Category: Workers Comp

Mar
25

Docs and drugs – details on the ‘high prescribers’

Posted by Joe Paduda on Friday, March 25th, 2011 | Comments

I wasn’t there, but certainly heard enough about it to wish I was.
I’m referring to CWCI’s annual meeting held yesterday in San Francisco, a meeting that might well have been subtitled “Opioids and the Doctors who prescribe them”.
The report that triggered the excitement (CMS has been asked to review the information, national media has weighed in, and some in the physician community are circling the wagons and attacking the study methodology) was discussed in some detail earlier on MCM; more details on who some of the more ‘liberal’ prescribers were and what they prescribed were presented at the meeting yesterday.
As we get more information on what’s happening with opioid prescribing, the revelations are getting even more frightening, particularly the information about Actiq(r) and Fentora(r), drugs that are only FDA approved for breakthrough cancer pain. Shockingly, there were essentially no diagnoses of cancer in the claimant population
The top 10% of docs who prescribed Schedule II opioids prescribed 84% of the Actiq and Fentora ; turns out that these high prescribers were usually prescribing these drugs for back injuries. (by the way, these drugs commonly cost upwards of $3000 per month…)
Overall, about three percent of doctors treating work comp patients prescribed 65% of the Schedule II narcotics. And, more than half of these scripts were for back strains and sprains.
Meanwhile, in my own home state of Connecticut, we learned this morning of yet another physician caught allegedly using his dispensing powers to enrich himself illegally.
What does this mean for you.
It’s long past time for payers to start working together – or individually – to identify these physicians, find out what’s going on, and take action. We can wait for regulators and law enforcement to act, but in the meantime costs are going up, claimants are dying from overdoses, and the damage to society increases.

Mar
23

Opioids in workers comp – attacking the messenger

Posted by Joe Paduda on Wednesday, March 23rd, 2011 | Comments

This morning’s WorkCompCentral had a piece by Greg Jones noting complaints by medical specialty groups about the study on physician prescribing of opioids recently released by CWCI.
I received a copy of the letter as well, and frankly was surprised – for several reasons.
What was most troubling was the statement that “Alone, the report’s findings do not indicate that there is anything inappropriate.”
I would argue that the findings absolutely indicate there is something very, very wrong going on here. In fact, a relatively few physicians are “handling the bulk of the prescriptions”; that was amply demonstrated in the analysis and results provided in the report, the details of which were discussed in detail therein.
In addition, the statement that “we are not surprised by these early findings” was quite troubling. I certainly was surprised.
Why was this not surprising to the medical society? Was it not surprising that a relatively few physicians were treating patients with low back sprains and strains for extended periods with relatively high doses of narcotics, when all evidence-based clinical guidelines do not support such treatment?
The letter suggested CWCI conduct a deeper analysis to determine whether the treatment was appropriate based on treatment guidelines.
Huh?
Every treatment guideline I’ve heard of, including ODG, ACOEM, Washington State – none of them supports extended use of opiods for treatment of musculoskeletal issues. None.
I would also note that the letter called into the question the methodology itself. The author of the letter’s statement “it is clearly misleading to use
the initial diagnosis” is inaccurate. Even a cursory review of the study
methodology reveals the researchers used a rather sophisticated clinical grouper to identify the PRIMARY diagnosis, which may well not be the initial diagnosis.
Finally, the letter asserted that others had mis-cited or misinterpreted the CWCI work, and requested CWCI somehow correct, clarify, or take steps to correct those misinterpretations. Studies are cited and discussed and reviewed and analyzed in the media and by individuals all day every day; I just don’t think CWCI has the time, resources, or obligation to monitor what everyone says about their research.
I guess is the net is I’m really taken aback by the letter.
There’s clearly abuse going on here, along with bad medicine and out of control prescribing of very addictive, dangerous medications that are ripe for diversion and abuse. I’m just very surprised that instead of taking this seriously, a medical society would attack the messenger. There’s something very rotten going on, and denying it is the wrong approach.

Mar
22

Federalization of workers comp – part 4

Posted by Joe Paduda on Tuesday, March 22nd, 2011 | Comments

Today’s post concludes the four-part discussion of the ‘Fedealization of Workers’ Comp’. And we’ll go out not with a bang, but rather a whimper…
There have been a couple of relatively recent developments that appear to have excited some concern that the Feds (e.g. Congress, HHS) are pursuing a plan to insert themselves deeper into work comp.
One occurred in November of last year, as Rep. Lynn Woolsey (D-CA), chairwoman of the Workforce Protections Subcommittee, called a subcommittee hearing on “Developments in State Workers’ Compensation Systems.”
The subcommittee hearing highlighted criticisms of the 2007 Sixth Edition of the AMA Guides to Permanent Impairment and what several witnesses identified as a trend toward shifting costs away from state workers’ compensation systems onto federal medical and disability programs – Social Security Disability Insurance and Medicare – and private health insurance plans. Several folks testified about various aspects of the issue, the hearing concluded, and nothing more has come of this.
I don’t see this one-day hearing before a subcommittee as terribly significant or portentous.
More recently, Sen. Susan Collins, R-Maine, asked the Government Accountability Office to start looking into possible waste, fraud and abuse in federal workers’ compensation benefits.
The federal government pays benefits to about 49,000 federal employees under the Federal Employee Comp Act (FECA).
What got Sen. Collins interested was the news that the U.S. Postal Service was paying workers’ comp to 132 employees who were at least 90 years old — decades after they should have retired. In my admittedly cursory research, I couldn’t find any provision in FECA that ends payment of benefits at a specific age, so this may well be entirely legitimate.
Collins asked GAO to audit FECA and find out how long people stay on the program, how many recipients receive benefits well past retirement age, and how the program compares to state workers comp plans. She also asked GAO to check workers’ comp records against the government’s list of deceased employees and payroll to find anyone who may be “double dipping,” or getting benefits and a paycheck at the same time, or who may still be receiving benefits after death. FECA doesn’t have any caps on how much benefits one can draw, or other cut-off periods, which Collins said makes it especially susceptible to fraud.
I’d suggest that this kind of publicity makes it unlikely anyone would consider the federal system one we should move to.
Finally, the President’s National Commission on the Deficit’s final report mentioned workers comp exactly once, and then only in passing. In a section on medical malpractice reform, the Commission noted that “Among the policies pursued, the following should be included: 1) Modifying the “collateral source” rule to allow outside sources of income collected as a result of an injury (for example workers’ compensation benefits or insurance benefits) to be considered in deciding awards…”
I would draw your attention to the wording, specifically “For example”. I’d suggest this one parenthetical mention of workers comp is not suggestive of any larger agenda.
Conclusion
The various ‘indicators’ that some point to are at best mischaracterizations of separate and very distinct issues – concerns about FECA; single big, one-time problems; coverage for workers employed in extra-state occupations; and/or political maneuvering to help constituents (Libby and Black Lung).
Why there won’t be a major Federal effort to co-opt or insert itself into workers comp:
1. Congress has many, many bigger issues to deal with, and workers comp is most definitely NOT a big issue.
2. There’s no traction for the issue; no political constituency wants a major fix, and folks from both political poles like it just the way it is.
3. Likely determined and motivated opposition from stakeholders
4. No one in Washington wins by reforming/addressing workers comp – and things only happen in DC if someone wins.

Mar
21

Federalization of workers comp – part 3

Posted by Joe Paduda on Monday, March 21st, 2011 | Comments

This morning we’re back at it. Now that we’ve talked about the political landscape, reviewed the OSHA Act and National Commission and discussed the progress, albeit rather minor, of workers comp in the several states, it’s time to dive into the myriad events that have convinced some that the Feds are just about to land their black helicopters atop your local Workers Comp Commissioner’s Office and take over the whole shebang.
Or, as I will argue, NOT.
Since 1974, there have been a few Federal actions that impact workers comp, and a few more that to some indicate some nefarious plot on the part of the Feds to take over WC.
Title X
Perhaps the best known example was back in the early days of the Clinton administration. Comp was originally part of the Clinton reform package, known as Title Ten, which essentially integrated the delivery – but not the financing – of work comp medical care.
What you may not know (and I didn’t until Bob Laszewski told me) is exactly one (1) person in DC wanted Title Ten. Bill Clinton. No one else, not Ira Magaziner or Jay Rockefeller or Hillary gave two hoots about WC, but the big dog did. Title X was essentially removed by Ted Kennedy by rewriting it in such a way that it had very little impact on WC. And we all know what happened to the Health Security Act…
The Baca bill
In January, 2008 Congressman Joe Baca, Democrat from California, introduced House Resolution to form a National Commission on State Workers Compensation Laws. HR 635 was referred to committee but no further action has been taken. The same bill was also introduced in the 2009 and earlier this year Congress where it died in committee. The 2011 edition, entitled HR 623, has a handful of cosponsors – CONNOLLY CONYERS, FILNER, GRIJALVA, KILDEE, and STARK; it was referred to a sub Committee on March 4, and has not been heard from since… (sub Committees are where bills go to expire for lack of attention)
My sense is the Baca bill has received a lot more attention outside Congressional chambers than it deserves (and yes, I am one of the guilty parties. For some reason, organizations antagonistic to additional Federal involvement in workers comp see this as quite dangerous. Here’s SIIA – HR 623, introduced by Representative Joe Baca (D-CA-43), could open the door to a federalization of workers’ compensation laws.
Highly doubtful. And if it was passed, and a door was thereby ‘opened’, it would lead not to Federalization of comp, but to another door, and another door, and yet another, all of which would have to be successfully unlocked before Congress could move on to the next step in what would be a lengthy, highly contentious, and ultimately, extremely unlikely takeover.
That first door isn’t going to be approached, much less opened, even though it is a pretty innocuous one. Here’s what HR 623 says:
 The proposed bill would establish a 14 member national commission to review all states’ workers’ compensation laws, specifically to determine whether the workers’ compensation laws of each state provide prompt and equitable systems of compensation and appropriate and necessary medical care for work-related injuries. The commission will also study and evaluate whether it should make other recommendations to help ensure prompt and good faith payment of benefits and medical care to injured workers and their families.
Health reform – or the Accountable Care Act
There is no mention of P&C or work comp in President Obama’s platform or policy papers or other bills addressing reform – Senate bills (Finance, HELP) or House Committee reform versions or final bill (HR 3590) or reconciliation bill (HR 4872)
Senator Jay Rockefeller, Democrat from West Virginia, filed an amendment with the Senate Finance Committee designed to merge auto medical insurance, workers compensation and healthcare into the health coverage plan, but that was quickly dismissed.
There was one occupational illness remedy contained within the Act, ‘Libby Care’. Included in the reform bill by Sen Max Baucus (D MT), this provision covers medical care for people exposed to asbestos in Libby, Montana; not just workers, but anyone exposed to asbestos or vermiculite from the mines in and around Libby. Care for victims will be delivered under Medicare, with more flexibility for innovation and supplemental services/treatment
Libby Care is seen by some as a step toward federalizing workers compensation. It isn’t. Far from it. There are 1700 superfund sites, and any future ‘sites’ must be declared a National Public Health Emergency by Secretary of HHS. Libby is the only one with this designation. Moreover, there don’t appear to be any other sites that meet the criteria today and the requirements
Gulf spill
During the height of the clean up of the Gulf of Mexico oil spill, some claimed the Gulf Coast states would be unable to handle the huge influx of expected workers comp claims, thereby opening another door into potential nationalization of comp.
This didn’t happen, for two rather apparent reasons. First, anyone injured while working on the water side of the high tide mark would already be covered by federal law – the Jones Act. Second, there just weren’t that many WC claims due to the on-land part of clean up effort; the heavy hand of OSHA and the mandated precautions taken by the clean-up workers on the beach resulted in few workers comp claims. Of course, it’s possible the shore-side clean-up workers will have future workers comp claims due to the exposure to oil and dispersants.
The point here is the existing Federal regulatory and insurance infrastructure handled this situation rather well. While some may, and undoubtedly will, point to problems, limitations, and anecdotal frustrations, there’s no systemic issue here that would have been avoided by some big new Federal program.
Tomorrow, we’ll conclude this series,.

Mar
17

Federalization of workers comp – part 2

Posted by Joe Paduda on Thursday, March 17th, 2011 | Comments

This evening we’ll dig into some of the history of Federal activities related to workers comp, activities that some view as somehow connected, a series of events leading to some greatly expanded role for the Feds in workers comp.
Me, I see this as disconnected, independent, nonlinear – a mishmash of events triggered by politics, publicity around public health problems, and constituent service/appeasement.
But that’s just me…
Let’s start with OSHA and the National Commission
There’s been talk of a federal workers comp system since 1970 when OSHA was created by the Occupational Safety and Health Act of 1970. Chaired by John Burton, the National Commission on State Workmen’s Compensation Laws was tasked with, among other things, evaluating state workers compensation laws, rules, and regulations. When the study was completed in 1972, the commission did not recommend the nationalization of workers comp. The study did make many recommendations adopted by many states, recommendations that many agree were long overdue.
The National Commission deemed 19 of the recommendations as ‘essential’, and noted that at the time of the report’s publication, the average state complied with 6.9 of the 19 essential recommendations. Over the next eight years, average state compliance rose rapidly to 12.0 in 1980.
In a recent hearing before a Congressional sub-Committee, Burton cited as proof of a more recent “counter-reformation” and outright deterioration in state compensation systems the fact that, as of 2004, average state compliance was still only 12.8 of the 19 essential recommendations. With all due respect to Professor Burton, a man who has probably done more than any other single human to improve workers comp, I’d note that a 0.8 increase is not, strictly speaking, a deterioration. It may be a very minor improvement, but it is an improvement nonetheless.
Here’s how Professor Burton addressed the issue: “The extent of the deterioration in adequacy and equity of state workers’ compensation programs in the last 20 years is not reflected in compliance scores with the essential recommendations of the National Commission. Rather, the slippage has occurred in other aspects of the program. A number of states changed their workers’ compensation laws during the 1990s to reduce eligibility for benefits (Spieler and Burton 1998). These provisions included limits on the compensability of particular medical diagnoses, such as stress claims and carpal tunnel syndrome; limits on coverage when the injury involved the aggravation of a preexisting condition; restrictions on the compensability of permanent total disability cases; and changes in procedural rules and evidentiary standards, such as the requirement that medical conditions be documented by “objective medical” evidence.”
I don’t see those changes as a diminution of workers comp, but rather a response to medical conditions based on rather sketchy science, an effort to accurately and fairly allocate employers’ responsibility (and therefore employee responsibility as well), and a response to the assignment of responsibility for degenerative skeletal-muscular conditions to the employer.
If anything, I’d argue there are more conditions covered under work comp now than forty years ago. In my home state of Connecticut, as in several others, public safety employees’ cardiovascular conditions are automatically deemed to be compensable. That’s just a BIT of a stretch.
I’m not clear how an improvement in average state compliance, and the increase in the type of condition covered by workers comp in many jurisdictions, is a ‘deterioration’. And it would appear that almost all of our national legislators don’t see a significant problem, either.
Many would argue that our national legislation is comprised of slick, money-grubbing, intellectually challenged politicians who don’t know a damn thing about much of anything. That’s may be your opinion, but it is irrelevant – the national legislators are the ones who decide what legislation is going to see the light of day, and, as I noted in some detail yesterday, they are very, very uninterested in workers comp.
Tomorrow, some of the other Federal initiatives…

Mar
16

The Federalization of Workers Comp – seriously?

Posted by Joe Paduda on Wednesday, March 16th, 2011 | Comments

This afternoon I was a lunch time speaker at the IAIABC Conference in St Louis, where I was asked to opine on the chances of a major Federal incursion into the (mostly) state regulated world of work comp. I’ve noted (way) more than once that this is one of those ‘never gonna happen’ things, so here was an opportunity to make my case in front of a very knowledgeable and engaged group. There was a lively and informed discussion after the talk, and I’ll dive into that in a later post.
Here’s the first of several excerpts from that talk. I welcome your comments and contrasting opinions.
Workers comp is a tiny, all-but-insignificant industry that accounts for less than two percent of total US medical spend. Sure, it may be wildly important to you and me, but, really, does anyone else give two hoots about work comp?
Didn’t think so.
Insurance segments that tend to be regulated or addressed (in a meaningful way) on a national basis are those that are so large or complex or federally-specific that only the federal government has the interest and resources and capacity required to address the risk – which is how flood insurance came about, and nuclear plant risk guarantees, terrorism risk insurance, and coverage for the beryllium industry.
WC doesn’t fit the profile. – it’s relatively small, has an active, vocal, and effective group of stakeholders from across the political spectrum and both political parties (plaintiff attorneys and the Chamber of Commerce are two examples), and isn’t perceived by anyone in a position of authority to be anywhere close to broken.
Why would anyone in Congress – except Joe Baca, – have any interest at all in taking on workers comp?
And if they did, which they don’t, where exactly would this fit on the priority list? Above the budget bill? Just below immigration reform? Senior to the medicare physician fee fix bill, or not? More, or less, important than the nuclear non-proliferation treaty? If less, now that the treaty is passed, can we expect some major action?
Somewhat less significant than the Israeli West Bank settlement issue, or more? More critical than the energy bill, or no?
If Congress(wo)man X has to spend time thinking about comp, or Afghanistan, or the US nuclear industry, or Iran, or China’s refusal to adjust its currency valuation, or bank regulation, what do you think s/he will do? Where will s/he spend her time?
As to any interest at CMS in taking over WC, wouldn’t you think they have enough to do what with dealing with Congressional oversight hearings, implementing health reform, expanding Medicaid by a third, revising hospital reimbursement, drastically changing physician compensation, completely redo-ing Part D, developing and implementing over a dozen pilots and trial programs, and revamping Medicare Advantage?
Next, we’ll review a bit of history and discuss some of the new ‘news’ that is generating excitement among those concerned about a federal takeover.

Mar
15

Managing Opioids in workers comp – What to do?

Posted by Joe Paduda on Tuesday, March 15th, 2011 | Comments

I’m up at zero-dark-thirty this am to catch a flight to St Louis, where the International Association of Industrial Accident Boards and Commissions (IAIABC) is hosting a meeting addressing many of the biggest issues confronting workers comp. The three-hour session I’ll be wrapping up today focuses on managing narcotics in work comp, and I’m hoping to learn what works and how.
Unfortunately, it looks like there’ll be a lot more discussion of the size, extent, and impact of the problem of overprescribing of narcotic opioids as there aren’t a lot of long term success stories out there.
There are myriad reasons for the huge growth in the volume of narcotics prescribed in the United States, many of which are way outside the control of those of us in the work comp space. As happens so often in comp, we’re buffeted by societal, economic, cultural, and demographic factors, often left to wonder how the world changed so quickly, and so dramatically, and what, if anything, we can do about it.
Fortunately, there are a couple models out there that hold out significant promise, that appear well-designed to help moderate the growth in the use of narcotics.
Perhaps the best is from Washington State, where the state fund (known as L&I) has long been aware of the issue, and under the leadership of Gary Franklin, has been working diligently to develop and implement intelligent solutions.

I’m going to be listening hard today to the other speakers, and will report back on what I learn.
Thanks to IAIABC for dedicating the time this issue so desperately requires.

Mar
13

ExamWorks – another opinion

Posted by Joe Paduda on Sunday, March 13th, 2011 | Comments

I received this comment from a reader in response to my post about ExamWorks and their recent financials. It is quite thorough and well worth consideration on its own merits.
Thanks Joe for a very interesting post. The market is always right, but not necessarily at the right time. The recent conference call for EW was posted on the SEC site.
See:
http://sec.gov/Archives/edgar/data/1498021/000118811211000517/ex99-2.htm
Here are some excerpts:
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: Notwithstanding what we believe to be a fantastic year for ExamWorks as reflected by our guidance, we feel that it is important to share what we believe will be lower than expected Q1 results due primarily to the severe weather conditions that impacted many of our geographical markets. We have repeatedly referenced that the IME business did not exhibit much seasonality and that it is immune to the cycles of the general economy; however, it isn’t immune to weather.
The high incidents of storm-related issues was quite significant. In some locations, every link of our logistical chain was challenged, whether it involved clients closing operational centers, doctors travel to their officers or, most importantly, claimants travels to their appointments. Obviously, not all service centers were affected and we did state that in markets like Florida and California we expect to have solid first quarter results that are in line with our internal plans.
However, as we sit here today, we believe that this could have a 5% to 8% negative impact on our Q1 revenue plan and an even higher impact on EBITDA, due to the reverse operating leverage these revenues imply. That being said, we are confident that almost all of this business will or has been rescheduled and will be recognized in the subsequent periods.
Jim Price – ExamWorks Group, Inc. – CEO: To wrap up the progress report, we have a few comments on our go-forward marketing strategy. MES is a formidable, premium brand with a long operating history. Because of this, we will retain the MES brand, providing assurances to the MES clients that their high quality service and support to which they are accustomed will continue…One of the distinguishing features of the IME business is that it is very relationship-driven. The current marketing and support teams will continue to service their respective accounts.
ANALYST QUESTION: Great. Thanks for taking my question. I guess I’d like to spend a little bit more time on the opportunity to maintain the MES brand and what it means for markets where there’s geographic overlap between the two companies…I guess my question centers around basically if insurance companies in a given market are using a variety of different vendors; I had assumed it would treat the ExamWorks Company in a market as a consolidated entity with the MES Company now that the merger is completed. Can you let me know if that is not going to be the case? And also, I’ve love to just get your thoughts on where there is the geographic overlap, and any assumptions for cannibalization of revenues in the guidance.
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: Yes… But, let me talk about the cannibalization. I think what we’ve tried to do in our guidance is be fairly conservative, and really we’ve built something in that in our conservatism. We have no reason to believe that it will occur….
Jim Price – ExamWorks Group, Inc. – CEO: In a lot of the insurance carriers and partners, they have multiple — we’ll call them baskets, where the adjusters will put files to be picked up or received. If they’re not going electronically, they’ll be in a partner’s basket. So there may be a MES basket, there may be an ExamWorks basket, or it may even be one of our local or regional companies’ names on that basket. So, the goal is to keep the existing structure and flow working well…. we are keeping both entities’ sales structure going forward…
ANALYST: Okay. So can I just be sure I’m understanding. The assumptions — so even though — please let me know if I’m capturing this correctly. Your conversations with the insurers where there is market overlap have indicated some comfort that they will continue to treat the MES — they will treat MES separately from the ExamWorks company and they will not treat it as one consolidated entity where there’s market overlap.
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: That is correct.
————-
This call is an example of the challenges they are facing. First of all, anyone who knows the IME and claims business knows that weather issues quickly result in rescheduling of events. ExamWorks has a national footprint, including many areas where there were no weather issues. Furthermore, issues with weather were quite temporary. Claims shops closed at best for a day or two. Exams would likewise see very limited cancellations. Most importantly is that weather is an annual event somewhere, and even more critically is the fact that claims are time sensitive and the vast majority of weather related issues in January and February would be rescheduled and completed well before the end of the quarter. Yet management is already trying to manage a 5-8% decline in revenue attributing this to the weather. Looks like they are having other challenges. I think there is no other way to say it on the weather excuse: ExamWorks management is likely not being truthful. They are not meeting their projections and it is not about the weather.
The other excerpts are about the MES acquisition and revenue cannibalization. They claim that they will keep two brands and teams. Help me understand how this will work in reality. Will there be two sets of sales people selling the same product to the same customers, presumably telling these customers why one is better than the other? Are the hundreds of staff and management members of the combined companies willing to buy off and capable of executing on this strategy?
Joe, your posting links to ExamWorks financials. One of their comps that we know in our managed care space is Corvel. Corvel has real income, about 44 million pretax on revenues of 366 million, with a market cap of 586 million.
[Paduda note – I haven’t written about Corvel in a long while; their P/E is around 21 which is pretty awfully very high for a company with decent but not great revenue growth in a mature market with declining claims frequency that hasn’t sold a big national account in quite a while. WIll remedy this oversight shortly.]
See: http://www.google.com/finance?q=NASDAQ:CRVL&fstype=ii
ExamWorks on the other hand has negative income, claims a run rate of about 350 million but has no real evidence of achieving it, and has a market cap of about 700 million. If investors really believe that they are capable of converting their challenges, based upon their current strategy and clear revenue challenges to profit, have at it.

Mar
11

Workers comp in 2012 – the economy’s impact

Posted by Joe Paduda on Friday, March 11th, 2011 | Comments

My post earlier this week re three major trends that will affect work comp in 2012 generated a few comments from friends and readers. One of the more pointed was from a claims exec, who noted he’s seen “a major shift in the employer’s appetite over
the past 3 years or so to return people back to work during their period
of recovery. The new post recession attitude – why bother, I have 50
people waiting in the wings for jobs that I can back fill!” Especially
true for lower end, less-skilled positions…So now as a payer, I have an injured worker with no job to go back to – wow, that’s a recipe for higher severity rates…”
Unsaid was a related issue – employers have lots of applicants from which to choose, making it difficult to place a recovering worker.
We are well into what feels like a somewhat halting, not-terribly-robust economic recovery. Although the employment picture is brighter than it was a year ago, the glow is still pretty dim. Payers seeking to re-employ injured workers, especially those from jobs in construction and manufacturing, are having little success. This inevitably leads to longer claims duration as claimants seek to maintain their cash flow by remaining on workers comp.
In turn, this can lead to more medical expense as claimants seek physical therapy, drugs, and other services to keep the medical treatment flowing.
The system-wide implications are clear – higher claims severity due to longer duration.
This won’t get better until employers’ demand for workers increases considerably, something that may not happen for another year, or perhaps two.
Another colleague had a rather different take, one that reminds us of the perils of unintended consequences. This exec noted that while they’ve run into employers like the one above (and by the way, they won’t be insured by his company, a mid-tier insurer, very long) the majority were handcuffed by the economy and couldn’t accommodate due to financial reasons. The incidents of financial hardship were much more significant
than the availability of abundant labor.
That said, yesterday he had a very interesting meeting with a very large trucking firm in who can’t hire drivers fast enough. Their biggest issue (supported by their consultant/broker who represents a large number of trucking firms with the same issue) has been with the government’s extension of unemployment benefits. They have a spreadsheet with names of potential drivers and when their unemployment will run out. These potential employees have been very open about their intention to enjoy the extended unemployment benefits. In the meantime, this insured can’t stay up with the significant spike in demand over the last 6-8 months.
Obviously this is not work comp related, but one has to wonder if drivers who are on workers comp are also choosing to stay at home rather than get back out on the road. This may well be – in some instances – the case, but I’d note that this is the age-old problem with work comp, and isn’t directly related to economic cycles.
There’s another factor complicating claim closure – MSAs. We’ll dip into those waters next.

Mar
8

ExamWorks – what’s the strategy?

Posted by Joe Paduda on Tuesday, March 8th, 2011 | Comments

ExamWorks’ latest financials were published last week. After taking a quick look, and reflecting back on a couple conversations with folks who know their business, I’m a bit puzzled.
For those unfamiliar with the company, ExamWorks is a relatively new publicly traded company that provides Independent Medical Exams and related services throughout the US. Their strategy is acquisition-driven; they are ‘rolling up’ other IME companies and seeking to reduce costs, thereby driving increased profits.
Their management profile is intriguing. Executives have similar backgrounds – looks like they all worked together in the past at companies such as PracticeWorks (a dental practice software company) and TurboChef. Doesn’t seem to be much workers comp or auto IME experience among the senior folks.
So here’s what’s got me puzzled.
First, ExamWorks reports something called ‘adjusted EBITDA’, a non GAAP (generally accepted accounting principle) measure. For we non-accountants, adjusted EBITDA is one of those nebulous reporting categories used by companies (often those growing thru acquisition) trying to show financial results when using GAAP numbers would produce numbers that, according to the companies using them, would not be representative of their real financial status. In terms of actual expenditures, it’s hard to figure out what exactly is included, and not included in ‘adjusted EBITDA’.
Here’s how ExamWorks defines the term – “Adjusted EBITDA [is] earnings before interest, taxes, depreciation, amortization, acquisition-related transaction costs, share-based compensation expenses, and other non-recurring costs.” Two terms stand out – “acquisition-related transaction costs” and “other non-recurring costs.”
Fortunately, as a publicly traded company, ExamWorks is required to use GAAP standards; when these are used the numbers become a bit more clear – for 2010, their actual net was a loss of $5.4 million. That’s not necessarily a problem, after all this is a high-growth company expanding thru acquisition, a strategy that necessarily results in higher costs early on, costs that hopefully disappear and are overtaken by the fruits of the acquisitions.
That is, if the growth-by-acquisition strategy actually works.
ExamWorks (EW) embarked on a massive acquisition spree a while back, with the biggest recent deal involving MES, which was acquired for $170 million in cash and more in stock. That deal, and the many others EW has consummated over the last year plus, is an attempt to own the market, to become the dominant national provider of IME and related services.
The problem with the strategy, and more to the point the future of the company, lies in two areas – revenue cannibalization and scale.
Revenue cannibalization – or, the whole is less than the sum of the parts.
Most workers comp payers like to spread their IME business among at least two, if not several vendors. Now that EW has bought up many of its competitors, these payers don’t look at EW and MES or BME Gateway or any of their other acquired companies as different; the payers, quite logically, consider them to be one and the same. As a result, business that was going to, say MES because it was a competitor of EW is now going to go somewhere else. Not all of the business, and perhaps not even much of it – but certainly some.
The implication is clear – the companies EW is buying may well see declining revenues as a result of the acquisition. And, it follows, the revenues produced by EW may well be less than the sum of the revenues generated by all the companies they acquired.
In the most recent earnings call, EW execs stated words to the effect that they were going to maintain the MES sales force as a separate and distinct entity, perhaps as a way to address this issue. While we in the work comp business may be slow, most of us will eventually figure out it’s the same company, and payers will shift business around to ensure they spread it amongst different vendors.
Which leads us to the next issue, scale.
We’ll leave aside the question of how expenses can be reduced if the company is paying for two competing sales forces, and focus on the Cost of Goods Sold.
The IME and peer-review services business has a cost structure that is based to a large degree on variable costs – primarily, what they have to pay the physicians who deliver the expert opinions. As a ‘craft business’, this doesn’t lend itself to scale-driven profit increases – the more IMEs they sell, the higher their variable costs are. Sure, there are some benefits to scale, such as smaller sales forces, consolidated IT and corporate administrative functions and the like, but these are small potatoes compared to the physician expense.
I suppose EW could try to negotiate better deals with their physician experts, but that isn’t likely to meet with much success. IME docs are a) in short supply; b) can offer their services through a rival IME company; c) payers like opinions from ‘good docs’ and will go to the IME provider who has those good docs on their list; and on a related note, d) quality is really important to most payers, who won’t like it if their IMEs are done by docs who don’t ‘get’ workers comp/auto.
EW’s investment proposition is to a large extent focused on generating outsize margins from a pretty labor-intensive business. Their forecasts call for EBITDA numbers approaching, and eventually surpassing, the 20% of revenue mark. I don’t see how this is possible. People in the business today who run companies in the same space, and do it quite well, can’t come near this figure. Most are pretty darn pleased with an EBITDA in the low teens, and a ten percent figure is pretty much industry standard.
If this was a high-fixed-cost/low-variable-cost business like the PPO industry or software, or relatively new (MSAs), we could reasonably expect a very well run, large player could deliver outsize margins. The IME business is neither. It is a mature industry, with companies operating in a highly competitive market with high variable costs.
In fact, as claims frequency continues its structural decline, the underlying driver of their business – the number of work comp claims – will continue to shrink year after year. Add that to the very real issue of regulatory risk, and you get an investment picture that’s rather risky.
I don’t doubt the management of EW has successfully built companies in dental practice management software and commercial and residential cooking. I’m not so sure they’re going to have much success in the IME business.
Finally, I’m completely befuddled by Wall Street’s apparent inability to understand these issues. For example, Goldman raised their six month share price target by a buck after the numbers came out. I would note that Goldman was a lead underwriter of their IPO…
Thanks to WorkCompWire for the heads’ up.