In the work comp world, the easy part is figuring out a better way to do things.  There are a gazillion opportunities for improvement; you could probably list a dozen without breaking a sweat.

The hard part is convincing the people you need to convince to actually make the solution work.

That’s where private equity folks seem to stumble.

They are used to finding a problem, identifying a solution, and relentlessly pushing execution – in technology, logistics, drug development, manufacturing, communications.  The weirdness of work comp doesn’t always – or even usually – work that way. In my experience, many private equity investors don’t “get” that their “solution” will ruin someone else’s business, hurt an exec’s performance evaluation, require IT resources that just don’t exist, and/or solve one individual’s problem while causing another grief.

A couple examples will help.

Reducing medical cost would seem to be a top priority for anyone on the payer side.  Yet managed care execs get evaluated and bonused based on network penetration and dollars saved below fee schedule.  Think about that – the more bills they get, for the more expensive procedures, and the more discounts they get on those bills, the better their performance is.  Meanwhile, medical expenses are going up, but that’s not part of the equation.

When I talk to PE folks about this, they have a hard time wrapping their heads around it.  It’s so nonsensical, so obviously backwards, so counter-productive, they just can’t get it.

Of course, they are right.  But that won’t make them succeed.

Getting adjusters to use specialty networks is another example.  I’ve been hearing about payers’ ostensible motivation to get as many claimants as possible using specific DME, Home health, imaging, and other providers.  The logic makes a world of sense – more control, lower net cost, higher savings and network penetration.

Except, work comp payers are just emerging from a long and very bleak soft market that lasted for a half-decade. Declining revenues, bare-bones budgets, no investment in IT, very lean staffing and very cranky stockholders/investors/owners have made for an industry that is very focused on turning a profit – and investing in new systems, new programs, and new business processes is not a priority.  Moreover, what is important to the specialty network investor is rather less important to the payer; DME HHC imaging account for less than 10% of medical spend.

Generally speaking, work comp network penetration (based on dollars) is about 62% nationally, and gross savings are about 11%. So, if one improves penetration by 30% (to 80%), and doubles savings on 10% of total spend, savings will increase just a bit less than one percent.

Compelling for the vendor, but less so for the payer.

What does this mean for you?

Be realistic and understand – REALLY understand – the market, the buyer, and the decision processes in the market and among the many buyers.

It’s not regulators, employers, providers, or insurers.

It’s not judges, advocacy groups, or bloggers. Not employment changes, on-shoring, infrastructure investment or Obamacare.

It’s private equity.

There are dozens of PE firms looking hard at this business, with many heavily involved in bidding on past and present opportunities.  There are several reasons for this interest;

• other PE firms are interested, and there’s a bit of herd mentality at play here
• investors are increasingly leery of health care/insurance sector plays focused on care regulated by PPACA; some functionary at CMS could blow up an entire business model by changing a few words in a few regulations, and that’s just too risky.
• the deals are getting bigger – much bigger.  Some PE firms don’t play in the hundred million to a few hundred million dollar range; as the deal size grows the mix of firms involved does too.
• work comp is STILL seen as an aging, creaky dysfunctional industry ripe for process improvement and increased efficiency.

This last bullet is to the point.  The more that these PE firms are involved, the more they will seek to modernize the industry.  While the founders, and initial investors in work comp firms made their millions navigating thru the mess, and in many cases taking advantage of the very dysfunction that defines workers comp, the new owners have little patience for this, and a wealth of experience squeezing inefficiencies out of systems.

They will engage lobbyists and hire ex-regulators, invest in technology, build strong co-operative relationships, relentlessly reduce cost, and listen very, very hard. And when they act it will be decisive.

Of course it’s going to be difficult and time-consuming and frustrating, but these folks have done this before, and they’re about to do it again.

What does this mean for you?

Things will get faster smarter and more efficient, to the benefit of many and the detriment of some.

 

The days of summer  – and particularly August – being slow for the work comp services business are over – at least for this year.

Word is the North Dakota state fund aka WSI, has chosen PBM PMSI to handle their work comp pharmacy requirements.  The Tampa-based PBM took the business from US Script; with the extractive industries’ employment zooming – and likely claims severity and frequency as well – this should be a nice addition to the portfolio.

CompSource OK – another state fund – is moving/has moved their bill review business to Medata. No official announcement here, and no other vendor lost the business as the inplace technology was a home-grown system.

Given the expected appearance of a “for sale” sign on Mitchell, there’s going to be a lot more action in the bill review market.  No word on Aetna’s plans for Coventry’s BR 4.0 platform, but there’s no doubt the increasingly creaky infrastructure will require some major investment, a complete re-write, or perhaps they’ll just blow it up and move to a current rival platform.

TPA QBE will be utilizing Sedgwick’s for claims adjudication – the TPA will be outsourcing some/a chunk of/most of that work to Sedgwick.  

I’m not in Orlando at the WCI Conference, so no reports from the Sunshine State, at least nothing first-hand.

Enjoy the week.

 

If your definition of “brighter days” is based on higher total premiums, things are looking decidedly sunny.

Factory orders are up significantly, which should lead to higher manufacturing employment.  As these jobs are typically higher risk than average, premiums will be proportionally higher as well.

Other positive indicators include a reduction in initial jobless claims and a healthy increase in private sector employment fueled by construction and trade/transportation/utilities.

If the knuckleheads on Capitol Hill could get their act together and end this stupider-than-stupid sequester, we’d see another 0.5% or more in GDP growth.  Alas, it does not look like sanity will arrive any time soon.

With rates up, employment up, and wages slightly higher, comp’s top line – revenues – will be steadily improving.  

The real issue is claims cost, and more specifically medical expense.  Anecdotal information from discussions with claims execs at several very large payers suggests growing unease about medical trend. Some may chalk that up to comp folks’ inability to ever be completely happy; I’d say they are realistic.

What does this mean for you?

With higher premiums come more dollars to invest in medical management. After hollowing out departments, cutting staff, avoiding IT investment, and counting managed care service fees as “revenue”, payers had best get back to real medical management.