70,000+ small businesses have permanently closed their doors.

The demise of big retailers has accelerated, with JCPenney, Men’s Wearhouse, and Brooks Brothers all entering bankruptcy.

Prom wear companies were also hit hard, with Occasion Brands also a victim.

The airline industry is mired in a deep slump, with passenger volumes down to a quarter of pre-COVID levels.

That’s driven by both far fewer flights, and far fewer passengers on each plane.

Air travel reductions affect other businesses…

• taxi ridership and rideshare services
• on-airport concessions, food, retail, and services (these account for 2/5ths of airport revenue)
• hotel and restaurant activity is lower with far fewer business travelers and vacationers
• airplane maintenance requirements are greatly reduced – along with the need for mechanics, spare parts, and consumables (fuel, lubricants, etc)
• airplane orders are way down and many have been cancelled, impacting the airplane industry  – and the thousands of suppliers dependent on it.
  • In June, Boeing had a single order for one jet, while losing 183 orders due to cancellations or likely cancellations.

And energy – in a slump to begin the year, got crushed with fallout continuing.

Its not all bad news; in general larger companies are doing better – if they aren’t in retail, energy, air travel or tourism. Of course exceptions abound; WalMart is doing just fine, thank you as are big box home improvement stores.

For workers comp, the implications are significant;

• lower premiums due to lower payroll
• tougher to return injured employees to work due to cutbacks
• fewer claims require fewer services
• insurers focused on energy, Main Street businesses and retail will be hit hardest

The implications of Mitchell’s acquisition of Coventry’s workers’ comp business are broad, from insight into the future of M&A in workers’ comp services to impact on competitors. (press release is here) Today we’ll dive into a few of the top-line implications.

M&A

The $850 million price was likely driven largely by the network’s profits and sustained position as the work comp PPO industry leader… the PPO is by far the biggest revenue and margin generator for CWC (Coventry Workers’ Comp). The transaction also represents yet another step in the rapid consolidation in the work comp services industry.

Mitchell now owns the number 2 bill review application (by customer base), the largest medical management entity (Genex + Coventry), the largest case management business (a mixed blessing these days), and the dominant network. If it holds onto both PBMs, it will gain the number three position in that sector.

As I noted yesterday, Mitchell is likely off the major acquisition field for a good while. It has to fix its PBM business, integrate Coventry, develop and implement a customer outreach that ideally will result in more stuff being bought by more customers, ensure Coventry’s distributors (including bill review rivals Medata and Conduent) continue to offer Coventry’s network, all while dealing with COVID19’s impact on work comp and auto claims.

The other big players left in this business are OptumWC (network, PBM, ancillary services), Paradigm (cat case services and management, case management, some network and ancillary businesses), and One Call. The next tier includes bill review/document management company Conduent; physical medicine expert MedRisk and myMatrixx (number 2 PBM, both are HSA consulting clients).

I don’t see any of these entities scrambling to react to the deal; they’ve known about it for months, and outside of Optum and Conduent any impact is tangential.

Networks

Coventry’s PPO is the industry leader – and has been for decades. It has the most market share, is rated highest by customers, and its policy of demanding top billing in any state (primary network status) remains secure. Expect Genex to invest heavily in the PPO. This will secure its leadership position and hold off competition from newer entrants – primarily Optum.

Bill review

The market’s perception of Coventry’s bill review function indicates room for improvement. The chart below shows how BR buyers rated the top bill review entities’ customer service in a survey I conducted two years ago; service is THE key metric. [shoot me a comment if you want a copy of the survey, the comment won’t be published]

As I noted yesterday Conduent handles much of Coventry’s bill review; How Mitchell will address this is an interesting question.

If you’ve got additional questions, leave them in the comments section and I’ll do my best to get answers posted.

What does this mean for you?

Smart acquisition at a very good price makes Mitchell the leading entity in workers’ comp services. I wouldn’t worry too much about Mitchell gaining too much market power.

After almost 5 months of negotiations and COVID19-related delays, Mitchell International owns Coventry Workers’ Comp.

The price was around $875 million, with most of the value based on Coventry’s work comp PPO. The network is a cash machine, has been the industry leader since it started the work comp PPO business, and so far is holding off a new competitor – Optum – without too much difficulty. Press release is here.

Sources indicate Coventry will report up thru Genex, with current president and CEO Art Lynch staying on in that role.

Long time readers will recall Aetna tried to sell Coventry six years ago, an effort that failed due to what can only be described as ignorance on the part of Aetna; whoever was responsible for the deal didn’t understand that network contracts were the linchpin.

What’s next?

Way back in March I dug into this in detail, here’s an edited excerpt:

Now that Coventry will be owned by a workers’ comp entity run by people who know workers’ comp, I’d expect a pretty significant investment into the core asset – the PPO.

That will undoubtedly include building and staffing a network contracting and management capability – from scratch. In the interim, one can assume M/G will use Aetna’s technology and perhaps contracting/credentialing resources until it has completed building a network management capability. M/G will do everything possible to build that network management capability quickly and well.

Quick takes

Mitchell is likely out of the acquisition game for some time. Digesting Coventry while battling thru a no-end-in-sight COVID crisis is going to consume management’s time and focus.

If anything, the company might sell it’s PBM business, a move that would free up management time that’s been focused on a business that has been rather challenged – and generate cash to pay down older and quite expensive debt.

I know, combining Coventry’s PBM – First Script – with Mitchell Pharmacy Solutions would create a third significant player to compete with Optum and myMatrixx. But…

• First Script has suffered from chronic under-investment,
• Express Scripts (myMatrixx’ parent company) provides First Script’s pharmacy network,
• the work comp PBM business is brutally competitive,
• selling the PBM businesses would free up cash to help lower debt, and
• management time is needed to
  • integrate the rest of Coventry’s assets,
  • strengthen the network,
  • figure out what to do about Coventry’s bill review operation (most is handled by Mitchell competitor Conduent) (myMatrixx is an HSA consulting client), and
  • manage thru COVID.

It is possible Mitchell will hold onto the PBM, but there isn’t a compelling business case. And no, the “bill review and PBM synergy” argument isn’t it.

Bill review

Coventry’s bill review function runs mostly on Conduent’s platform. This will (very) likely change – the question is when.

Mitchell will want to cut costs and increase cash flow by switching customers over to a Mitchell platform. That is no simple task; systems connections and data feeds are business-critical; state reporting; integration with UR, claims, and financial systems as well as external vendors and other entities are notoriously complex and will take quite a while to build out.

This:

• in an industry that chronically under-invests in IT, and
• at a time when insurers and TPAs are staring a in the face of a 20% reduction in claims volume and accompanying drop in premiums.

What does this mean for you?

Consolidation continues, Coventry’s network should get better.

Tomorrow – a deeper dive into implications.