While there have been a plethora of deals in the work comp services industry of late, the pending acquisition of MSC by OneCall Medical has surprised many. The rumored size of the transaction, the buyer, and the level of interest in MSC among investors and strategic buyers are causing folks to re-examine long-held views of the business as slow-moving, stodgy, and insular.
The success of MSC, who chose to sell its pharmacy management business several years ago to concentrate on durable medical equipment and home health care, has been remarkable. This was a bit of a contrarian play, as most services firms were looking to diversify, adding additional service lines in an effort to capture more revenue from their existing customer base. PBMs and other vendors added DME and HHC, diversified into PT, imaging, and other lines as they sought to be all things to their customers.
For most suppliers, this wasn’t terrible successful. The additional lines added some revenue, but the time, energy, and resources invested in the diversification effort took away from the focus on their core business. Moreover, it was hard for most suppliers to build much credibility or differentiate their offerings in these new service lines; their level of expertise and experience just weren’t that impressive.
In contrast, after spinning off their PBM to Express Scripts, MSC invested heavily in systems and sales staff, seeking to deeply penetrate its existing customer base and add as many new customers as possible. By all accounts it was quite successful, taking share from competitors through a coordinated effort targeting both home office buyers and individual adjusters and case managers.
MSC will be added to OneCall’s product portfolio, not as another product line but as the leading supplier in the DME and HHC sectors. Combining MSC’s transportation and translation business with that of OneCall consolidates their position as the leading T&T provider. Adding their leadership position in the small but rumored-to-be-highly profitable work comp dental space gives OneCall a rather interesting combination of products and services.
Equally, if not more important, is the combined companies’ sales and service footprint. While there will almost certainly be some reduction in the total number of staff, there’s no question OneCall will have more “feet on the street” than any other vendor in the business. The ability of OneCall to stay in front of adjusters and case managers, service national accounts, stay in touch with market trends and competitive dynamics, and measure and track what’s selling where and to whom for how much will be unparalleled.
Make no mistake, the MSC-OneCall deal is a watershed moment in the workers comp services industry. For decades this has been a cottage, mom-and-pop business, with most suppliers either small, local vendors or entities that grew up from those mom-and-pops. The industry will mature:
– Expect the pace of consolidation to continue, if not accelerate, as local suppliers – of all service types – fear their ability to compete with the big national suppliers decreases with each deal.
– New entrants will emerge, focusing on ever-more-tightly-defined niches, seeking to carve out and “own” a space where their expertise and capabilities are enough of an advantage to convince payers that adding one more vendor is worth the hassles.
– More investors – private equity funds in particular – are focusing on this space. They will likely drive up the price of deals (somewhat), although the tough credit markets will help keep multiples down.
What does this mean for you?
Opportunities to be sure, at the top end, and in newly-defined niches – for smart, creative, and, most importantly, disciplined entrepreneurs and managers.

With Washington seemingly frozen in place, unable to agree on anything except it’s the other side’s fault, the awful specter of the Fiscal Cliff looks more and more possible. But unlike any other fall from a great height, we’re already getting hurt.
The “Fiscal Cliff” is shorthand for the automatic government spending cuts and tax increases that will go into effect January 1, 2013 – less than five months from today – if Congress fails to reach agreement on a plan to reduce the deficit. The CBO projects the cuts and tax increases will reduce the deficit by over a half-trillion dollars, but they will also cut four points from GDP and trigger another recession.
The CBO also projected that a failure to reach agreement early in 2012 would negatively affect the economy, leading households and businesses to cut spending and thereby reducing 20123 GDP by a half-point.
That projection appears to be prescient.
Manufacturers are already cutting back on orders. Some companies are holding off on hiring new workers. The hospitality industry is watching occupancy rates decline. Failure to address the Cliff will mean infrastructure construction and maintenance projects are in jeopardy
All this at a time when workers comp insurers are finally seeing some consistent premium rate increases, increases desperately needed to build up deficient reserves and cover rising medical expenses.
Employment drives workers comp, and employment in manufacturing and construction has a disproportionate effect. Although forecasts are still positive for hiring (particularly in non-residential construction), the closer we get to 12/31/12 the more dicey things will get.
What does this mean for you?
Watch what happens in DC; A resolution to the deficit crisis bodes well for work comp; no resolution would be bad news indeed.

The results for the second quarter are in, and Coventry’s doing well.
For now, we’ll focus on the work comp sector; if you are looking for any insights into Chariman Allen Wise’ views on comp, you won’t find them in his comments or the transcript of the earnings call. Both the Coventry folks and the analysts were entirely focused on preparations for reform, Medicaid, Part D, and expansion plans.
Despair not, as there’s enough other info out there that we can discern some trends with their work comp sector.
Fortunately Coventry has been reporting the work comp sector’s revenues on a separate line for a couple of quarters. The data indicates essentially flat sales with a slight dip this quarter (2.5 percent) compared to the same quarter in 2011. That’s a solid accomplishment, as its came despite the loss of significant PBM revenue with the move of ACE’s pharmacy business to rival Progressive Medical.
Pharmacy drives Coventry’s work comp top line. Coventry’s PBM, First Script, (and all PBMs) count pass-thru pharmacy transaction revenue as Coventry revenue. Contrast this to other service lines such as bill review and networks, where only Coventry’s portion of the spend hits their top line, and the importance of pharmacy to top line becomes evident.
Those other lines are under pressure as well. ACE reportedly is moving other business away from Coventry, including provider networks. Macro factors, such as the continued soft employment picture and fewer workers comp claims are also dragging down performance, reducing case management, bill review, and network business.
A factor that is getting almost no attention is the impact of physician dispensing on First Script’s revenue. With almost two-thirds of work comp pharmacy spend in Illinois and Florida and over a third of national spend from dispensing physicians , First Script’s top line is about a third lower than it would be if this practice was limited — as well it should be.
Best guess is Coventry’s work comp revenues would be about a hundred million dollars greater if not for dispensing docs.
To keep expenses down, management has been reducing staff; sources indicated several analysts from the reporting group were let go a few months back.

Rising medical severity. The worst combined ratio in a decade. Inadequate reserves. Stubbornly slack employment demand. Premiums down a full 23 percent over the last six years.
Things can’t get any worse, right?
Right?
Before we answer that, consider many asked the same question a year ago, and here we are. The most important single factor is employment – rising employment makes a lot of these issues way less significant. Employment drives premium dollars, which increases money available for additions to reserves. To say employment growth has been “disappointing” is to understate just how weak its been. Until employment growth increases significantly, comp writers are going to be running to catch up.
Specifically, they’re trying to increase premiums written to reverse the seemingly-intractable increase in the combined ratio. According to Fitch, the workers comp industry’s combined is at a ten year high at 117, a full 9.5 points above the average for the decade. There’s no doubt the 23 percent decline in premiums we’ve seen over the last five years was the big driver of the high combined.
There’s also no doubt rising medical severity coupled with reserve deficiencies are going to make improvements to the combined a “heavy lift”.
I’ll bang on this drum again – many payers have no idea what their opioid-addicted claimants are going to cost them. With opioids accounting for almost a quarter of all work comp drug spend, and the long-term usage of these drugs increasing everywhere (except California!), and few payers fully grasping the significance of this, the picture is ugly.
Being an optimist by nature, I’m hoping
a) employment picks up dramatically;
b) carriers don’t cross the stupid line when it comes to pricing;
c) insurers get a grasp on the cost of opioids and get serious;
d) regulators support that effort; and
e) employers start investing in safety, screening, and loss prevention.
Or at least two out of five.

State funds’ share of the nation’s work comp premium dollar increased 7.1% last year, the first net gain in several years.
As state funds generally grow when commercial carriers’ underwriting gets tighter, this is yet another data point we’ve seen that indicates the work comp market is hardening
The report from AMBest (thanks WorkCompWire) specifically noted one of the reasons for state funds’ growth was a stronger pricing environment. Higher prices follow higher combined ratios: funds’ calendar year combined hit a very painful 134.9 in 2011.
This news comes on the heels of reports from agencies of firming pricing and indications that some larger employers are also expecting higher work comp premiums.
Anecdotally, several HSA consulting customers point to somewhat tougher underwriting decision making coming from home offices, higher rates, and more “selectivity” re new business.