operations to fall off the table. They won't. [emphasis added]

Perhaps most telling is this comment from CFOP Shawn Guertin:"those that are close to the details and fundamentals of the business, will succeed over the long haul."

Kudos to Coventry for getting this news out quickly. While they can, and should, be pilloried for not knowing all the factors that led to the problem, better to get the news out quickly then wait weeks more in an effort to be able to answer all the questions.

My sense is that Coventry's management has been spending way too much time managing the numbers and nowhere near enough time managing medical. Those are not the same thing. Reflecting back on the calls I've listened to and management reports I've read, I can't recall any detailed discussion of disease management, hospital expense management, outpatient utilization, or centers of excellence. These guys (and they are mostly guys) know the numbers better than anyone, but I don't get the sense that they spend any time looking under the numbers, at medical cost drivers.

Contrast that with Aetna, a company that has invested both dollars and management skill in analyzing, understanding, and addressing their medical cost drivers. Their website and press releases reflect a focus on medical - reform, drivers, new initiatives, getting information out to members, physician ratings. There's a lot there. And this isn't just fluff, the work they are doing is deep and targeted at the right issues.

Aetna gets it. So far, Coventry hasn't. We'll see if this stumble triggers a rethinking of their approach. If they get defensive, fire a bunch of middle managers (which it appears they are already doing) to get costs under control, and keep doing what they've been doing, they will not remain among the industry leaders .

Posted by at 7:33 AM | Permalink | Comments (10)

Since Coventry's announcement late Wednesday that they were cutting earnings projections almost in half, the financial markets have been hammering health plan stocks. Their pessimism may be overdone.

Humana and Aetna have reaffirmed their earnings forecast while Wellpoint, Cigna, and UHC have been silent (as of this moment). The market's fear is that Coventry's news that they failed to accurately forecast the medical loss ratio for both the Medicare private ffs and group health business is the first indication of an industry-wide problem. Especially because Coventry has carefully cultivated an image of competence, both absolute (we know our business very well) and relative (we're more on top of our numbers and business than other health plans).

I'd point to Coventry's presentation at the Citigroup Healthcare Conference at the end of May as typical. "...Medicare...has obviously been an area offocus andgreat success for Coventry and 2008 is no exception...(small group) is really a business that is premised on a deep understanding of local market dynamics, really a fanatical attention to detail."

Contrast that with management's statement re Medicare pffs in Thursday's call, where CEO Dale Wolf said that it has been tough to forecast results due to the rapid growth of that business, while acknowledging the need for Coventry to better track cost drivers. It got tougher for Wolf, as the analysts, who seemed genuinely surprised by the news, got more and more specific as the call went on. Wolf admitted that Coventry had limited visibility into group inpatient and outpatient costs, had not yet figured out exactly what drivers led to the cost increases in outpatient, and there had been cost spikes in several specific markets including Utah, Atlanta and central IL.

These factors led Coventry to revise their cost trend estimates for the group business upwards by 150 basis points, driven by a 300+point increase in outpatient and 100 point jump in inpatient costs. Medicare trend rates were also raised. Meanwhile, other health plans were not revising their numbers.

Both Humana and Aetna publicly affirmed their forecasts, with Aetna's CFO noting "The medical cost trend we are experiencing in the second quarter is in line with our expectations to date and consistent with our prior guidance of 7.5 percent, plus-or-minus 50 basis points."

Humana's announcement was even more specific "Analysis of medical claims payments and receipts through May 2008 indicate no adverse prior period development for either full year 2007 or first quarter 2008 medical claims estimates,"

And ten days ago industry giant Wellpoint said it would also be confirming its earning forecast, albeit in private meetings with analysts.

Here's the net. There does not appear to be an industry wide issue. Coventry's history of success and strong performance may have led to overconfidence, a lack of focus, and perhaps atouch of hubris. Wolf's tone went from defensive to chastened to almost combative, and I'd bet this screwup makes Coventry a better company.

But I'll hedge my bet; Coventry has a hard-earned reputation for arrogance and lack of concern for the customer. If that doesn't change you can expect another, similar announcement at some point in the future.

Posted by at 7:23 AM | Permalink | Comments (0)

The notice for the teleconference popped up in my email inbox a mere hour and a half before the telecon was scheduled to begin. That was the first indicator of potential trouble.

The second was the opening line from Coventry's CEO: "To say we're disappointed with the news we shared earlier this afternoon is an understatement..."

The source of Mr Wolf''s disappointment was Coventry's report that it will miss its financial projections - by a wide margin.

For a company that has long been (justifiably) proud of its ability to tightly monitor and manage its business, the disclosure that it had significantly underestimated Q1 and Q2 medical costs was a bitter pill indeed, all the more so as it came a few weeks after Wolf's recent efforts to pump up internal morale by comparing Coventry's management discipline favorably to competitors.

Earnings will fall short due in large part to higher than expected medical costs in Coventry's Medicare private fee for service and core group health businesses. In explaining the failure to meet the Medicare program’s projected MLR, CFO Shawn Guertin described the problems inherent in the claims submission and processing flow. Guertin went on to note that the company also had identified some problems in Coventry’s internal claims processing. Curiously, management blamed part of the problem on ID cards not being used by claimants, which delayed claims flows internally. Evidently some members don't bother to show their Coventry cards when leaving the doctor's office. The office sends the bill to Medicare, who returns the bill with a note that the patient is not a member. The office then contacts the patient, gets the correc claims submission info, and sends the bill to Coventry.

This takes time, and has led to Coventry under-estimating claims volume and expense for its Medicare private ffs business. I'd note that in prior calls management has been effusive in its self-praise for its ability to operate this business with statements like 'we couldn't be more pleased with how this business is running'.

For the Medicare business, the MLR is up 300-340 basis points over prior guidance. This isn’t even close enough for horse shoes or hand grenades. From comments by management on last night's call, it appeared this popped up in April and May, after things appeared to look pretty solid earlier in 2008.

Again, this is a pretty big surprise.

On the group health front, higher trend in group outpatient utilization and inpatient unit cost, or price per service appear to be the problem. Instead of the forecast 100 basis point reduction in MLR, management is now expecting higher medical costs - with a potential swing of 400 basis points for outpatient expense. Inpatient costs are also up 100 basis points, so the combination is driving up total MLR by 150 basis points.

Another significant contributor to the higher MLR is an increase in the number of more severe (more costly) claims – not more claims, but more high cost claims, specifically between 50k and 150k in dollars paid.

In contrast hospitals are not seeing increased utilization. Facility revenue numbers are not trending up. Coventry wasn’t able to figure out why their hospital costs were going up while overall hospital utilization nationally is not.

Admittedly Coventry has not yet determined all the factors causing these increases in MLR. They do appear to have a grasp on the major factors; from the tone and delivery
of management comments I'd expect there's a lot of yelling at Coventry HQ, likely to be followed shortly by the distinctive sound of heads rolling. (During the call Wolf did allude to staff reductions in a response to an analyst's query.)

Lastly, management reported that the work comp business is not meeting projections due in part to lower fee revenue for bill review.

As the market closed, Coventry's stock price had dropped to $40.97, resulting in a P/E just under 10. Coventry has long been rumored to be a potential acquisition target, and if the stock price declines further (a not unreasonable expectation) suitors will likely emerge.

Posted by at 8:07 AM | Permalink | Comments (6)

Following up on yesterday's post on supply chain management, today we'll discuss what happens when a company cedes too much power and control to a vendor.

Years ago Compaq (remember them?) was a leader in the PC industry. Now, they no longer exist. Why? In large part because they outsourced key parts of their business to a vendor that became a partner that became a competitor.

As Clayton Christensen put it in an interview; "there’s a tendency in the supply chain for the vendor in the emerging market to integrate forward until they hollow out their customer, and in many ways what they do is they commoditize their customers.

Christensen likes to cite Compaq. Like many electronics firms, Compaq outsourced parts of their product to off-shore companies. In this case, Compaq outsourced the simple circuit boards in their computers to Flextronics, a Singapore-based company. After a few years, Flextronics "came back to Compaq and said as long as we’re doing the circuit boards, let us do the whole mother board, because it’s not really your core competency, and we can do it for 20 percent less. Compaq says, you could do it for 20 percent less. If we outsource that to you we could get all of these circuit manufacturing assets off our balance sheet. They make the transfer, and Compaq’s revenues are unaffected, but its cost actually improved by 20 percent. At Flextronics, their revenue and profitability improved smartly. Wall Street likes what Compaq and Flextronics did.

Then Flextronics says, as long as we’re doing the mother board, why don’t you just let us assemble the whole computer, because that’s not really your core competency, and we can do it for 20 percent less.

Compaq looks at that and says, we could get rid of all our manufacturing assets. They make that transfer. Compaq’s revenues are unchanged but its profitability improves, and Wall Street really likes this. At Flextronics, revenue and profitability improve as well. Wall Street likes this too. This goes on as Flextronics takes over the manufacture of the whole computer followed by the supply chain.

From Flextronics’ point of view, it’s getting into value-added services now. So not only does its revenue improve, but its gross margins improve. Finally, Flextronics says, as long as we’re managing the whole supply chain for you, why even bother designing the dumb computer? That’s not really your core competency, and we’re dealing with all the component vendors anyway. Compaq says, yeah, our core competency really is our brand. We can fire all of our engineers if you do that for us.

So little by little the supplier in the Third World starts to eat their way up inside of the customer, and every step forward they take progressively trivializes the remaining value that Compaq adds, until in the end they’re providing almost no value and the company vaporizes." [emphasis added] (quote from WorldTrade Magazine, The Supply Chain as ‘Disruptive Technology, December 12, 2006)

Compaq is to Big Insurance Co as Flextronics is to Big Managed Care Co., except it sounds like the folks at Flextronics moved a little slower, and were a bit less heavy-handed. Because what is happening in the market now is large payers (and small and medium ones too) are effectively outsourcing medical management to network/bill review/case management vendors. BigInsCo will argue that no, the adjusters are still in control - sure, just like the engineers were at Compaq. Meanwhile, BigMgdCareCo is busy figuring out how to maximize its revenue from BigInsCo.

And as we've seen, BigMgdCareCo succeeds when there are lots of medical bills with high medical charges.

So maybe my original thesis statement was wrong. Perhaps what's really going to happen is not that managed care firms are going to 'hollow out' insurers, but instead they are going to bleed them dry.

And because the insurers no longer control the medical, there's not a damn thing they can do about it.

Posted by at 1:25 PM | Permalink | Comments (2)

Last week I wrote a post on workers comp insurers' loss of control over medical costs. The post triggered a good bit of email traffic and requests to expand on my central point -

big networks now dictate terms to insurers, and the network business model is a major reason for the continued growth in work comp medical expense.

Think of the work comp claims process as organizing the products and services necessary to return an injured worker to full employment - and keep him/her there. The services - doctors, nurses, voc rehab, other providers, attorneys, field adjusters, investigators - supply expertise and skills that produces the desired end result - sustained return to work.

This process is analogous to manufacturing's supply chain management.

A quick explanation - Supply chain management (SCM) has become one of the keys to profitable manufacturing. Defined as the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible, SCM is based on the idea that companies should focus on what they do really well, their core competencies, and outsource tasks and functions that are not 'core' to organizations that do those things very well.

This allows the manufacturer to concentrate on what they do well, reduce overhead and staff, and focus management time and expertise on stuff that really drives value.

In the old days, companies tried to control as much of their raw materials - and the refining and transportation of those raw materials - as possible. In addition to auto plants Ford owned iron mines, steel mills, glass factories, rubber plantations, ships, and railroad cars. Nowadays Ford outsources some of its vehicles' key components (engines, transmissions, steering linkages) to other companies, concentrating on designing, assembling and marketing instead.

Over the last couple of decades, manufacturers found themselves increasingly relying on other companies for critical processes and components - if all worked well, profits zoomed, and if not, heads rolled. Recognizing the importance of their suppliers (important = if they screwed up the manufacturer could be out of business), over time manufacturers combined these processes, approaches, and management techniques into the process of supply chain management.

The purpose of supply chain management is to make sure the company gains all the desired benefits from SCM, and avoids the nasty results of a failure in the supply chain - engines don't show up at the assembly line, the wrong size tires appear, screws have left handed threads when right handed were spec'ed.

Or, the fancy order tracking system designed to make sure enough widgets are on hand to make the thingies ordered by customers just in time to meet the delivery deadline breaks down, or the investment in automation of central processes is a complete failure, or a working plant is closed and manufacturing sent to a cheaper plant that can't deliver a quality product.

This happens more often than you might think, and when it does disaster often ensues. There are plenty of examples; reading about them gives one a mild sense of superiority (jeez, we'd never be that dumb) that alternates with a cold dash of reality (uhh, actually I could see us screwing up like that - or worse...).

What's happening in workers comp (see, I told you we'd get to this eventually) is rather more insidious. I would argue that most payers' approach to medical is tantamount to Sony outsourcing design and marketing, Honda outsourcing engine R&D, Ruth's Chris outsourcing cooking, or Dave Mathews outsourcing singing (wait, that might not be a bad idea...). As I argued last week, medical is central, core, a critical function - fixing broken claimants so they can return to work is more important than anything else a comp insurer can do. I know, loss prevention is key as well, but claims will happen, and when they do the payer simply must ensure the claimant gets the right medical care that gets him/her back to full functionality.

But comp payers have, with a few, rare exceptions, completely lost track of what's important. Fact is, almost all workers comp insurers buy medical care without regard to how good it is, or how fast it returns injured workers to employment. No, they buy it based on how much of a discount the doc or hospital will give them. The bigger the discount, the better - that's how most comp payers evaluate medical care. While a few insurers are trying to change the model, and a few experiments, albeit on a very small scale, are in place, essentially all medical care for work comp is evaluated not on the basis of performance but on price per service.

Analogy - Sony buys LCD panels not on clarity and brightness but on cost, thinking hey, they are cheap so more folks can afford them - don't worry if the picture is lousy and colors muddy - in fact don't even look at the picture before you select a vendor.

Analogy - Airlines decide what travelers really want is low cost - so they remove seats from airplanes and have everyone stand up.

Ridiculous? Absolutely - about as ridiculous as choosing a doctor based on the discount they give your network.

I'm pretty passionate about this, so much so that tomorrow's post will dive even deeper into the issue of how dumb supply management is killing work comp.

Posted by at 7:16 AM | Permalink | Comments (2)

So the purchase of MSC Pharmacy Services by Express Scripts will be finalized within a few weeks; what's next?

It is way too early to tell, as the announcement hit the street just last Friday. That said, from discussions with sources from both Express and MSC Pharmacy Services it is clear that some heavy thinking has been going on for some time.

(Note I'm using MSC Pharmacy Services as that is the entity that was purchased by ESI; the other part of legacy company MSC remains 'behind' and will keep the MSC brand identity)

There's the usual corporate-PR speak in the companies' press releases, but folks involved in the discussions point to a few areas that bear watching. First out of the gate is MSC's Oasis web portal. Their web app enables customers to access information in summary and drill down format, create reports, and keep track of specific claimants. ESI's customers may be moved onto Oasis as systems integration efforts progress; this will not be an overnight move as it will require back- and front-end integration with customer, clinical, and processor applications.

MSC Pharmacy Services currently uses processor Restat as their network administrator; I'd expect to see the combined company move quickly onto Express' platform and use Express' network contracts. This would reduce MSC's admin expense and likely improve rebate income as well.

Expect to see some consolidation of clinical programs; neither legacy company has a complete suite of services and the combined offering will almost certainly be stronger than each firm's solo effort.

Something that has not been discussed, but has been alluded to in public statements is the possibility of cross selling ESI/MSC's core offerings to their respective customers. This would entail ESI helping MSC sell DME, home health, imaging, etc to their customers and MSC cross selling PBM services to ESI's customers.

Finally, while it is likely there will be a few folks looking for employment elsewhere, those decisions have not been finalized. MSC Pharmacy Services' executive management is solid and well-regarded, as is ESI's. I'd expect the headhunters are already circling...

Posted by at 6:34 AM | Permalink | Comments (0)