Yesterday’s announcement that Carlyle is acquiring Sedgwick is a clear indication that the work comp services industry remains a favorite of private equity investors.

The transaction, which valued the giant TPA at $6.7 billion, far exceeds the previous record set by the ill-fated One Call deal. It also produced very healthy returns for previous owner KKR; it bought the company for $2.4 billion just four years ago.

A 180% increase in value over a brief four years speaks to Sedgwick’s successes over that period, a clear and compelling growth strategy, and strong belief in management, which remains an investor in the company. (To be clear, a big chunk of this value growth was also driven by two major acquisitions, discussed below)

Here’s my brief take on why Sedgwick sold for so much.

Management

I’ve crossed swords with CEO Dave North in the past, but no one can argue with the success he and his team has delivered. I’ve also come to know several senior management folks, and they are, to a person, impressive.

Strategy

Work comp is shrinking, and TPAs are perhaps the only segment of the industry that will benefit from that shrinkage.  As claim counts decline, more insurers are choosing to have TPAs handle more of their claims.

Sedgwick also increased its internal work comp services expertise and capabilities. One example – the pharmacy management program overseen by Paul Peak PharmD is delivering impressive results.

North et al embarked on a clear diversification strategy several years ago, a strategy evidently designed to continue the company’s growth by dramatically increasing its footprint internationally and in property adjusting. Sedgwick’s acquisition of Cunningham Lindsey and Vericlaim positioned the company to profit from climate-change driven events such as hurricanes, fires, tornadoes and the like.

Wise indeed.

Scarcity

I’d be remiss if I didn’t reprise my comments from a few weeks ago –  there just aren’t that many work comp services assets to buy these days. To be clear, Sedgwick is neither a Pinto or a Gremlin; far from it.

The services industry has bifurcated into really big companies – Mitchell, Genex, Sedgwick, One Call, and relatively small ones – MTI America, HomeCare Connect and the like. While there are several firms occupying the middle ground, overall the number of potential acquisition targets has shrunk dramatically.

Because the big companies are really, really big, relatively few PE firms have the financial wherewithal to buy them.

As a result, when assets do come to market, investors seem willing to bid up prices.

What does this mean for you?

There are ways to succeed and profit in a consolidating, highly mature industry.

 

Paradigm announced it is purchasing Adva-Net, a Florida-based company with a network of pain management providers. While terms weren’t disclosed, word is the price was north of $105 million, a very healthy multiple of earnings.

I interviewed Paradigm CEO John Watts a few weeks back, but decided to hold off on publishing it until this deal was done. Watts, who has an impressive resume including multiple leadership roles in the “real world” (outside of work comp) is impressive; he has a clear strategic vision for the company, knows what he doesn’t know, and appears to understand the critical importance of branding. Quotes are from Watts

We talked about his strategy for Paradigm and the acquisitions the company made over the past year plus – specifically Foresight Medical and two case management firms – Alaris and Encore. In addition, Paradigm just acquired several ‘advisory solutions’ focused on pain management, catastrophic claims, and back care from Best Doctors.

Frankly I’ve long been somewhat puzzled by these acquisitions; NCM is old school, Foresight is anything but (and was wicked expensive).

Before those additions to the company, Paradigm had “a nice longstanding business doing pretty much one thing” – managing a carefully selected inventory of catastrophic claims, and doing so quite well.  Management realized that a sole focus on cat claims wasn’t enough and the company needed to diversify.  Acquiring case management assets, a business that Watt noted is “way more traditional than the cat claim business”, gave that cat claim “operation access to about 500 +/- employed nurse case managers.” Not only did this expand Paradigm’s ability to handle cat cases, it increased it’s customer footprint, provided a training ground for cat nurses, and added some “synergies” – management speak for reducing overhead expenses like management, finance, and HR.

Going forward, Paradigm “wants to stitch together assets with the ability to take risk in complex acute situations to manage clinical outcomes…[the company will likely handle] more types of catastrophic conditions while also moving into lower severity claims.” Alaris and Encore (Paradigm’s NCM firms) help them do that.

Foresight was another acquisition; I asked how these services align with Foresight.

Foresight stands on it’s own. According to Watts, it has a “Strong focus on implants, cost and quality…Foresight is also building a high performance orthopedic network using data analytics.”

In the near future, expect Paradigm to be a “big player in the musculoskeletal space.” The company (again this was several weeks ago) was “in an acquisitive place now.”  Going forward, the plan is to focus on becoming known as expert in managing ortho surgery care…first, couple [Foresight’s ortho network] services with NCM, then add catastrophic services.”

At the end state, expect Paradigm to handle a defined bundle from point of injury to back to work.

Future expansion will likely include a “front end solution on musculoskeletal condition to help clients avoid unnecessary surgeries” and the tools to do that.

So, Paradigm is focused on adding depth and breadth to the solutions it provides work comp payers – adding services to help with less acute claims, and broadening its capabilities to handle more of the claim medical service spectrum.

In this context, Adva-net will add a pain management provider network. After a rather prolonged development period, the company’s earnings recently ramped up significantly. The business model is primarily a traditional percentage of savings arrangement – the more services delivered, the more dollars earned.

The acquisition brings another specialty-focused business, some additional customers, and a provider network to the Paradigm portfolio.

The acquisition was expensive, but as the company has shown with Foresight, it isn’t afraid to pony up the bucks when it sets its sights on a deal.

My take.

Paradigm is intelligently diversifying and has a coherent and promising strategy. That said, I still don’t understand the prices paid.

A totally unqualified person has been appointed to California’s Workers’ Compensation Appeals Board. The person in question is not a work comp person, legal scholar, labor advocate, or claims expert, but an 80 year old retired music teacher whose sole regulatory experience is a brief stint on the Alcoholic Beverage Control Appeals Board.

Mr Gaffney, undated photo from facebook

Mr Gaffney has no apparent experience, education, or training that in any way qualifies him for any role in the workers’ comp system, much less a role as significant as an Appeals Court Judge. He is a high school classmate of retiring Gov Jerry Brown, who reportedly ran into Mr Gaffney at an event, and after a discussion decided to help him out by appointing him to a very lucrative position.

The California Applicant Attorneys Association seems to think this is a good idea, citing Mr Gaffney’s “heart”:

Getting beyond legalisms and into the heart and humanity of the workers we represent could be music to our ears.

I don’t see the logic behind the CAAA’s statement that Mr Gaffney’s decades of involvement in choral music mean he is a “person who has dedicated himself to the hearts of ordinary people – working class immigrants.” Sounds like he has dedicated himself to their ears, not their hearts…

If intrinsic goodness, love, dedication to the downtrodden, and pureness of heart are key criteria, the sainted Mother Teresa would be a perfect candidate.

Further, this is an Appeals Board – one where Mr Gaffney will be involved in decisions that will set precedent. Where he will have to adjudicate complicated issues around causation, apportionment (!), penalties for unreasonableness, assignment of liability, exclusive remedy and the like.

This is really complicated stuff that attorneys with decades of experience struggle with.

No matter how wonderful one’s heart is, it is no substitute for knowledge and experience.

If you are hurt on the job and have a disagreement with your employer about your claim, you very much want the arbiter of that disagreement to:

1. Know a lot about workers’ compensation
2. Have a lot of experience dealing with cases like your’s
3. Understand the laws so they can give a final ruling that won’t keep you in limbo

If the arbiter isn’t all of the above, you may well be treated unfairly, have your case appealed to an even higher court, and not get things resolved for years.

What does this mean for you?

The appointment will be reviewed by the California State Senate Rules Committee.  Encourage this body to reject the appointment. 

 

Claims counts are continuing to decline. That’s good news for employers and taxpayers, but not-so-good news for the businesses that service claims.

Ok, counts aren’t falling as fast as that sheep, but you get the point.

Here’s what this means for you and others…

For TPAs – Good news indeed – as counts decline, more insurers are choosing to have TPAs handle more of their claims. That new business is great, but…

That “but” is this – the claims business is going to become ever more competitive.  TPAs are going to have to get a lot more creative than figuring out new ways to charge for bill review and network access. Predictive modeling, narrow network development and operation, outcomes assessment are all paths to take. But become especially adept at taking over claims, because…

Smaller claims staffs = more flexibility for insurers and lower admin expenses.  It is much easier for carriers to adapt to changing markets when they don’t employ their own claims staff.  It also keeps their unallocated loss adjustment expenses lower, allowing them to be more competitive.

Those carriers also don’t have to worry (as much) about investing in new systems, processes, applications or technology when the claims are handled by a third party. This addresses one of the biggest problems in work comp – insufficient (to be kind) IT budgets.

Service companies – investigations, case management, peer review, IME, you name it – are all fighting over a shrinking pie. In this very-mature market, there just isn’t enough business for everyone, so competition is brutal.  Margin pressure, the buying power and IT security resources of very large competitors, the increasing demands made by large buyers are making it tough for smaller suppliers to grow and expand.

Technology firms – bill review, UR, claims and others – are kind of in the middle. If their tech can reduce expense and be implemented with a high chance of success and relatively low expense, they may do well.  But these companies recognize that IT budgets are tighter than ever, and they MUST be creative around pricing, be clear about deliverables and assume as much of the implementation and maintenance as possible.

Brokers and consultants – you’ve got a choice to make. Either skate along, get carriers/TPAs/vendors to cut prices to the bone, and show your employer clients what a great job you’ve done…or keep pushing for value – fewer injuries, faster return to functionality, lower total claims costs, lower medical expense.

What does this mean for you?

Success favors the prepared.