One Call’s got a cash injection and reduced its debt burden (so the company doesn’t spend most/all its earnings on interest payments).

Congratulations to the debt holders for coming up with a very creative solution – and for doing a masterful job of cat herding.  KKR, GSO, and their advisers somehow convinced all the debt holders to agree to losing millions of their investment – and got some debt holders to dump hundreds of millions more into One Call in return for ownership stakes.

Darn impressive work.

So, what’s next?

Well, I tried to find out from One Call…I sent One Call several questions early yesterday; Jessica Taft, OneCall’s VP of Marketing and Branding,  was kind enough to send a statement earlier today.  I’d note the response was not very “responsive” as it didn’t fully address my questions; I’ve pasted the communication in at the end of this post verbatim so you can judge for yourself.

Management

In response to my question about management changes, Taft said there are “no planned changes to the management team.” Ms Taft may not have full visibility into the new owners’ plans – and I don’t either. Now that Apax is no longer involved, the new owners will undoubtedly install their own Board; I expect major changes to, if not wholesale replacement of ,the Board of Directors.

It would be surprising if the new Board didn’t install new folks in the C-Suite.  (As I mentioned in an earlier post, execs were dealt a pretty poor hand to start with, so it’s unfair to blame the entire mess on them.)

Business lines

I asked:

What business lines will OCCM focus on going forward, and which lines will be de-emphasized? For example, there have been recent efforts to sell the hearing business; will those efforts continue or be halted?

OCCM responded:

One Call will continue to focus on delivering products and services to enable our customers to get injured workers the care they need when they need it…Finally, there are no plans to sell our hearing business…

I don’t expect One Call to sell any of its businesses at this juncture, although the new owners may look to do so after things settle down. It may be that the parts are greater than the entire operation; time will tell.

Provider reimbursement

I asked;

Management acknowledged extending payments to some providers out an additional 15 days in a recent call. When will OCCM reduce days outstanding for provider payables, or is that not being contemplated at this point?

OCCM responded:

Our provider network is one of our most valuable assets, and we intend to continue to enhance the value we deliver to our provider partners and continue to pay them timely.

I would expect One Call to work on strengthening relationships with providers, but don’t know what to make of Taft’s response.

Polaris

I asked a question about future investments in Polaris; the response was marketing-speak.

My view

With somewhere north of $300 million in the bank (if the entire equity payment went to the company’s coffers, and not to any other entities) and the annual debt load reduced from around $150 million to $60 million, One Call is in waaaaaay better shape than it was before the infusion.  

That’s good news indeed for the company’s workers and customers – and for the industry at large.  More competition for payer business is better than less.

The next steps are critical.  The industry wants to see a highly credible exec installed, one with deep experience in workers’ comp and a very strong brand. The company would also benefit greatly from more IT strength; it’s reliance on Polaris(r) for much of the customer-facing functions makes that platform essential to One Call’s future.

Happier and more connected workers would also be a big plus; sharing equity or otherwise rewarding workers who’ve stuck by the company during a very tough time is relatively inexpensive and would get more folks to buy in to the future.

 

 

United Airlines’ Joan Vincenz spoke on changing TPAs at the California Self Insurers’ Association’s Employer Summit meeting, one of those rare events that has focused, highly useful presentations narrowly targeted to the attendees.

Joan’s career is pretty diverse, with experience as a flight attendant, in marketing, working on safety. She’s a stickler for details, for customer service, for metrics, for doing things the right way and living up to your commitments.

UAL changed TPAs a couple years ago in a process that has created opportunities for ‘step change’ improvements.   United had experienced progress with the previous TPA, e.g., over 6 years the number of open claims dropped by more than 40% – while employee head count increased.  However, to take the program to a new performance level, United decided to change TPA partners.

United had been with one TPA for 19 years; in 2015 the workers’ comp and procurement teams collaborated on a full RFP for TPA services.  The process was both quick and intense, taking only 6 months from beginning of the RFP process to selecting a new TPA. [editorial comment – other procurers could learn a lot from this] Moving the business would be tough, as all the closed and open legacy claims would be moved to any new vendor – if one was selected.  Vincenz was not going to “leave those claims behind.”

At the end of the RFP, Vincenz and the other decision makers decided to stick with the current TPA and not move. Later, after more diligence and a determined and focused effort to improve some areas and be more collaborative, she decided to move the business to the top candidate from the RFP.

Staying with a current vendor is an easy ‘default’ since moving ‘run in’ claims is expensive and there is considerable risk in making sure all the financial and claim data is moved on time, accurately and without any negative impact on injured employees.  Moving the ‘run in’ claims cost UAL several million dollars, plus took lots of management time and staff resources to change. Vincenz was sure to get everyone on board (especially the Chief Financial Officer and the company’s external actuary)  as to why this is necessary.

A big part of Vincenz’s business case to senior management was the move would pay for itself within three years, with process improvements in claims handling and other key program parameters wins.

Lessons learned

Vincenz strongly emphasized the importance of making sure you’re moving your program for the right reasons and not just because of a few mistakes or because you think there are greener pastures elsewhere.  It’s key to document the pluses and minuses of moving, make sure you are clear on the goals you will achieve by moving, commit to those improvements and measure them post-move.

If you’re going to move, give it enough time to get it done right, but don’t leave claims with prior TPA any longer than necessary.  United moved their entire program in 3 ½ months.

Watch out for problems with recent claims that go into a ‘shell’ status, which is the time period (~3 weeks) immediately after the move when the new TPA doesn’t have access to history on some of the claims.  United set up a ‘war room’ for the month after the move and the staff kept access to the prior TPA’s claims system so that they could help the new examiners with information.

Technology issues are also key to manage – there are multiple feeds and connections that all have to be programmed, tested, verified, and secure.

Other key recommendations included:

• Pick a hard date, plan for it, and commit to it.
• Have a comprehensive communications plan using corporate communications, involve the TPA, and be prepared to handle questions via a hotline to make it as seamless as possible for active claimants.
• Make very sure the indemnity payments are on time – UAL prepaid all TTD payments for the month post-move date to make sure employees wouldn’t be affected negatively.
• Stay close to the current TPA during transition to make sure things are handled appropriately.
• Train the new TPA’s staff to handle YOUR standards and processes, not the new TPA’s best practices.
• Performance guarantees should be managed by actuarial data, e.g., United’s performance guarantee required that all financial data had to be complete and accurate as validated by United’s external actuary.
• Celebrate success – UAL had a party to thank all the folks involved internally from all areas.

Lessons learned:

• Keep your intent to move confidential until you tell the current TPA.  Leave with grace by acknowledging all the positive things they handled for your company over the years.  Demonstrate your appreciation for what they did for your employees
• Keep your focus on your injured employees and make sure there is no interruption in their medical treatment or pay
• Clear and consistent leadership is key; the new TPA’s leadership responded and took responsibility for problems and worked to fix them
• Build partnerships – these are essential to solving unforeseeable problems

One question I asked Joan was around TPA differentiation; during the process did the competing TPAs stand out from one another? The response was there wasn’t much differentiation in responses to the RFP, but there was in the onsite meetings – particularly around technology,  and the questions the TPAs asked Joan and her team.

What does this mean for you?

Learn your prospect inside and out, ask them lots of questions, and make very sure your solution is specific to the prospect. And spend more time preparing for the onsite than in doing the RFP response.

The latest news from Bloomberg put a damper on my plans to play point guard for the Warriors.

As loyal readers know, in a previous post on One Call I alluded to the company’s  survivability having the same chance as me playing point guard for that esteemed NBA franchise.

Alas my hoops career appears stillborn.

We are now 10 days past the date One Call failed to make a $15 million debt payment, and it appears little progress is being made. Some have pinned their hopes on the company‘s future on One Call’s debt holders all getting together, joining hands and singing Kumbaya. Somehow I don’t think that’s likely.

Why would the most senior debt holders agree to take a haircut to help more Junior debt holders? The senior debt holders accepted a lower interest rate in return for their seniority in the event of a default. I doubt the senior debt holders are going to give up anything to help junior debt holders, who got higher interest payments in return for less security. However it’s possible – if some of the senior debt holders also own some of the more junior debt, they could work something out – if all the other debt holders agree.

IF they somehow manage to convince ALL debt holders to do this it’s possible a restructuring could occur. Notice the emphasis on ALL.

There’s also been a lot of talk about some sort of a debt-for-equity swap.

Again, I just don’t see this happening. The debt holders will end up owning the company if it enters bankruptcy, so (Sorry to repeat myself here) why would the senior debt holders agree to give up some of their ownership – – when they probably don’t have – to just to be nice to the junior debt holders? All debt holders would have to agree and that’s pretty unlikely.

Far more likely is the worst case scenario; the company runs out of money, defaults, and ends up going into bankruptcy.

I just don’t see how the company makes it given its huge debt load and cash flow problems, coupled with client losses and I would argue, feckless and far-less-than-forthcoming management.

I’ve heard from several colleagues that One Call management has repeatedly characterized my efforts to shed light on the problems at OCCM in pretty insulting terms. Those still undecided on who is right and who has been telling tales may want to reflect back on management’s multiple  “all-is sunshine-and-puppies” pronouncements given today’s Bloomberg piece.

For the mid-level managers and other workers who have stock or stock options, this slow-motion train wreck must be beyond painful. While there are certainly some who contributed to this debacle, I’m sure there are many talented and hard-working folks in Jacksonville who deserve another chance.

Three days ago One Call failed to make a $15 million payment to some of its bond holders. Last night I asked the company for a comment; the company responded saying they “…chose to take advantage of an available 30-day grace period for paying interest under the terms of one of our debt agreements…”

Simultaneously they released a statement about the situation – kudos to OCCM management for working to get their message out before the payment problem was revealed elsewhere. That was smart marketing.

In a followup email, I asked “Was one call’s very tight cash position a factor in the failure to make the payment on the due date?”

As of yet there has been no response.

Let’s parse this out.  “Taking advantage” of an “available 30-day grace period” is not a tactic commonly used to “provide additional time to further advance these constructive lender discussions as we work together on a comprehensive capital structure solution that will best position One Call for the long term.”

You may recall One Call did a major debt restructuring earlier this year, one that allowed the company to forgo paying monthly interest but added that interest cost to the principal amount. That saved cash flow but increased the total debt burden.

That higher debt burden coupled with debt covenants made for a potentially bigger long term problem. Simply put, the higher the debt, the more pressure on the company to make sure it has adequate cash reserves and didn’t have to dip too deep into its line of credit.

If you can’t make a debt payment, you know that well before that payment is due.

If you haven’t been able to figure out how to come up with the cash to make that payment, chances are you won’t be able to do so in another month. Reports indicate One Call has been working on this for over three months

If you haven’t been able to “advance constructive lender discussions” when you’ve been working on it for more than three months, and after a major debt restructure a few months before that, one wonders how constructive those lender discussions have been – and will be.

Here’s what we know.

At the end of June the company had about $6 million in cash and equivalents on hand.  That’s equal to about one day’s expenses…perhaps a bit more.

We also know there are three levels of debtholders – the first, “1.5”, and second lien holders. That’s the order of seniority in case of default; the first lien holders get first crack at any assets, followed by the 1.5, with second lien holders hoping there’s something left.

We also know One Call has debt covenants that way well be in play here as the company has drawn down its line of credit, which triggers certain rights for debtholders.

We also know One Call said everything was fine just three months ago; now we hear they are in “constructive lender discussions”. Quoting CEO Rone Baldwin;

 I would like to share that One Call is stable and secure. The company is fully compliant with its debt covenants and meeting all of its legal and financial obligations, and we expect this to continue to be the case.

Finally, we know the three sets of lien holders are each working with financial advisers.

More to come later today.

One Call’s official statement is here.

Among the several things that could affect workers’ comp, the toughest to handicap is the trade war.

[The details are below – a very conservative estimate is the trade wars have already cut annual work comp premiums by $686 million. (300,000 workers, 2080 hours per year, average WC premium rate $1.10 per hour). (source data here)]

That’s about 10,000 lost time claims.

Predictions are difficult mostly because one of the protagonists is entirely unpredictable. While we don’t know what will happen in the future, we do know how the trade war has already affected employment.

This from Yahoo Finance:

Moody’s Analytics estimates that Trump’s trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels absent the trade war. That’s a combination of jobs eliminated by firms struggling with tariffs and other elements of the trade war, and jobs that would have been created but haven’t because of reduced economic activity.

If the trade war continues thru the end of this year, Moody’s reports another 150,000 jobs will be eliminated. If the trade war isn’t over by December 2020 the total will double to 900,000.

Other data indicate manufacturing has already shrunk and the number of new jobs created dropped from 1.9 million last year to 1.3 million for the same period in 2019. Most troubling, the CBO is forecasting economic growth will slip below historical averages next year to 1.8%.

Sectors most affected are manufacturing, warehousing, distribution and retail.

Where we live in farm country, the impact of the trade war is visible next door.

Farm equipment sales are slumping as soybean and grain prices have plummeted while steel and aluminum prices jumped. Dairy is a big part of agriculture here; when Mexico – the largest overseas consumer of our milk products – slapped tariffs on US dairy, we lost $1.8 billion in sales. Equipment manufacturers including Deere have lost sales, and the effect is rippling thru communities throughout upstate New York.

What does this mean for you?

If things aren’t resolved by the end of next year, work comp will be losing $2 billion in premium annually.

That’s about 32,000 lost time claims.

Work comp’s medical spend is about 1/100th of total US medical spend.

So we don’t control healthcare, healthcare controls us.

Sure, there are work comp rules and regulations, laws and courts, but medical providers are far more interested in and aware of what Medicare/Medicaid/Private insurance wants/demands/does than all-but-insignificant work comp.

Well, that’s not exactly true – providers are getting ever smarter about how to profit from work comp.

The US health care system needs major reform – covering most/all of us, forcing providers to reduce the cost of care and cost per person, and improving the health of all of us.

I believe we’ll see major national health reform by 2025; others think I’m nuts. (we may both be right!)

If reform happens – or doesn’t – work comp will be affected. Here’s why.

Over the very near term, let’s assume the ACA dies when the Republican Attorneys General win their Texas lawsuit.

The next day – or darn close to it – the legal basis for our healthcare delivery and reimbursement system could be effectively gone. What will providers and insurers do?

Most health insurers will do everything they can to roll back protections for insureds, limit coverage, and tighten provider networks, because they’ll make a lot more profit doing that.

Then, providers will find their patients are increasingly under-insured, or their conditions aren’t covered, or the treatment they prescribe isn’t allowed.

In comes Fred Flintstone with a mushed foot suffered when he dropped a boulder on it, and voila! Provider problem solved…thank you workers’ comp.

The result – workers’ comp may well see higher medical costs from revenue maximizing providers suffering under lower reimbursement and more uninsured care.

If I’m right about national health reform and massive reform does occur, its highly unlikely work comp will be included in that reform. Without much stronger regulatory protection such as a universal all-payer fee schedule, savvy providers will increasingly target work comp as we’re woefully unable to stop sophisticated schemes to suck more dollars out of workers’ comp payers.

The result – workers’ comp may well see higher medical costs from revenue maximizing providers suffering under lower reimbursement and more uninsured care.

What does this mean for you?

Prepare. 

There are no challenges facing today’s work comp insurance industry. 

Profitability has never been this high for this long.

The combined ratio – the cost of claims plus admin expense – is historically low, and getting even better.

While rates continue to drop, that isn’t hurting profitability.

Employment and payroll is high and appears (to some) to be stable.

Reserves are far beyond adequate, eliminating fears of a major expense shock or premium jump.

All this joy helps squash any whisper of innovation, any fleeting thought of change, any “risky” initiatives.

The work comp insurance industry has never been better, and has never had better reason to see nothing but blue skies ahead.

That is a grave mistake.

While we must pay close attention to potentially disruptive forces that may well significantly alter the landscape, many are too easily – and far too readily – dismissed. It’s analogous to global warming; the deniers long scoffed, protesting that climate scientists were catastrophizing the likelihood of major change, and here we are.

While outright deniers have much to regret, those who sort of knew the climate is changing have done little to prevent it, adapt to it, mitigate it. That’s in our DNA; we humans survived and flourished through our ability to quickly recognize and address immediate threats.

Very long term threats, not so much.

Some of the external forces are obvious, others are hidden. But all should be acknowledged, objectively considered, and, if necessary, planned for. Over the next few days we’ll be digging into these in some detail.

I offer a few for your consideration.

• Implementation of major national health reform
• Failure to implement major national health reform
• Expanded trade war
• Consumer debt bubble pops
• Impact of Amazon-Berkshire Hathaway-JP Morgan’s Haven Health
• Global warming
• Downstream impact of decreased opioid utilization.

What does this mean for you?

To be sure, some/many of these won’t happen and/or won’t affect workers comp. But it’s likely some will. The time to prepare is now.

 

Debtwire reported (subscription required) yesterday that multiple sources indicated work comp medical services firm One Call has retained Centerview Partners “as liquidity tightens, covenant hurdles loom.”

Centerview, an investment bank with extensive experience in the workers’ comp service industry, will reportedly “help [One Call] navigate balance sheet pressure, including a potential liquidity shortfall and covenant compliance hurdles.”

(A “liquidity shortfall” means a company may not have enough available cash to pay its bills.)

Debtwire also noted other sources said a group of One Call’s lenders have retained Jones Day as legal counsel.

Ten days ago One Call CEO Rone Baldwin released a business update on One Call’s website indicating “One Call is in full compliance with all debt covenants.”

The Debtwire piece went on to indicate that the company had $11 million of available liquidity split between cash and a revolving debt vehicle (it was not clear if this was at the end of of the second quarter or at some other time). This was down from $18 million at the end of the first quarter.

Several other sources discussed “potential remedies” to the company’s current situation, naming a meaningful debt for equity swap and/or a fresh injection of additional equity.

I don’t see either as viable options.

Equity would have to come from current owner Apax (or, much less likely, another investor). Apax has already written down its original investment. Private equity firms have to get agreement from their investors before spending their dollars; I strongly doubt Apax’ investors will want to increase their financial exposure to a potential default. More detail on this here.

The debt for equity swap is also unlikely. If the covenants are breached, the debtholders likely get (some) control over the company. I don’t see why the debtholders would swap debt for equity now, when that may occur in the near future.

Debtwire’s reporting comes on the heels of Baldwin’s announcement of a layoff of about 50-60 folks; on Friday Michael Jordan, the former head of One Call’s effort to expand into group health departed.

My best guess is One Call’s daily revenue is around $5 million.  Unfortunately, the company’s headquarters was closed for at least two days due to hurricane Dorian. The closure plus the strong likelihood that Dorian prevented many claimants from scheduling or receiving services provided via One Call didn’t do anything to help the company’s tight cash flow.

For more detail on the company’s recent history, here’s information on One Call’s debt refinancing, and a detailed review of One Call as of December 2018.

I’ve asked Moody’s and S&P when they will update One Call’s credit rating and will report back if and when that occurs.