IAIABC President Peter Federko had twenty minutes to discuss the impact of health reform on workers compensation. I’ve posted on this several times, for those interested here’s where a summary post.

Before we delve into Mr Federko’s comments, I’d be remiss if I didn’t note that there already has been, and almost certainly will be, ‘health reform’ initiatives that will impact workers comp – to greater or lesser degrees. These include S-CHIP and the Medicare Set-Aside language inserted into that bill at the very last minute (for those who thought that health reform would have little impact on comp, the insertion of MSA language into a bill for poor kids’ health care is a big bucket of icy water smack in the face).
On to Mr Federko, President of IAIABC. Mr Federko is Canadian, CEO of the Saskatchewan Workers Comp Board, so knows a lot about the relationship of universal health care and workers comp. (I’d note that there are a variety of health reform proposals before Congress today, some of which call for universal coverage, others do not).
Speaking from his perspective as the boss of a comp regulator/seller/administrator. he noted that the fundamental principal of universal care is the access to medical necessary care regardless of the ability to pay. Canada, Norway, Denmark and Sweden use single payer systems, where money comes from the government and is paid to private providers. In the UK and Spain, the government owns the payer and providers. In Germany and Switzerland, there are many insurers which employers and individuals contribute to, who pay independent private providers to deliver care.
Note that in those systems that include ‘private providers’ the providers are not government employees. Most of the hospitals in Canada are privately owned by regional authorities or not for profit organizations. Physicians are independent, for-profit providers who bill and receive payment from the government.
In Canada, the same amount is paid for any procedure regardless of the payer type. Thus payment for a hernia is the same whether it is through workers comp or ‘regular’ health. However, the work comp board negotiates with providers to ensure quicker access to care to facilitate quick scheduling, completion of reports, and compliance with communications standards. There are additional payments for reporting and communication, and in some instances the Board sends claimants south of the border to get treatment more quickly.
Federko noted that the US spends considerably more than the US for health care, while life expectancies in Canada are a couple/three years longer than in the US, infant mortality rates are lower in Canada, and the WHO reports that Canada ranks slightly higher than the US (30 v 36) on a ranking of industrialized nations’ medical quality (paraphrasing here).
He also noted that the cost per claim in Canada for comp can sometimes be higher than in the US. Federko said this is due to their intense focus on return to work, which leads to the Board doing whatever they can, paying for whatever services may be suggested, in an effort to get their injured workers back on the job. However, this intense focus has led to significant savings in indemnity expense, and therefore, according to Federko, it is well worth it.
A couple other observations worth mentioning. First, Federko said that it is indeed possible that universal health care in the US may well reduce cost shifting to workers comp resulting from underpayments to providers by medicare/medicaid/the uninsured.
Finally, Federko reiterated a key point – universal coverage is not socialized medicine, in Canada 95% of care is delivered by private providers.

Here’s the non-substantive view of the conference.
Very well done. Lots – and I mean lots – of good data and information about trends, costs, cost drivers, potential impact of political and economic developments, broken up with entertaining and thought-provoking presentation on global trends.
Very good speakers with very deep knowledge on their topics. As an example, I learned a lot about the use of Medicare RBRVS in workers comp reimbursement – a topic of critical importance in comp that I thought I knew pretty well.
The dinner last night was not the typical formal sit-down but a casual outside affair with various Italian delicacies on tables surrounding stand-up and sit-down dining tables. This allowed for lots of mingling, discussion, and was a lot of fun to boot.
Two quibbles. In the Medicare presentation yesterday there was no discussion about the potential impact of the pending changes to Medicare physician reimbursement fees. This is a big issue as it will dramatically impact workers comp medical expense, likely in several ways.
One of the morning presenters yesterday, Robert Hartwig of III, allowed (what I perceived to be) a political bias to intrude on an otherwise excellent presentation. Hartwig talked about ‘wealth redistribution’ at some length, and even made the statement that we might see workers comp used as a mechanism for ‘wealth redistribution’. His slides also included a reference to the pending socialization of health care. As I’ve noted repeatedly, that is not what is proposed in Washington by the Administration nor is it consistent with the proposals that have any chance of passage.
These memes – wealth redistribution and socialized medicine – are not helpful nor are they accurate.
But these were minor compared to the solid substance throughout the day.

Dennis Mealy, Chief Actuary at NCCI, got into the details with his State of the Line address at NCCI’s annual conference. We’ll focus on workers comp, but it’s important to remember comp is a part of the overall property and casualty industry .
The P&C industry saw a ten point jump in the net combined ratio from 2007 to 2008, with NCCI predicting a 105% 2008 combined ratio.
That’s big news. But as bad as that is, there may well be more bad before things turn around – historically the PC market does not turn around until the combined ratio hits 116%. And, it is still slightly lower than the average ratio over the last 22 years, which was 106.1%. So we may well have more bad news before the sun comes out.
So, how’s comp doing?
Well, as noted in a post earlier today, for the fourth year in a row, work comp premium declined to $39 billion after three consecutive annual declines. From 2005, premiums have dropped almost $8.5 billion – with a big chunk of that decline in California and Florida.
The combined ratio stayed static at 101 after a stellar 93 in 2006. After accounting for investment results, the industry returned a pre-tax operating gain of nine percent in 2008 (predicted) – a solid result to be sure, although a significan drop from 2007 (12%) and 2006 (17%). And, it is still higher than the average return of 6.5% (from 1990 to 2007).
There’s more data that indicates we may still be a ways from the bottom of the soft market. Reserve deficiencies are still relatively low, the accident year loss ratio remains historically low (although my personal opinion is 2008 and 2009 medical costs will come in significantly higher than most industry folks expect. The industry’s predictive accuracy is pretty poor – private carriers projected the AY loss ratio would be 84 in 1999 and 83 in 2000; when the final numbers came in, the rates were 106 and 102 respectively. that’s rather a large miss) See the 2009 SOL report on their website – particularly slides 20 and 22.
Medical costs
Mr Mealy stated that medical costs, while not solved, appear to be moderating. Mealy mentioned that further development (looking back at past predictions after collecting more data) of projected medical costs have indicated medical inflation rates are moderating. He backed up his assertion (perhaps assertion is too strong a term; opinion might be more accurate) by noting that medical costs as a percentage of claims costs look to have dropped from 59% to 58%. Mealy noted this is by no means proof that medical costs are under control, and he does expect medical to reach 60% of costs.
In a follow up discussion with Mr Mealy, we discussed this issue in more detail. The net is although some payers (specifically HSA’s payer clients) are seeing significant increases in medical costs, driven in large part by facility expense, Mr Mealy’s numbers (which include about half of the nation’s workers comp dollars) don’t indicate medical inflation is trending up.
I’m struggling with this, as it goes against I’m seeing. Then again, I tend to work with payers who are working hard to manage medical costs, so my world view may be skewed.
What are you seeing? (Anonymous responses welcomed)

NCCI President Steve Klingel led off the NCCI Annual Issues Symposium (AIS) with a discussion of reform.
Regulation
Notably, despite the sweeping wins by Democrats at the state level, the actual number of reform bills likely to become law decreased.
From the Federal perspective, one of the more significant potential issues is the advocacy by CA Rep Joe Baca (D) of a National Commission on Workers Compensation to evaluate state WC laws and regulations to determine the equity and fairness of the states’ comp systems. There’s not much support on the Hill for Baca’s initiative – but given the pace and variety of issues under consideration in DC it is possible – if only slightly – that the bill gets some attention (it also doesn’t cost anything, which is kind of rare these days).
The overall message? We are very much in a wait-and-see mode regarding changes in regulation. oversight, and potential impact of reform and Medicare changes.
Recession
Payroll (which has a dramatic impact on work comp premiums) looks to be somewhat flat; if unemployment hits double digits, expect payroll to decline for the first time in decades. Watch this closely…
If employers continue to cut wages across the board, premium will decrease – but the underlying risks, and the cost of those risks, will not. There appears to be anecdotal evidence of these across the board wage cuts; insurers would do well to monitor this carefully.
The decline in frequency is logical during a recession – in fact in six out of seven recessions frequency declined (note I’ve posted on this several times in the past). However this recession is deeper, broader, and nastier than almost any others on record, and therefore it’s harder to predict what the impact will be. There’s no doubt – in my mind – that the recession has prolonged an already-too-long soft market. Despite rising medical costs and increases in overall lost time claim costs, comp premium rates remain historically low.
As some economist long ago said, if something can’t go on forever, it won’t. The obvious question is the timing of ‘forever’. For many comp writers, ‘forever’ may come too late. Their ongoing decisions to write comp at low rates despite upward pressure from medical expense may well result in a shake-out similar to the one we old folks saw after the end of the soft market of the late nineties.
There will be much more detail on these issues in later sessions – stay tuned.

I’m covering the Annual Issues Symposium at the NCCI Conference in Orlando…
The agenda looks pretty strong, and attendance is solid as well – at 98% of 2008 levels (a big contrast to the RIMS show last month).
NCCI released their State of the Workers’ Comp Line report this morning (available at their website www.ncci.com. Highlights include:
– Frequency declined four points in 2008, evidence that the recession is impacting work comp claims
– As further proof of the continued existence of the soft market, comp premiums declined by 12% last year to $39 billion.
– The accident year combined ratio (claims plus admin expenses) increased to 100%
in 2008, up four points from the prior year.
The agenda includes a discussion of the impact of health reform – and Medicare – on workers comp. Hallelujah. It is long past time for the comp industry to look up and out, to realize we are the flea on the tail of the dog, and that dog is moving in new and different directions, and moving fast.
More to come…

Bill review vendor Stratacare announced the closing of their financing deal this morning. An investment group led by long-term industry veteran Paul Glover now owns a majority stake in the company; SV Life Sciences and Beecken Petty O’Keefe are the private equity firms behind the deal.
Sources indicate the deal is for a majority stake, but significant equity has been retained by the original owners.
Stratacare’s bill review customers tend to be mid-tier and smaller payers; the company’s application has strong auto-adjudication capabilities and was one of the first to integrate the ODG treatment guidelines, essential to processing medical bills in Texas. Most clients utilize their hosted services, although a few have loaded the Stratacare application on their own hardware.
Bill review companies have long been at the mercy of big network vendors who could, and have, altered the terms of their network rental arrangements at will. Stratacare and giant Coventry battled over price increases last year with Stratacare eventually paying significantly higher access fees.
Stratacare will be the foundation of a significantly expanded work comp managed care firm. Expect Stratacare, under new chairman Glover, to rapidly expand into the network business; network rental fees are often a major contributor to bill review company profits and represent a significant growth opportunity for the company. Sources indicate Stratacare is evaluating several initial market opportunities with initial focus likely on Texas, where the larger networks are having challenges meeting payers’ needs.
More details to follow: I have a query into Stratacare.
For now, off to the NCCI annual conference…

“it’s all a fee-based business, so actually the workers’ comp business, the more bills there are, the more claims there are, the better that we do.” [emphasis added]
Allen Wise, CEO, Coventry Healthcare, Q1 2009 earnings call
That was the chairman’s response to an analyst question about workers’ comp claim frequency declines – and he’s right. Coventry’s networks, bill review, case management, and other services deliver more revenue and profit when there are more injuries generating more bills.
As plain as the nose on your face, a crystal clear explanation of how Coventry profits when workers comp medical costs go up. By the company’s chair, no less.
(To quote my wonderful bride, Coventry’s incentives are “diabolically opposite” those of its clients.)
In his opening comments, Wise noted “I do feel confident that we’ll be able to improve our operating margins in the short term [emphasis added] and when the employment market returns that we will be able to demonstrate revenue growth. In summary, it’s a good business and we’re absolutely committed to it. The chairman went on to talk about the business bouncing back with the economy. Wise expects a 300 basis point ‘margin opportunity’ in comp over the next 24 months.
He didn’t say where that increased margin was coming from, but the company’s recent layoffs and price increases give a pretty good indication of what we can expect.
Wise also expressed confidence in the new management team, led by David Young. It is quite clear that the work comp unit will operate almost autonomously, with great flexibility and control over their own destiny.
No one from corporate is going to be watching over their shoulders.
According to Wise, “we have given the management group the resources of a large company in terms of IT and some of our favorable network locations but made them more autonomous, and their earnings and their bonus depends on EBITDA targets, and so, I think now that they have better control of their expenses or rather more accountable for their expenses, they’re making better business judgments…”
Can it be sold?
At RIMS I had several conversations with individuals opining that Coventry would sell off the work comp division. I think not. While it would be easy to just quote Wise’s statement of commitment, we all know how corporate-speak works – it could very well be a smokescreen to cover a transaction in the works.
But I doubt it, for a simple reason – what’s to sell?
Bill review – well, Coventry’s application is OK (see upcoming results of bill review survey for more details) but the market is limited, competitors including Medata and Mitchell are doing quite well, Coventry’s BR has always been a low margin business, they recently laid off key support staff and EDS will not support the application after this September.
Case management – seriously? who would buy a CM business these days? Perhaps for 3x ebitda, but perhaps not. This business, on the downslope for years, is cratering.
Medicare Set-Asides – what’s left to sell? What was a $30 million business is now projected to do $5 million in 2009. That, and the overhanging liability of First Health’s ill-conceived ‘guarantee’ program is causing major problems with several customers, as the customers have started to ask for payment on the basis of those ‘guarantees’. Much as they’d like to stick that in a box at the bottom of a very long mine shaft, it’s not going away.
Networks – ah, the crown jewel. Except hospital discounts are fading, the Aetna (which provides the actual network in sixteen or so states) is seeking to renegotiate their contract, and Wise himself has alluded to his concern about using goup health to get workers comp discounts (which has been causing problems since 2003). Even if they could leverage the group business’ buying power, how could they then turn around and sell the ‘workers comp network’ to another entity? Answer – they couldn’t.
FirstScript PBM – the network is accessed thru a group PBM (Caremark), pricing is low, and there isn’t much in the way of value-add. Still, the sales force under Matt Padden is pretty good, and Padden is well respected throughout the industry. On balance, one of the stronger offerings Coventry work comp has.
This is not to say Wise is not actually enthusiastic about comp – even if it is only 6% of Coventry’s total revenues. But he has way bigger fish to fry, and he’s leaving this to run on its own.
Let’s recap.
We have the dominant player in the work comp managed care business being told to increase profitability. We have an express acknowledgment by the CEO that the more bills their workers comp clients have, the better for Coventry. We have several months’ experience with the ‘kinder, gentler’ Coventry.
What does this mean for you?
Price increases, service decreases, higher medical costs.
post script – Once again I reached out to Coventry to seek their views. And once again – no response.

As the biennial Texas legislative session nears its end, it looks like the legislature may pass a bill that would have a dramatic effect on workers comp PPO networks.
According to WorkCompCentral (subscription required):
“HB 223 would regulate “discount brokers” that are engaged in (for money or other consideration) “disclosing or transferring a contracted discounted fee of physician or health care provider.”
A broker could not transfer a physician’s or health care provider’s contracted discounted fee or any other contractual
obligation unless the transfer is authorized by a contractual agreement that complies with the provisions of the bill.
Those provisions include notifying each physician and provider of “the identity of the payers and discount brokers authorized to access a contracted discounted fee of the physician or provider.”
The notice must be provided at least every 45 days through “electronic mail, after provision by the affected physician or health care provider of a current electronic mail address” and posting of a list on a secure Internet website.”
Now that’s a huge change, one that would effectively stop much of the rental network business cold. The dirty secret of the work comp PPO business (well, one of the dirty secrets) is that networks don’t have direct contracts with providers in all states – every ‘national’ PPO uses another network’s contracts in at least a few jurisdictions.
Docs sign contracts in return for direction – they are trading a discount for the promise of more volume. Yet few networks actually drive any significant volume to the vast majority of their contracted physicians.
We’ve been seeing a rapid rise in the volume of litigation from providers contesting reduced reimbursement due to PPO contracts, with three payer clients reporting a significant upsurge in the last twelve months.
What does this mean for yuo?
Find a better, and more sustainable, way to reduce medical expense. The days of cutting costs by slashing provider reimbursement on the basis of some flimsy network contract are rapidly ending.