WorkCompWire’s Leaders’ Speak column features a two-parter from Jack Bailey of Bailey Southwell.  He has worked on a lot of transactions in our space and knows a lot about deal-making.

Bailey’s point about the growing importance of technology, and specifically the need for accreditation around cyber-security is dead on. His other thoughts on the importance of execution and customer service are as well.

I do have a different perspective on one of his statements.

From WorkCompWire:

Trend Away from Monoline Vendors to Integrated Service Offerings: While this isn’t necessarily a new concept in the industry, payers increasingly emphasize the benefits of having multiple service lines handled by a single vendor in their contract decisions. As an example, see the below quote from the recent quarterly earnings call of publicly-traded industry vendor:

…singularly focused vendors are quickly becoming obsolete while payers recognize a greater efficiency and effectiveness of integrated services.

Two points here.

First, outside of the quote – which I’ll get to in a minute – I don’t see any supporting evidence for this assertion. OneCall is the best example of a diversified service provider, and we all know how that experiment has worked out.

It hasn’t.

In contrast, single-focused vendors such as bill review firm Conduent, physical medicine management company MedRisk (HSA consulting client), DME/Home Health provider HomeCare Connect, and PBMs (most of which focus almost entirely on pharmacy) are doing well. Conduent and MedRisk are the largest providers in their business sectors, HomeCare Connect is growing rapidly, and PBMs myMatrixx (HSA consulting client) and Optum now dominate the work comp pharmacy business.

There are many reasons for this – which I’ve explored in past posts in mind-numbing detail – but the core issue is the same as in any other industry – doing one thing really, really well is hard enough. Doing several things really well is damn near impossible.

As Bailey noted, payers are demanding excellence in execution and customer service, demands that have (with rare exceptions) not been met by diversified service providers.

Point two.  The quote in Bailey’s piece comes from CorVel’s CEO. 

Of course Clemons would say that integrated services are the bee’s knees;  CorVel’s business model is predicated on getting as many dollars from its customers as possible.

Supporting evidence for my contention that single-focus companies are doing well, and are very attractive to investors is everywhere.

For example, SUNZ’ purchase of case management company Ascential Care and Mitchell’s acquisition of physician adviser/peer review/IME firm MCN. Both Ascential and MCN were founder-owned and had narrowly-focused businesses; they weren’t diversified.

Then there’s Paradigm’s acquisition of Adva-Net for about $110 million, a transaction completed in the last month or so. Adva-Net was also founder-owned (with some venture capital as well) and narrowly-focused; it brings a network of pain management providers and facilities to the table.

This follows Paradigm’s purchase of Foresight Medical last year. As I said last September, “Foresight’s niche is narrow but important – the company’s core business is negotiating prices for implantable surgical devices.”

Finally, in all my conversations with larger work comp payers, the vast majority of buyers want best-in-class services – because their customers expect and demand it. SVPs of Claims, VPs of Medical Management, Chief Medical Officers – I’ve never heard one say “I’ll take mediocre service levels and results because working with one vendor makes my life easier and is less burden on my department.”

Yes, there are exceptions, primarily for smaller payers who don’t have the staff or resources to handle multiple relationships. In that case, the “multi-offering supplier” approach makes sense, and this can be an attractive niche, with vendors building attractive businesses around wide service offerings.

What does this mean for you?

Market segmentation is key; understand what your buyers’ problem is, and solve it. Larger payers want best-in-class, and many smaller payers are looking for simplicity.

The three top takeaways from HSA’s 2018 Survey of Bill Review in Workers’ Compensation and Auto are:

1. It’s all about customer service
2. Analytics are lacking
3. Medata leads the pack

We’ll dive into customer service today, and discuss the other takeaways later this week.

From the Survey’s Executive Summary:

The importance of customer service cannot be overstated. At a time when the BR industry and payer community are looking at e-billing advancements, connectivity, and predictive analytics to make BR faster and more efficient, customer service rose to the top of the list when discussing or scoring the most important aspects of BR.

Whether we were asking “are bill review vendors differentiated?”, “how important is customer service”, or how respondents ranked individual bill review vendors, customer service kept coming up. Whether respondents outsourced bill review or processed bills internally using a third-party application, whether their companies were large or small, operated in a single state or nation-wide, customer service and variations on that theme were pervasive.

For example, one may well think bill review is a commoditized business, where vendors compete on price and relationships. Fully 2/3rds of the 30 respondents believe bill review vendors are differentiated, primarily by responsiveness, customer service, and a sense of partnership.

Stepping back, this is not surprising.

In any commoditized market, the customer who believes they are being listened to, serviced promptly and competently, that their vendor/partner really cares about the relationship and is always looking to add value, will view that vendor as a partner – a key differentiator.

In non-commoditized businesses, buyers don’t care nearly as much about customer service. Think Apple; people stand in line for hours if not days to buy their latest tech because it can do all this innovative stuff, has a really great camera and screen, can store a gabillion photos…(and many of us love to show off our latest toys to jealous friends). And often that tech has bugs and costs a fortune and shatters when you drop it and battery life sucks and it is obsolete in months… (Disclosure – I’m an iPhone, Mac Air, and Mac desktop user…but I’ve never camped out at a Store)

Or Tesla.  Costs a mint, one has to wait months to get the car you want, software can be buggy, getting service is a pain in the neck, charging is NOT easy or simple or readily available in many places…Yet lots of people buy Teslas.

I know, there are deep psychological/emotional reasons we humans want to own iPhones and Teslas. That doesn’t negate the key point here – people buying highly differentiated products don’t care about customer service.

Service can be THE differentiator in a commoditized business.  

Tomorrow, data analytics.

What does this mean for you?

Much of workers’ comp – claims, medical management, insurance, related services – is pretty much commoditized. I would argue  – and the research clearly indicates – that differentiation is not only possible, but critical to your company’s survival and success.

Two messages from colleagues about yesterday’s claim frequency post add important nuance and depth to the issue.

First, thanks to WCRI CEO John Ruser PhD for his note with more current information on recordable data.

These data are critical as they are the only source I know of that records the actual injury numbers, or counts of occupational injuries and illnesses. Almost all other sources document percentages based on premium dollars or FTEs. While those are useful, service providers really want to know the actual number.

Ruser [emphasis added]

BLS has data through 2016 on its website (the chart book is easiest to digest and can be found here: https://www.bls.gov/iif/osch0060.pdf)  The data show continued decline in OSHA-recordable rates through 2016, particularly among “other recordable cases.”  BLS will release updated non-fatal injury data through 2017 on November 8.

I agree with you that credible research on why rates are declining is lacking.  There simply aren’t good data to tease out the possible factors.  Interestingly, shifts in hours worked away from high hazard industries does not explain the long decline in rates.  The vast majority of industries are experiencing declines.  I documented this in a paper I wrote for the American Journal of Industrial Medicine. 

I’d emphasize John’s comment on high hazard industries. I’ve opined that fewer injuries in heavy manufacturing and construction were a likely contributor to the reductions in trend; thanks to John for correcting my error.

Next, from a former state workers’ comp director. [emphasis added]

as I look at chart provided in your blog today it took me back to the early days after the reform of XXXX. As can clearly be seen in the chart starting in 1992 the trend started down and has continued ever since.  A lot of risk managers and safety staff took a lot of credit for those numbers as proof that they were doing a good job. I remember at the time thinking boy this looks really good but surely there is another explanation other than the [legislated] reform and all that we were doing in safety and I was right. Even after the… emphasis on safety [was reduced]…the number continued to go down. As I look back I was just in the right place at the right time.  But when good things happen that can not be explained we tend to take credit for them…

This expert’s view is well worth repeating, perhaps best said by Tacitus:

victory is claimed by all, failure to one alone

What does this mean for you?

Claim counts are dropping – and will continue to do so. There is little “white space”, so growth for claims service companies will come from taking business from competitors.

A recently-released analysis of workers’ comp claim frequency tells us what we’ve known for years – the percentage of workers that gets hurt on the job has been and continues to drop.

Yet one major insurer indicates there are warning signs that frequency may be ticking back up, albeit in a tightly defined sector of the economy. More on that below.

There are many theories about why frequency has declined for decades – more automation, more emphasis on safety programs and loss control, less heavy industry here in the US, low investment in infrastructure leading to fewer jobs doing heavy construction. Many theories, but I have yet to see any credible research into exactly why frequency is declining.

This is one of those data points that is enormously important, yet it doesn’t get enough attention. So, here’s the skinny.

Claim frequency is a percentage  – the number of injuries compared to premium dollars or FTE workers. Therefore the number of work comp claims is driven by the denominator; if premium or employment goes up, that can offset a decline in the percentage of claims.

But employment is about maxed out, so any changes in the percentage of claims will closely mirror the actual number of claims.

Another way to track the number of claims is to compare it to Federal data on the actual number of occupational injuries and illnesses. The graph below shows that the actual number of claims per 100 workers…

You’ve already figured out that the graph ends in 2013…so what about the intervening years?  Fortunately NCCI provides ongoing research into just that here.  When you dig deeper, we learn that total frequency dropped almost one-fifth from 2011 to 2016, led by office and clerical job classes.

As we learned at AIS in May, NCCI estimated frequency declined another 6 percent in 2017; the average decline over the last two decades has been 3.7 percent.

But.

Last week the Hartford announced it is seeing early indications of an uptick in claims volume. Chairman and CEO Chris Swift said [emphasis added]:

“workers’ compensation 2018 frequency trends are elevated from expectation…

our frequency in small commercial and middle market has turned positive this year. Based on our business and economic analysis, we view this trend as broader than just our book of business.…

Many businesses are struggling to find qualified employees and beginning to add more new workers to their payroll, generally increasing the risk of workplace injury versus what it would have been say a year or two ago.

Additionally, the tightening labor market produces more hours work for employee often resulting in fatigue and less training time compounding the risk of injury for the less experience workers.

Our uptick in frequency change has been moderate turning positive on a rolling 12-month basis. The actual frequency levels are now comparable to what we experienced in 2016 which is a very manageable shift in a book of business as large as ours.

The frequency increase is more pronounced among less tenured employees and it can be several times that of experienced workers.”

Notably, the Hartford attributed a 3.5% increase in Accident year combined ratio for its middle market business to this increase in frequency.

Couple of key points about this.

1.  The Hartford is the largest national seller of work com policies to small employers, and thus has the broadest lens.
2. As a major writer, it also has lots of dollars to invest in business analytics – so it knows more faster than many insurers do. This from Hartford President Dough Elliott:

we have now installed a new claim platform over our 5,000 desk throughout claim. And the ability to access what I’ll call structured data and to slice and dice and be on top of it and to look at your metrics and watch your trends is much advanced from where we were five years ago. And so we have monthly and weekly discussions but we’re sitting on top of trends that candidly five years ago were very manual in nature to try to get our arms around and they were slower than we’d like to them to be.

What does this mean for you?

• This is not unexpected; we are close to max employment; small employers are desperate for workers and don’t have the time/expertise/resources to screen/train/protect those workers.
• Time to look at your data – closely.
• And likely time to dust off those underwriting, safety, and loss prevention manuals.

Over the last decade I’ve worked with over 30 investment firms on perhaps 60 deals.  One question I almost always get is:

Would you buy this company?

And a related question:

What would you pay for this company?

For years I tried to answer those questions, factoring in the company’s service reputation; the uniqueness of it’s services and/or business model; experience of management; value delivered to it’s customers; and a bunch of other stuff.

I finally realized those criteria often had little to do with the “value” defined by most investment firms. And much more to do with Dutch Tulips.

To most private equity firms, “value” is what can they sell the company for in a few years. One would think the selling price would be driven in large part by those other criteria; in many cases, one would be wrong.

Recent valuations of some work comp service companies are – in my view – completely disconnected from the actual value inherent in these companies – actual value defined as the value they bring to their customers and the potential for those companies to grow and prosper.

In fact, what seems more important than actual value is the ability of the seller to craft a story about how the company is going to grow, it’s unique business model, it’s scalability and potential to be a platform to which other acquisitions can be added. This is typically future-forecasting, theoretical stuff based on assumptions thin enough to blow away in the slightest of headwinds.

But more often than not, enough potential investors buy into the story to create a bit of a feeding frenzy, until one agrees to pay way more than that company’s actual value.

I’m far from an investment expert – one look at my personal portfolio will prove that – and in no way am I saying the brilliant folks at private equity firms don’t know what they are doing.  Far from it – these people are doing exactly what they are supposed to do – make gobs of money for their investors.

What I am saying is these firms are rewarded when they sell the companies they bought for a lot more than they paid. That works out really well – if they can find someone to buy it at a hefty markup. At some point the next owner – or the one after that – finds out that the actual value of that company is far less than they thought.

It’s also known as the Greater Fool Theory, or the Dutch Tulip problem. You know the asset isn’t worth what you’re paying, but you’re sure you can find someone else who will pay more than you did.

What does this mean for you?

Beware of tulips. They flourish until winter comes. And winter ALWAYS comes.