While it may be a bit premature, I’d suggest it is never too soon to being thinking thru the potential implications of a deal of this magnitude.  

Let’s do a very quick review of market changes, then jump into some detail on the network issue – we will look at other aspects in future posts.

The workers compensation medical management market is going through a period of rapid consolidation across all segments.  There are now five large PBMs; three years ago there were eight (plus two much smaller ones).  Bill review application companies now number four (mcmc, Medata, Mitchell, Xerox); four years ago there were eight.  (this does not include CorVel, it does not sell access to its application) There are now two PT firms; last year there were three.  The sector that has changed the most is IMEs; EXAM is now the biggest player, with its competitors far behind in terms of revenue and market share.  Similar consolidation has occurred in DME/HHC, transportation/translation, and other segments, and this will continue.

The work comp PPO landscape looks markedly different.

Coventry is still the big kahuna, but the gap between CWCS and competitors has narrowed considerably.  The expansion of other PPOS has been a major reason; Procura, Magnacare, Anthem, Prime, Rockport, MultiPlan are all bigger and have more share than they did a few years ago.  Other Blues plans have expanded into the comp network business (or expanded their existing WC PPO).

Simultaneously, Coventry’s PPO has weakened.  It has been increasingly difficult to get meaningful discounts from health systems and facilities, long the biggest driver of Coventry’s success.  That’s due to the consolidation of the provider marketplace and a lack of emphasis on WC on the part of Aetna (and pre-Aetna) provider contract negotiators.

For workers comp payers, big PPOs are the big “savings” driver, yet the biggest of the PPOs is losing its ability to deliver “savings” while its competitors are getting more competitive.

Way back in the day, Coventry used its leverage with the Federal Mail Handlers’ Program along with PPO HMO and Medicaid lives to negotiate discounts with providers – discount arrangements that included workers comp.  Recall total work comp spend is just about 1 percent of total US medical spend; governmental programs (Medicare and Medicaid) alone  are over a third of US health care costs.

While sources indicate Aetna has committed (not sure that is the right word, and may be too strong) to support the PPO re-contracting process for two years, this is one of those times where actions speak louder than words.  As noted yesterday, Aetna just inked a network deal with a relatively small health system in northern California which does NOT include work comp – but does cover medicaid, medicare, group, individual, and other health insurance.

More significantly, Geisinger and Aetna signed a major agreement earlier this summer that also excluded workers comp. Geisinger is the dominant health system in central PA; a very-well-regarded operation with a great reputation and outstanding quality (disclosure, I did a brief consulting stint there some years ago).

And this means…what?

By far the biggest contributor to CWCS’ value is the PPO.  It generates (or perhaps more accurately generated) at least $200 million in cash flow and provided Coventry with the leverage to get payers to use its PBM, case management, bill review and other services.  Clearly, that cash flow is, if not already significantly reduced, at some considerable risk.

That factor alone is why ALL the financial buyers I spoke with (several of the largest private equity (PE) firms) did not pursue the deal – they were very concerned about the long-term viability of Coventry’s PPO.  While the historical numbers looked good, none were convinced the PPO would continue to deliver those results going forward.

Without the market leverage and total commitment of Aetna, it is difficult to see how Coventry can maintain its lead over other work comp PPOs; its negotiating leverage with providers will be based on work comp, and work comp only.

APAX will pay something like $1.5 billion for Coventry’s work comp division.  I’m very sure it will have a very good communications plan, a well-developed strategy, and some talented and experienced people focused on this.  That’s all well and good, but – as other WC PPOs know very well – without the market leverage of a major national health plan, the real negotiating power will be on the other side of the table.

NCCI’s recently-released report that indemnity claim frequency dropped another two points last year is just the latest indication that the market for traditional managed care services is shrinking.  

Fewer claims = fewer services needed = fewer bills; less need for UR, case management, and related services.

Sure, severity is increasing, so there may be more utilization for a subset of claims, but this is not likely to offset the structural decline in frequency that looks to be baked in to workers’ comp – frequency is down over 50% over the last two-and-a-half decades.  And yes, cost-shifting from providers scrambling to deal with tighter controls from private payers and reduced reimbursement from governmental payers will increase providers’ efforts to get more revenue from work comp payers.

Meanwhile the supplier market is consolidating, and managed care vendors are scrambling to capture enough of the shrinking market to survive the coming shakeout. If APAX/Genex/OCCM buys Coventry – which looks increasingly likely – they will control the largest network, case management company, PT vendor, DME/HHC vendor, and imaging network; one of the largest (albeit fading) bill review entities, a big PBM, and a ton of other services  – MSA, UR, peer review, IME.

Some may think the FTC may find this dominant position a bit too much and not allow the transaction.  I disagree; no one in DC cares about workers’ comp, there are many other networks out there, many other bill review entities and specialty managed care providers, and this is an election year and the focus certainly isn’t on a relatively small industry.

The implications are rather significant.  Leverage is all-important – and I don’t mean the financial leverage but the customer leverage.  With all these services, it would be surprising indeed if AGOC (APAX Genex OCCM Coventry) didn’t encourage payers to buy everything from them in return for discounts on some/most/all services, enhanced reporting, integration services and technology and/or some other incentives.  Some buyers, already hard-pressed by reductions in staff, low IT budgets, and increasing demands for more “savings” and higher network penetration might find it hard to resist such a pitch.

The pitch would be compelling – more cost reductions and less hassle at discounted fees.

The trade-off would be ceding effective control over medical costs to a third party, one with arguably different incentives and motivations.

That alone will give many pause, as well it should.

For those who say I have a dog in this fight, you are correct.  I work with several entities that directly or indirectly compete with these entities, and that is by choice.

More to the point, I also work with several very large payers on various aspects of medical management, and my opinion is control over medical management MUST reside with the payer. 

What does this mean for you?

Workers’ comp is a medical business.  Three-fifths of claims costs are medical, and that’s going to be two-thirds very soon.  It makes no sense to outsource two-thirds of your costs to a third party.