AIG is set to announce a fourth quarter loss of some $60 billion. That’s a huge, immense, devastating number. And one that likely spells the end of what was once the largest commercial insurer.
Most of the attention has focused on the Asian business, auto lines, and other financial operations. Amidst all the speculation about breakup, sale, outright takeover by the Feds, or business termination there is one missing element – a recognition of the value of the core business – AIG’s domestic operations.
The domestic commercial insurance operations and underwriting companies (Commercial and American International Underwriters (AIU)) are in generally good shape. Reserves are solid, and share is excellent. While the company suffers from chronic under-investment in claims technology and a managed care strategy that could best be described as old-fashioned, there is a lot of value in the domestic business.
AIG is justifiably renowned for its underwriting skill; distribution is solid, and management is generally strong. It is the largest underwriter of workers comp, a line that has been quite profitable of late. AIG is also a large writer of property and general liability coverages. There’s a nice, big business here, one that will undoubtedly be very valuable when the dust settles. But right now, no one wants to buy anything remotely associated with AIG. Intracompany relationships at AIG are tangled, interwoven webs – difficult to understand much less separate out. Any acquirer will have to be very sure they have extricated what they want, and left the rest behind, before closing a deal.
And right now there’s just no interest in starting the process. Couple that risk aversion with the sense among many big carriers that it will be cheaper and less risky to just take over customers as they flee AIG, and oyu start to understand why a sale to another insurer is unlikely over the near term.
The Feds sure don’t want the business. That leaves one other way to capture value – an IPO. Sure, that’s a crazy idea – who would want to do an IPO these days? You’d have to be nuts, or desperate, to do an IPO. That’s exactly the position AIG management finds themselves in – desperate.
The problem with an IPO – in addition to the obvious – is there has to be something left to sell – and that something includes management and staff. AIG is due to pay bonuses in a couple weeks, and if it doesn’t, the exodus of talent will turn into a flood of Biblical proportions. That will strip AIG of the people it would need to make an IPO work. But, as anyone who’s been paying attention will tell you, big financial companies that are getting big taxpayer bailouts better not pay any staff any bonuses.
There may be a pony in here. If deserving employees get shares in the new business, that may help convince them to stick around and recover some of the equity they lost as AIG’s stock cratered.
Desperate times call for desperate measures. And the folks at 70 Pine Street are nothing if not desperate…

Hank Stern has a multi-course meal for your mind with his ed of Health Wonk Review.

The Allen Wise II era has begun with today’s release of Coventry Health’s fourth quarter 2008 earnings. Wise, who occupied the CEO/Chairman’s office before the recently-departed Dale Wolf, resumed the position ten days ago after Wolf resigned.
Here’s my key takeaway. Wise has figured out that Coventry’s non-group lines of business – work comp and Medicare – were in part responsible for higher medical loss ratios for their group business. Recall that Coventry’s medical loss ratio (MLR) sent up more than 300 basis points last spring, sending shock waves through the company.
It appears that Coventry’s local network negotiators/provider relations staff had to consider medicare and WC when negotiating contracts with providers (especially facilities), and the larger providers said that if Coventry wanted deals on those lines, then their unit prices were going to increase. This led to higher MLRs on their core group business. For Coventry, higher costs are being driven by facility expense.
More to follow as I digest the call and comments.
Here are a couple highlights.
– Medicare Advantage membership increased 34% in 2008. I suppose that’s good news, although the pending termination of the MA premium subsidy isn’t going to help the profitability of that segment (expect a rapid cut in the Feds’ 13% average subsidy this year).
– Commercial group membership declined each quarter in 2008, leading to a decline of ust under 100,000 members for the full year. This isn’t necessarily bad news, as the company raised prices a lot after last summer’s surprise disclosure that the Medical Loss Ratio unexpectedly jumped.
– The workers comp business is muddling along, with no evidence of growth. It’s not possible to tease out the precise WC numbers as they are combined with other businesses in the Specialty Services Revenue line item – but that line was essentially flat quarter over quarter throughout 2008. And although it grew nicely (if my guess-timations are accurate), in the past, it looks like that growth leveled off during the last three quarters of 2008. For more on Coventry’s WC top line growth strategy, click here.
Finally, what does the future hold? As I noted a year and a half ago, the company has “a tight focus on managing the medical loss ratio (MLR), although that ‘management’ appears to emphasize financial rather than medical management – the MLR strategy is driven much more by increasing premiums ahead of medical inflation than by actually ‘managing’ medical care and costs.
This will serve the company well over the near term, but the ‘MLR management approach’ has to change over the longer term.”
What does this mean?
A change in management personnel may not mean any change in how the company operates. Simply put, Coventry has to change its business model from one that is financially driven (raise prices) to one that emphasizes medical management (actually add value). This is CEO Wise’s second stint in the job; we’ll see if he changes course.
Note – there’s a lot to interpret, these are initial takeaways so more to follow

Passage of the SCHIP expansion came about when several Republican senators joined the Democrats to pass the bill by a substantial margin. Although the bill passed the House easily (290-135), the key was the GOP votes in the Senate.
This is big news – for two reasons.
In the signing ceremony, Pres. Obama said “”The way I see it, providing coverage to 11 million children through CHIP is a down payment on my commitment to cover every single American.” This marks the first step towards universal coverage, a goal set by President Obama during the Presidential campaign, and one many of his supporters are monitoring closely. The expansion of SCHIP continues coverage for seven million kids and provides funding for an additional four million.
Perhaps equally significant was the Senate vote, where nine Republican Senators joined their Democratic colleagues to pass the bill easily last week. This despite GOP complaints that legal immigrants would be eligible for coverage under the SCHIP. (Despite what CNN reported and nativist Lou Dobbs says, there are strong provisions in the bill preventing coverage of illegal immigrants including requirements for verification of immigration status by the states).
Among the GOP Senators voting ‘yea’ were Collins and Snowe of Maine, Alexander and Corker of Tennessee, and Hutchison of Texas (!). While the Snowe and Collins votes are not unexpected, the support of the two Tennesseans and Hutchison in Texas are somewhat surprising. I wouldn’t expect the latter Senators to be very supportive of future health reform legislation. That said, the fact that this initial bill passed with some bipartisan support is a positive signal for reform advocates.
What does this mean?
A much-needed success for the President – and perhaps a little momentum on the heatlh reform front.

Among the loyal readers of ManagedCareMatters are more than a few with Coventry email addresses. I consider a few to be personal friends, know some quite well, worked with others, and have heard good things about many.
I know Coventry has a strict don’t-do-it-or-you’re-fired policy against talking with the media – a category that includes yours truly. That’s dumb.
This is a big mistake on the part of Coventry management. In the four and a half years I’ve been publishing this blog, I have reached out to several individuals within Coventry, as well as soon-to-be former CEO Dale Wolf many times in an effort to get their side of the story – and have been rebuffed each time. So, I’m left with what I gather from customers, competitors, investor calls (I own stock in Coventry), and my own intuition and interpretation thereof. Most of that isn’t pretty, or more accurately hasn’t been pretty lately. But there is another side to the story, and Coventry management’s myopic media strategy means the fifteen hundred readers stopping by every day don’t get to hear that side.
The company is going through a very tough time, and may well be broken up and/or sold off. Customers on the work comp side are none too pleased with management’s ‘my way or highway’ approach, and many are looking hard for alternatives. Brokers are frustrated with what they perceive to be a “screw everything but the medical loss ratio” marketing ‘strategy’, which they view as nothing more than an attempt to show Wall Street that management is fixing the problems created by underlings. Employees from among Coventry’s acquisitions have found things to be much different than they were led to believe (or perhaps than they led themselves to hope).
All this hides what would otherwise be a decent success story. The secondary market strategy for the small group HMO business made, and makes, sense. The distribution strategy worked reasonably well, as did pricing discipline. Some of the work on Medicare Advantage was creative and intelligent. The forays into the individual market boded well for the coming of national health reform. Unfortunately, these good moves, and the people who drove them, have been overshadowed by the big mistakes made by management.
Here’s the ugly truth – and it reflects not on you, but on Coventry management. Their arrogance and hubris has been the cause of their downfall. So confident were they in their abilities that they ignored the basics of the business – issue cards on time, monitor IBNRs, track medical trend and all its components, stick to what you know, treat customers as you would like to be treated. Now that it’s too late, we finally hear a chastened, perhaps even humble tone from Coventry management.
Fortunately the experts on Wall Street finally removed their heads from wherever they were storing them and figured out these guys (and they are almost all guys) didn’t have a grasp on their business.
There’s plenty of talent at Coventry, and whatever happens to the company, that is recognized in the industry.

Coventry Health announced late today the resignation of CEO Dale Wolf. Allen Wise, who preceeded Wolf in the position, will be the new CEO.
Wolf’s resignation comes after a tough ten months at the company, and may be a result of the continuing problems at Coventry (that’s speculation on my part). As reported on this blog last week, Coventry’s recovery program did not exactly resonate among Investors.
More to come…

President elect Obama’s speech this morning highlighted the critical state of the US economy. It also marked the beginning of the Obama Presidency.
Obama has made every effort to avoid interfering with Pres. Bush’s authority as the sitting President. But events have overtaken Obama, forcing him to inject himself into the legislative process before things get even worse.
One line dramaticaly makes this point. “For every day we wait or point fingers or drag our feet, more Americans will lose their jobs. More families will lose their savings.”
The speech was designed to increase pressure on legislators of both parties, to focuse them on passing the stimulus package without bogging it down with grandstanding and loading it with pork. Of course, one representative’s pork is another’s essential investment in infrastructure.
Simultaneously, Tom Daschle was in the midst if confirmation hearings just a few miles away. Daschle was introduced by none other than Bob Dole, former GOP Presidential candidate.
A couple thousand miles away, hospitals in California were reporting elective admissions were down almost a third while indigent cases have risen dramatically. This over the last few months, and if It continues we can expect hospitals to join the ever-lengthening line of supplicants coming to Washington with their hands out. .
The wheels have fallen off the economy faster than anyone anticipated, much faster than our leaders’ ability to react much less anticipate the next yawning pothole. There’s no question the imploding economy is directly related to hospitals’ travails, just as there is no question these travails will add their own weight to the burden on the economy.
I predicted a few weeks ago that the number of uninsured would hit 50 million in 2009. At this rate, that may come sooner than anyone expects. The only thing standing in the way is a huge stimulus; President Elect Obama’s speech this morning shows exactly how important fast action is.

before I even hit the floor (exhibit, that is), it became evident that the big thing this year is…MSAs!
Really.
For those of us who were under the impression that the Medicare set-aside business had peaked some time ago, it looks like a lot of folks were reading the tea leaves differently. With “a lot” defined as seventeen.
There are no fewer than 17 vendors that list MSAs (of something very close to that) in the conference guidebook. Most sell other services as well, a few specialize in MSAs, and there are a couple law firms that do the legal work part of the MSA process.
With that much competition, it’s pretty apparent the MSA business is fast becoming commoditized, with prices likely falling rapidly. Sources indicate Coventry has been hit hard, and ha recently shut down an MSA office, laid off some of the staff, and transferred the remaining work to another Coventry location. This may well be an astute decision as competing in a commodity market is not a good long term tactic for any but the most focused, and Coventry’s attention is clearly elsewhere.
For those just entering the fray, get efficient quickly, deliver great customer service, don’t overpromise or commit to things you don’t control (eg acceptance by CMS) and communicate well and often with adjusters. And be prepared for shrinking margins.

WCRI’s annual meeting concluded with a panel discussion reviewing the previous day and a half.
Following up on Dr Mueller’s excellent presentation about the coming changes in the health care system, Keith Bateman noted that while guidelines may help increase consistency, a percentage of providers won’t follow guidelines because they are just in it for the money. Bateman is right; I’d add the rather obvious observation that guidelines help payers, judges, and analysts determine which providers are ‘good’. That is, who treats consistent with best practices. I’d suggest that this may actually be the most important benefit of guidelines.
There was discussion earlier in the conference re the influence of fee schedules on utilization of health care services; Bateman said utilization is driven by claimants but also by payers themselves, for without treatment there is no claim.
Scarlette Gardner Esq. spoke about provider networks saying that the perception is the larger the network the more savings due to the network’s market share. She did note that there is some research indicating networks do not actually result in lower costs. Gardner said in fact physicians actually view networks as an intrusion and evidence that payers don’t trust them. Networks want lower reimbursement for what are usually higher cost patients, with costs defined as more work for the provider.
Makes sense to me.
It got worse for networks from there. Gardner noted that the ‘medical home’ can deliver better outcomes, and this model requires good communication among all parties yet networks have removed the payer from a direct relationship with the provider. The doc rarely answers to the insurer, but rather to the managed care vendor. She concluded by asserting that there is some evidence suggesting that the impact of discounted networks may include lower fees, but these fee reductions are overcome by increased utilization.
She summed up with a few words lauding fee schedules as one way to manage reimbursement. Her point was that fees in work comp should be fair in that work comp reimbursement should be competitive with other payers – the same services should be reimbursed at the same rates regardless of who is the payer.
I’d note that Ms Gardner works for the North Carolina Medical Society. Nonetheless I’d have to say her points are well worth considering.
Darrell Demoss of Medrisk made two excellent points. DeMoss noted that sometimes we err when we think that something is common because it is easy to think of examples of that ‘thing’ occurring. Specifically DeMoss says this happens when payers apply UR to providers, and gave as an example UR for physical therapy. The law requires payers to review all requests for more than six PT visits in Tennessee. I agree with DeMoss, The technique is not wrong, the application of the technique is just not appropriate in this instance.
Managed care as differently defined and applied in the fifty-one plus jurisdictions can be a blunt instrument – at best. The impact of networks – big, discount based, compendia of every live and some dead docs – has been of questionable value. Mandatory UR, and its opposite, the refusal to consider any utilization review, are both problematic. One drives up admin expense while the other makes it very hard to eliminate inappropriate care.
Note – this was posted via an iPhone, which although really cool, doesn’t allow me to use some features of the blogging software. I’ll clean it up later.