Three days ago One Call failed to make a $15 million payment to some of its bond holders. Last night I asked the company for a comment; the company responded saying they “…chose to take advantage of an available 30-day grace period for paying interest under the terms of one of our debt agreements…”

Simultaneously they released a statement about the situation – kudos to OCCM management for working to get their message out before the payment problem was revealed elsewhere. That was smart marketing.

In a followup email, I asked “Was one call’s very tight cash position a factor in the failure to make the payment on the due date?”

As of yet there has been no response.

Let’s parse this out.  “Taking advantage” of an “available 30-day grace period” is not a tactic commonly used to “provide additional time to further advance these constructive lender discussions as we work together on a comprehensive capital structure solution that will best position One Call for the long term.”

You may recall One Call did a major debt restructuring earlier this year, one that allowed the company to forgo paying monthly interest but added that interest cost to the principal amount. That saved cash flow but increased the total debt burden.

That higher debt burden coupled with debt covenants made for a potentially bigger long term problem. Simply put, the higher the debt, the more pressure on the company to make sure it has adequate cash reserves and didn’t have to dip too deep into its line of credit.

If you can’t make a debt payment, you know that well before that payment is due.

If you haven’t been able to figure out how to come up with the cash to make that payment, chances are you won’t be able to do so in another month. Reports indicate One Call has been working on this for over three months

If you haven’t been able to “advance constructive lender discussions” when you’ve been working on it for more than three months, and after a major debt restructure a few months before that, one wonders how constructive those lender discussions have been – and will be.

Here’s what we know.

At the end of June the company had about $6 million in cash and equivalents on hand.  That’s equal to about one day’s expenses…perhaps a bit more.

We also know there are three levels of debtholders – the first, “1.5”, and second lien holders. That’s the order of seniority in case of default; the first lien holders get first crack at any assets, followed by the 1.5, with second lien holders hoping there’s something left.

We also know One Call has debt covenants that way well be in play here as the company has drawn down its line of credit, which triggers certain rights for debtholders.

We also know One Call said everything was fine just three months ago; now we hear they are in “constructive lender discussions”. Quoting CEO Rone Baldwin;

 I would like to share that One Call is stable and secure. The company is fully compliant with its debt covenants and meeting all of its legal and financial obligations, and we expect this to continue to be the case.

Finally, we know the three sets of lien holders are each working with financial advisers.

More to come later today.

One Call’s official statement is here.

Among the several things that could affect workers’ comp, the toughest to handicap is the trade war.

[The details are below – a very conservative estimate is the trade wars have already cut annual work comp premiums by $686 million. (300,000 workers, 2080 hours per year, average WC premium rate $1.10 per hour). (source data here)]

That’s about 10,000 lost time claims.

Predictions are difficult mostly because one of the protagonists is entirely unpredictable. While we don’t know what will happen in the future, we do know how the trade war has already affected employment.

This from Yahoo Finance:

Moody’s Analytics estimates that Trump’s trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels absent the trade war. That’s a combination of jobs eliminated by firms struggling with tariffs and other elements of the trade war, and jobs that would have been created but haven’t because of reduced economic activity.

If the trade war continues thru the end of this year, Moody’s reports another 150,000 jobs will be eliminated. If the trade war isn’t over by December 2020 the total will double to 900,000.

Other data indicate manufacturing has already shrunk and the number of new jobs created dropped from 1.9 million last year to 1.3 million for the same period in 2019. Most troubling, the CBO is forecasting economic growth will slip below historical averages next year to 1.8%.

Sectors most affected are manufacturing, warehousing, distribution and retail.

Where we live in farm country, the impact of the trade war is visible next door.

Farm equipment sales are slumping as soybean and grain prices have plummeted while steel and aluminum prices jumped. Dairy is a big part of agriculture here; when Mexico – the largest overseas consumer of our milk products – slapped tariffs on US dairy, we lost $1.8 billion in sales. Equipment manufacturers including Deere have lost sales, and the effect is rippling thru communities throughout upstate New York.

What does this mean for you?

If things aren’t resolved by the end of next year, work comp will be losing $2 billion in premium annually.

That’s about 32,000 lost time claims.

Work comp’s medical spend is about 1/100th of total US medical spend.

So we don’t control healthcare, healthcare controls us.

Sure, there are work comp rules and regulations, laws and courts, but medical providers are far more interested in and aware of what Medicare/Medicaid/Private insurance wants/demands/does than all-but-insignificant work comp.

Well, that’s not exactly true – providers are getting ever smarter about how to profit from work comp.

The US health care system needs major reform – covering most/all of us, forcing providers to reduce the cost of care and cost per person, and improving the health of all of us.

I believe we’ll see major national health reform by 2025; others think I’m nuts. (we may both be right!)

If reform happens – or doesn’t – work comp will be affected. Here’s why.

Over the very near term, let’s assume the ACA dies when the Republican Attorneys General win their Texas lawsuit.

The next day – or darn close to it – the legal basis for our healthcare delivery and reimbursement system could be effectively gone. What will providers and insurers do?

Most health insurers will do everything they can to roll back protections for insureds, limit coverage, and tighten provider networks, because they’ll make a lot more profit doing that.

Then, providers will find their patients are increasingly under-insured, or their conditions aren’t covered, or the treatment they prescribe isn’t allowed.

In comes Fred Flintstone with a mushed foot suffered when he dropped a boulder on it, and voila! Provider problem solved…thank you workers’ comp.

The result – workers’ comp may well see higher medical costs from revenue maximizing providers suffering under lower reimbursement and more uninsured care.

If I’m right about national health reform and massive reform does occur, its highly unlikely work comp will be included in that reform. Without much stronger regulatory protection such as a universal all-payer fee schedule, savvy providers will increasingly target work comp as we’re woefully unable to stop sophisticated schemes to suck more dollars out of workers’ comp payers.

The result – workers’ comp may well see higher medical costs from revenue maximizing providers suffering under lower reimbursement and more uninsured care.

What does this mean for you?

Prepare. 

There are no challenges facing today’s work comp insurance industry. 

Profitability has never been this high for this long.

The combined ratio – the cost of claims plus admin expense – is historically low, and getting even better.

While rates continue to drop, that isn’t hurting profitability.

Employment and payroll is high and appears (to some) to be stable.

Reserves are far beyond adequate, eliminating fears of a major expense shock or premium jump.

All this joy helps squash any whisper of innovation, any fleeting thought of change, any “risky” initiatives.

The work comp insurance industry has never been better, and has never had better reason to see nothing but blue skies ahead.

That is a grave mistake.

While we must pay close attention to potentially disruptive forces that may well significantly alter the landscape, many are too easily – and far too readily – dismissed. It’s analogous to global warming; the deniers long scoffed, protesting that climate scientists were catastrophizing the likelihood of major change, and here we are.

While outright deniers have much to regret, those who sort of knew the climate is changing have done little to prevent it, adapt to it, mitigate it. That’s in our DNA; we humans survived and flourished through our ability to quickly recognize and address immediate threats.

Very long term threats, not so much.

Some of the external forces are obvious, others are hidden. But all should be acknowledged, objectively considered, and, if necessary, planned for. Over the next few days we’ll be digging into these in some detail.

I offer a few for your consideration.

• Implementation of major national health reform
• Failure to implement major national health reform
• Expanded trade war
• Consumer debt bubble pops
• Impact of Amazon-Berkshire Hathaway-JP Morgan’s Haven Health
• Global warming
• Downstream impact of decreased opioid utilization.

What does this mean for you?

To be sure, some/many of these won’t happen and/or won’t affect workers comp. But it’s likely some will. The time to prepare is now.

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.