The healthplan company’s Q2 earnings were released last week. If you were looking for any insights into their comp business, the Coventry release wasn’t the place to look; there was no mention of workers comp results – this despite the sector’s three-quarters of a billion dollars in revenue and outsized contributin to margin.
The big news – actually it was pretty much the only news – was not related to operations, but rather the settlement of the Louisiana lawsuit. Coventry added $0.68 to EPS after the May 31 definitive settlement agreement reduced the company’s liability in the class-action lawsuit. Originally, Coventry had reserved for the full amount of their liability, which came to $1.18 a share; the definitive agreement resulted in a substantial reduction in the company’s liability. As to the merit of the suit, my take is Coventry was mistreated; this suit couldn’t have succeeded in many places other than Louisiana, where providers’ legal power is all out of proportion to any harm they may suffer.
The workers comp operating results appear to be pretty flat, notwithstanding CFO Randy Giles’ statement that Coventry “increased our fee revenue guidance slightly for the second consecutive quarter, driven by our Workers’ Compensation Services business. We continue to be pleased with this ability of these businesses and the very valuable nonregulated earnings that they produce for the company.” (thanks to seeking alpha for the transcript)
While the company does not break out WC financials from the rest of the business, the workers comp sector is the lion’s share of the “Other Management Services” product type. Sources indicate comp is about 88% of that sector’s revenue, making Q2 revenue somewhere in the $195-$199 million range, up slightly over Q1’s $191.6 million, (which was a 4% increase over the prior year’s quarter).
Coventry remains enthusiastic about this business, characterizing its offering as the “Most complete national offering…[with a] Long-term penetration opportunity…CVH offers unparalleled integrated capabilities…[in a] fragmented industry ripe for consolidation…] (from a June 2011 Investor Presentation)
I’d disagree with their characterizations in several ways. First, Coventry is a network and bill review company first and foremost. While it does have offerings in complementary product lines, they aren’t nearly as robust, and certainly nowhere near as dominant as their PPO (their bill review operation is far from industry-dominating). Second, Coventry’s work comp revenue is growing primarily via price increases; the company has lost business of late (Broadspire’s very public split being the most noticeable) and Anthem Wellpoint’s network offering is gaining traction both within, and outside, California.
Second, their integrated capabilities are not “unparalleled” — far from it. Moreover, the market doesn’t see the value of integrating what are pretty different services under one vendor. To the extent that Coventry has been able to sell combinations of services, they’ve been doing this by offering deals – “you buy our PBM offering and we’ll offer a price reduction in these other areas.”
Finally, Coventry is not investing in this business – in fact they’re harvesting margin from workers comp, margin they need to prepare for the post-2014 world of health reform. Don’t expect them to spend anything they absolutely don’t have to on workers comp; this is a cash producer, not a long term growth business.

One big reason – physician dispensing of repackaged drugs.
Two stories, seemingly unrelated, appeared in the last week or so that, when read together, clearly lay out the problem.
One described the costs borne by Florida’s employers, costs much higher than necessary due to inflated costs from drugs dispensed by physicians. A loophole in the law allows doctors to dispense drugs at prices far above those for the same pills dispensed in a retail pharmacy. More on this in a minute.
So, why is this happening. In a word – money. Specifically, political connections fueled by large campaign donations from companies profiting from the current Florida fee schedule, a fee schedule that has added tens of millions in costs to Florida’s employers and tax payers.
here’s an excerpt from the article:
“Employees of one influential healthcare company, Miramar-based Automated Healthcare Solutions, accounted for $55,200, the second-highest amount of contributions to Haridopolos.
With Haridopolos’ backing, the firm was active in pushing a bill tightening reporting requirements for a prescription-drug monitoring database [PDMP]. The firm, along with Haridopolos, also unsuccessfully fought a provision restricting many doctors from dispensing painkillers in their offices.”
Now at first blush this is good news – and I’d say at second blush too. AHCS appears to be promoting a PDMP, a long- and desparately-needed tool that would enable much better tracking of narcotic prescribers, dispensers, and users by physicians, pharmacists, and, when appropriate, law enforcement. Doctors would be able to see if their patient was getting multiple scripts from other doctors; pharmacists would see if their customer was getting similar scripts filled at other pharmacies, and law enforcement’s ability to identify potentially criminal behavior would be greatly enhanced.
So far, so good.
What’s less good – much less – is AHCS’ actual business. AHCS enables physician dispensing in Florida and many other states. Which leads to the next article.
WCRI’s recent report indicates Florida’s drug costs are 45% higher than the median state, largely due to physician dispensing – not of narcotics, but the run-of-the-mill generics that make up the vast majority of work comp prescriptions. Here are some of the study’s conclusions.
– the average payment per claim for prescription drugs in Florida’s workers’ compensation system was $536 – 45 percent higher than the median of the states in the study.
– Over a two year period (2005/2006 and 2007/2008), the average cost per claim for prescription drugs in Florida increased 14 percent. By contrast, prescription costs per claim were fairly stable in most study states over the same period.
– Higher and growing costs of prescription drugs in Florida were largely due to more frequent and higher-priced physician dispensing.
– Physician-dispensing in Florida’s workers’ compensation system has been taking an increasingly larger share of prescription payments. The percentage of prescription payments for physician-dispensed prescriptions in Florida increased from 17 to 46 percent over a four year period (2004/2005 and 2007/2008)…
I’d note that WCRI’s most recent data are from 2008 – three years ago. If physician dispensing continued to grow at the same rate, we’re looking at drug costs in Florida that are probably twice as high as other states…
Here’s the net. AHCS has contributed close to two million dollars to various politicians, political campaigns, PACs, and other entities. Sure, some of their activity appears to be focused on controlling narcotics in workers comp. But most of their donations occurred back when Florida’s legislature was intent on closing the loophole that has generated millions in revenue for AHCS, AHCS’ affiliates, and AHCS’ dispensing physicians.
Nationally, physician dispensing of repackaged drugs adds more than a half-billion dollars to employers’ costs. These added costs are passed on to taxpayers, customers, stockholders, and employees.
All at a time when employers and taxpayers are struggling to get though a horrendous recession.

On the list of successful uses of social media in workers comp, one has to put Mark Walls’ LinkedIN Work Comp Analysis Group at the very top.
Mark’s group just passed 10,000 members. Yes, that’s ten thousand members – a pretty amazing feat considering the group is just a few years old.
Kudos to Safety National for accommodating, and encouraging, Mark’s work in social media. I have to believe it has been enormously productive for Safety National; Mark’s now hosting speaking symposia at the National Workers Comp and Disability Conference; the group has several ongoing conversations at any one time; Safety National’s name is far better known among the rank-and-file; and all at a cost of a few hours a week for one executive.
Safety National’s decision to promote and support the use of social media has been rather unique in the industry. I’m not aware of any other carrier or TPA of any similar size that has been so forward-thinking and, to be blunt, courageous. This is a very risk averse industry, yet the LinkedIN Group shows what can be accomplished if one has a bit of foresight, a good measure of dedication, and an excellent platform.
By way of contrast, this blog has just under 2700 subscribers and WorkCompInsider about the same. Notably, Roberto Ceniceros’ CompTime blog is gaining traction daily; it is likely among the leaders in any ranking. Undoubtedly this has greatly helped Business Insurance, which may be suffering from the same malady affecting all ‘old school’ media – a struggle to stay relevant and timely in the world of the internet.
I’d be remiss if I didn’t note WorkCompCentral President David DePaolo’s Work Comp World. David’s thoughtful discussion of contentious and complex issues is must reading for all execs in the business. He’s a professional with strong opinions, and the brains and diligence to back them up.
Finally, Pat Sullivan’s WorkCompWire continues to highlight the latest research and reports, coupling intel with advertising in a new blend that the rest of us are watching carefully.

Work comp PT network company AligNetworks has been sold to private equity investor General Atlantic. While terms weren’t disclosed, sources indicate the company went for a premium well above the ‘usual’ 6-7 multiple of EBITDA.
Butch Hofstetter and his team did a remarkable job, building a serious competitor to industry founder (and HSA consulting client) MedRisk and Universal SmartComp in a few short years. Leveraging their relationships, Butch and his team went after adjusters, relying on those relationships to drive transactional volume. The focus was a success, and the numbers certainly showed they’d carved out a solid niche.
While there were at least two strategic buyers in the mix, General Atlantic made the winning bid, leaving those entities looking to add to their portfolios to keep looking. While the GA people are undoubtedly very, very smart, this is also their first major foray into what is a pretty weird business space. My bet is they use of their additional capital (along with debt) to invest in IT and operational infrastructure. Align’s been able to handle their volume to date with a pretty thin operation, but they’ll need to invest if they want to move beyond pleasing adjusters to nailing down deals with some of the big boys.
That’s not to say Align hasn’t begun some relationships with larger payers; emphasis on the ‘begun’. However, that market has long been MedRisk’s sweet spot, and anyone who knows CEO Shelley Boyce knows taking share away from MedRisk will be a serious challenge. MedRisk has been working very hard to consolidate relationships with current large payers, while building the infrastructure necessary to deliver the same savings results to individual adjusters.
Regardless, this is good news for payers. More focus on physical medicine, which accounts for about a fifth of all workers comp medical spend, is a welcome thing indeed. And competition, especially between two such organizations, will produce better outcomes, more efficient processes, and lower costs for all work comp payers.