Cuts in workers comp insurance rates continue. From California to Florida, premiums continue to fall, driven by a decline in claims frequency and lower costs brought on by reforms and stagnant wages.
The latest announcement came from Florida, where rates have declined 60% from their peak in 2003 (after major reform). Ths Sunshine State is not alone; Pennsylvania is yet another state with rate cuts scheduled for 2008.
There are several factors driving down premiums – claims costs appear to be moderating with medical expense predicted to stay in the single digits. Investment income was looking pretty solid (until recently). Competition in many markets served to force insurers to keep rates down or risk losing big chunks of market share. And the mix of business continues to shift towards lower-risk industries as construction activity tapers off, there are fewer goods in transit, and manufacturing and industrial firms see a decline in purchasing.
So where does it stop?
A better question is what are happening to the underlying drivers. I’d opine that there are two major factors that will lead to a hardening of the market in the near future.
Medical trend in the group world is approaching double digits. Historically the work comp medical trend rate has been somewhat higher than group trend; I see nothing that indicates that has changed.
The investment market has imploded, likely driving down the value of the funds held for reserves and surplus. While most investments are in what used to be thought were ‘safe’ instruments, it may well be that regulators and rating agencies, newly sensitized to the potential problems with even ‘safe’ vehicles, will require carriers to take down the value of funds held in reserve.

There’s a lot more to this, a whole series of levers and triggers that undoubtedly will impact the industry. But from here, the indicator dials all appear to be pointing to a return to a harder market. And soon.

At risk of being accused (and justifiably so) of being Johnny One-Note, this is the third consecutive post on Coventry. While the other two were focused on their recent moves to enhance customer relations, this one is specific to the company’s Q3 financials.
Which were not good.
Despite statements to the contrary, it looks like Coventry isn’t exactly sure where the problems lie and how its efforts to resolve those problems are doing – it has canceled the annual December Investor day conference and won’t be releasing detailed guidance until some time in January. Listening to the conference call and particularly management’s response to analysts’ questions, I was struck by the continued, and almost exclusive, focus on pricing and underwriting, and its corollary – a lack of focus on the issues, factors, disease states, and medical management deficiencies driving medical costs (which are trending higher than Coventry projected early this year.
This isn’t a new finding – neither Coventry, nor the analysts following the firm, have paid any attention to medical cost drivers in past calls.
I’ll leave further analysis of the group health, Medicare, Medicaid, and individual business for a later date, and focus today on the work comp numbers. Note that workers comp is a pretty small part of Coventry, accounting for about 7% of total revenues.
To begin, Coventry reduced projected 2008 eps by $0.19 for “Lower than expected business volumes (risk revenue, workers’ compensation fees)”. Obviously some portion of that take down was due to comp; the question is, how much?
For that, we can dig into the financials. Coventry recently began reporting its work comp and network rental business on the same line, making it a bit harder to precisely determine work comp revenue. By reviewing financials reported prior to the accounting change, it looks like the network rental business generated about $18 million in revenue in Q3, 2007. Assuming that the network rental business accounts for $20 million per quarter, here’s my best guess as to work comp revenue.
– Q2 2007 – $157 million
– Q3 2007 – $157 million
– Q4 2007 – $163 million
– Q1 2008 – $172 million
– Q2 2008 – $190 million
– Q3 2008 – $194 million
That looks like pretty solid revenue growth; up almost 24% over the same quarter in the prior year, with a good chunk of that coming from additional PBM sales (which result in a disproportionate increase in top line as ‘revenues’ include drug costs).
But that wasn’t what Coventry was looking for. Earlier statements from management indicated they were expecting work comp to grow even faster, driven by price increases, additional sales of their PBM services, and ‘account rounding’ – requiring customers to use Coventry’s network in all jurisdictions (where they can convince their customers to agree).
While the network, bill review, and pharmacy benefit management sectors appear to be growing nicely, some of the ancillary lines are not. The MSA business continues to struggle, as does case management. And there are some pretty substantial headwinds – the recession has, and will continue to, drive down injury rates. Without injured workers there aren’t bills to be paid and ‘savings’ to profit from. Carriers and TPAs are increasingly internalizing managed care functions to capture the revenue and profits for themselves.
Chairman and CEO Dale Wolf spoke to this (in response to an analyst question), saying: “we have seen [the impact of reduced claim frequency] clearly all year; we have seen as big a drop in claims volumes as ever happens in this industry and relative to expectation this [the drop in frequency] has been most the significant shortfall relative to expectation; it impacts bill review, network, and other product lines… the business is still growing significantly…” [I may not have captured this precisely but it’s pretty close]
The net
Workers comp remains a solid business, likely generates high profit margins (excepting the PBM product), and will continue to grow. If the recession deepens, which appears more likely than not, expect work comp revenue growth to continue to disappoint.

I’ve been conversing with a few old industry hands about Coventry work comp’s recent decision to become kinder and friendlier. As I reported, the motivation stemmed from a customer survey done this summer by an outside consultant/now employee, Pat Sullivan. I haven’t seen the survey, but it appears it shook up Coventry management enough to (finally) recognize what everyone else has known for years – Coventry’s customers really don’t like Coventry.
Jim McGarry, Coventry work comp’s leader, then hired Sullivan to help reform the company’s image, (as well as to oversee their California strategy) an initiative that was announced last week.
They have two major challenges.
First, cultural change. There are two competing cultures at Coventry work comp – the remnants of First Health and Concentra. Sitting on top of these folks are the Coventry senior managers and a few experienced work comp managed care execs from outside organizations (e.g. Rob Gelb from Intracorp and Dwight Robertson MD from Travelers/USHealthworks/Zenith).
The First Health folks came out of an organization that was quite self-confident and pretty hard-nosed with customers, vendors, and competitors. I recall a conversation I had with one of their top execs about sharing data to compare my client’s results in an area with FH’s; the exec asked me “who the F*** do you think you are?” the conversation deteriorated from there. I’d note that this persona did not by any means extend to everyone, and in fact some of the folks in customer-facing positions were strong advocates for their clients.
In contrast, Concentra, while not without its warts, tended to foster a culture that was somewhat more customer-centric. Their people tended to listen better (at all levels of the organization) and be more proactive in dealing with customer issues internally.
Those two groups have clashed at Coventry, with the FH folks seeming to dominate early on, and Concentra alums now starting to exert more influence. But make no mistake, Concentra came into a company that was already dominated by FH staff, and that dominance will not be readily displaced.
Compounding the problem is the abysmal record American companies have when they try to change their culture; fully three-quarters of execs said that 50% or fewer of their cultural change initiatives were successful.
Second, there may well be a conflict between Coventry’s financial objectives and desire to become more customer-focused. These are NOT mutually exclusive, and in fact many organizations have been financially successful because of their customer focus.
That will be a challenge at Coventry. Growing the workers comp business has long been a top priority for Coventry. Inordinately profitable (estimates are that WC margins are three to four times higher than Coventry’s group health business), work comp is also a ‘fee’ business – unlike the ‘risk’ business in Coventry’s portfolio, there’s little uncertainty – you charge X, collect Y, and profits are Z. Thus work comp balances out their book of business nicely and as a mandated benefit employers have to buy it (unlike group health, which is declining as premiums continue to escalate).
In a time of decreasing injury rates, falling insurance premiums and declining TPA fees, Coventry has been pushing customers very hard to agree to higher prices and additional services. Network access fees have been increased substantially for clients facing renewal, and Coventry has also strong-armed customers into using its networks exclusively, thereby preventing customers from selecting other networks in specific jurisdictions (e.g. California and New Jersey). The company has also threatened big (and small) customers with litigation as a way to force the customer to comply with Coventry’s requests. Meanwhile, improvements in data quality for bill review and network directory functions, enhancements to the 4.0 bill review application, and other client issues appear to be on the back page of the priority list.
As much as account managers may want to help out their customers, their bosses’ bosses are driving hard for more revenue across an expanded product line. And as the only viable national work comp ppo, Coventry has monopolistic power in that segment.
David Young, Pat Sullivan, Ken Loffredo, Jim McGarry et al are smart and capable business people. If they can pull this off they will have accomplished something few companies ever have.
What does this mean for you?
It is really hard to change a company’s culture. It is especially difficult when the people tasked with taking that message to the customer also have to tell the customer their prices are going up and they have to buy more services.