Building a better mousetrap – that’s the easy part

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.

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