Perhaps the most insightful presentation of the entire WCRI conference was this morning’s session, where Dr Kathryn Mueller of the University of Colorado gave a detailed summary of the current, rather pathetic (my word not her’s) state of the medical care delivery system, population health, and the health care financing system. Dr Mueller’s central contention (and one with which I wholeheartedly agree) is that health reform is coming, and with it will come fundamental changes in the way health care is delivered, the virtual ‘location’ delivering that care, and the evaluation of care.
And this is going to dramatically affect workers comp.
Dr Mueller noted that today health care is delivered episode by episode; diagnosis, care plan, treatment, assessment, and repeat steps 2-4 until the situation is resolved (again, my summary of episodic care, not her’s). Her view is that this episodic model of care will change to one based on functional outcome management – care focused on returning the patient to functionality, and maintaining that functionality.
This will be in large part driven by the growing influence of chronic care and need to develop a better care model to address chronic care, one that will heavily emphasize patient education and monitoring. It will also require a different ‘location’ of care – more on that in a minute.
Where the mainstream, i.e. non-workers compensation health care delivery system has not been focused on function or outcomes, these issues have been central to workers comp. Dr Mueller observed that physicians are not trained to deal with functional recovery, and don’t take this rather significant issue into consideration when treating patients.
As my kids would say, ‘True that’.
She also believes, with reason, that most high cost claims are not medically catastrophic, but rather are chronic, high cost cases due to the management of the case. (see Bernacki JOEM 2007 July).
Think about this. While there are undoubtedly really horrible injuries – significant third degree burns over a large part of the body, crushing injuries, multiple trauma, some of the more potent blood-borne disorders caused by needle sticks – most of the high cost claims are not ‘high cost’ due to the medical condition itself, but because we in the workers comp industry just don’t manage medical well.
Dr Mueller sees the medical home model as a big part of the solution in workers compensation, as the medical home will be the dominant model for delivery of care throughout the health system in years to come. Studies indicate the home decreases medical errors and improves the quality of care delivered. Notably, the medical home model is NOT a primary-care gatekeeper model – but rather a model wherein the physician is tasked with and responsible for coordinating care and educating the patient.
One other takeaway from Dr Mueller’s talk. She noted that “provider networks are not necessarily medical homes”; to date, provider networks have been based on changing/reducing fees, and have not been based on “quality”.
Amen.

Dave North, CEO of Sedgwick CMS was one of the morning panelists. He began with a rather strong statement about workers comp, a statement that was also an indictment of the industry’s complete inability to manage medical – the fact that medical costs have increased 892% over the last 25 years.
North’s presentation reviewed the history of medical management, evolution of managed care, and changes in regulations that have occurred over the last 25 years and then made a few suggestion about hat the comp industry should focus on over the next ten years. North said that despite changes in society, business, and medical care, the types of injuries we see today are similar to the injuries we say 25 years ago.
He made two particularly trenchant observations. First, the unintended consequences of regulations. Specifically, North noted that when the CA pharmacy fee schedule was changed several years ago, it had the unintended consequence of increasing costs – specifically, the repackaging of drugs and dispensing by physicians and clinics at much higher rates due to a loophole in the regulations.
Second, North stated (this is close but probably not word for word) “Discounted networks have underperformed and will someday be regarded as first generation, primitive efforts to address costs.”
Agreed. The question is, when will the industry stop decrying the problem, studying potential solutions and implementing tiny pilots and launch ‘second generation’, outcomes based networks?

Yesterday I opined that health care costs are on the way back up, driven by a worsening economy. Premiums will also rise due to cost-shifting by providers seeking compensation for underpayments by Medicaid and Medicare and no payments from the uninsured.
Those providers will also cost-shift to workers comp payers, driving up medical expenses, claims costs, and premiums. Physician income has been stagnant or declining for years, and many docs are struggling to keep the doors open. Here’s what comp payers can expect.
As a provider’s patient mix (Medicare, Medicaid, commercial, work comp) changes, their income is affected. The price per service is relatively fixed – either by Medicare’s RBRVS, the Medicaid fee schedule, their commercial contracts, or the workers comp fee schedule (most states have a physician fee schedule) or their comp PPO contracted rate. A provider seeking to increase his/her income has to either see more patients (pretty tough to do when many are already working sixty hours per week) or figure out how to do more services for the patients they see.
Increasing utilization is the key driver behind rising Medicare costs, with physician service volume up 11.3% in 2006.
Workers comp is particularly vulnerable to increasing utilization, as managed care models actually incentivize networks to drive up utilization by paying networks based on discounts per service delivered. The more services performed, the greater the “savings,” and the more revenue and profit for the network. Everyone benefits from this arrangement; that is, everyone except the payer.
There’s already evidence that comp medical costs are on the upswing in California, and my prediction is that true to legend, California’s experience foreshadows what we’ll see in the rest of the country.
What does this mean for you?
Expect medical to become an even larger part of the claims dollar, expect to pay your PPO network more for the ‘savings’ they deliver, and expect your combined ratio to deteriorate.

Cuts in workers comp insurance rates continue. From California to Florida, premiums continue to fall, driven by a decline in claims frequency and lower costs brought on by reforms and stagnant wages.
The latest announcement came from Florida, where rates have declined 60% from their peak in 2003 (after major reform). Ths Sunshine State is not alone; Pennsylvania is yet another state with rate cuts scheduled for 2008.
There are several factors driving down premiums – claims costs appear to be moderating with medical expense predicted to stay in the single digits. Investment income was looking pretty solid (until recently). Competition in many markets served to force insurers to keep rates down or risk losing big chunks of market share. And the mix of business continues to shift towards lower-risk industries as construction activity tapers off, there are fewer goods in transit, and manufacturing and industrial firms see a decline in purchasing.
So where does it stop?
A better question is what are happening to the underlying drivers. I’d opine that there are two major factors that will lead to a hardening of the market in the near future.
Medical trend in the group world is approaching double digits. Historically the work comp medical trend rate has been somewhat higher than group trend; I see nothing that indicates that has changed.
The investment market has imploded, likely driving down the value of the funds held for reserves and surplus. While most investments are in what used to be thought were ‘safe’ instruments, it may well be that regulators and rating agencies, newly sensitized to the potential problems with even ‘safe’ vehicles, will require carriers to take down the value of funds held in reserve.

There’s a lot more to this, a whole series of levers and triggers that undoubtedly will impact the industry. But from here, the indicator dials all appear to be pointing to a return to a harder market. And soon.

At risk of being accused (and justifiably so) of being Johnny One-Note, this is the third consecutive post on Coventry. While the other two were focused on their recent moves to enhance customer relations, this one is specific to the company’s Q3 financials.
Which were not good.
Despite statements to the contrary, it looks like Coventry isn’t exactly sure where the problems lie and how its efforts to resolve those problems are doing – it has canceled the annual December Investor day conference and won’t be releasing detailed guidance until some time in January. Listening to the conference call and particularly management’s response to analysts’ questions, I was struck by the continued, and almost exclusive, focus on pricing and underwriting, and its corollary – a lack of focus on the issues, factors, disease states, and medical management deficiencies driving medical costs (which are trending higher than Coventry projected early this year.
This isn’t a new finding – neither Coventry, nor the analysts following the firm, have paid any attention to medical cost drivers in past calls.
I’ll leave further analysis of the group health, Medicare, Medicaid, and individual business for a later date, and focus today on the work comp numbers. Note that workers comp is a pretty small part of Coventry, accounting for about 7% of total revenues.
To begin, Coventry reduced projected 2008 eps by $0.19 for “Lower than expected business volumes (risk revenue, workers’ compensation fees)”. Obviously some portion of that take down was due to comp; the question is, how much?
For that, we can dig into the financials. Coventry recently began reporting its work comp and network rental business on the same line, making it a bit harder to precisely determine work comp revenue. By reviewing financials reported prior to the accounting change, it looks like the network rental business generated about $18 million in revenue in Q3, 2007. Assuming that the network rental business accounts for $20 million per quarter, here’s my best guess as to work comp revenue.
– Q2 2007 – $157 million
– Q3 2007 – $157 million
– Q4 2007 – $163 million
– Q1 2008 – $172 million
– Q2 2008 – $190 million
– Q3 2008 – $194 million
That looks like pretty solid revenue growth; up almost 24% over the same quarter in the prior year, with a good chunk of that coming from additional PBM sales (which result in a disproportionate increase in top line as ‘revenues’ include drug costs).
But that wasn’t what Coventry was looking for. Earlier statements from management indicated they were expecting work comp to grow even faster, driven by price increases, additional sales of their PBM services, and ‘account rounding’ – requiring customers to use Coventry’s network in all jurisdictions (where they can convince their customers to agree).
While the network, bill review, and pharmacy benefit management sectors appear to be growing nicely, some of the ancillary lines are not. The MSA business continues to struggle, as does case management. And there are some pretty substantial headwinds – the recession has, and will continue to, drive down injury rates. Without injured workers there aren’t bills to be paid and ‘savings’ to profit from. Carriers and TPAs are increasingly internalizing managed care functions to capture the revenue and profits for themselves.
Chairman and CEO Dale Wolf spoke to this (in response to an analyst question), saying: “we have seen [the impact of reduced claim frequency] clearly all year; we have seen as big a drop in claims volumes as ever happens in this industry and relative to expectation this [the drop in frequency] has been most the significant shortfall relative to expectation; it impacts bill review, network, and other product lines… the business is still growing significantly…” [I may not have captured this precisely but it’s pretty close]
The net
Workers comp remains a solid business, likely generates high profit margins (excepting the PBM product), and will continue to grow. If the recession deepens, which appears more likely than not, expect work comp revenue growth to continue to disappoint.

I’ve been conversing with a few old industry hands about Coventry work comp’s recent decision to become kinder and friendlier. As I reported, the motivation stemmed from a customer survey done this summer by an outside consultant/now employee, Pat Sullivan. I haven’t seen the survey, but it appears it shook up Coventry management enough to (finally) recognize what everyone else has known for years – Coventry’s customers really don’t like Coventry.
Jim McGarry, Coventry work comp’s leader, then hired Sullivan to help reform the company’s image, (as well as to oversee their California strategy) an initiative that was announced last week.
They have two major challenges.
First, cultural change. There are two competing cultures at Coventry work comp – the remnants of First Health and Concentra. Sitting on top of these folks are the Coventry senior managers and a few experienced work comp managed care execs from outside organizations (e.g. Rob Gelb from Intracorp and Dwight Robertson MD from Travelers/USHealthworks/Zenith).
The First Health folks came out of an organization that was quite self-confident and pretty hard-nosed with customers, vendors, and competitors. I recall a conversation I had with one of their top execs about sharing data to compare my client’s results in an area with FH’s; the exec asked me “who the F*** do you think you are?” the conversation deteriorated from there. I’d note that this persona did not by any means extend to everyone, and in fact some of the folks in customer-facing positions were strong advocates for their clients.
In contrast, Concentra, while not without its warts, tended to foster a culture that was somewhat more customer-centric. Their people tended to listen better (at all levels of the organization) and be more proactive in dealing with customer issues internally.
Those two groups have clashed at Coventry, with the FH folks seeming to dominate early on, and Concentra alums now starting to exert more influence. But make no mistake, Concentra came into a company that was already dominated by FH staff, and that dominance will not be readily displaced.
Compounding the problem is the abysmal record American companies have when they try to change their culture; fully three-quarters of execs said that 50% or fewer of their cultural change initiatives were successful.
Second, there may well be a conflict between Coventry’s financial objectives and desire to become more customer-focused. These are NOT mutually exclusive, and in fact many organizations have been financially successful because of their customer focus.
That will be a challenge at Coventry. Growing the workers comp business has long been a top priority for Coventry. Inordinately profitable (estimates are that WC margins are three to four times higher than Coventry’s group health business), work comp is also a ‘fee’ business – unlike the ‘risk’ business in Coventry’s portfolio, there’s little uncertainty – you charge X, collect Y, and profits are Z. Thus work comp balances out their book of business nicely and as a mandated benefit employers have to buy it (unlike group health, which is declining as premiums continue to escalate).
In a time of decreasing injury rates, falling insurance premiums and declining TPA fees, Coventry has been pushing customers very hard to agree to higher prices and additional services. Network access fees have been increased substantially for clients facing renewal, and Coventry has also strong-armed customers into using its networks exclusively, thereby preventing customers from selecting other networks in specific jurisdictions (e.g. California and New Jersey). The company has also threatened big (and small) customers with litigation as a way to force the customer to comply with Coventry’s requests. Meanwhile, improvements in data quality for bill review and network directory functions, enhancements to the 4.0 bill review application, and other client issues appear to be on the back page of the priority list.
As much as account managers may want to help out their customers, their bosses’ bosses are driving hard for more revenue across an expanded product line. And as the only viable national work comp ppo, Coventry has monopolistic power in that segment.
David Young, Pat Sullivan, Ken Loffredo, Jim McGarry et al are smart and capable business people. If they can pull this off they will have accomplished something few companies ever have.
What does this mean for you?
It is really hard to change a company’s culture. It is especially difficult when the people tasked with taking that message to the customer also have to tell the customer their prices are going up and they have to buy more services.

More accurately, here’s a report about the meeting, held this year at the Ritz Carlton in Naples, Florida.
The annual client meeting, which is always held at a very nice place with lots of golf courses, finished up Thursday last. You may be shocked to hear I wasn’t invited; maybe Coventry knows about my aversion to golf…
But a bunch of folks were, and here’s what a few experienced/thought/took away.
The shocker came early, in the kickoff speech delivered by Work Comp boss Jim McGarry. According to several attendees, McGarry led off by apologizing for Coventry’s poor responsiveness, lack of customer focus, and general ‘our way or highway’ attitude. He acknowledged the Coventry work comp’s poor reputation for customer service was well earned, and promised that the company would be working diligently to change its ways.
There’s some actual evidence of Coventry’s commitment – the hiring of Pat Sullivan back in September. Sullivan, a long time and well respected industry veteran, surveyed Coventry’s market position for the company earlier this year and told McGarry et al that Coventry’s image was, well, lousy. (I don’t have inside knowledge of this so am likely not getting the characterization exactly correct.) So, McGarry hired Sullivan to help redo the company’s image.
Meanwhile, the announcement was in large part shocking because outside of the Sullivan hire, no one I spoke with saw any evidence that Coventry was at long last actually attempting to change its ways. One client commented (paraphrasing here) “we sure haven’t seen any evidence of any change.”
It is possible that the ex-Concentra folks are finally making their voices heard. First Health, the other predecessor company that is now under Coventry, was never noted for its customer orientation. After Concentra was merged into Coventry work comp, there was some expectation on the part of a few customers that things would get better. That expectation has not (yet) become reality.
Sources indicated Coventry did not say anything in public about the changes at Aetna Workers Comp Access; (AWCA lost its separate business unit status a few weeks ago in a move that may , or may not, result in improvements or a decline in its workers comp network). In private, a couple heard that AWCA’s representatives were telling everyone that it’s business as normal, no changes, moving forward on all fronts, full commitment from senior management, and other calming words.
There was some discussion about pending regulatory changes in Texas and the potential for revisions to California’s work comp law, with Coventry assuring its clients the company was on top of matters (which it probably is).
And a good bit of golf, sailing and spa-ing as well.
Notably, there was no one from AIG or Travelers in attendance. Seems like AIG is hunkering down and trying to avoid anything that remotely appears to be a boondoggle.
(Note – I contacted Coventry early this morning to get their take on the meeting but did not hear back by press time)

At the behest of readers and clients, I’ve been working to get some answers from Aetna on what exactly the ‘restructuring’ of their workers comp business division means for customers and prospects. I’m not having much luck.
I’d note that many AWCA customers learned of the restructuring of AWCA from my post earlier this week. That’s not to blow my own horn (well, perhaps a modest toot) but rather to point out that Aetna did not make any external announcement – and still has not made any public statement – about the changes. Nor has any there been any attempt on the part of the new management to reach out to (at least some and perhaps all of) the largest users of AWCA. AWCA Account management staff has been calling their customers, but beyond the “it’s business as usual, I’m your contact”, they don’t have much to report.
Here’s the text of a recent email from an Aetna communications staffer in response to a blog post re the changes. The author is Dr. Dan Bernstein, the head of the New Product Businesses unit. (Bernstein graduated from medical school but never practiced medicine)
“We would like to take the opportunity to clarify a few of the points you made in today’s posting [referring to this post]. We want your readers to understand that the New Product Businesses network and operations areas have not been merged with Aetna’s Group Health network and operations organizations. We have brought together the network and operations teams for the Cofinity, AWCA and Aetna Signature Administrators businesses under two leaders because these businesses all serve business partners, including other Insurers, TPAs and Bill Review companies, that are outside of Aetna’s traditional business channels. [ok, but the markets are completely different, with different providers, different ‘quality’ measures, different buyers, different reimbursement methodologies] Importantly, the network and operations functions described are still separate for AWCA.
[sources indicate the comp network staff now report up to an exec in Maine, sales reports to Denver, operations staff to personnel in the PPOM business (now called Cofinity) in Michigan, and account management to a different person in Maine; Bernstein is located in Maine as well]
The changes we announced this week will help us maximize our resources to create better value for our customers. We see these changes as benefiting our customers by allowing us to concentrate on building our network, providing consistently superior customer service and offering our customers innovative solutions to address their business needs.”
This left me, and others, looking for just a bit more depth and detail. So, I emailed the quite-helpful PR staffer; here’s the ‘conversation’:
Paduda question
Does he [Bernstein] mean there are staff dedicated to WC within each unit? If so, what is their relationship with the larger Aetna provider relations units? Do they work together? Who decides on negotiation strategy and tactics? If not, how does Aetna leverage it’s group health buying power to benefit WC customers?
Aetna response
The AWCA Operations and Network teams are still distinct, dedicated units. They simply report up to new managers, alongside other similar units.
The AWCA Network team has always worked collaboratively with the larger Aetna provider contracting teams, and will continue to do so. The negotiation strategy is jointly developed. The combined size and strength of the relationship with providers across all businesses benefits all customers, including Workers Comp customers.
Paduda question
How will this change affect the network development process? Florida has been an ongoing challenge for awca; is the new structure going to help Aetna address FL?
Aetna response
We are always striving to improve the network development process and strategy. The new leadership team is focused on both strategic and process improvements for our network activities.
So, no answer to the Florida question, nor any sense for how this change will affect network development. A good bit of corporate-speak, and no specifics. I tried one more time to get more specific answers, and got this back: “at this point, we can’t share additional information.”
Either they haven’t thought this through (my bet), or they have and haven’t finished telling the affected parties (doubtful), or they just don’t want to tell me (possible). If the latter is the case, they aren’t telling some of their biggest customers, either.
Here’s a bit of background. Despite the conjecture of several, myself included, that Aetna would get out of this business, Aetna has stuck by its work comp unit for five years (to date). Reports indicate the business has been financially successful, profitable, and achieving success defined as “aspiring to be a rounding error” at mother Aetna (remember Aetna’s annual revenues exceed $24 billion). This success has occurred despite the unit being bounced around the org structure at Aetna, with former AWCA president Pat Scullion reporting up to (at least) five bosses over the last four years.
I’m from Missouri on this. Many health plans/insurers that got into work comp (United Healthcare in FL, with Focus and MetraComp, Travelers with Conservco, UNUM with Genex) got out. Some, such as UPMC, Wellpoint and Horizon, have done pretty well. The ones that have succeeded have almost always had WC as a separate business unit with P&L responsibility reporting up to a ‘special products’ department (that likely had dental, vision, etc). They also had a strong executive sponsor, someone who could, and would, go to bat for the WC network development staff when the group health folks (understandably) started to cave on WC rates to get a better discount for their group health business.
But that’s not the most important reason to have a separate WC division. The most important reason is simple – WC is so fundamentally different from group health that the network development/provider relations, operations, compliance/legal, customer service, and sales staff will find themselves spending most of their time explaining WC basics to their support staff/management/peers – first dollar every dollar coverage; treatment is limited to procedures related to the disabling condition; focus on return to work; and the primacy of fee schedules, that they won’t have much time to resolve issues related to California cascading rules for PT, Florida limits on chiro visits, pre-cert requirements in MA and NY, MPN access requirements in California, EDI requirements in Texas and the gazillion other small but critical-for-compliance comp rules.
The ones who should be the most nervous/interested in this have “Coventry Workers Comp” on their business cards. Coventry has essentially turned network development and management in more than a few states over to AWCA. If Aetna decides to get out of the comp network business (again, I doubt this will happen), Coventry is going to have to scramble.
Aetna’s a good company. Even good companies make mistakes, and they’ve made a few here. This has not been handled well; from here it looks like AWCA management was ousted in a cost-cutting move, replaced by folks who don’t know much, if anything, about workers comp, or about managing a transition.
What does this mean for you?
Be careful and have a Plan B.