First, WCRI’s annual meeting is coming up quickly.  The fine folks from Cambridge Mass have added a second panel on opt-out.  You’ll hear from a regulator, employer, workers’ advocate and industry spokesman after listening to a “point-counterpoint” from two of the leading experts on opt-out.

For anyone who’s remotely involved in or affected by work comp, this is a must-do; you’ll get a solid education on one of THE key issues in workers’ comp.

Second, Tennessee’s adopted the ODG treatment guidelines and formulary; they go into effect Monday. More precisely, as of 2/28/16, the formulary applies to refills of scripts written before 1/1/16.  For newer prescriptions, the effective date is August 28, 2016.

Tennessee becomes the fifth state (after WA, OH, TX, OK) to adopt a drug formulary; perhaps a dozen others are working on formularies.

I’ve been far from diligent in posting of late – now that a couple projects are almost wrapped up, thing should get back to normal.  Thanks for your forbearance!

Back from vacation and catching up on all the goings-on; some pretty big news out of California re work comp these days…

We’ll start with the highest impact news, and that is the California Supreme Court’s “decision” to let stand a lower court ruling that the IMR process is not unconstitutional (sorry for the double negative) AND that the IMR process does not violate an injured workers’ due process rights.

While there remain constitutional challenges to the IMR process, the Court’s decision to not review the lower court’s ruling implies these other challenges may face a similar fate.

Implication – business as usual for California.  As Court rulings supporting the IMR/UR process continue to pile up, it’s becoming increasingly clear that IMR is not going away.

Serendipitously, CWCI just released its latest analysis of IMR outcomes for 2015 (they work fast out there in Oakland!).  Here’s the need-to-knows:

• IMR letters increased 19% from 2014 to 2015.
• Turn-around-time (TAT) is pretty stable – and a lot faster than in 2014
• UR decisions were upheld by IMR 88.6% of the time – essentially identical to previous results.
• Drugs were the leading category of service appeals yet again, with opioid scripts topping the list as the drug class most-commonly appealed.  88% of denials were upheld.
• Compounds accounted for 11% of requests; denials were upheld 98% of the time.
• 10 physicians accounted for 34,700 IMR decisions – 11.8% of the total

Implication – Many docs are not learning – or are willfully ignoring established precedent for medical necessity/appropriateness.  The 10 docs who average 10 letters for every calendar day are jamming the system with futile requests, knowing full well that 9 out of 10 will be rejected.

Why?

As California moves to adopt a formulary next year, we may well see a rise in IMR requests when these unteachable docs continue to prescribe drugs that are inappropriate.

Thanks to Bob Young at CWCI for the heads’ up; CWCI’s take on the Court case is here.

Another item worthy of your attention – Congratulations to Rick Victor PhD; the founder and former Executive Director of WCRI has been named a Senior Fellow at the just-established Sedgwick Institute. Rick is a good friend and one of the most honorable people I know. It is great to see he will stay involved in the industry.

Just realized I’ve yet to post my annual Top Ten Predictions for Workers’ Comp – my apologies!

Here we go…

1. The comp market will soften pretty much everywhere*.
   As rates continue to come in flat or a few points down, the equity markets flounder about, and interest rates stay low, there’s going to be more capital than places to put it. So, expect work comp insurers and insurance funders to keep looking to expand market share – which will keep rates low.
2. *Except in California, where rates are up – and will stay there.
   The uncertain regulatory and judicial environment – at many levels and dealing with many aspects of comp – has made just about everyone nervous indeed about the financial future of the industry. Until there’s some clear direction and these ridiculous court cases are put to bed, the market is going to push prices up and availability down.
3. Liberty Mutual will continue to de-emphasize workers’ comp.
   Which, given the company’s improved financial performance of late driven by personal lines’ profitability coupled with off-loading a huge chunk of legacy claims liability to Berkshire Hathaway, is a smart move.  However, this does open up opportunities for other insurers and those looking to deploy capital.
4. Private equity’s role in the vendor market will decrease – a lot
   After years of intense interest, private equity investors’ interest in workers’ comp is waning rapidly.  There are several reasons for this, including the most obvious – the market has been over-heated for far too long.  In addition:
   1. Upheaval in the credit markets makes debt financing a lot harder to come by – and somewhat more expensive.
   2. The past consolidation means there are fewer decent-sized assets (>$10 million in EBITDA) to buy
   3. Strategic buyers are winning more of the deals because they can generate more earnings thru consolidation – United Healthcare buying Catamaran (owner of Healthcare Solutions) and Helios, EXAM buying various small companies, Xerox acquiring Stratacare, York buying MCMC are all examples.
   4. Partially due to strategics, prices have been historically high for a very long time. Double-digit multiples are likely unsustainable for much longer – and certainly not in a PE-driven marketplace.
   5. Some recent deals have not worked out so well.
5. A half-dozen – or more – states will adopt drug formularies
   Here’s hoping they integrate formularies with utilization review and a very solid and efficient review process.
6. Opt-Out will not gain much traction
   The bad behavior of bad actors will significantly hamper efforts to advance opt-out legislation.  That, and the lack of any real problems in most states’ workers’ comp systems.
7. We will see a couple/several bundled payment pilots
   Gaining traction rapidly in Medicare and the group/individual health businesses, we can expect bundled payments for orthopedic care to take place in several locations. Initial reports indicate Illinois (!) and – of course – California may be on the leading edge.
8. PBMs and payers will make even more progress reducing the use of opioids
   The work comp world has a lot to be proud of here.  After years of enabling opioid use, we – all of us – are doing a much better job stopping initial scripts, working to wean long-term users off opioids, and thereby really helping people and companies. Expect opioid use to drop again in 2016, especially for new claims.
9. A couple of large, vertically integrated delivery systems will make significant moves into occupational medicine
   Work comp pays well (in most states), is a feeder for orthopedics, gets insured people into the health system, and diversifies revenue sources.  Delivery systems are looking for diversification, and their large infrastructure lends itself well to work comp.
10. There will be big changes at OneCall
    With debt trading in the low eighties, pressure from debt holders on owners and management to deliver the numbers, management shuffles and continued challenges with customer service, I expect OCCM will go thru some significant changes this year.

That’s it – and I’ll check back in this summer to see how I’m doing.

What are your predictions?

is Dale Wolf.

Wolf, OCCM’s executive chair, was named CEO yesterday after serving as the interim CEO since Joe Delaney’s departure last summer.

Wolf’s history includes a stint running the small group health insurance business at the Travelers (where he was a client of mine), a series of progressively responsible executive slots at Coventry Healthcare, and a couple years working in the private equity world. Wolf’s tenure at Coventry concluded with former CEO Allen Wise removing his former protege from the CEO position after a series of underperforming quarters due to high medical loss ratios.

The announcement came after OneCall’s sales meeting in Jacksonville where close to 300 sales staff heard about a realignment that reportedly reflects a shift from field to corporate sales.  While many will not be directly affected by the change, the overall mood was, according to some, “muted”.

Word is OCCM will soon have the vacant CFO position filled, the last of the executive slots sitting open.

Where the company goes from here is a great question, and one of intense interest among OCCM’s debt and shareholders.  With its debt reportedly trading well below par and returns in the mid-teens there is, depending on your perspective, significant upside or a lot of risk.  Much will depend on the ability of leadership to staunch the bleeding from Align as that subsidiary is coming off a tough year with significant client defections; more are rumored over the next few months.

Meanwhile, changes in state fee schedules for imaging, especially in California, have reduced the profitability of that business line somewhat.  It remains to be seen if other states follow suit, although I do NOT expect future changes to have anywhere near the impact of California.

The net is Wolf has a tough row to hoe indeed.

Earlier this month the fine folk at CWCI published a two-page briefing on NAIC’s workers’ comp insurer financial returns.  One could be excused for thinking the document detailed halcyon days of overflowing corporate coffers, treasuries stuffed with profits gleaned by jacking up rates and screwing employers and patients.

Shockingly, despite two terrific years of solid financial results, the work comp industry is only half as profitable as the rest of American industry.

I know, I was stunned too.

But the numbers don’t lie; US workers’ comp insurers’ 2014 return on net worth was 7.5% – while the US industry average was 14.3%.

And that wasn’t atypical. Over the decade ending in 2014, work comp insurers’ delivered an average return on net worth of 6.8% compared to the all-industry average of 13.9%.

Digging deeper into the numbers, there were only two years where WC hit a net worth return in the double digits – while the rest of US industry did that  e v e r y year.

Now, thanks to ProPublica, we KNOW you work comp carriers are totally and completely focused on jacking up profits by screwing workers. Clearly, you guys and gals are just NOT getting it done.

What does this mean for you?

Time to get cracking!

The NAIC report is available here.

Investors focused on the workers’ comp network and specialty managed care businesses are a bit obsessed with “white space” – the “potential” business, the “opportunity” to capture unmanaged services, to get patients to network providers and thus deliver lower costs to payers and fees for networks/specialty vendors.

During management presentations, potential investors are smitten by the unmanaged care, seeing that as the growth they need to increase the value of the company they’re bidding on.

White space is the term used to describe the volume of services delivered to workers comp patients that are outside the networks used by the employer/insurer.  As these “non-network” services aren’t priced at a contracted rate, there is no reduction below the fee schedule or state-set reimbursement rate.  No reduction, no savings; no savings, no fee paid to the network vendor.

About 65% of medical services provided to patients are “in-network” – leaving about a third of spend – or around $11 billion in medical costs – unmanaged.

When potential investors look at “unmanaged” services, they see upside, return on investment.  What they may well not see is the reality – there’s a reason that space is “white”.  Employers, TPAs and insurers have been working since about 1991 to increase network penetration.  They’ve tried lots of approaches and generally had pretty good success, especially in states where employers can require patients to go to specific providers or choose from a network.

All the easy stuff has been done – now the real heavy lifting is needed.  Increased penetration will come from:

• educating small employers (a huge challenge),
• working with primary care providers to refer in-network (when work comp accounts for a very small piece of their business)
• faster claim reporting, triage, and acceptance
• reducing litigation
• broader networks (but this means some providers will be not-so-good)
• more effective, precise, and fool-proof medical bill processing systems and workflows
• better provider data – much better

A good way to think about this is that each incremental percent of network penetration takes twice as much work as the previous percent.

That doesn’t mean it isn’t possible. In fact there are some specialty vendors, employers, and insurers making significant progress.  These are the careful, thoughtful, analytical companies with very well-developed workflows and a very deep understanding of state regulations, provider behavior, employer limitations, and a lot of people working this every day.

There are others that are stumbling badly – not so much because they don’t know what they are doing, but because actually doing it is really hard, complicated, and requires investment.

And that highlights one of the challenges investors have with work comp.  The private equity world is used to automation, stripping people out of processes to improve performance and cut cost.  That doesn’t work so well in workers compensation.

What does this mean for you?

If it was easy, it would already have been done.