In an announcement a few minutes ago, Third Party Administrator (TPA) Sedgwick announced it will be buying SRS from the Hartford for $278 million in cash, with the deal scheduled to close early next year.
That’s a nice multiple over 2009 revenues of $230 million, and sources indicate this will be a clean deal, with the Hartford cutting ties completely post-closing.
SRS, like many TPAs, was hit hard by the soft market then slammed again by the recession, events that reduced market demand for TPA services while reducing claims volumes for those self-insured employers that remained. TPAs typically get paid based on claim volume, so this double hit has been tough for the entire industry.
Including private-equity-owned Sedgwick, which has some pretty lofty top line growth goals. The company has been working hard to increase revenues both organically (quoting very competitive prices for administrative services) and via acquisition (most recently of Factual Photo).
The release had this statement from Sedgwick CEO Dave North – “Sedgwick CMS and SRS share remarkably similar philosophies on issues of quality and accountability for client results. We look forward to bringing these two exceptional organizations together for the benefit of our customers, industry partners and company colleagues.”
I’m reasonably familiar with both organizations and don’t see the similarities Mr North does. Or perhaps more accurately I don’t see them as very similar organizations.
Sedgwick has been quite aggressive in pursuing new business and has done so at least in part through aggressive pricing. Their scale may well contribute to that strategy, but there’s a big variable cost component to the TPA business – you have to have so many adjusters to handle so many claims. SRS has been somewhat less successful in acquiring new business over the last few years, choosing to hold the line on company policies and, as much as possible, on pricing
In the Work Comp Analysis Group roundtable at the Vegas Comp Conference, SRS CEO Joe Boures stated that SRS does not take commissions or share in revenue from their managed care vendors in any way, shape, or form. I applauded Joe at the time, and do so again. That’s not to say that vendors sharing revenue or paying commissions or fees to TPAs is inherently unethical or immoral – in fact it’s a way of doing business for many TPAs. This stance may well have contributed to the Hartford’s decision to sell SRS, as the numbers may have been a bit bleak of late.
I don’t know Sedgwick’s policy re vendor commissions or revenue sharing; that’s something current SRS customers may want to discuss with their account execs.

The week is almost over, and none too soon for your faithful reporter. In addition to new client work, deliverables for current clients, and trying to keep MCM up to date, we’ve also been dealing with the Texas…situation.
Word is we’ll get an emergency regulation today from the Division of Workers Comp that will allow PBMs to continue to operate after January first.
Let’s hope so.
While that’s welcome news rumor, we’re still stuck with the demise of other ‘voluntary networks that provide big cost savings for DME, home health, imaging, physical therapy and other services – services that together account for far more of the work comp medical dollar than drugs do.
In retrospect, we can all learn a lot from what happened in Texas – much of the problem that consumed far too much time from for far too many people was due to the unintended consequences of what can only be described as poorly worded legislation.
It is very tempting to put this behind us and get back to the other gazillion priorities that were shoved to the side while we were working our collective butts off to get this resolved. But before we do, lets reflect on lessons learned.
1. get in front of these issues early.
2. build coalitions by educating politically powerful forces about the potential adverse consequences of legislation/regulation.
3. listen when others come to you with similar scenarios, and think thru what it means for you, your operations, and your ‘customers’.
4. realize that no matter what you do or how much you prepare, there are going to be times when the stuff is going to hit the fan – be calm, have a plan, communicate, and persist.
Now I’m going to tackle the ‘real work’ that’s sitting on my desk.

Here, in no particular order, are a few of the more interesting goings-on in the work comp space these days.
Eileen Auen, CEO of PMSI, was named one of Business Insurance’s Women to Watch for 2010. I first met Eileen when she called me the day before she took the helm of PMSI to discuss a PMSI client situation. I was impressed then with her demeanor and openness, and over the last two years my respect has increased as I’ve watched PMSI regain much of the luster it lost before the arrival of Eileen and her team. They are once again a formidable competitor, due in large part to her leadership, and the desire and hard work of many long-time PMSI veterans.
Texas
The Texas ‘situation’ may be changed dramatically later today, as rumor has it the Attorney General is set to release his opinion on ‘involuntary networks’. The opinion has allegedly been sitting on the AG’s desk since before the Thanksgiving holiday.
The complexity of this situation is matched only by its importance to employers, insurers, PBMs, imaging networks and other ‘specialty managed care’ vendors – as of now, after 1/1/11, it will be illegal for a ‘network’ to take a discount unless it is part of an HCN.
To say this is critically important is bland understatement – about forty percent of the work comp medical dollar is for services managed by these entities, and their demise will raise workers comp costs – immediately and significantly.
California
Pat Sullivan’s WorkCompWire has the news that SCIF (California State Fund) is going thru some drastic changes – all intended to save $200 million. The moves include moving staff to other locations, reducing staff, and selling real estate.
It must be brutally difficult to manage a ‘carrier of last resort’. When the market hardens, business booms, requiring more staff, more computers, more everything. Then when the commercial carriers decide to get back in the market, premium volume declines, along with the need for those new employees, computers, offices, telephones. In the meantime, any politician can excoriate Fund management for understaffing and the associated service issues in a hard market, then turn around and lambast management for bloated payrolls and inefficiency when demand drops.
Reform
Finally, there’s been a bit more discussion about the impact of reform on workers comp. Friend and colleague Greg Krohm, Executive Director if IAIABC, has written an insightful piece about this, and SwissRe’s also provided their insights. Mark Walls’ Work Comp Analysis Group is also engaged.
It is good to see lots of discussion about this, as the more smart people we have focused on reform’s impact, the better prepared we’ll all be.

Yesterday SwissRe published their analysis of the impact of health reform on workers comp. The full report is available here [opens pdf]
It’s good to see an international player in the workers comp market consider the potential direct and indirect impact of reform on workers comp. That said, my sense is SwissRe’s perspective is narrow and flawed in several respects.
For example, in one section the report states: “Major reductions in the uninsured population could have a positive effect on Workers’ Compensation costs. Those newly insured may be less likely to attempt to bring a non-work injury into the Workers’ Compensation system.”
That’s not correct. Studies indicate those with insurance are less likely to file a comp claim, although the correlation appears to be statistical and not causal. For a more in-depth discussion, click here. [opens pdf]
SwissRe missed a much more significant issue – the increase in the number of people with insurance will have a significant – and positive – impact on comp.
Healthier claimants
What may well be the most significant long-term impact of reform is the likelihood that workers will be healthier, their underlying conditions and comorbidities will be addressed by their health plan, and therefore comp payers won’t have to pay for treatment of those conditions in order to resolve the work injury. Think diabetes and surgery, spinal stenosis, and hypertension.
Degenerative conditions
For some diagnoses, identifying the cause of the injury is becoming increasingly problematic. It is often difficult for a physician to determine the ’cause’ of back pain or dysfunction; it may, or may not be wholly or partially related to a work injury and different physicians often reach different conclusions about the cause of injury. While reform won’t clear up those medical mysteries overnight, it will reduce the need for comp payers to pay for what are clearly non-work-related conditions.
Less need to cost shift
Workers comp is the most profitable payer for many facilities; margins are much higher for comp than for medicaid (which pays below cost) and Medicare (which pays right around cost). When more people have health insurance, there will be less need to shift cost to workers comp to cover the expense of providing care to the uninsured. Sure, the ACA will not cover everyone, but it will cover about two-thirds of those currently without health insurance. And most of those newly-covered folks will be the employed (and dependents thereof).
This isn’t to take shots at SwissRe, merely to point out that their perspective reflects a lack of understanding of the broader problems with the current environment, and the potential positives of reform – at least for workers comp.