The recent news concerning the Spitzer investigations, Broward County’s Work Comp troubles, the Arthur Gallagher payment inquiries and the adverse publicity surrounding same has caused some industry players to delay decisions regarding new initiatives. TPAs particularly have pulled back from some previous “done deals” while they re-examine their business practices, commission arrangements, and relationships with managed care firms.
I am attending the Florida Workers’ Comp Institute, and after one evening’s discussions with several vendors and TPAs the impact is obvious and considerable. Both are lamenting the delays imposed by TPA senior management.
This is a good thing. For far too long, the relationships between some TPAs and insurance companies and their servicing entities has been somewhat cloudy, with rumors of commissions, kickbacks, and other behind-the-scenes payment arrangements periodically surfacing. Now that the Broward audit and Spitzer inquiries (which include subpoenas of managed care firm Concentra and several insurers and TPAs) have shed some light on these practices, risk managers, brokers, and CFOs are paying much closer attention to these relationships.
Part of this increased attention may well be due to the potential for OFAC and Sarbanes – Oxley complications. I am certainly no expert, but the provisions of the “Sarbox” law that require CEOs to sign off on financial statements coupled with the OFAC reporting requirements (who receives funds from the corporation) appear to be playing a significant role.
What does this mean for you?
If you have always competed fairly and ethically, good things. If you have played fast and loose, troubles ahead.
Hallelujah.

Sources indicate the “rebates” that broker Arthur Gallagher & Co. has recently paid to several employers in Florida may be related to contingent commissions and/or fees paid by managed care firms to the broker. At least three municipalities have received checks, including $1.3 million to the City of Gainesville, over $1 million to Lakeland, and over $100,000 for Alachua County.
The State Attorney General’s office is heading up the investigation, and there are apparently internal inquiries under way at several other public entities. Preliminary indications are that at least one city risk manager has been “asked to resign”, and other moves are likely in the next two weeks.
According to the Attorney General’s release,
“There are indications that insurance brokers have improperly steered business to insurers who pay the brokers the highest fees rather than seeking the best deals for their customers. There are also indications that the companies may have engaged in bid-rigging. The alleged practices could be in violation of Florida’s antitrust laws, Chapter 542, Florida Statutes. Penalties allow fines of $1 million for corporate violations, $100,000 for individuals and for three times the amount lost due to illegal activities.”
Gallagher has responded to the inquiry, claiming that this is due to the actions of a single producer who no longer is associated with the firm. The statement follows:
“During an internal process review, Arthur J. Gallagher discovered an over billing discrepancy that did not follow the terms of the contracts for the City of Gainesville, the City of Lakeland and Alachua County…These discrepancies were isolated incidents handled by one AJG producer who has since been terminated…As soon as these discrepancies came to our attention, the situation was immediately rectified with the over billed amount returned and the appropriate Florida authorities notified.
While it is entirely possible that Gallagher had nothing to do with this matter other than receiving the inappropriate payments, it is indeed troubling that
a. it took Gallagher ten years to uncover this problem
b. no explanation other than a brief “we billed you in error” was provided
c. risk managers appear to be at risk over this
What does this mean for you?
Hopefully, nothing…

The Ohio Bureau of Workers’ Compensation announced that it will be significantly reducing reimbursement to hospitals . Cuts will be 21% for inpatient and 17% for outpatient services, and are slated to go into effect October 1, 2005.
Estimates of savings to BWC are about $3.3 million per month, or $40 million a year.
The cuts were the direct result of an analysis performed by a major union in the state which indicated hospitals’ most profitable line of business was workers comp. Previously, reimbursement was 70% of a hospital’s stated charges for inpatient admissions; the new rate will be 55% of charges. Outpatient rates would drop from 60% of charges to 55%.
While one has to applaud the quick action by BWC, an entity that has never been known for fast action, cutting reimbursement that is based on a percentage of charges is a highly suspect way to reduce expenses – what, if anything, prevents hospitals from increasing their charges?
Moreover, this is an across the board cut, and does not reflect any measure of outcomes, efficiency, or results. Thus the hospitals that have excellent results and performance suffer the same cuts as poorly performing hospitals.
Once again, a blunt instrument employed in the name of cost control.

Managed care firm CorVel recently announced its results for the most recent quarter; revenues are down 7% and EPS dropped 12.5%. The company attributed its poor returns to soft claims volume in the workers comp sector (the source of most of CorVel’s revenues), higher costs for regulatory compliance, and soft case management volume.
Perhaps even more telling is the trend: profits for the quarter were .28 per share last quarter, .32 in the same quarter in 2004, .40 in 2003, and .36 in 2002. The profit margin is also slim at $2.8 million on revenues of $70 million. While the cost of revenues declined, SG&A expenses actually increased by 1%. One wonders how this is possible, despite the “increased costs of regulatory compliance.” Moreover, the stock carries a hefty P/E of 29, a valuation more in keeping with a growth stock than one with a three-year trend of flat or declining revenues and profits.
What is really hurting CorVel, which is most accurately characterized as a work comp managed care firm, is their business model and reliance on revenues and profits from nurse case management.
CorVel is highly decentralized, with operations management varying greatly from one office to the next. Some of their offices, notably northern Virginia, appear to be well run, while others, including south Florida, have significant problems as evidenced by the Broward County School Board audit. In addition, sources indicate CorVel’s IT infrastructure hampers their ability to serve national customers, as it has very limited ability to integrate across offices. I’m no IT expert, but the company’s dearth of national accounts seems to support that claim.
Nurse case management is a low-margin, high fixed-cost business that is mature, highly price competitive, and fraught with opportunities for “creative” billing. CorVel has hundreds of highly-compensated nurses that must be working billable hours at all times if it is to generate any reasonable returns. This is a tough, tough business that is likely dragging down results.
The company has made several acquisitons over the last couple of years which may have helped generate positive results; mention of these were notably absent in the earnings release.
In their earnings release, CorVel noted that it’s Network Solutions (PPO) revenues increased as a percentage of total revenues. This seems to imply that it was flat or negative quarter-over-quarter. Industry sources indicate that CorVel did not make it past the first round in a recent PPO network RFP process at a large national carrier due to an inability to share critical pricing data.

Back to my review of the audit of Broward County School Board’s workers comp program. My last post focused on some of the specific problems identified in the Broward School Board work comp audit. This post will concentrate on more global problems, and highlight some “indicators” that you may be able to use to identify potentially problematic issues with your own program.
From 2001 to 2004, the percentage of the total program costs that were paid to “outside” entities (e.g. CorVel and Gallagher Bassett) went from 14% to 22%. However, according to the audit report,
“our tangible results, lost time, litigation expenses, permanent impairment ratings have not improved.”
Note – if your program management costs have increased but results have not improved, you have a problem.
CorVel (the managed care firm contracted with Broward’s TPA, Gallagher-Bassett), was paid over $2.7 million for the 2004-2005 school year, an amount which is greater than 10% of the actual claims paid. By any measure, that is wildly excessive. And the program is getting even more expensive – from FY 02/03 to FY 03/04, CorVel’s total expenses increased by 27.4%.
Note – if your costs go up 27% and results do not improve, you have a problem.
The average case load for CorVel’s field case managers went from 36 in 2003 to 31 in 2004. However, the number of case managers working Broward claims went from 8.6 to 12.5, an increase of almost 50%. During this period, the number of telephonic case managers did not vary, while their case load increased by 10%. Tellingly, the number of claims increased one percent during this time frame.
So, we have more case managers billing more hours for the same number of claims.
Note – if your FCM costs and staffing increases while the number of claims is static you have a problem
The audit report also noted “the District has a relatively large number of open claims which are quite old”; 146 cases are more than 10 years old, have incurred costs of almost $50 million, and comprise almost 19% of ALL claims.
Note – if one-fifth of your claims are over 10 years old, you have a problem.
The risk management department under-reported WC claims expense by about $1.7 million for the most recent school year. Leaving aside the question of “how is that possible”, this suggests a need for an annual audit to verify expenditures.
Note – if your books don’t balance, you have a problem
What does this mean for you?
This situation is gaining national attention, which should serve as a warning to vendors, risk managers, and regulators alike. Clearly there have been signs for some time of problems at Broward County – if you haven’t audited your program or services recently, best do it now.

The recent report on hospital expenses in Ohio’s workers compensation system which indicated WC generates less than 1% of cases but 12.5% of profits for hospitals has become the proverbial kick that overturned the ant hill. The governor has ordered the Bureau of Workers Comp to determine if hospital costs can be reduced; a major union has called for deep reductions in hospital reimbursement; the Ohio Hospital Association has vowed to participate in discussions “with an open mind and a flak jacket”; and the Bureau itself has vowed to take an active role in the process.
The latest news on the issue comes from the Columbus Dispatch;
“This month, The Dispatch used the union’s analysis to show that during the past seven years, the bureau paid hospitals about $544 million above their actual costs to treat injured workers.
The hospitals made an average of about 50 percent on workers’ compensation cases, far more than they made for treating patients with private or government insurance, such as Medicare.
Bureau records show payments to hospitals rose 80 percent between 1997 and 2003, though the number of injured workers dropped by nearly a third.”
The study of the BWC’s hospital expenses was initiated by the Service Employees International Union and shared with the newspaper, who reviewed the data and participated in the analysis. According to the Dispatch, the “Service Employees International Union District 1199, which represents 27,000 health-care workers in Ohio, Kentucky and West Virginia, will pitch a proposal it says would save $90 million a year.
The union plan would reimburse hospitals for the cost of care – as defined by the federal government – plus 10 percent. Under the current system, hospitals are paid based on the bills they submit, which sometimes are multiple times the actual cost of care.
As an aside, one wonders how many union employees are working at hospitals that would be affected by their proposal

Robyn Walsh, the head of Aetna Workers Comp Advantage program, is retiring. No replacement has been named. Started over a year ago by Aetna as a means to enter the workers comp network business, AWCA has struggled to gain traction. While AWCA has attracted interest from several payers, the only payer customer signed to date is the Hartford, and only in Pennsylvania. However, the Hartford appears interested in expanding their relationship into other jurisdictions.
Walsh came into the position with little background in workers comp; she had previously worked in investor relations, networks, and pharmacy.
As I have noted previously, the logic behind group health payers entering the workers comp market leaves me scratching my head. There just is not that much revenue in workers comp.
What does this mean for you?
It is unclear if Walsh’s retirement is due to lack of success, a desire to change leadership, or if this was part of the plan all along. We’ll have to wait and see. In the meantime, before committing to do business with Aetna, watch carefully to see if Aetna does gain any traction in WC.

The Ohio Bureau of Workers Comp scandal is now hitting Gov. Bob Taft hard. State Sen Marc Dunn has sued Taft to find out what he knew about the Bureau’s disastrous investments and when he knew it. Although Taft had released many of his records, some of the words had been blacked out and other documents were not provided to Dunn.
The Bureau of Workers’ Comp’s investments (the subject of much of the hue and cry) may have been noted in reports submitted by the BWC to Taft that were the subject of the suit. At first, Taft had fought the action, then decided to give in and provide Dunn with the materials. However, Taft has now said the redacted bits were subject to executive privilege, a strange claim as he has already waived that protection in this matter