Debtwire reported (subscription required) yesterday that multiple sources indicated work comp medical services firm One Call has retained Centerview Partners “as liquidity tightens, covenant hurdles loom.”

Centerview, an investment bank with extensive experience in the workers’ comp service industry, will reportedly “help [One Call] navigate balance sheet pressure, including a potential liquidity shortfall and covenant compliance hurdles.”

(A “liquidity shortfall” means a company may not have enough available cash to pay its bills.)

Debtwire also noted other sources said a group of One Call’s lenders have retained Jones Day as legal counsel.

Ten days ago One Call CEO Rone Baldwin released a business update on One Call’s website indicating “One Call is in full compliance with all debt covenants.”

The Debtwire piece went on to indicate that the company had $11 million of available liquidity split between cash and a revolving debt vehicle (it was not clear if this was at the end of of the second quarter or at some other time). This was down from $18 million at the end of the first quarter.

Several other sources discussed “potential remedies” to the company’s current situation, naming a meaningful debt for equity swap and/or a fresh injection of additional equity.

I don’t see either as viable options.

Equity would have to come from current owner Apax (or, much less likely, another investor). Apax has already written down its original investment. Private equity firms have to get agreement from their investors before spending their dollars; I strongly doubt Apax’ investors will want to increase their financial exposure to a potential default. More detail on this here.

The debt for equity swap is also unlikely. If the covenants are breached, the debtholders likely get (some) control over the company. I don’t see why the debtholders would swap debt for equity now, when that may occur in the near future.

Debtwire’s reporting comes on the heels of Baldwin’s announcement of a layoff of about 50-60 folks; on Friday Michael Jordan, the former head of One Call’s effort to expand into group health departed.

My best guess is One Call’s daily revenue is around $5 million.  Unfortunately, the company’s headquarters was closed for at least two days due to hurricane Dorian. The closure plus the strong likelihood that Dorian prevented many claimants from scheduling or receiving services provided via One Call didn’t do anything to help the company’s tight cash flow.

For more detail on the company’s recent history, here’s information on One Call’s debt refinancing, and a detailed review of One Call as of December 2018.

I’ve asked Moody’s and S&P when they will update One Call’s credit rating and will report back if and when that occurs.

Surprise medical bills happen when you think you’re going to an in-network medical provider, only to learn some of your care was delivered by a non-contracted provider who can bill you whatever they want.

In work comp, this happens when your employee suffers a serious injury on the job, and you send her to the nearest emergency room – which happens to be at a hospital in your work comp PPO network. You then get a bill for $30,000 because the ER is operated under contract by TeamHealth or Envision, private-equity owned companies that aren’t in your network.

While state fee schedules may help, rest assured the hospital revenue maximization industry knows exactly how providers need to bill you to guarantee collection.

While this has made headlines in the private insurance world, it has yet to get much attention from work comp insurers. That may be because comp payers are pretty unsophisticated about facility billing, despite claims from bill review departments/vendors to the contrary. (there’s legislation in Texas that deals with a very narrow slice of the issue; it will have almost no impact on the problem save for patients treated at a federal medical facility)

Congress has been blathering about “solving” the surprise medical bill problem all year – making as much progress as usual, that being none. That’s largely because the PE-owned medical service companies are spending tens of millions fighting legislation intended to stop surprise billing.

What’s clear is while the PE firms may win this battle, they will certainly lose the war. The surprise bill fiasco will generate huge returns over the short run, but lead to major reform as voters get madder and madder about this legal theft. The PE firms fully understand this. They are fighting to preserve their right to rip off patients as long as they can, and will keep doing so until voters rebel.

So, to Blackstone, KKR, Welsh Carson et al, enjoy it while you can. This is yet another example of hugely profitable investors’ short-term fixation on short-term profits.  While it will lead to massive short-term profits, it is creating a massive backlash, one that will inevitably lead to laws and regulations that will crush their business model.

In the meantime, employers and taxpayers will pay the price – especially because work comp hasn’t woken up to the issue.

What does this mean for you?

Analyze your facility spend to find out.

Yesterday I briefly summarized today’s work comp market, which in a word is

While this has been very profitable for work comp insurers (that are enjoying double digit returns for the first time ever) and has saved employers and taxpayers hundreds of millions of dollars, it’s been causing agita amongst service providers – with several notable exceptions. (by “service providers” I am referring to TPAs, medical and disability management entities, networks and other parties)

TPAs are flourishing.  As insurers look to reduce their overhead costs, they are finding fewer dollars available to invest in systems, IT projects, training and recruitment. They are also facing the reality that claim frequency declines mean there will be fewer claims to handle next year than this.

The net effect – why spend dollars to get better at handling a shrinking business, when you can outsource claims to a third party?

That’s driving growth at ESIS, Broadspire, Sedgwick, GB et al; most TPAs have seen significant increases in carrier business over the last few years.  That growth will continue.

Medical management entities are in a different situation – but it’s not a simple one.

With fewer claims to handle, there’s less demand for case managers. With medical costs flat, the volume of bills to handle, visits to schedule, and services to provide is static. Of course, while that’s true for the industry as a whole, there’s wide variation amongst the individual companies in the space. Some are growing quite nicely, while others are losing share and revenues.

Of course that’s due primarily to service providers’ abilities, competency, customer service, and how easy they are to do business with.

Many are cutting prices and giving up margin as they try to stay competitive, hold onto current customers, and have any shot at adding new business.  In general this makes sense, but you have to wonder at the long-term viability of the strategy.

A somewhat different approach is worth contemplating.

What’s working for some providers is their ability and commitment to take work off their customers’ desks and do it for them quickly, easily, and with minimal disruption.  These days this tactic isn’t just a nicety, it allows insurers to reduce their internal workloads by offloading tasks to vendors.

Some are doing this intentionally, others may not even be aware they are solving their customers’ strategic needs as well.

There’s a wildcard out there as well – or rather two.

First, most payers require at least two service providers for most services (excluding pharmacy and bill review).

Second, should one of the big service providers stumble or hit financial difficulty, there will be significant opportunity for competitors able to jump in and help out.

What does this mean for you?

Even in a very tough market, there are opportunities for those who think strategically.

Work comp rates continue to drift ever lower, with new declines announced pretty much every week. While this is great for employers and taxpayers, the impact on insurers, TPAs, and the work comp ecosystem is rather less than “great.”

It’s going to end…someday…right?

It always does, but this time around feels different.

Here’s where we are today – and why.

Rates and payroll drive premiums; as we’re at or darn near full employment with pretty static average weekly wages, premiums are likely holding steady or up just a hair.

Graph shows changes in average weekly wages adjusted for inflation from the Bureau of Labor Statistics

Florida’s rates will likely drop for a third straight year, New Hampshire employers are even happier as rates have declined for 8 straight years – this time by almost 10%. California – by far the biggest work comp state in terms of premiums, gets another decrease in 2020. Same story in Missouri, Wisconsin, and Virginia.

Rates follow declines in claim costs, so insurers are making tons of money. Historically high profits result from low combined ratios (defined as the ratio of total losses plus admin expense to premiums earned). As long as claim costs continue to drop, profits will remain strong.

Result – insurers are really happy. So are employers.

With work comp medical costs static [see detailed report from NASI, free to download] and claim counts stable-to-lower, there’s little if any growth in the number of claimants, the number of medical bills, and the volume of medical services. This means payers have fewer dollars to upgrade systems, pay staff, invest in improvements and training. As premiums drop, overhead costs get squeezed too.

Think of it this way – a California insurer collects $1 million in premiums this year. If it keeps all its current business and doesn’t gain any new customers, that same customer base = $900,000 in revenue next year. The 10% decrease means 10% fewer dollars to spend on IT, marketing, staff training, process improvement.

The impact on service companies isn’t quite as straight forward – for reasons we’ll dive into tomorrow.

What does this mean for you?

Fewer dollars is good news for some, but is likely preventing many insurers from much-needed investment and upgrades.