Category: Workers Comp

Feb
26

So, you want to invest in workers comp managed care?

Posted by Joe Paduda on Tuesday, February 26th, 2008 | Comments

The private equity and venture capital folks have been prowling around the WC managed care world for a couple of years now, looking for opportunities to invest their hard-solicited cash. Firms have invested in PBMs (MSC and Cypress Care), bill review firms (StrataCare), case management providers (Genex), and specialty firms (OneCall Medical). And the interest is not waning.
I’ve had more than a few conversations with everyone from freshly-minted MBAs to grey-haired veterans, and they always seem to start with the same set of questions.
So here, at the risk of giving away information that I (and others) could charge for, are the answers to that first round of questions.
Market size – the WC medical market was about $27 billion in 2007 and is increasing at around 8% per year.
Segments (percentage of total spend by category)
(actual results may vary depending on location and definitional differences)

  • Hospital and facility – 30%
  • Physician services – 22%
  • Pharmacy – 15%
  • Physical medicine (PT and Chiro) – 21%
  • Imaging – 6%
  • DME, home health, lab, other – 6%

Major players – general managed care services

  • Coventry (includes Focus, First Health, and Aetna networks marketed by Coventry) – $700+ million
  • CorVel – $300 million
  • Genex – $200 million
  • Intracorp – $200 million

Key issues

  • fee schedules – a majority of states control prices paid to providers via fee schedules, others use UCR as basis for reimbursement
  • managed care regulations – different states have very different regulatory environments, with some favoring strong programs with lots of employer control eg FL and NJ, while others are much more employee focused eg NY, and others seem to favor providers eg IL
  • Claims frequency is declining, meaning the annual number of claims has decreased for the last 15 years by over 50%…and this trend is continuing
  • Group health players occasionally dip their toes in the murky waters of WC, but in the last ten years, the only one to stick it out has been Aetna

Trends

  • Frequency (see above)
  • Consolidation – Coventry is looking to make this a big part of its business, and is investing heavily in acquisitions and absorption thereof to generate top line, and secondarily bottom line.
  • The rise of the specialists – Specialty managed care companies are eating the generalist PPO’s lunch (and stealing their lunch money too) – companies such as MedRisk (physical medicine management and HSA client) and FairPay Solutions (facility bill review and also HSA client) and OneCall Medical (imaging) are ‘hollowing out’ the generalist PPOs’ revenue stream by doing a much better job of managing their niche businesses
  • Drive to outcomes – yes, after 12 years of talking about it, I’m finally starting to see some real movement from payers towards attempting to identify and direct claimants to the best providers.

Want more? We’ll have to start the clock…

Feb
19

Why is workers comp reimbursement based on Medicare?

Posted by Joe Paduda on Tuesday, February 19th, 2008 | Comments

Many states have physician fee schedules for workers comp, and most of those are based on Medicare.
That makes no sense.
Medicare covers all the health conditions and maladies encountered by elderly and disabled folks – from breast cancer to cataracts, from dementia to diverticulitis. There is little to no concern for the patient’s ability to ‘return to work’; few are actually working.
In contrast, most of the working population is not old, and the conditions are overwhelmingly musculoskeletal, and returning that claimant to functionality is critical. There is lots of paperwork to fill out, return to work scripts to write, adjusters to talk with, job descriptions to review, and employers to appease, all while treating an injury and dealing with a worker who may/may not want to return to their job.
Sure, many states pay providers a slight premium over Medicare, but that premium doesn’t even offset the already low medicare rate, much less adequately compensate providers for the additional work.
Unfortunately, a bad situation may well get worse. Medicare reimbursement is scheduled to decline, and not by a little. According to Paul Ginsburg writing in the Health Affairs blog, “a cumulative payment rate reduction of 41 percent is scheduled through 2016 (9.9 percent on 1 July 2008 and approximately 5 percent annually thereafter), in contrast to a 21 percent increase in physician input prices projected by the Medicare Actuary.”
Yes, although their costs are going up 21% over the next ten years, they will be paid 41% less. And due to the shortsightedness of regulators and legislators, reimbursement for comp will suffer an identical drop. I know, Congress always bails out the docs and increases reimbursement…but sooner or later that won’t happen. Then we’re really in trouble.
Perhaps states should start thinking now about a smarter way to pay docs.
Or, we can wait for Congress…

Feb
12

Workers comp payers’ deadly blind spot

Posted by Joe Paduda on Tuesday, February 12th, 2008 | Comments

Medical costs are rising much faster in workers comp than in group health. Over the last ten years, WC medical trend has been going up more than twice as fast as overall medical inflation. Medical is now almost 60% of claims costs and is projected to hit 70% within ten years.
Why?
Simple, really. Workers comp payers just don’t get it. They don’t understand that medical drives everything. Sure, they may pay it lip service, may ‘think’ they are controlling medical by implementing discount-based PPO networks, bill review, and case management/UR, but these programs have been in place for years – and medical trend has increased during those same years.
If the industry doesn’t figure it out, they will go the way of the group health indemnity payers – the Home Life’s, Phoenix’, Mutual of Omaha’s, Travelers’, and Met Life’s. These insurance companies and their competitors dominated the group health industry in the eighties. To these insurance companies, ‘medical’ was a line item on a loss run, a cost of doing business, a black box to be addressed with ‘cost containment’ programs.
Now, almost without exception, these big insurers are out of the health business, killed off by HMOs who understood that their business was not insurance, but health care.
We are now at that point in workers comp. Most of the senior people in workers comp payers don’t understand that they are in the medical business. They think they are insurance companies that prosper by risk selection and financial wizardry. They evaluate their managed care programs by network penetration and savings below billed charges, by denied procedures and slashed bills.
They are saving themselves to death. Instead of bill reductions, payers should be looking at cost per claim. Replace network penetration with physician performance evaluation, based on total outcomes. Stop looking at denied procedures and start identifying the providers who do a great job, send claimants to them, and leave them alone.
What is scary is that many in the industry think they are making progress. They are plodding deliberately along, studying, evaluating, debating, discussing, re-organizing, considering, meeting, presenting, recommending.
Just like the indemnity insurance companies did right up until United HealthCare ate their lunch.
What does this mean for you?
In ten years, many of today’s largest workers comp payers will be out of the business.
How about you?

Feb
11

Signs of the softening market

Posted by Joe Paduda on Monday, February 11th, 2008 | Comments

Liberty Mutual’s announcement that profits dipped slightly in 2007 (albeit from a pretty solid 2006) looks to reinforce the impression that the workers comp market is softening.
Anecdotally other writers in New England note that Liberty is pursuing risks in the $100k and up range very aggressively – and this is not just holding on to current policyholders, but new risks as well.
Liberty is not the only one facing declining prices, and workers comp is not the only line. According to a recent study, pricing for liability, D&O, and property coverage is also decreasing.

Feb
8

Coventry work comp’s fourth quarter results

Posted by Joe Paduda on Friday, February 8th, 2008 | Comments

For Coventry, 2007 was an excellent year. Total revenue (including group and medicare) came in just short of the $10 billion mark, the commercial group medical loss ratio (MLR) was a stellar 77.3%, and there was modest membership growth in group, Part D and the individual health lines.
The workers comp business, which is under the “specialty business” division at Coventry, also produced solid numbers. Revenues for the quarter were up 4% over the previous quarter, from $156.8 million to $163.1. But this doesn’t begin to tell the whole story.

Continue reading Coventry work comp’s fourth quarter results

Feb
5

Why is workers comp paying for hospital errors?

Posted by Joe Paduda on Tuesday, February 5th, 2008 | Comments

Surgical devices left inside a patient. Dispensing the wrong medication or the wrong dosage. Giving a patient the wrong blood type in a transfusion. Serious pressure ulcers incurred while hospitalized. Infections from catheterization in the ICU.
These are among the ‘never-ever’ events – incidents that should never, ever happen during an inpatient stay. CMS recently decided to stop paying hospitals for care required due to certain“preventable complications” — “conditions that result from medical errors or improper care and that can reasonably be expected to be averted” (NEJM, 10/18/07). The list includes air embolisms, certain infections, patient falls, pressure ulcers and the like.
HealthPartners in Minnesota was one of the first payers to identify the problem and take action, way back in 2002. Now, other commercial health insurers, notably Wellpoint and Aetna, are planning to move beyond CMS’ list and eventually refuse payment for 28 events. These events, identified by the National Quality Forum are also under review by the Blue Cross/Blue Shield Association, United Healthcare, and CIGNA who may decide to stop paying for them.
And the Leapfrog Group’s membership, which includes many of the country’s largest employers, is also asking providers to not bill for these events.
It is not just the payers; hospitals themselves are starting to see the light. Hospital associations in Massachusetts and Minnesota have agreed to not charge payers or patients for these events, which include “wrong-site and wrong-patient surgery, patient death or disability due to wrong use of blood or blood products and medication errors, and follow-up care needed to bring the patient back from such errors.”
The largest payer in the nation, CMS, has decided that paying for certain medical errors is bad policy. So has two of the largest health plans, along with one of the best-run health plans in the country. Our biggest companies have joined the “no pay for mistakes” movement. Hospitals themselves have decided it is inappropriate to charge for their screw-ups.
So why are workers comp payers reimbursing hospitals for ‘never-evers’? I don’t have any empirical evidence that WC payers are not paying for these events. In fact, given the lax payment policies of most payers, I’d be very surprised if more than a very few (if any) payers have the ability to deny payment, much less a policy to do so.
What does this mean for you?
There is clear precedent for non-payment for medical errors. Moreover, workers comp payers may find themselves in the rather awkward position of trying to justify their payments for conditions that their clients have publicly stated are not reimbursable.

Jan
25

PMSI’s for sale, part 2

Posted by Joe Paduda on Friday, January 25th, 2008 | Comments

SInce I learned of PMSI’s pending sale, I’ve been digging thru financial reports and talking with customers and industry folk to find out more.
Turns out FY 2007 (ended 9/30/07) was a down year for both revenue and profit at PMSI-Tmesys (PMSI). Although top-line increased 1%, that was primarily due to the acquisition of Health Advocates (HA) for $83 million (about 4.2x revenues). When you consider the overall WC Rx inflation rate was 6.5% and add in HA’s revenue, PMSI’s core business actually declined by about $50 million, or around 11% from 2006 to 2007.
The news was worse for profits, which dropped by 45%, while reserves for bad debt increased by $3.7 million. Notably, the MSA business contributed a whopping $12.4 million in gross profit – although that number looks awfully high. Given what they paid for it, I would not be surprised if dollars were shifted around to make the acquisition look good – 4.2 times revenues is awfully expensive.
It should also be pointed out that 2006 was not a stellar year; although revenues increased 4% from the previous year (while WC Rx inflation was close to 10%), profits had declined by 11% from 2005.
Clearly the company’s owners have not acted precipitously.
Competitive pressure certainly played a part in ABC’s decision to sell off the firm; as noted here Coventry has been aggressively pursuing new business, and PMSI has already lost one large customer that by itself will cut 2008 revenues by another 10%.
Despite what some commenters think (and write), I don’t think it is fair to hammer the (relatively) new management at PMSI. The company had started declining years ago, and had started to turn itself around under the prior president, David Weidner. The company also lost its best spokesperson, Phil Walls PharmD, who has since moved onto another PBM. Weidner was replaced by Mark Hollifield, who brought in a new sales and marketing team (can’t speak to the sales side, but the marketing has been rather uninspired).
What does not appear to have changed is the complacent culture at PMSI – although the company had done innovative work in several areas, it was very slow to market, could not move quickly, and seemed more interested in having meetings than delivering on commitments to customers.
Cultures are notoriously hard to change, and this may well be a case in point.
We’ll get into what a buyer would get when next we meet.

Jan
25

PMSI is for sale

Posted by Joe Paduda on Friday, January 25th, 2008 | Comments

The largest workers compensation PBM, PMSI-Tmesys, is on the block. The company’s owner announced the sale yesterday, noting that it is being spun off so the parent, Amerisouce Bergen, can concentrate on the core business of drug distribution.
PMSI-Tmesys has suffered through client losses of late, the latest CNA’s departure at the end of last year. Declining margins may also have played a role in the decision, as price pressure from competitors, coupled with the drastic cuts in reimbursement in NY and CA, have likely contributed to the company’s failure to meet financial goals in 2007.
With revenues exceeding $400 million, PMSI-Tmesys is the leader in the space, providing drugs, durable medical equipment, and other services to many WC payers. Reading between the virtual lines, it looks like Amerisource’s senior management is expecting a strategic buyer, as the company has been in the process of shopping PMSI-Tmesys for a few weeks already.
More to follow…