Managed Care Matters

I've been watching a disturbing trend in workers comp medical costs - they appear to be headed up. New information from California adds fuel to that fire.

The insurance rating board in California has recommended a premium increase of 17.8%, driven mostly by medical inflation - inflation that has caught regulators somewhat by surprise. According to an article in WorkCompCentral (sub req):

"new medical data from 2006 and 2007 convinced the board that an even bigger increase is necessary. The rating bureau says the rate must jump by 10.8% just to cover rising medical costs.

[California Work Comp Insurance Rating Board Communications Director Jack] Hannan said the governing board, in its last two filing recommendations, adjusted pure premium rate recommendations based on an assumption of 1% medical inflation. He said the board believes the inflation trend in medical costs is actually closer to an increase of 5% per year. [emphasis added]

Hannan could not say specifically what area of medicine is spurring the rise in costs, but he said the bureau hopes to have a breakdown by the time the Insurance Department holds hearings on the rate recommendation in September."

I'll take an educated guess. Facility costs, with a big push from surgical implants, and a smaller contribution from drug pricing.

After a year of essentially little to no increase in drug pricing, manufacturers raised prices for a relatively small number of brand drugs - few of which are commonly (or ever) used in work comp. But that was a year ago, and manufacturers, stung by flat utilization, are going to have to get top-line growth from somewhere. If they can't sell more drugs, they'll have to increase pricing on the pills they do sell.

What does this mean for you?

Nothing good.

Posted by at 7:18 AM | Permalink | Comments (0)

We're going to stick with the hospital story for just a bit longer. So far posts have discussed the significant profits generated by workers comp payments, the inability of comp networks to manage facility costs, and a cornucopia of other hospital-related issues.

The thesis statement for all could be summed up thusly - Hospitals are gaining power at the expense of commercial payers.

Here's the proof.

The largest hospital/surgery center company in the nation, HCA reported a 21.6% jump in profits in the last quarter. Revenues "increased 3.7 percent to nearly $7 billion despite a decline in surgeries and flat admission numbers. "

Lets parse that statement out.

Profits were up much more than revenues, indicating the company (also known as Hospital Corp of America) has been able to keep expenses under control while delivering higher margin services.

Revenues were up even though surgeries (which tend to be very profitable) were down (albeit slightly at 0.5% for inpatient and 0.7% for outpatient facilities) and admissions were flat. The only way that can happen is by changing the mix of services delivered and improving the payer mix (think private insurance instead of Medicaid).

HCA's success wasn't an anomaly. Unlike the other hospital companies, Universal Health Services (could we please get just a bit creative with the company names here?) enjoyed an increase in profits and revenue. UHS saw its profits increase 35%, driven by a big increase in inpatient admissions (up 8.5%) and smaller, yet significant increase in the length of hospital stays (up 3.1%). This wasn't just a one-quarter event; looking at the first half of the year, revenues were up 8% and net income rose 34%. Note that UHS is one of the smaller for-profit hospital companies with fewer than 31 hospitals.

Revenues and profits were also up at HMA, with top line increasing 3.9% despite a decline in patient volumes. HMA, which operates 58 hospitals, also had a good first half of the year with profits almost doubling on a 4% increase in revenue. Interestingly, surgery counts also declined slightly at HMA over the same quarter in the prior year.

We'll round out the review with a quick look at Tenet - the 58 hospital company saw admissions up almost 2%, driven mostly by 'governmental managed care admissions' which jumped 16%. (I wonder, does that mean the Medicaid and Medicare Advantage programs are seeing higher inpatient admission rates? or is it just a shift from unmanaged Medicare?) Tenet also enjoyed a 7.5% increase in 'same hospital commercial managed care revenues'. (which brings up the rather uncomfortable question - is Tenet a preferred partner with the big managed care companies, or are the big managed care companies seeing a jump in hospital admits?)

Notably, Tenet's revenues were up 6.3% on that 1.9% increase in admits, a rather surprising jump given that the Feds are not exactly a generous payer. And digging deeper into Tenet's earnings report, one learns that commercial insurer admits actually declined 2.2% and patient days dropped 3.1%, while outpatient visits were also down 1.8%. So, revenues were up 7.5% on fewer admits and shorter stays...Cost-shifting, perhaps?

Here are a couple statements from Tenet's earnings report that shed additional light on the situation.

• Outpatient pricing outpaced the growth in inpatient pricing due to an improving mix of procedures performed in our outpatient facilities.
• Pricing improvement was evident across all key metrics, primarily reflecting the improved terms of our commercial managed care contracts [emphasis added]

And this from Forbes "Price increases from better terms in its commercial managed-care contracts also helped boost Tenet's profit and revenue."

Looks like a trend to me - hospital revenues are up slightly, profits are up much more than revenues, and this despite (mostly) flat patient volumes and lower surgical volumes.

The source of all these profits? Commercial managed care companies.

Which brings us back to a question I asked a while ago; "what exactly are 'managed care' companies managing?"

Thanks to FierceHealthcare for the heads up

Posted by at 7:08 AM | Permalink | Comments (3)

A few weeks ago I wrote about the big profits hospitals get from workers comp, and closed with the observation that comp payers are overpaying hospitals. The question is why?

Glad you asked.

Since OUCH (predecessor organization to First Health, now Coventry) first started the work comp network business in a major way (although AIG's managed care sub had one in the DC area in the mid-eighties, OUCH's entry really got things going in the late eighties) the business has exploded, with pretty much every work comp payer using a PPO nowadays. The idea is payers get to reduce their expenses and only pay the PPO for 'savings'.

So, are networks actually saving medical dollars?

Lets run the numbers. National PPO penetration averages around 58-62%, with wide variations among the states (NJ and FL are up above 90% with NY down below 45%). Savings (below FS or U&C but not net of PPO fees) runs about 10-12%, and PPOs charge from 16-23% to their 'retail' customers.

Total work comp medical spend this year will be about $32 billion. PPOs are 'saving' about $2.4 billion and getting paid about $480 million for that service.

But medical costs in comp are still going up faster than group health medical inflation, and considerably faster than the medical CPI. The biggest contributor to that inflation is facility costs.

According to the latest stats from NCCI, comp medical trend was 6.0% in 2007, 8.6% in 2006, and 6.2% in 2004. By way of comparison, the CPI was 4.4% in '07, 4% in '06, and 4.4% in '05. Anecdotal information from several payers indicates trend is heading up in 2008, with facility costs particularly problematic. And that anecdotal information is backed up by national figures, which indicate facility costs are the fastest growing component of the medical CPI at an annual rate of 4.8%.

In contrast, drugs and supplies were up 0.1 percent in June after dropping 0.7 percent in May. Professional services increased 0.3 percent in June after a 0.7 percent increase in May.

Facility costs in workers comp make up between 35% to 55% of total medical expense (depending on the state) - a pretty significant chunk. As they continue to rise faster than other sectors, that 'share' will also rise, making facility costs increasingly significant.

Why aren't networks able to deliver better results for facilities? Market share. Workers comp makes up less than 2% of total medical costs in the US. When a workers comp network calls on a hospital, the red carpet isn't exactly rolled out - the managed care contracting department is pretty uninterested in offering a deal to a network that might deliver one percent of their total revenue. While workers comp can be very profitable for hospitals, most facilities look at the revenue numbers and set priorities accordingly.

This isn't going to change - work comp network deals (with a few minor exceptions) are specific to workers comp. A PPO owned by a group health company may try to leverage the group business when negotiating with a hospital, but get real - the group contract is way more important to the insurer/network than work comp, so when push comes to shove during the contract negotiation process, work comp discounts will be given up to get a better group health discount.

Although there is consolidation going on as one would expect in what is a mature market, there is little in the way of innovation among the larger generalist network vendors. Even though their results are declining, the big PPOs have nothing to gain from innovation, and a half-billion dollars to lose.

What does this mean for you?

Until payers decide they are sick of being pushed around by networks producing increasingly crappy results, this isn't going to change.

Posted by at 7:25 AM | Permalink | Comments (6)

I think I've figured out why analysts have been unable to accurately forecast health plan financials - they don't know what questions to ask.

That's the only conclusion I can draw after listening to the latest earnings call from Coventry Health. The mid-tier health plan company is still reeling a bit from last month's announcement that it had been surprised by a sharp increase in medical costs, an increase that evidently had caught management by surprise.

Folks, this is a health plan company - one that claims "We deliver exceptional value every day, driving solutions that help people enjoy optimal health."

One might think that a health plan company makes money by managing medical care for hundreds of thousands of Americans. Near as I can tell, Coventry isn't a health plan, it is a transaction processor that makes money by pricing its insurance far enough above medical costs to administer the plans and make a bit of margin.

And from the questions that were asked ,and the ones that weren't, it is pretty obvious Wall Street analysts think Coventry is a transaction processor as well. Out of the twenty or so questions after the management presentation, there was one - yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in teh 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.

That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.

The entire conversation was about medical trend and how Coventry was fixing its pricing model to reflect higher trend, and if enrollment was going to decrease as a result. Not the factors causing medical trend and what Coventry was doing about it. Well, to be fair, there was a little dialogue about higher inpatient utilization and unit costs in Medicare, and higher hospital utilization on the commercial side. But if you were interested in Coventry's solution to same, you're out of luck. Not one analyst even asked.

If analysts don't know to ask the company why their costs are going up and what they are going to do about it and how that will play out, what, exactly, are they 'analyzing'?

There's this thing in business called a sustainable competitive advantage - something you do really well, that is hard to do, that others don't do well. This gives you an edge in the market, one that makes you a perennial winner. Coventry doesn't have one, and neither do any of the other health plans. Because all they do is process transactions, adding no value.

Here are some of the questions they should have been asking.

• What key indicators of medical trend do you watch closely?
• Exactly what is your average inpatient days per thousand for each block of business and how does that compare to industry standards?
• How about admissions per thousand?
• what is driving trend? Is it unit cost (price per service), utilization (number of those services received by a member when they do get those services), frequency (percentage of members that get that service) or intensity (higher cost version of a technology or more expensive procedure type than expected)?
• Which types of medical care are the biggest drivers; ancillary, physician services, pharma, inpatient, outpatient?
• What is your plan to address those issues?
• How will you measure results and when will you know if you've been effective?
• What is Coventry doing about members with chronic conditions? How have your results compared to industry standards?

And the big one:

How would Coventry compete and win if it could not risk select and had to take all comers at a community rate?

Because that may well be the scenario Coventry, and all its competitors, face in two short years.

Note - this applies almost equally to most every health plan. In fact you could just about replace 'Coventry' with Wellpoint, Cigna, Humana, Blue Cross, etc and the same perspective would hold true.

Now I really am going on vacation.

Posted by at 8:32 AM | Permalink | Comments (3)

In today's earnings announcement, AmerisourceBergen, parent company of work comp PBM/ancillary services firm PMSI, detailed the financial impact of the deal.

ABC carried PMSI on the books at about $260 million; by selling the property for $40 million (plus a $10 million contingency) ABC will be taking a $222 million hit as a result of the transaction. On an earnings per share basis the result is 1.37 per share, giving ABC a net loss of $108 million, or 67 cents per share.

Observers who are confused about the recent on-again, off-again status of the PMSI sale can be forgiven for that confusion; ABC has been somewhat schizophrenic about its dealings with PMSI. After putting PMSI on the market early this year, ABC announced last month that the company was not going to sell PMSI after the initial offers came in well under expectations. According to ABC's CEO David Yost, "We look to PMSI to be on track in the September quarter and into fiscal '09."

Contrast this with Yost's announcement today - “We were very disappointed with PMSI’s performance in this quarter, and after re-evaluating our alternatives, we decided to sell the PMSI workers’ compensation business in order to focus our full attention on our pharmaceutical distribution and related businesses and allow H.I.G. to focus on the opportunities at PMSI."

ABC's impatience with the turnaround may have played a role, but from here it looks like the hammering Yost took over ABC's overall financial performance to date may have been more of a motivator.

HIG, the investment firm that bought PMSI does have some experience in this space with investments in Align Networks and Gould and Lamb. They have been quite successful in selling properties and generating rich returns for their investors, a history that bodes well for PMSI. And for the PMSI employees who add value, are flexible, focus on customers, and don't buy into the "we do it that way because that's the way we've always done it" nonsense.

Posted by at 8:16 AM | Permalink | Comments (2)

PMSI, the workers comp PBM and ancillary services provider, will announce today that it has been sold to investment firm HIG. Sources within PMSI indicate the stock deal is worth $50 million, of which $10 million is contingent on achieving certain performance measures. Current management will likely remain in place after the deal closes in about 60 days.

The timing of this transaction is coincident with Express Script's announcement of the closing (sub req) of their acquisition of MSC's Pharmacy Benefit Management business. Express Scripts is now poised to become one of, if not the largest workers comp PBMs.

These deals are the latest in a series of financial transactions and potential transactions involving work comp PBMs. Cypress Care was recapitalized by investor Brazos Private Equity in November, 2006; Fiserv sought to sell its third party biller/PBM business early last year; Coventry purchased First Script as part of the Concentra transaction, and MSC itself was purchased by Monitor Clipper early in 2005.

PMSI has been struggling of late, losing the Hartford's business (while retaining SRS (Hartford's TPA)) to ESI and CNA late last year to Coventry. While PMSI's parent company, Amerisource Bergen, was somewhat of a distant parent and may not have provided the attention and resources necessary for PMSI to maintain its historical leadership position, there's no question HIG's focus and attention will be intense and constant. Private equity management can be quite helpful; it can also be overbearing and short-sighted. And sometimes all three - which may be exactly what PMSI needs to recover its leadership position.

At risk of being accused of burying the lead, here's what has me puzzled. Sources indicate Express looked closely at PMSI - recently . Yet they plunked down $248 million for MSC's pharmacy business, when they could have paid a fifth of that for all of PMSI (which includes a robust ancillary services division).

PMSI has been somewhat damaged goods lately due to customer losses, yet MSC was in a similar position less than two years ago after it lost its largest PBM customer, Liberty Mutual, to rival Progressive Medical (PM had half of Liberty and was awarded MSC's portion).

From here, it looks like a pretty good deal - although PMSI's financials have been pretty bad lately, $50 million is a very good deal for one of the top two companies in a growing market.

Posted by at 7:24 AM | Permalink | Comments (0)

From our good friends at WorkersCompInsider comes this entertaining post on the Massachusetts firefighter/bodybuilder. It's always great to have a hobby. Especially when one is totally disabled.

Yes, the bodybuilding ex-firefighter is out on disability. Total, complete, permanent disability.

One has to respect Mr Arroyo - He could have given up, resigned himself to a life in front of the TV, with little to look forward to but the next day's sports pages. But no, in what can only be described as an uplifting (no pun intended) story of perseverance and a willingness to live life to the fullest, Arroyo entered a bodybuilding contest, and competed, just 6 weeks after he was declared fully disabled.

Adding even more drama to the story, Mr Arroyo's disability was due to an injury to his back suffered when he slipped down some stairs. Unfortunately, no one was there to help him during his time of trouble, or to witness the accident itself.

What's even more incredible/unbelievable/ridiculous is Mr. Arroyo's attorney's statement in response to the recent publicity. Here's what Attorney Neil Osborne said:"Nothing in his specialized training regiment [sic] for the competition contradicts his neurologist's documentation of his injuries." And (this just gets better and better) this was our hero's sixth injury while on the job.

Here's a video of Mr Arroyo - got to love the thong.

Oops, late breaking news from another source - this wasn't a miraculous recovery; it turns out Mr Arroyo has been training for years, has won several body-building contests, and perhaps, just perhaps, his completely-disabling injury is somehow due to his avocation instead of the unwitnessed slip down the stairs.

Just perhaps.

Posted by at 8:55 AM | Permalink | Comments (0)

Bowing to the reality of the market, the New York Work Comp Board has issued a revised pharmacy fee schedule for workers comp.

The previous fee schedule based WC pharmacy fees on Medicaid - a linkage that was problematic for at least a dozen reasons. Here are the major ones.

1. Medicaid has 'positive enrollment' - members' eligibility is determined instantly, electronically. In WC, there is no upfront enrollment, therefore retail pharmacies don't know where to send the claim, or even if the claim has been accepted by an insurer. Work comp requires a lot of manual work, while Medicaid is electronic and instant.

2. The Medicaid reimbursement schedule has been a political football of late, as state legislators, under pressure from declining revenues and increasing service demands, have looked to cut Medicaid costs by cutting prices paid for drugs. California's decision to cut reimbursement by 10% has resulted in a political/judicial back and forth that is apparently still not resolved. By tying WC reimbursement to Medicaid, pharmacies, PBMs, and payers would be batted back and forth, not knowing from day to day what they should pay for drugs.

3. Medicaid has a formulary which reduces the cost of the drugs to the pharmacies. There is no such formulary in WC (except in a very few states such as Washington), and therefore drug manufacturers won't give discounts in return for preference in a therapeutic class.

4. The Medicaid FS is actually significantly lower than the contracted prices PBMs pay retail pharmacies. Thus there is no benefit to payers, or retail pharmacies, in working with PBMs. This despite the strong evidence that PBMs, properly implemented and managed, can dramatically reduce utilization (the volume of scripts dispensed).

What drove NY to make the change? Access issues. Claimants were not able to get their scripts filled as pharmacies could not afford to do so under Medicaid reimbursement, and PBMs could not afford to operate in the state while losing money on every script.

That's not to say the revised FS is much better. In fact, as the second lowest fee schedule in the nation, it represents an incremental improvement at best, and may not be sufficient to keep all stakeholders participating.

Cynics may point to California, and note that PBMs and pharmacies stayed in that market after the FS was based on Medicaid. True, but each state's Medicaid FS is unique, and CA's is significantly more reasonable than NY's.

Posted by at 10:21 AM | Permalink | Comments (0)

Insurance Journal's new pub MyNewMarkets has an entertaining piece about the history of workers comp, which according to author Chris Boggs, began back in the days of the pirate.

Boggs does allow opinion to influence his rendering of history - notably he claims former German Chancellor Otto von Bismarck "was not known as a socially-conscious ruler; the working conditions of the common man were not necessarily foremost in his mind."

I beg to differ.

von Bismarck was nothing if not pragmatic, and the fact that he forced passage of the first national health insurance, pension, and disability legislation shows that if anything, he was extremely socially conscious. Any ruler of a European country in the latter half of the nineteenth century had to be socially conscious, as the locus of power was moving rapidly away from the genetically-chosen elite.

The ones who were not socially conscious (e.g. Czar Nicholas Alexander) didn't survive very long.

Other than that difference of opinion, the piece is well done and provides a brief intro with a promise of more to come.

Posted by at 3:05 PM | Permalink | Comments (2)

The Medicare vote to rescind the 10% cut in physician reimbursement likely kept many docs in the business of providing medical care to workers comp patients.

But that 'stay of execution' ends Jan 1 2010 when a 21% cut is scheduled to go into effect.

As Bob Laszewski has been noting, the current incredibly stupid way we are addressing Medicare physician compensation is resolving nothing, while ensuring we're right back on the edge in eighteen months.

Long-time readers are undoubtedly tired of me reciting the myriad reasons it is dumb to base WC reimbursement on Medicare. But here's yet another example - WC is a state-based system where reimbursement is controlled by a political process completely unconcerned about its implications for comp insurers, employers, physicians, or injured workers.

A study completed in 2007 illustrated the problem - low reimbursement rates mean few physicians are willing to treat comp claimants. Among the five states that based their fee schedule on low percentages of Medicare (109% to 125% of Medicare), the percentage of neurologists and orthopaedists that participated in workers’ compensation tended to be a fraction of the available population (9% to 27% for neurologists, 23% to 46% for orthopaedists).

Among the states using Medicare's RBRVS as the basis for physician reimbursement are Florida, Pennsylvania, West Virginia, Hawaii, Maryland, California, Michigan, Ohio, Tennessee, Minnesota, Oregon and Texas.

Yes, most pay above the Medicare rate, and many have built-in inflation adjustments. But physician compensation is still primarily controlled by the politics of Washington.

Posted by at 10:33 AM | Permalink | Comments (0)

Fiserv has sold 51% of its insurance business, including third party biller Third Party Solutions to a private equity firm. The buyer, Stone Point Capital, also owns workers comp managed care firm Genex and multiple other insurance-related companies, including brokerage, investment, distribution, reinsurance, technology, and claims services.

Fiserv will continue to own 49% of the new company, to be titled Fiserv Insurance Services (I'm hoping they didn't pay a naming consultancy a lot for that).

Close watchers of the work comp pharmacy business (both of you) will recall that TPS acquired WorkingRx last fall, at the time its sole competitor in the third party biller industry.

What does this mean for you?

Folks familiar with the industry are of the opinion that TPS was a throw-in; Fiserv sought to sell TPS eighteen months ago, and has been trying to sell it off every since. Don't be surprised if TPS is back on the market once this transaction closes later this month.

Posted by at 12:18 AM | Permalink | Comments (1)

Last Thursday's post showed that workers comp is a huge money maker for hospitals, generating about 16% of their profits on less than 2% of revenue.

The attempts to date to control hospital costs have been to set WC reimbursement using primarily DRGs (Medicare Diagnosis Related Groups) (NY), a percentage discount below charges (as in Florida), or on the basis of the facility's cost to deliver that service (Connecticut).

But it is never as simple as setting rates at DRGs or a discount below charges.

For the latter, a hospital could charge a billion dollars for an epidural, and the payer would (conceivably) have to pay 60% or 75% of that rate. So states add language around that provision requiring payment to be based on 'usual and customary' charges - which sounds fine until you try to define usual and customary. Florida is in the midst of just such an effort, and the process has become pretty contentious.

Using Medicare as a basis is also problematic. DRGs were developed for Medicare patients - older with different conditions and often not working. The resources - procedures, services, therapies, setting, providers - employed in providing care to an 88 year old with herniated disk are likely quite different from those provided to a 33 year old with the same condition.

Yet these differences have never been evaluated. To my knowledge, there has never been any thorough study of how the inpatient or outpatient hospital resources used by workers compensation patients compare with resources used by Medicare patents per Medicare's inpatient MS-DRG groups or Medicare's outpatient APC groups.

Another option, and one I would argue is highly problematic, is to pay based on some multiple of Medicare. Several states use this methodology, including South Carolina (which has seen rapidly rising WC medical expenses). Texas recently announced that it is moving in this direction. The problem for payers, is that Texas is paying hospitals an extremely high multiple of Medicare. According to FairPay Solutions CEO VIncent Drucker (and HSA client); "This provides huge financial incentives for over-utilization of high cost hospital and hospital-based-specialist services [emphasis added]. Over utilization that Wennberg, for example, reports account for 25 percent of wasted dollars for Medicare chronically ill patients." (Drucker is referring to Dr John Wennberg's recently-published Dartmouth Atlas of Health Care.)

As a commenter noted last week, "TX and CA have a Medicare based system with a mark-up ranging from 25% - 100%. However most hospital contracts with group health insurers and PPO networks are below Medicare rates."

Why?

Why do workers comp payers consistently overpay for hospital services? Why can't comp networks deliver the kind of reductions that are commonplace among group health insurers?

And why do employers allow their payers and managed care firms to spend their dollars so carelessly?

Posted by at 7:08 AM | Permalink | Comments (7)

Workers comp medical expenses account for less one-fiftieth of total US health care costs - $30 billion(see WC report pdf) out of $2 trillion.

Yet workers comp generates almost one-sixth of hospital profits.

Here's how the numbers work. About one-third of comp medical payments are issued to healthcare facilities. The average US hospital cost-to-charge ratio (what it costs the hospital to provide a service compared to what they bill for that service) is approximately 31.2%; in comparison workers’ compensation payers reimburse about 55% of hospitals' billed charges.

Thus workers comp payers pay hospitals 176% of their costs.

(There is another, very big argument over the methodology hospitals use to calculate their 'costs', my opinion is there is conclusive evidence that costs are exaggerated and overstated)

In dollar terms, in 2007 workers comp insurers and self-insured employers paid facilities roughly $9.1 billion. $3.9 billion of that $9.1 billion was profit for hospitals.

The entire US hospital industry generated profits of roughly $25 billion, workers’ compensation – which you will remember represents only about 1.5% of total hospital revenues – accounts for approximately 16 percent of all the profits for US hospitals.

Few dispute that workers comp insurers and SI employers should adequately reimburse hospitals. It is equally indisputable that under the current systems, comp payers are paying much more than their fair share.

How much should workers’ compensation payers pay? According to Vincent Drucker of FairPay Solutions, "something between what Medicare pays and the costs + twenty percent that group payers are reported to be paying." (FPS is an HSA client)

Why are comp payers overpaying hospitals? That's a subject for a later post.

Posted by at 7:53 AM | Permalink | Comments (3)

Following up on yesterday's post on supply chain management, today we'll discuss what happens when a company cedes too much power and control to a vendor.

Years ago Compaq (remember them?) was a leader in the PC industry. Now, they no longer exist. Why? In large part because they outsourced key parts of their business to a vendor that became a partner that became a competitor.

As Clayton Christensen put it in an interview; "there’s a tendency in the supply chain for the vendor in the emerging market to integrate forward until they hollow out their customer, and in many ways what they do is they commoditize their customers.

Christensen likes to cite Compaq. Like many electronics firms, Compaq outsourced parts of their product to off-shore companies. In this case, Compaq outsourced the simple circuit boards in their computers to Flextronics, a Singapore-based company. After a few years, Flextronics "came back to Compaq and said as long as we’re doing the circuit boards, let us do the whole mother board, because it’s not really your core competency, and we can do it for 20 percent less. Compaq says, you could do it for 20 percent less. If we outsource that to you we could get all of these circuit manufacturing assets off our balance sheet. They make the transfer, and Compaq’s revenues are unaffected, but its cost actually improved by 20 percent. At Flextronics, their revenue and profitability improved smartly. Wall Street likes what Compaq and Flextronics did.

Then Flextronics says, as long as we’re doing the mother board, why don’t you just let us assemble the whole computer, because that’s not really your core competency, and we can do it for 20 percent less.

Compaq looks at that and says, we could get rid of all our manufacturing assets. They make that transfer. Compaq’s revenues are unchanged but its profitability improves, and Wall Street really likes this. At Flextronics, revenue and profitability improve as well. Wall Street likes this too. This goes on as Flextronics takes over the manufacture of the whole computer followed by the supply chain.

From Flextronics’ point of view, it’s getting into value-added services now. So not only does its revenue improve, but its gross margins improve. Finally, Flextronics says, as long as we’re managing the whole supply chain for you, why even bother designing the dumb computer? That’s not really your core competency, and we’re dealing with all the component vendors anyway. Compaq says, yeah, our core competency really is our brand. We can fire all of our engineers if you do that for us.

So little by little the supplier in the Third World starts to eat their way up inside of the customer, and every step forward they take progressively trivializes the remaining value that Compaq adds, until in the end they’re providing almost no value and the company vaporizes." [emphasis added] (quote from WorldTrade Magazine, The Supply Chain as ‘Disruptive Technology, December 12, 2006)

Compaq is to Big Insurance Co as Flextronics is to Big Managed Care Co., except it sounds like the folks at Flextronics moved a little slower, and were a bit less heavy-handed. Because what is happening in the market now is large payers (and small and medium ones too) are effectively outsourcing medical management to network/bill review/case management vendors. BigInsCo will argue that no, the adjusters are still in control - sure, just like the engineers were at Compaq. Meanwhile, BigMgdCareCo is busy figuring out how to maximize its revenue from BigInsCo.

And as we've seen, BigMgdCareCo succeeds when there are lots of medical bills with high medical charges.

So maybe my original thesis statement was wrong. Perhaps what's really going to happen is not that managed care firms are going to 'hollow out' insurers, but instead they are going to bleed them dry.

And because the insurers no longer control the medical, there's not a damn thing they can do about it.

Posted by at 1:25 PM | Permalink | Comments (2)

Last week I wrote a post on workers comp insurers' loss of control over medical costs. The post triggered a good bit of email traffic and requests to expand on my central point -

big networks now dictate terms to insurers, and the network business model is a major reason for the continued growth in work comp medical expense.

Think of the work comp claims process as organizing the products and services necessary to return an injured worker to full employment - and keep him/her there. The services - doctors, nurses, voc rehab, other providers, attorneys, field adjusters, investigators - supply expertise and skills that produces the desired end result - sustained return to work.

This process is analogous to manufacturing's supply chain management.

A quick explanation - Supply chain management (SCM) has become one of the keys to profitable manufacturing. Defined as the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible, SCM is based on the idea that companies should focus on what they do really well, their core competencies, and outsource tasks and functions that are not 'core' to organizations that do those things very well.

This allows the manufacturer to concentrate on what they do well, reduce overhead and staff, and focus management time and expertise on stuff that really drives value.

In the old days, companies tried to control as much of their raw materials - and the refining and transportation of those raw materials - as possible. In addition to auto plants Ford owned iron mines, steel mills, glass factories, rubber plantations, ships, and railroad cars. Nowadays Ford outsources some of its vehicles' key components (engines, transmissions, steering linkages) to other companies, concentrating on designing, assembling and marketing instead.

Over the last couple of decades, manufacturers found themselves increasingly relying on other companies for critical processes and components - if all worked well, profits zoomed, and if not, heads rolled. Recognizing the importance of their suppliers (important = if they screwed up the manufacturer could be out of business), over time manufacturers combined these processes, approaches, and management techniques into the process of supply chain management.

The purpose of supply chain management is to make sure the company gains all the desired benefits from SCM, and avoids the nasty results of a failure in the supply chain - engines don't show up at the assembly line, the wrong size tires appear, screws have left handed threads when right handed were spec'ed.

Or, the fancy order tracking system designed to make sure enough widgets are on hand to make the thingies ordered by customers just in time to meet the delivery deadline breaks down, or the investment in automation of central processes is a complete failure, or a working plant is closed and manufacturing sent to a cheaper plant that can't deliver a quality product.

This happens more often than you might think, and when it does disaster often ensues. There are plenty of examples; reading about them gives one a mild sense of superiority (jeez, we'd never be that dumb) that alternates with a cold dash of reality (uhh, actually I could see us screwing up like that - or worse...).

What's happening in workers comp (see, I told you we'd get to this eventually) is rather more insidious. I would argue that most payers' approach to medical is tantamount to Sony outsourcing design and marketing, Honda outsourcing engine R&D, Ruth's Chris outsourcing cooking, or Dave Mathews outsourcing singing (wait, that might not be a bad idea...). As I argued last week, medical is central, core, a critical function - fixing broken claimants so they can return to work is more important than anything else a comp insurer can do. I know, loss prevention is key as well, but claims will happen, and when they do the payer simply must ensure the claimant gets the right medical care that gets him/her back to full functionality.

But comp payers have, with a few, rare exceptions, completely lost track of what's important. Fact is, almost all workers comp insurers buy medical care without regard to how good it is, or how fast it returns injured workers to employment. No, they buy it based on how much of a discount the doc or hospital will give them. The bigger the discount, the better - that's how most comp payers evaluate medical care. While a few insurers are trying to change the model, and a few experiments, albeit on a very small scale, are in place, essentially all medical care for work comp is evaluated not on the basis of performance but on price per service.

Analogy - Sony buys LCD panels not on clarity and brightness but on cost, thinking hey, they are cheap so more folks can afford them - don't worry if the picture is lousy and colors muddy - in fact don't even look at the picture before you select a vendor.

Analogy - Airlines decide what travelers really want is low cost - so they remove seats from airplanes and have everyone stand up.

Ridiculous? Absolutely - about as ridiculous as choosing a doctor based on the discount they give your network.

I'm pretty passionate about this, so much so that tomorrow's post will dive even deeper into the issue of how dumb supply management is killing work comp.

Posted by at 7:16 AM | Permalink | Comments (2)

So the purchase of MSC Pharmacy Services by Express Scripts will be finalized within a few weeks; what's next?

It is way too early to tell, as the announcement hit the street just last Friday. That said, from discussions with sources from both Express and MSC Pharmacy Services it is clear that some heavy thinking has been going on for some time.

(Note I'm using MSC Pharmacy Services as that is the entity that was purchased by ESI; the other part of legacy company MSC remains 'behind' and will keep the MSC brand identity)

There's the usual corporate-PR speak in the companies' press releases, but folks involved in the discussions point to a few areas that bear watching. First out of the gate is MSC's Oasis web portal. Their web app enables customers to access information in summary and drill down format, create reports, and keep track of specific claimants. ESI's customers may be moved onto Oasis as systems integration efforts progress; this will not be an overnight move as it will require back- and front-end integration with customer, clinical, and processor applications.

MSC Pharmacy Services currently uses processor Restat as their network administrator; I'd expect to see the combined company move quickly onto Express' platform and use Express' network contracts. This would reduce MSC's admin expense and likely improve rebate income as well.

Expect to see some consolidation of clinical programs; neither legacy company has a complete suite of services and the combined offering will almost certainly be stronger than each firm's solo effort.

Something that has not been discussed, but has been alluded to in public statements is the possibility of cross selling ESI/MSC's core offerings to their respective customers. This would entail ESI helping MSC sell DME, home health, imaging, etc to their customers and MSC cross selling PBM services to ESI's customers.

Finally, while it is likely there will be a few folks looking for employment elsewhere, those decisions have not been finalized. MSC Pharmacy Services' executive management is solid and well-regarded, as is ESI's. I'd expect the headhunters are already circling...

Posted by at 6:34 AM | Permalink | Comments (0)

In an announcement released this morning, MSC has sold their pharmacy division to rival Express Scripts, Inc.

Rumors had been circulating for some time about a potential merger of MSC with rival PMSI-Tmesys, or of a deal wherein MSC would buy PMSI's ancillary service lines business (durable medical equipment, home health care, etc).

Since the loss of Liberty Mutual's pharmacy contract (MSC covered one half of the country with Progressive Medical handling the rest) to Progressive Medical last year, MSC has been able to regain momentum. According to MSC CEO Joe Delaney (from a conversation at RIMS in April) the company had essentially sold enough new business to make up for the loss of Liberty, and new business opportunities for 2008 have been plentiful.

Express has long had the second position in the industry behind leader PMSI; the newly merged entity will be a formidable competitor and may well take over the industry leader spot. MSC's pharmacy revenues totaled close to $200 million.

Sources close to the deal indicated the purchase price is $248 million.

The deal will close within a few weeks, barring any anti-trust issues which sources do not expect to be a factor.

Meetings are starting this morning in MSC's headquarters in Jacksonville, FL to start the customer contact outreach. They will also begin the "who does what from where' conversation, as it appears no decisions have been reached regarding leadership of the newly merged entity.

Note - this deal is for the pharmacy business only; MSC will keep its ancillary services operations and it looks like current CEO Joe Delaney will stay in his current position. Delaney has done a good job turning the company around, and he will now be able to focus on this sector. I'd expect that MSC may now start (if they aren't already) looking for acquisitions in this space.

Posted by at 8:01 AM | Permalink | Comments (0)

It is Friday the 13th. That legendary day of mythical fears, the bane of the superstitious, the day of bad luck and portentous omens. A fitting day indeed to tell an all-too-real horror story.

We'll begin with the dry, dull, numbers, ones that we all know so well their impact has been dulled by their very repetition. But sit up straight and open those eyes, because they tell a very scary story.

59% of work comp claims cost is from medical expense. That percentage has been steadily growing over the last fifteen years. WC medical trend is significantly higher than the medical CPI; comp is up 7.8% per year over the last five years while the medical CPI only increased at an annual rate of 4.2%.

Why? What else happened over the last fifteen years?

Comp carriers came to rely on discount-based generalist networks as the central pillar of their medical management program.

And now the networks are in control.

The industry's addiction to the easy solution of discount-driven medical care is slamming up against the hard reality that it just doesn't work. Nationally, workers compensation preferred provider organizations (PPOs) deliver discounts in the range of 10 percent to 12 percent before network access fees. The claim, therefore, is that they deliver “savings” of 10 percent to12 percent. This claim is based on the simple premise that without the network, the cost would have been 10 percent to 12 percent higher. While this argument is logical on its face, there are at least three problems with it. First, the argument assumes that the injured worker would go to the exact same providers without a network. Second, it assumes the providers would deliver care, and bill for it, in exactly the same way. Finally, it does not consider the impact of frequency or utilization of care, merely the price per service.

But there's an even bigger problem. Consider the incentives of the provider in this model. The PPO has asked the provider for a discount, for without a discount there is no profit for the PPO. The provider agrees and delivers care at a lower price, and thus less profitably. Clearly, the provider has a financial incentive to deliver more services, for if it does not, its decision to join the PPO makes no sense. The incentives for the PPO are equally perverse. The higher the medical cost, the more the “savings,” and the more revenue and profit for the PPO. Everyone benefits from this PPO arrangement; that is, everyone except the payer.

Yet this is the network model in place at almost every payer in the nation. It has been so successful for the biggest managed care firms that they are powerful enough to dictate terms to their 'customers' - the insurers and employers.
But relying on vendors to manage medical has clearly failed. If it had worked well, trend rates would not be where they are, and medical would not be eating up so much of the claims dollar.

Many payers are only now beginning to realize the implications of their addiction - their network vendors have the upper hand. Payers are now being confronted with the awful reality that their addiction to the huge discounted network is at its inevitable endpoint of all addictions;

the drug is controlling the addict, while slowly bleeding it dry.

This is not idle speculation. Nor is it hyperbole or exaggeration. In conversations with executives at several very large insurers it has become all too clear that the power is on the other side of the table now. The networks are dictating terms, and payers are confronted with 'take it or leave it' ultimatums - ultimatums that include exclusivity across all states, much higher fees, required bundling of services, and lower customer service standards.

Workers comp is now a business of managing medical expense. Medical is core to work comp, a central part of the business. Payers must recognize this and restructure their thinking, their culture, their methods and practices to deal with the new reality.

What does this mean for you?

It is time to regain control.

Posted by at 6:09 AM | Permalink | Comments (0)

The Fifth Annual Survey of Prescription Drug Management in Workers Comp has been completed, and copies of the Public version of the report are available at no charge. (email infoAThealthstrategyassocDOTcom)

A few late respondents contributed significantly to the report, and their data also moved the figures around a bit. Here are a few key statistics.

Drug inflation for 2007 was 4.9% (looking at the increase in total dollars for 2007 over 2006).

Generic utilization was in the high seventies, with generic efficiency in the ninety-percent range.

Essentially all larger payers are now using PBMs, although are many are not using them as effectively as they could be. PBMs' clinical, reporting, outreach, paper bill processing, and related capabilities are not being utilized to their fullest by all but a very few payers.

The use of home delivery has jumped and is close to 5% across all respondents. This is a major improvement over a couple years ago, when it was in the 2% range for most payers.

And finally, the first fill capture rate is in the low twenties - although half of the respondents did not have the figure readily available.

Copies of past surveys are available here.

Posted by at 2:26 PM | Permalink | Comments (3)

I received a few calls and emails yesterday from workers comp payers asking for clarification about my post on the potential (highly inflationary) changes to the Florida outpatient work comp fee schedule. Evidently there is some confusion out there about the linkage of Medicare to the WC fee schedule, with several entities contending that Florida is actually linking WC reimbursement to Medicare reimbursement.

Kinda sorta but not exactly.

The three member panel (regulatory entity responsible for the FL WC FS) is looking at the difference between Medicare charges and reimbursement, and basing their calculations on that differential.

The proposed change to the FS would link the “usual and customary” payment standard for outpatient hospital claims contained in Fl. St. § 440.13(12) to the ratio between what Florida hospitals charge Medicare and what Medicare actually pays. The net result would be a dramatic increase in the reimbursement for outpatient services billed by hospitals.

Here's some detail; apologies for the density of the subject, but you wanted details.

The change proposed by the FL Dept of Financial Services (DFS) is to link what Medicare pays hospitals, as defined by the Ambulatory Payment Classifications (APC) payment rate, adjusted to mark up the Medicare APC payment on a hospital's charge to roughly equate with what DFS thinks are the average charges billed by FL hospitals for that 'group' or APCs.

FL is putting APCs into two APC groups - surgical and 'other hospital outpatient'. DFS' calculation is that the average mark up - on which payment would be made - is 302% for surgery and 467% of Medicare payment for other hospital outpatient APCs

Thus, per regulation, 60% of the 302% would be paid for surgeries and 75% for other hospital outpatient.

There are a few issues with the methodology, data sources, and assumptions used by DFS, issues that have been raised in past meetings of the panel.

But the real problem is simple - WC costs are going to be substantially higher if this goes through. First, this methodology will increase costs - today - by 181% for surgeries and 330% for other hospital outpatient services.

Second, the annual inflation rate for charges in FL is 14%. So today's high costs will be tomorrow's even higher costs and the day after will bring really really high costs...

Third, the location of services will likely change dramatically to the higher cost hospital location. Thus procedures which were being done in offices will now be billed - at the much higher rates - by hospitals.

Fourth surgeries which were done on an outpatient basis will likely shift to inpatient to take advantage of the much higher reimbursement.

What does this mean for you?
The next meeting of the three member panel is June 19. Unless you want to pay a lot more for medical care in Florida, make your voice heard.

Posted by at 6:58 AM | Permalink | Comments (3)

I'm mystified, perplexed, confused, confounded, and appalled.

There's just no other logical reaction to the goings-on in the Sunshine State, where several workers comp payers are actually supporting a major increase in reimbursement for outpatient facilities - an increase that is wildly inflationary and completely unnecessary.

I've reported on this impending disaster a couple times over the past month, a disaster that the payers are bringing on them selves. Comp reimbursement in Florida is under the control of the 'three member panel', a triumvirate that is attempting to come up with a clear definition of 'usual and customary' - the criteria by which facilities are reimbursed under workers comp.

Here's a brief video metaphor of the last hearing...

The panel is looking to specifically and clearly define U&C in an effort to eliminate the ongoing legal battles between payers and hospitals over what exactly is 'usual' and 'customary'. The benchmark that the panel seems committed to is the amount hospitals charge Medicare. Not get paid by Medicare, but charge Medicare. According to testimony at one of the panel's recent hearings, hospitals mark up their Medicare costs by 715% - they charge Medicare seven times more than it costs the hospital to provide the service.

If the proposed regulation is adopted, workers comp's 'usual and customary' would be based on that 715% mark up. Running the numbers, this would result in workers comp payers paying Florida hospitals (and perhaps ASCs) 472% of what Medicare pays for outpatient services - one of the highest rates in the nation.

And this will increase Florida WC costs by about 20%. (the calculations and basis thereof are too lengthy to go into here, email me at infoAThealthstrategyassocDOTcom if you want the gory details)

Yet payers are supporting this change. Why? Do they want to increase policyholders' costs? Jack up their loss ratios? Are they feeling particularly charitable (always easy when spending policyholders' money)?

Or is it because they are sitting in the back of the train, relaxing while it hurtles down the tracks, blindly confident in their ability to determine its destination?

In private conversations, they say because it will make it easier to deal with the issue, establish a firm basis for reimbursement, eliminate the hassle, end the litigation.

If that's the case, why not just set the amount at "whatever the billed amount is, you have to pay it"? That would be even simpler, eliminate the complex calculation needed under the proposed system - and have the same result.

Payers are being incredibly short sighted. Lazy even. And here's where that train is heading.

What does this mean for you?
(Many) employers in Florida are being ill-served by their insurers and TPAs. Send this post to your broker and ask them to find out what your work comp carrier's position on this is and why, and what they are doing to protect your interests.

Or you can just hang out in the club car, trusting that someone will get control of this impending disaster before too late.

Posted by at 7:51 AM | Permalink | Comments (4)

Disclaimer - This is the kind of post that makes one want to take a shower after reading. My apologies to readers without convenient access to bathing facilities.

One of the fastest growing segments of the surgical industry is the spinal implant business. In what may be the most comprehensive review of the problem, the Orange County Register reported:

"About 70 percent of U.S. adults -- or 153 million people -- have lower back pain, according to Millennium Research Group. Of those, about 15 million require medical treatment, and most eventually get spinal implants." My take is that is a wildly overstated estimate; one survey reported that the total world market for devices was $4.2 billion; note this study used 2006 data. Another indicated the market was $5 billion in 2005, and predicted growth to $20 billion by 2015. Stryker, one of the major manufacturers, expects growth of 16% per year in the spinal implant market. Yet another report(note opens .pdf) indicated the 2007 worldwide market was $7 billion, with the US accounting for $5.4 billion of that total.

And boy is it profitable. One manufacturer (Allez Spine) sold screws to an implant device company for $79.31 each - screws that were then sold to hospitals for $1000 each (who then marked them up even more when billing insurers).

Yep, there are $480 worth of screws in this xray (wholesale), $6000 retail, and probably $9-12,000 to the insurer/patient. And that doesn't include the other parts...

Medtronic, one of the larger device companies with about 45% market share in the US and the same worldwide, reported sales of $869 million for spinal implants last quarter, driven in part by a big jump in sales of its Kyphon technology. The $869 million represents growth of 35% from the same quarter last year.

The Kyphon story is an ugly one, and points to one potentially significant problem in the spine surgery industry - the focus on devices as a tool to maximize reimbursement.

Kyphon (the company) was acquired by Medtronic in 2005. The company settled a lawsuit filed by the Feds, agreeing to pay $75 million in fines. Kyphon agreed to stop providing inappropriate advice on reimbursement to providers, advice that resulted in hospitals filing inflated claims with Medicare for a spine procedure with the otherworldly name of kyphoplasty.

The details of the case, as reported by the New York Times, are revealing.

Kyphon "persuaded hospitals to keep people overnight for a simple outpatient procedure [bold added] to repair small fissures of the spine. Medicare then reimbursed the hospitals much more generously than it otherwise would have for the procedure, which was developed as a noninvasive approach that could usually be done in about an hour.

By marketing its products this way, Kyphon was able to artificially drive up demand among hospitals, bolstering its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, greatly enriching Kyphon’s senior executives. "

Margins for Kyphon's devices approached 90%, due in large part to the high price the company charged, a price that hospitals offset by extending hospital stays (as advised by Kyphon's sales reps and reimbursement experts), thus generating higher bills and much higher revenue.

Another major contributor to the rapid increase in spinal implant surgeries may be the growth of device companies that have spine surgeons as stockholders. The OCR article reported that physician-owned companies are now under investigation by HHS' Office of the Inspector General (OIG). In testimony before the Senate Special Committee on Aging, Gregory E. Demske, Assistant Inspector General for Legal Affairs at the OIG said:

"These financial relationships [between device manufacturers and physicians] can benefit patients and Federal health care programs by promoting innovation and improving patient care. However, these relationships also can create conflicts of interest that must be effectively managed to safeguard patients and ensure the integrity of the health care system...during the years 2002 through 2006, four manufacturers (which controlled almost 75 percent of the hip and knee replacement market) paid physician consultants over $800 million [bold added] under the terms of roughly 6,500 consulting agreements. Although many of these payments were for legitimate services, others were not. The Government has found that sometimes industry payments to physicians are not related to the actual contributions of the physicians, but instead are kickbacks designed to influence the physicians’ medical decisionmaking [bold added]. These abusive practices are sometimes disguised as consulting contracts, royalty agreements, or gifts."

All this growth may well be based on a focus on surgical treatment that is just not supported by research. Some studies indicate surgery is not the best treatment for a substantial number of patients. According to the OCR article (source above);

a "2005 study of patients with back pain published in the journal of the British Medical Association concluded: "No clear evidence emerged that primary spinal fusion surgery was any more beneficial than intensive rehabilitation."

"You look at the number of procedures and the rate of growth and it seems to far outstrip the number of patients who need this," said Dr. Steven J. Atlas, a back specialist and Assistant Professor of Medicine at Harvard Medical School."

And that old nemesis, provider practice pattern variation, is nowhere as obvious as with back surgeries. Looking at Medicare data, the back surgery rate in Fort Myers, Florida was 5 times higher than in Miami. Same population demographics, same state, but different providers.

Perhaps the best explanation for the considerable growth in the use of implants and spine surgery is the lack of evidence either for or against these procedures. There are some reports that indicate positive or negative outcomes, but nothing definitive has been published that could be used by payers and providers to judge the appropriateness of surgery for most patients with back injuries or degenerative conditions.

Posted by at 7:10 AM | Permalink | Comments (0)

Medicare is to Workers Comp as:

a) Mars is to deck stain
b) surgery is to literature
c) a jelly sandwich is to Colorado
d) all of the above
e) none of the above

If you chose (d), congratulations, you understand there few similarities between the two systems, other than both involve paying health care providers to deliver care.

Beyond that, Medicare and Work Comp are, as the Brits say, chalk and cheese. Yet many regulators and legislators still try to base reimbursement under workers comp to Medicare's RBRVS system (resource based relative value scale). The latest effort is in California, where a recent study by the Lewin Group has come under fire from providers in the Golden State. Critics contend Lewin's analysis does not accurately assess the inherent differences between the two systems or the way providers deliver care, and bill for that care, and therefore the study's conclusion is inappropriate.

I think the critics are right. As I've noted before, the additional paperwork, different procedures, complex and dynamic treatment rules and approval process, additional communications requirement, and different demographics make work comp a very different animal from Medicare.

I'll have more on this later, as the reports and analysis require more time than I've got right now.

But there are two more (very) current examples of the problems inherent in linking WC reimbursement to governmental programs. Both involve drugs, and in both cases WC drug costs are linked to Medicaid. The states are NY and CA. In both cases, the FS will also drop in July; to AWP-16.25% in NY for brand and an across-the-board cut of 10% (below the current very low rates) in California.

There are already myriad examples of claimants unable to fill comp scripts in New York today, and that is at the current, slightly more generous FS. There have been fewer reports of this issue in CA, but the new rate reduction has pharmacy chains screaming.

As well they should. Here's how Workers comp and Medicaid are different

1. Unlike Medicaid, there are no copays, restrictive formularies, or other cost- and utilization containment measures in WC. Thus all cost containment efforts in WC for drugs involves Drug Utilization Review processes that can involve pharmacists and clinicians reviewing scripts for appropriateness, medical necessity, potential conflicts and adverse outcomes, and relatedness to the WC medical condition.

2. PBMs pay pharmacies more for WC drugs than for Medicaid drugs; a typical brand discount is AWP-12%, generic is MAC or -25-35%. The Medicaid FS is substantially lower, at AWP-15+% for brand and FUL (>-40%)for generics.

3. Unlike Medicaid, to the extent they exist at all, rebates are much lower in WC. In NY, Medicaid rebates are a minimum of 11% of the Average Manufacturer’s Price per unit. The rebate revenue significantly reduces states’ costs for drugs. As these rebates are much lower or nonexistent in WC, PBMs do not have rebate dollars to offset their drug costs.

Sure, it is easy for lazy insurers, regulators, legislators, and employers to think they are doing something positive by cutting the price they pay for drugs.

It is also a big mistake.

Posted by at 10:24 AM | Permalink | Comments (1)

With a case load of 160 lost time claims, how does any workers comp claims adjuster have any time to 'manage' any case?

That's the point Bob Kulbick, CMO at Cypress Care (HSA consulting client) made in a talk last week, a point I've been thinking about since that meeting.

The obvious answer is 'they don't'. There is no possible way an adjuster can dedicate the time and brain power necessary to effectively manage claims with a case load that high. And that is not an unusual case load - in fact most TPAs keep case loads well above 120. Even that load is excessive - it breaks down to about an hour a month per case.

Yes, an hour a month per case.

I'll grant that some of those cases are old and there's little going on - little except continued use of medications, in many cases physical therapy, and the odd surgery to repair an older fix or replace a surgical implant worn out by use or otherwise defective.

That is certainly not the situation with newer claims. Adjusters have to initiate the three point contact (actually four in most cases) within a predetermined time, set up the case, conduct an investigation into causality, establish liability, ensure reports are filed in a timely manner, determine the initial reserve, and coordinate with medical management.

Established cases require ongoing contact with case management, voc rehab, the injured worker, attorney(s) if represented, employer, and likely the injured worker's family. Medical bills have to be approved, drugs authorized, surgeries and hospital cases ok'ed, voc rehab plans reviewed, and then discussed with management.

This just hits the highlights - there are dozens of other discrete tasks involved in the process of adjusting comp claims, tasks that take time, careful thought, and professional judgment.

All of which are going to be in short supply with a case load of 160 LT cases.

Here's the message. Employers who buy claims adjusting services on the cheap will get exactly what they bargain for - poor quality from overburdened, frustrated, ineffective adjusters.

Posted by at 7:45 AM | Permalink | Comments (4)

For some, red ink.

Most workers comp TPAs are struggling. The softening market has pushed many larger employers back to insured programs - for good reason. If a policyholder can buy fully-insured coverage for less than their projected losses plus admin expenses plus reinsurance premiums, most will.

This is particularly true in New York, Florida, and California, states where premiums have/are dropping precipitously. In Florida, the number of self-insured employers has dropped by over half since reforms went into effect.

The decline in California has likely paralleled the other sunshine state. Reports are that TPAs are slashing admin expenses in an effort to hold onto business - actually adding new business is a pipe dream for any TPA not willing to give admin services away.

So how are TPAs surviving? Slashing costs, cutting staff, merging, and creatively raising prices on managed care services. Or, working to educate their customers on the long term benefits of a continuous focus on cost drivers - loss prevention, return to work, network direction, medical management. That's where a long-term focus on the part of the employer will pay off - at some point the market will harden, and when it does the employer will be on the other side of the negotiating table, pleading with TPAs and insurers to provide comprehensive services at a price they can afford.

Take a long term view. Paying a bit more for services now will earn loyalty when the market hardens. And that investment will more than pay for itself.

Posted by at 8:11 AM | Permalink | Comments (2)

I've just about completed compiling results of the Fifth Annual Survey of Prescription Drug Management in Workers Comp. While the report won't be completed for a couple weeks, here are a few factoids that are rather compelling.

Drug trend continues to moderate, with inflation in 2007 coming in at 4.3%. That's a big improvement over last year's 6.5%, which was a big improvement over the previous year's 9.5%...

Generic fills (the percentage of scripts that are filled with generics) looks to be in the high seventy percent range, with generic efficiency around 90% (that's the percentage of scripts that could be filled with generics that are).

New this year is a question about first fill capture rate, defined as the percentage of initial scripts that are routed through the PBM's network. This is starting to get attention, with the average respondent rating it just under 'very important'. That doesn't mean they have the data - about half of the twenty payers surveyed couldn't identify their first fill rate. Of those who could, the numbers indicate about one-fifth of initial scripts are in-network.

Many of the survey respondents (primarily large and mid-size carriers, state funds, and TPAs) have a lot more insight into their drug spend, know what the cost drivers are, and the ones with the lowest inflation have all put programs in place to clinically manage drugs.

Thanks to all the folks who set aside time to help with the survey - you know who you are.

Posted by at 6:47 AM | Permalink | Comments (2)

I'm knee deep in my annual survey of pharmacy management in workers' comp, and if I look at one more column of data I'm going to need a few class 2's myself.

So in the interest of my sanity, here are a few early findings from the survey.

Inflation looks to be down from last year's 6.5%, marking the fifth consecutive year of 'decreases in the rate of increase'. More detail to follow on what's causing the decline, but preliminary review indicates the focus on utilization is continuing to reduce the volume and type of drugs dispensed. As NCCI has noted, utilization is significantly more important cost driver than price.

Clinical programs are getting better, more targeted, more sophisticated, and more effective. A focus on addressing high cost claimants is almost universal among the best performing payers - this may seem blindingly obvious, but requires one to have data, know what to look for, and be able to develop and implement programs to attack the issue.

I try to use the same questions each year so we can track trends and changes in the industry. But new things, points of interest, and queries come in each year which requires that some old and not-as-interesting-any-more questions have to get dropped to make room for the new stuff.

This year we added questions on generic efficiency and fill rates. While the analysis is not yet complete, and a couple more respondents are going to send their data in, the preliminary figures indicate the average generic fill rate is right around 70%, with generic efficiency (the percentage of scripts that could be filled with generics that are) around 90%.

This is an average - types of business written and managed, jurisdictional nuances, data availability, accuracy, and consistency all make this stat somewhat questionable.

That said, better to start asking then to wait for perfection.

Thanks to Cypress Care for sponsoring the survey for the third consecutive year.

Posted by at 8:41 AM | Permalink | Comments (0)

Friend and colleague Peter Rousmaniere recently attended the NCCI conference and was kind enough to provide a comprehensive report. Here it is, and thank Peter when you see him.

Continue reading "NCCI Conference - the Rousmaniere Report" »

Posted by at 4:58 PM | Permalink | Comments (0)

I recently gave a keynote speech to a group of insurance brokers affiliated with the Institute for Work Comp Professionals; the talk focused on cost drivers in WC, with special emphasis on medical costs.

The part of the talk that generated the most discussion was the section on networks, and specifically how most WC networks have completely failed to reduce medical expenses.

My net is insurers are shooting themselves in the head, with a pistol provided by their managed care departments.

PPOs contract with providers to deliver services at a discount. Most PPOs get paid a percentage of the savings that is delivered by that discount, typically 15 to 22 percent of the savings. So, the more the PPO 'saves' the more it makes. On the surface, this sounds good: the system rewards the PPO for saving money and does not pay it when it delivers no savings.

However, a closer look reveals that when the PPO vendors win, the payer loses. The ugly head of the Law of Unintended Consequences emerges again.

At the most basic level, health care costs are driven by a relatively simple equation:

Price per Unit x Number of Units = Total Costs

Under a percentage-of-savings arrangement, reducing total cost is ignored in favor of saving money on unit costs. The PPO gets paid for savings on individual bills. Therefore, the more services that are delivered and the more bills generated, the greater the 'savings' and the more money the PPO makes.

The system encourages over utilization because it is in the PPO's best interest financially to have numerous providers generate lots of bills for lots of services. Also, the providers, squeezed by a per-unit fee schedule that is lower than fee schedule/Usual and Customary Rates (UCR), have a perverse incentive to make up for that discount by performing more services.

The industry has been hit, and hit hard, by the Law of Unintended Consequences. Two of the top managed care "fixes" - fee schedules and PPOs with pricing based on percentage of savings, encourage over-utilization, a major cost driver for workers' compensation.

It's no wonder that most PPOs like this model, but why would any of their customers?

The simple answer is that managed care departments at many carriers and third party administrators (TPAs) are evaluated on the basis of their network penetration (the percentage of dollars that flow through a network provider) and network savings (on a per-bill basis).Their internal and external customers have bought into the per-unit discount model, and measure the success of their managed care programs on the dollars and/or bills that flow thru the network, and the savings below fee schedule or UCR delivered by the network.

The fact is few carriers, TPAs, or employers have realized that per-bill 'savings' is the wrong way to assess a managed care program. And unless senior management changes their evaluation methodology, their managed care departments will have no incentive to change their program to one that actually does reduce total costs.

After my conversation with a hall full of brokers, my bet is more carriers are going to be getting more questions about this.

Posted by at 6:54 AM | Permalink | Comments (4)

Many payers look at 'medical' as a line item and nothing more. This myopia, this failure to look deeper, to try to understand what drives medical, is perhaps the most significant shortcoming in the industry.

Many readers will dismiss this criticism, claiming that they are different and smarter, that they know better.

And most will be wrong.

One current example provides compelling evidence of the industry's ignorance of many things medical. I've posted on the pending changes to the Florida fee schedule, namely the move by the Three Member Panel to establish Medicare billed charges as the standard for Usual and Customary for facilities. That's right, billed charges, not reimbursement. Yet many payers - self insured employers, insurers, and TPAs - are blissfully unaware of the damage this will do.

Here's why hospital costs are important. According to the WCRI, hospital costs are rapidly accelerating for claims with more than 7 days lost time (which account for 83.5% of all workers' compensation medical payout).

• Medical payment for NonHospital providers: up 3.8%
• All hospital medical payments: up 7.1%
• Inpatient hospital medical payments: up 12.1%

In Florida, where hospital costs are about half of all medical expenses, this is particularly significant. In fact, two studies indicate the Panel's proposed changes will dramatically increase hospital costs - by over $50 million annually. More troubling, the change will likely have the unintended consequence of shifting the location of care for many patients. With facility reimbursement becoming much more profitable, payers can expect to see many more bills for care delivered in hospitals, outpatient facilities, and ASCs. And they will be paying much more for that care.

Yet payers, in testimony before the Panel, seem to be completely ignorant of the impact of the proposed changes.

Here's hoping payers wake up from their slumber - and soon. If not, many will have to explain to their clients why they didn't act to prevent this disaster. Because it is preventable.

(for detailed information on this in the form of an extensive analysis, email infoAThealthstrategyassocDOTcom with Florida Hospital Reimbursement in the subject line)

Posted by at 6:36 AM | Permalink | Comments (0)

Ingenix has had a tough few months. The latest injury comes in the form of a suit filed by a Connecticut man, seeking class action status based on allegations that the United HealthCare sub engaged in an "alleged conspiracy in which insurance companies calculate their usual, customary and reasonable rates from a flawed and manipulated Ingenix database. The low payments to providers, according to the lawsuit, left Weintraub and other consumers with higher out-of-pocket costs." (Modern Healthcare)

For the legal folks out there, the full case can be accessed here. (PACER sub req)

The plaintiff, Jeffrey Weintraub, is suing Ingenix, their parent, UnitedHealth Group Inc; sister company Oxford Health Plans, as well as Aetna Inc, Cigna Corp, Empire BlueCross BlueShield, Humana Inc, Group Health Ins Inc, Health Ins Plan of NY and Health Net Inc.

OK, so what does this mean? My sense is this is piling on; since the Cuomo announcement Ingenix has been a highly visible target, and based on the company's rather lackadaisical approach to defending its methodology in the Davekos case, it looks like the legal sharks smell blood in the water.

But just because it is piling on does not mean these cases are without merit.

I would expect to see more of these suits filed, perhaps in more class-action friendly jurisdictions (Mississippi, for example). I also expect the industry to rally around Ingenix - this is a very, very big deal, and one that has been mishandled so far. Ingenix, and the health payer industry, cannot afford any more mishaps.

Thanks to Fierce Healthcare for the heads' up.

Posted by at 6:24 AM | Permalink | Comments (2)

I'm at the annual meeting of the Institute of WorkComp Professionals in Asheville, NC today. A very impressive group; what is notable is these folks actually do 'get it'; they do understand that workers comp is not just a spreadsheet game, a price war, a contest to see who can squeeze the carrier the most.

These agents understand that the value they must deliver is to develop and implement long term programs, programs that attack cost drivers, that reduce injuries and speed return to work.

And those programs, and the results they provide, can't be done on the cheap.

Posted by at 12:36 PM | Permalink | Comments (0)

I had a chance to spend more time with the Medcor folks this morning at RIMS, and liked what I saw. They've been doing the combo first report of injury (or most of it)/nurse triage/network direction work for ten years now, and some of their nurses (all calls are answered by nurses) have logged over 5000 calls.

Because they don't have any stake in any network, they don't worry about increasing network penetration (a wholly misguided metric used to evaluate managed care plans) per se, but rather focus on getting claimants to the right doc. They do have the ability to send patients to specific docs based on the type of injury - but (here's a shocker) most of their customers are not yet sophisticated enough to be able to identify those 'right' docs.

The value? Avoided ER admissions and reduced claim frequency.

Not an earth-changing business, but one with a lot of potential - even more if the employer is somewhat sophisticated.

Posted by at 12:12 AM | Permalink | Comments (0)