Why is Genex buying more case management?

Yesterday Genex announced it acquired yet another case management firm; Integrated Care Management of Alpharetta GA and their 150 employees broaden Genex’ CM coverage in about 20 states.

This comes on the heels of the MHayes purchase. According to sources familiar with the deal, the Maryland-based firm reportedly commanded a pretty high multiple; congratulations to Melinda Hayes on that news.

While there were no details on price or cash/stock mix for the ICM transaction, the timing likely had everything to do with last week’s announcement that Genex increased their borrowing capability by almost $80 million.

The announcement, dated June 22, noted “Net proceeds from the offering will be used to fund acquisitions.”

ICM’s revenues will push Genex’ top line well above $400 million, and further consolidate its position as the dominant case management firm in work comp (with footholds in other insurance niches).

That said, the debt to earnings ratio will now exceed 7.5x, a level Moody’s considers “aggressive for the firm’s rating category…” The rating agency doesn’t seem too worried, as they expect the ratio to improve due to organic growth and higher EBITDA (earnings before interest, taxes, depreciation and amortization).

I’m puzzled by the “organic growth” expectation.  Case management, especially field case management, is declining for two reasons; work comp claim frequency continues to drop 2 – 4% a year, a decline that is structural, long-term, and seemingly-inevitable. And payers’ use of field case management continues to decline, with most preferring telephonic and using field only for a relatively-narrowly-defined group of claims. While Genex does a LOT of telephonic CM, TCM is fairly easy to internalize (altho some states regulatory requirements make it feasible only for payers with significant volume).

Moreover, payers continue to seek ways to capture more and more services internally; they don’t like to vend claims services they can do themselves, thereby adding revenue, increasing efficiency, and better integrating process. Think York’s acquisition of Wellcomp, Sedgwick’s ongoing efforts to acquire a wide variety of claim service vendors, GB and MedInsight, the Hartford handling MSAs with internal staff.

Methinks there is one primary reason for the growth-by-acquisition strategy – case managers may well be expected to drive business to One Call Care Management.

And one secondary – organic growth (despite Moody’s optimism) just isn’t happening.

Genex is owned by Apax, the private equity firm that also owns One Call Care Management.  One Call provides imaging, physical therapy, DME/home health, transportation/translation, dental and other services to the work comp industry, a portfolio of services that accounts for about a quarter of total workers comp medical spend.  Genex’ 1800 +/- case managers would be a great mechanism to recommend/refer/direct business to OCCM whenever and wherever possible.

From an ownership perspective, this makes perfect sense.  At some point Apax will sell these assets, and combining them – the service provider and the referral driver – into one entity makes the whole greater than the sum of the parts.

Of course, this assumes Genex et al provide exemplary customer service, meet the needs of current customers, resolve any issues quickly and to the satisfaction of clients…

A cautionary note for ICM employees; study any new paperwork very carefully, and look closely at any non-compete agreements.  You want to be sure you know what you are signing. 

What does this mean for you?

Who controls your referrals?