Two recent acquisitions and one possible transaction provide insight into investors’ views of the workers’ comp services sector.

Spoiler takeaway – Size is good; a) up to a point, b) as long as the additions strengthen management, add solid revenue and are strategic.

Paradigm acquires HomeCare Connect and TRISTAR acquires Risico.

Paradigm Outcomes’ acquisition of HomeCare Connect makes a ton of sense – as does TRISTAR’s purchase of Risico. We’ll dive into the first today, the second tomorrow, and the possible transaction later this week.

HomeCare Connect provides home care, DME, prosthetics and other services to workers with significant injuries…a population exactly the same as Paradigm’s. By internalizing these services, Paradigm:

• gains control over a key part of the care continuum, thereby streamlining communications and service delivery;
• adds strong management talent (I’m a big fan of HCC leaders Vonesa Wenzel, Teresa Williams and Tim Rametta);
• increases HomeCare Connect’s revenue by funneling Paradigm cases through HCC; and
• adds significant revenues (my guess is $60 million+…but that’s just a guess) to its top line and earnings to the bottom line.

I spoke with Paradigm CEO John Watts, here are a few quotes from that conversation, takeaways that point to Paradigm’s evolution and strategy.

• • “almost every case we manage involves durable medical equipment and home healthcare”
  • With (those services managed in-house, “it is seamless to the injured worker and provides more continuity as we are able to stay on the case longer.”
  • “HCC has very strong leadership that is already thinking about other opportunities…they have a really interesting solutions for prosthetics…”
  • Paradigm has “historically has dealt with high-severity claims, usually in the $1.5 to $2 million range.We are expanding the types of claims we work with to include lower-severity cases including those that need DME and HHC…HomeCare Connect’s solutions are a key part of our  service set…”
  • “As we continue to evolve our value-based solutions, we will extend our focus to events that are more episodic in nature…shoulder injuries for example…where our focus on return to work and reducing cost are essential value drivers for the market.”

Paradigm is clearly focused on capturing more of the services delivered to its current patient population, while moving “down the severity ladder” to handle less severely injured patients.

And…the final quote is pretty interesting as it implies expanding beyond fee-for-service into value-based care and financial models. 

I’d be remiss if I didn’t add what I see as one of the bigger benefits of the acquisition for Paradigm – HCC execs and staff get workers’ comp, understand the critical nuances and needs of front-line adjusters and case managers, and also know what drives decision makers.

From Vonesa Wenzel:

• • “It is all about the integrity of your organization and that you can be trusted by your clients to do the right thing for them, and also for the injured worker. You have to earn your client’s trust.”
  • “It’s important to understand that expectations of what folks need at the desk level may be different than corporate level decision makers.”

 What does this mean for you?

Focusing on your end users’ needs, wants, problems, and foibles = success.

Last week the first five predictions about what happens in workers’ comp this year went up…today’s the second five.

6. With one or two exceptions, don’t expect much in the way of private equity investments.

There may be one or two large transactions, and a couple small ones, but outside of that, the bloom on the workers’ comp rose appears to be fading.

7. OneCall will be sold and/or split up. 

The BlackRock and KKR entities that are the current owners are not operators; they are debt owners. CEO Tom Warsop has squeezed out all the squeezable costs – and then some. Growth – defined as new business from new customers – is not happening. Add the overall drag on work comp services from the still-real drop-off in claims and claims services, and the reasons to hold on and hope are few indeed.

Plus, if interest rates increase – which is a distinct possibility – and if private equity interest in workers’ comp continues to diminish from it’s current modest level – also a distinct possibility – OCCM’s owners may well decide to sell soon rather than watch values decline.

8. COVID’s impact on costs and rates will prove to be minimal.

COVID claims are cheap, few are anywhere close to catastrophic cost levels, the effect of presumption laws and regulations is not much of an effect at all, and many employers – especially health systems – are forcing employees to use PTO rather than file for WC when they test positive/have symptoms.

Most research organizations and actuaries would do well to reflect how their early predictions were so…bad.

Helpful hint – two places to start; a) the tendency for WC “experts” to catastrophize and b) the almost-complete lack of understanding of healthcare drivers, costs, cost structures, reimbursement, and epidemiology.

9. There will be no big issues in workers’ comp. “Big” defined as important, needle-moving, disruptive, revolutionary.

No, medical marijuana is NOT a big issue – neither is COVID, or presumption, or the mid-term elections (there is ZERO interest in workers’ comp on the federal level) or remote work (does anyone seriously believe office workers tripping over toys will amount to any real dollars?)

Oh, and with rates at all time lows, frequency continuing to drop, and medical costs (with the exception of physical therapy and facilities) flat, coupled with ongoing supply chain and labor market issues, execs at big employers are (justifiably) completely uninterested in workers’ comp.

If the big girls and boys don’t see any issues, there aren’t any.

10. Here’s the kicker – the biggest long-term concern for workers’ comp is global warming...yet this is getting zero attention.

There’s going to be an inevitable increase in issues related to heat, flooding, fires, drought, tornados and hurricanes. This is getting more real every day yet remains all-but-ignored by pundits, policy-makers  and rate-makers.  We can expect more heat-related claims. Hurricanes, fires, and tornados will increase in number and severity; affecting logistics, labor, construction, and claims. The research is clear.

What does this mean for you?

As always, success favors the insightful, and failure plagues the ignorant.

Once more I head out on a limb to prognosticate on the events and trends that will shape 2022.

1. The soft market will continue.
   Carriers are still over-reserved, rates are still too high (see the opioid hangover), capital is still flowing into workers comp (gotta love that looooong tail), and employment growth may continue to be modest (low wage workers have discovered that working at crappy jobs isn’t always a have-to, especially when child care is unavailable and unaffordable).
   On the other side, wage growth will likely continue (thus partially mitigating the above drivers) as more employers finally figure out that people aren’t interested in crappy jobs for crappy wages.
   Caveat – towards the end of 2022 we may well see a bit of tightening as construction, infrastructure, green energy and other initiatives start up and get operational.
2. TPAs will add more business, mostly from carriers.
   As work comp continues to shrink, insurers will ramp up efforts to shed assets and expenses to reduce their cost structure. By outsourcing claims, carriers are trading the high fixed costs of a claims infrastructure for the variable cost of a per-claim admin fee.
   The smarter carriers will negotiate hard so they don’t get screwed by medical management and other non-fixed fees…but many carriers aren’t that smart.
3. Insurers will reduce staff, particularly in claims.
   Well, of course. see #2 above. However, TPAs will look to add claims staff, so experienced, well-trained claims folks will be highly sought-after.
4. IF total medical costs go up – and I doubt they will  – the increase will be marginal.
   Yeah, I know there’s lots of press and punditry about work comp medical costs aka “severity” increasing – and most of it is flat out wrong.
   
   I’ve read far too many investment banker slide decks, “research” reports and surveys of work comp executives that talk about rising medical costs –  almost all are not based on data or solid research.
5. That said, facility and therapy costs will go up.
   Mostly because a) medicare is increasing reimbursement for therapy which trickles down to work comp fee schedules, and b) some healthcare systems and for-profit entities (looking at you, HCA, especially in Florida) have figured out how to bust open the work comp piggy bank.

Monday – 5 more predictions.

What does this mean for you?

Work comp will just muddle along…