I’m thinking yes.

Here’s why.

The economy recovery is uneven at best. Auto manufacturing is hamstrung by scarcity of parts and a steel shortage, construction by not enough sawmill and timber workers, and many sectors desperate for parts lamenting the scarcity of shipping containers.

Hotels, restaurants, cruise lines and airlines are still a long way from pre-COVID revenues.

Supply chains will straighten out, demand will drive up wages for workers in key sectors, and that will drive increased employment.

All that may well increase occupational injuries.

from Foresight…

As “injury-intensive” industries such as manufacturing, logistics, energy, and construction staff up and accelerate production to meet rising demand, they will:

• hire inexperienced workers,
• hire temp workers,
• increase the speed of work,
• have less time to train, educate, monitor and protect workers, and
• increase overtime.

All this will increase the likelihood of injuries.

Add in rising employment, and you get more claims – and likely higher average severity.

That’s bad news for workers, employers, and insurers – but good news for TPAs and service companies.

Expect you’ll hear a lot more from NCCI Chief Actuary Donna Glenn in today’s Annual Issues Symposium.  Will be reporting on the first day of the AIS tomorrow.

What does this mean for you?

Success favors the prepared.

Here’s how to think about price and service. Hint – getting it right requires taking the time to dig deep…

Commodities vs specialized services

All “services” are NOT created equal. Some are commodities – drugs, facilities, PPO networks, and some other types of medical services/treatments. These are usually – but not always – best bought from a big company with big buying power.

Pharma is a great example. Buying power is king – generally speaking, the bigger the PBM’s non-WC business, the better the price. Workers’ comp represents a tiny fraction of total drug spend – as in less than 1 percent. PBMs that aren’t owned by a PBM with a lot of group health, Medicare Part D and Medicaid business have to buy drugs through a third party, adding cost and complexity to each transaction and complicating communications.

In contrast, specialized services aren’t uniform; think clinically-oriented services, those delivered to high-need patients e.g. powered wheelchairs, medical bill review. These aren’t “vendor size dependent.”  That is, what matters is NOT the buying power of the supplier, but it’s customer-centricity, depth of knowledge, flexibility, and adaptability.

The power wheel chair has to be the right weight carrying capacity, have the right functionality, fit thru the right width and height, and meet the user’s functional restrictions and limitations. These are one-offs, customized (or manufactured in very small quantities, then customized) for each individual.

Okay, that’s one part of the equation…but just one. There’s more to this than just theoretical buying power.

Ownership – Investor vs Strategic

This can have a major impact on the level of service – but it may not be what you think.

Some of the vendors owned by investors have a smart long-term plan, are well-managed, and not overly burdened with debt (which can suck up cash flow needed for staffing, training, IT, product development…).

Unfortunately others have none of the above…and I’m sure you know who I’m talking about.

Then there’s those WC services companies that are owned by another company (generally called a “strategic” buyer as opposed to an investor or “financial” buyer). In most instances, the WC services company is a small part of a much-bigger organization. If the WC company is lucky indeed it may get the attention and commitment of the parent’s senior execs. The execs help by leveraging the parent’s assets, skills, and buying power to help the WC subsidiary succeed.

More often, the WC subsidiary is treated like just another asset, albeit a very small one. Senior execs are focused on their main business, and the WC sub is a distraction, gaining attention only when quarterly earnings reports are due. WC is a line item of interest only as a source of cash. The result is chronic under-investment, declining service and loss of key staff, tremendous pressure to maintain pricing and an inability to innovate and improve.

The industry is littered with now-gone-but-once-good companies that were bought by huge group health entities or big investors that proceeded to screw them up until they all but disappeared.

Netting it out

Huge companies have the ability to delivery the lowest price for commodities, driving value for their WC subsidiaries.

Some WC subsidiaries pass those prices on and some don’t. It’s not the type of owner that matters, rather does the investor or strategic owner have a plan, is it focused on the customers’ needs, and how well does it execute that plan.

Similarly, some big companies can and do deliver great service, and many smaller ones do as well.

Others, not so much.

What does this mean for you?

Assumptions are always dangerous – especially when they drive major buying decisions. 

It has been a while since we checked in on OneCall.  The investment community’s level of interest seems to be rising as I’ve had several calls from investment firms of late, all seeking information on what’s happening and what the future holds.

Here’s a quick summary of what’s happened since OneCall was “recapitalized” late in 2019, a last-minute move by a few investors that may well have saved it from bankruptcy.  You may recall that the company had a huge debt burden that was hoovering up cash flow at a frightening rate; as a result the equity investor agreed to “sell” OCCM to ADD here.

Revenues and customer gains/losses

Like most workers’ comp service companies, OCCM took a major hit last year, with revenues reportedly down 15% from 2019. Earnings suffered as well, although with all the accounting gymnastics I’m not sure there’s a way to compare 2020 (post recap) to 2019.

Also like most workers’ comp service companies, things have gotten better as the economy has improved. Revenues are reportedly up, which is a good thing.  Several sources indicated OCCM is claiming it is gaining “new business”. I contacted OCCM to ask about new business; this was the response:

As a matter of policy, we do not discuss customer agreements externally.

Okay, I’m a bit confused as a company exec reportedly told “external” folks about new business. Perhaps there are different types of external discussions.

S&P reported “the company ended 2020 with new net wins of $35 million, compared with net new losses of $54 million the prior year, which will translate into incremental revenue in 2021.”

So, I asked several contacts in the service sector about recent client moves to OCCM; one indicated OneCall picked up about $3 million in additional revenue from the Travelers through the HealthESystems pipe.

If that is in fact the case, it is certainly a credit to the organization. Any company that can lay off some sales personnel, reduce salaries and titles for others, and add new business is darned impressive.

However…one has to balance new business against business losses. On that front, things are not so good. Sources indicate OCCM lost somewhere around $40 million of business to competitors last year.

Takeaway – According to S&P,

• One Call added $35 million of revenue after accounting for lost business in 2020.
• S&P also reported the company’s revenues dropped 14% from the previous year.

So, revenue actually dropped by $175 million +/-, while One Call “added” $35 million in net new revenue…which one might reasonably assume means new business from new customers, or perhaps new product/service lines added to existing customers, revenue that may materialize in 2021. Or…something…

Again, outside of the reports re Travelers’ $3 million of PT volume taken from MedRisk, I haven’t heard of any other entities losing business to One Call.

I have heard of One Call losing business, specifically reports indicate Mitchell took CNA ancillary business from One Call and MedRisk captured Acuity’s PT business; MedRisk is an HSA consulting client.

If you know of other transactions, shoot me a comment; all are screened before publication.

Financials

Debt remains a problem.  OneCall appears to be involved in yet another debt restructure process, one that Moody’s states:

will improve One Call’s liquidity profile [cash flow] as it will extend the debt maturity profile while materially reducing the annual cash interest expense.

In discussing OneCall’s current credit rating a month ago, Moody’s (free registration required) said:

One Call’s B3 [Corporate Family Rating] CFR is constrained by its high financial leverage and historical challenges to grow revenue and profitability.

[B3 is defined as “speculative and a high credit risk”; A CFR is a defined as a credit rating assigned by a Credit Rating Agency, to reflect its opinion of the ability of a corporate group to honor all of its financial obligations, as if there was a single class of debt; in other words, the overall rating of a corporation.]

S&P was slightly more positive, (free registration required) upgrading One Call’s ratings somewhat from “negative” to “stable”;

Again, Moody’s…

The affirmation of the B3 CFR reflects a continued improvement in One Call’s operating performance following a decline in revenue in Q2 2020 due to the impact of the coronavirus pandemic on referrals. Since then, a combination of new business wins [??], strict cost discipline, and productivity improvements have helped One Call limit the pressure on earnings and cash flow. Going forward, Moody’s expects further earnings and cash flow growth in 2021.

As noted above, I’m not aware of any material new business wins, One Call would not discuss them, and outside of S&P’s statement, credible reports indicate significant losses of existing business.

[a detailed discussion of the credit ratings and related matters is here.]

What does this mean for you?

I’ll let you figure that one out.