There is no discussion or intention to include workers comp in any health reform package currently under consideration in Washington.

Let me be even more clear.

No one in the White House or Senate or the House or any staffer or party policy group - mo one even remotely close to the legislative process is in any way shape or form considering, contemplating, evaluating, mentioning or even thinking about workers comp. Comp is not now has never been and will not be part of any health reform program package bill or proposal.

I have no idea where this rumor is coming from, but I've talked with several folks who have heard that there is a task force working on this. If there is, they aren't located inside the Capital Beltway. Ostensibly this is part of some deal involving labor who theoretically will trade giving up on the card check program if the Feds make work comp a national program. I may well have this wrong because labor bosses would sooner give up their mothers fathers and pensions before giving up on cardcheck, much less something as inconsequential as federalizing comp.

And yes, we all know that comp was originally part of the Clinton reform package, known as Title Ten. What you may not know (and I didn't until Bob Laszewski told me) is exactly one (1) person in DC wanted Title Ten. Bill Clinton. No one else, not Ira Magaziner or Jay Rockefeller or Hillary gave two hoots about WC, but the big dog did.

What is also little known is that the person who deleted Title Ten was none other than Ted Kennedy. And the Senator has not had a change of heart.

Could thus change? No.

As Sen. Ron Wyden told me several months ago, when it comes to health reform, no one wants to pick a fight with anyone they don't have to.

Will health reform meaningfully affect workers comp?

Absolutely. If - and it's a big IF - reform passes into law comp will be indirectly affected. I've written on this extensively and will be doing so again shortly.

But comp WILL NOT be part of any bill.

Posted by at 3:23 PM | Permalink | Comments (2)

I received several calls about my post a couple weeks ago regarding using peer review to manage PT.

Generally, there appears to be some confusion over the article I cited in the post - specifically about its conclusion that peer review "may have had an impact" on the number of visits.

Here are the key paragraphs:

"It seems that peer review may have had an impact - possibly by reducing the number of claims with more than 24 visits (this wasn't apparent from the article). Complicating the analysis was the underlying data; it wasn't possible to determine objectively if there were jurisdictional differences or claim severity differences (e.g. there is a very wide range of 'severity' associated with lumbago). The article noted that more severe claims were probably more likely to have peer review, but that was based on the assumption (a reasonable one in my view) that lost time claims were more likely to have requests for peer review than medical only claims...if the peer review program did result in fewer cases with more than 24 visits, how many of those were still excessive (the average number of visits for PT in comp is much lower than 24). And what was done during those visits, were the claimants 'shaked and baked' or was there actual work hardening and therapy designed to increase the patient's functionality?"

In actuality, despite a close read of the study itself there was no conclusive evidence that peer review had any impact on the number of visits.

The underlying data did not have enough detail to provide any meaningful comparisons; for example it wasn't possible to determine if a specific claim was a med only or lost time, or how severe the injury was.

And the analysis of a smaller number of claims from one large employer (reportedly UPS) was not directly comparable as the claims may have been in different jurisdiction (or more or less severe).

The net is this. It was not possible from the article to determine if peer review had any impact on duration of treatment. Yet some readers (at least a few who contacted me) drew that conclusion.

As I noted in the conclusion, "more questions were raised than answered." Here are a few:

- why was the article published if the conclusions were so...inconclusive? would it not have been more useful and interesting if some of these issues were addressed more thoroughly?

- the data was not corrected for jurisdictional variations. If that wasn't possible, I'd suggest that another data set should have been sought, as there are huge differences among and between states regarding utilization and cost of PT, as well as changes within a state due to regulatory changes (see Florida, New York, Texas and California). It could be that no other data set was available.

- the severity issue is quite important; the data were evidently not sufficiently robust to make some assessment of differences in severity. Without some measure of severity, it is impossible to make comparisons and draw conclusions about those comparisons, especially as there can be wide ranges of severity for conditions such as lumbago (one of the diagnoses featured in the report).

I applaud the author (Janet Jamieson, PhD) for her research and effort to add to our understanding of this critical issue. While it would be best to wait until all the data are in, and tested, and all follow up questions asked and answered, that's not realistic nor possible. Instead, it is usually more helpful to publish what you have, recognizing that it will likely spur additional research.

It is incumbent on those who read reports and analyses to think critically, and not read more into the results than they should.

That is a disservice to the researcher, and may well lead to inappropriate conclusions.

Posted by at 6:43 AM | Permalink | Comments (1)

There are two key takeaways from the WCIRB report on California's work comp costs (as reported by workcompcentral.com).

Medical costs are rising fast, and managed care costs are rising much faster.

Medical expenses climbed 7.9% last year, led by a ten percent increase in hospital expenses. Drug costs were up marginally while physician expense growth was flat.

Hospital costs are approaching a third of all medical expense in the Golden State and are growing despite a tighter fee schedule and all millions spent on 'medical management'.

There are two contributors to this unhappy circumstance. One is the double payment for surgical implants that occurs due to a loophole in the CA fee schedule. HSA clients report their costs for implants in California are much higher than in any other states driven by both price and more frequent usage of devices.

The second driver is the disconnect between utilization review and the bill review and payment function. As noted previously here, many UR determinations don't find their way thru the electronic labyrinth to bill review and payment.

Which is why there is so much frustration among employers forced to pay ever increasing fees for managed care services that, in many cases, do little to 'manage' claimants' care much less reduce costs.

The California reforms have done much to restrain cost growth but the individual rules and regs have often done harm as well as good. The pharmacy fee schedule and associated regs resulted in the explosion of physicians dispensing repackaged drugs at wildly inflated prices. The 24 visit cap for PT etc has resulted in too many visits for some claimants with modest injuries and too much hassle for all parties involved in complex claims. And the implant issue is exhibit one.

The stakeholders benefiting least from the reforms are the physicians.

What's wrong with this picture?

Posted by at 7:32 AM | Permalink | Comments (1)

There are specialty managed care offerings for PT, imaging, pharmacy, home health, DME, facilities; even dental. Till now, the only type of medical spend that didn't have a custom answer had bern diagnostic lab.

That gap has now been filled.

Work comp managed care firm DiaTri (www.diatri.net) has signed a deal that provides their clients with access at deep discounts to the 5000 Quest lab facilities. The access enables payers to benefit from rates that look to be substantially under most generalist networks, and far less than fee schedule rates.

The deal requires payers to work diligently (my words not their's) to encourage claimants to use the participating labs; payers will have to do more than just take discounts. However, the discounted rates will be applied to retro as well as prospective referrals.

DiaTri has an exclusive deal here; thus is a savvy business move for the company which has been operating in other work comp and group health niche markets.

Note: neither myself nor HSA have any professional or business relationship with DiaTri or Quest.

Posted by at 11:54 AM | Permalink | Comments (0)

'Managing the Impossible', an analysis of catastrophic case management firm Paradigm's results and comparison of those results to those achieved by work comp insurers, has been sitting on the upper right corner of my desk for a couple of months now.

I've read it, re-read it, discussed it with Paradigm staffers and a couple of their clients, and started to post on this at least twice. Each time other hotter issues popped up, and this got pushed back into the corner of the desk.

This may be similar to how Paradigm has been dealt with by many in the payer community. Sure, those cat cases are important, and yes, we really need to do something about it, but hey, I have a really important meeting on the latest PeopleSoft upgrade to go to, and I really need to review the latest case closure report, and...

So the urgent takes precedence over the important. And make no mistake, catastrophic cases are very important indeed in work comp. According to an analysis by NCCI, half of all medical expenses are for 6.2% of claims.

Six percent of medical dollars are spent on 0.3% of claims. By my calculation, that's $1.8 billion annually on a very few claims. The real dollars are much larger, as cat claims account for a very large chunk of the industry's reserves.

Many payers have set up dedicated teams to handle cat claims. Staffed by senior claims reps supported by legal and medical experts, these are variously known as 'high exposure', 'large loss', or 'complex claim' units. While there's undoubtedly a lot of experience embedded in many of these units, it is simply impossible for a single payer to have the depth if expertise in specific types of cat claims that is resident in Paradigm. No insurer has seen as many TBIs, burns or spinal cord injuries; if they had they'd be long out of business.

Yet despite the demonstrated expertise and documented results of Paradigm, many claims execs refuse to objectively consider referring cat claims to Paradigm (or a similar entity).

Why?

Experience tells me some are threatened by the potential that an outside firm could actually handle a claim better than their own people. Others blindly believe (with inadequate justification) that no one outside their company could possibly do a better job.

Paradigm isn't blameless. The company has stumbled in their efforts to build a succesful sales and marketing program. At times they have been insensitive to the threat they pose to clients' entrenched processes and personnel. That said, there's no question they have far more expertise in cat claims than any single payer, and their financial model is usually compelling.

Note: Paradigm is not a consulting client and has no business relationship with HSA or myself.

Posted by at 10:39 AM | Permalink | Comments (5)

Physical therapy is one of the least understood components of work comp medical expense. This lack of understanding begins with a wide range of 'definitions' of what counts as PT - from services performed by physical therapists, to all the 97xxx procedure codes, to services billed by a PT clinic tax identification number (TIN).

Confusion continues when the widely varying state regulations are brought into focus, with states like Florida and California setting a hard-and-fast maximum number of visits ('the 24-visit rule'), while others ignore PT altogether in their medical management regs, and still other jurisdictions require payers to review and authorize PT.

Physical therapy is not a price-per-service issue, but rather a number-of-services issue. Several years ago I did an analysis for a very large self insured employer that identified several claims with more than five hundred PT visits over periods of no more than three years.

That's not a typo nor hyperbole.

Another analysis, this one for a large insurer, found over a dozen claims with more than a hundred visits over the course of a year. In both cases, there was no apparent medical necessity for the excessive visits, they were not authorized in settlement agreements, and most of the treatment records reflected massage and whirlpool treatments, repeated day after day after day.

Overutilization not only drives up medical costs, but also keeps the claimant out of work.

A recent article in the IAIABC Journal (sub req) authored by Janet Jamieson, PhD, President of the Physical Medicine Research Institute, an organization funded by PT management firm Universal SmartComp, evaluated one strategy for controlling PT visits - peer review.

Janet's been studying the work comp world for years, so I was excited to learn of her study. Janet was kind enough to clarify several questions I had after reading the article, as I couldn't determine if peer review had an impact on controlling utilization, and if so, if that impact was quantified.

It seems that peer review may have had an impact - possibly by reducing the number of claims with more than 24 visits (this wasn't apparent from the article). Complicating the analysis was the underlying data; it wasn't possible to determine objectively if there were jurisdictional differences or claim severity differences (e.g. there is a very wide range of 'severity' associated with lumbago). The article noted that more severe claims were probably more likely to have peer review, but that was based on the assumption (a reasonable one in my view) that lost time claims were more likely to have requests for peer review than medical only claims.

That begs the question - was the 'right' number of visits 24? And if the peer review program did result in fewer cases with more than 24 visits, how many of those were still excessive (the average number of visits for PT in comp is much lower than 24). And what was done during those visits, were the claimants 'shaked and baked' or was there actual work hardening and therapy designed to increase the patient's functionality?

One finding of note was that active involvement of the payer appeared to reduce the number of visits more than the possible impact of peer review itself. That is not surprising; employers with strong risk management, injury prevention, and claims management programs always get better results than those who rely on utilization review alone.

As with almost any study, more questions were raised than answered.

Posted by at 8:41 AM | Permalink | Comments (2)

Well done, RiteAid.

Industry sources indicate RiteAid and workers comp PBM FirstScript have worked out their differences; RiteAid is again accepting FirstScript claimants.

While no one would speak on the record, reliable sources reported that the deal came together when FirstScript agreed to stop accessing group health reimbursement contracts for their claimants (in comp, patients are claimants, not members). This was the very large bone of contention that led RiteAid to boot FirstScript out of their stores several weeks ago.

This is good news - not only for FirstScript, but also for all retail pharmacy chains. As I noted in an earlier post, retail stores charge more for comp scripts because it costs them significantly more to identify the correct payer, establish eligibility, and comply with utilization review edits and processes. That's entirely reasonable and appropriate.

Price compression in the comp PBM business has driven down margins, and is likely behind the RiteAid-FirstScript 'disagreement'. As PBMs compete for business in what is a rapidly-maturing market, they make price concessions to get new deals. This drive for share has come smack up against the reality that the PBMs' cost of goods sold is pretty consistent across all PBMs; thus the ones that want to continue to slash price to gain share have to figure out another way to reduce their cost.

In violation of their contacts with the chains, some (but by no means all) PBMs have been accessing group health/Medicare contract rates.

RiteAid's tough stance has paid off for the retail giant; good for them. Now we'll see if other retail chains also do the right thing and get tough with WC PBMs that are circumventing their contract obligations.

If they do, we'll see a level - and fair - playing field for WC PBMs. If the retail chains don't get tough with the PBMs using group contracts they'll lose revenue and force the PBMs that are complying with their contracts to either lose business to the unethical PBMs or join the 'bad guys'.

Note - as mentioned ad nauseum I'd welcome a response from firstscript or their parent but my requests have been ignored.

Posted by at 8:44 AM | Permalink | Comments (0)

Those of us with plenty of gray (or silver) hair have not been surprised by the significant increase in medical expense in California since the implementation of reform several years ago. What has been surprising is that it has taken this long for medical inflation to 'present'.

Medical costs are the primary reason premiums are headed back up, but before we get too excited, let's remember that work comp premiums plummeted over the last few years, dropping to almost-unprecedented levels. Carriers rushed into the state, new insurers started up, and existing carriers sought to write even more business. The result was a very competitive market, and a dramatic drop in employers' workers comp costs.

The market has turned; the insurance rating board is looking for a rate increase of almost 24%, driven in large part by the increase in medical expense.

In a recent hearing before the state's insurance commissioner, two problems became apparent - one obvious and the other much less so.

The obvious problem is the rapid rise in medical expense in California. According to a recent release by CWCI, their analysis shows "significant increases in California workers' comp medical payments since AY 2005, with amounts paid for treatment, pharmaceuticals and durable medical equipment...all on the rise."

The less obvious problem is the lack of understanding on the part of most insurers, TPAs, and other payers about the factors driving up medical expense. This ignorance is demonstrated by their continued reliance on medical management techniques and tools that are not only ineffective but I would argue are likely contributing to the increase in costs.

As reported in WorkCompCentral (subscription required);

"Despite the fact that self-insured employers such as Safeway and the University of California reported much smaller medical cost increases than commercial insurers, they pointed out that their medical networks have helped reduce much of their exposure to cost drivers because of the quality of their physicians [emphasis added], and their ability to encourage claimants to seek treatment within their medical networks and avoid litigation."

Big generalist networks do not reduce comp medical expense because the incentives are all wrong and they contain too many docs who can't spell workers comp.

What does this mean for you?

Until and unless payers figure this out and stop talking about doing something and actually start doing that 'something' medical costs are going to continue to rocket up, and so will employers' premiums.

Posted by at 9:29 AM | Permalink | Comments (3)

Magellan Health is buying a small chunk of Coventry - the unit that provides prescription drug programs and other services for Medicaid members. Although the unit was identified as 'First Health', it is NOT Coventry's workers comp managed care business.

The business currently generates about $55 million in annual revenue.

Coventry will take a loss on the sale (evidently the business was carried on the healthplan company's books at a value considerably higher than the sale price) of fifty-five to sixty cents a share.

The move ties into a larger relationship between the two firms, as Magellan will also be managing Coventry's radiology and oncology claims for the next three years. The radiology contract is on at at-risk basis, meaning Magellan will guarantee to hold costs to a specific range or dollar figure.

The sale continues CEO Allen Wise's strategy of divesting under-performing and non-core businesses; expect more news like this over the next year.

Posted by at 8:51 AM | Permalink | Comments (0)

The two overarching issues in work comp bill review are state reporting and the non-connect between utilization review/medical management and bill review.

Bill Review
Workers comp payers spend hundreds of millions of dollars each year on medical management - pre-cert, utilization review, peer review, case management, clinical guidelines, and the variations and permutations thereof. Dozens of companies from mom-and-pops to regional players to industry giants like Coventry and Genex employ highly trained professional medical personnel to watch over the care delivered to injured workers, carefully reviewing and approving or not approving thousands of medical procedures.

Then, the medical bills come in to the payer. The frightening/amazing/unconscionable truth is that many non-approved medical treatments actually are performed, and billed for, and likely paid - because those determinations are not automatically fed into the bill review system's database, and/or the bill review system can't link the determination to the bill/provider/claimant.

How much of this actually occurs on a national basis is impossible to say, and there's no doubt some payers have the links in place to ensure most if not all medical management determinations are linked to the right claimant/provider/event.

But many payers do not have this link in place and/or it doesn't work very well and/or it requires a human to make the link, dramatically increasing the opportunity for error.

I've seen anecdotal evidence of this non-connect in audits performed for payer clients, but this is the first evidence I've seen of an industry-wide issue.

Implications
There are a number of potential implications, starting with the obvious - how much are payers spending on treatments that have not been authorized or were actually non-authorized? How much are payers spending on medical management programs/services that are not delivering results due to the bill review linkage issue? Which systems/vendors have these links in place, and how well are they working?

State reporting
State reporting is another issue; friend and colleague Peter Rousmaniere has long proved his ability to cut right to the heart of the issue and he did it again in an email to me this morning wherein he asked the question that is likely on many bill review/IT managers' minds - what exactly are states doing with all the data they are forcing payers to send to them? Are they doing anything? If so, what, and how will that benefit the industry, employers, society? When?

These are both vitally important issues, albeit for different reasons. But at their core, the question we should be asking about both is the same; what are we getting for our expenditure of time, effort, intellectual capital, and money?

Posted by at 9:13 AM | Permalink | Comments (2)

I had a chance to speak with the PR folks from RiteAid this morning, who were responding to my request for additional information about RiteAid's decision to terminate its relationship with work comp PBM FirstScript.

RiteAid is still participating with other work comp PBMs, just not with FirstScript. Sources also indicate that California-based work comp PBM WorkComp Rx has also been terminated by RiteAid for the same reason - processing comp scripts through group health contracts.

As this is a contracting matter, RiteAid will not comment on it publicly, and I won't characterize my conversation with their corporate PR staff.

However, other internal sources have confirmed that RiteAid has term'ed their relationship with FirstScript. And I'm also hearing that FirstScript has told at least some of their payer customers that they should have their claimants start using other pharmacy chains. FS is obviously doing this in an effort to force RiteAid back into their network; by threatening to pull customers out of stores, FS is trying to hit the big retailer where it hurts most.

Other PBMs are watching very, very closely - as are other retail chains. If RiteAid backs down (which to date it has shown no intention of doing) expect other PBMs to start using group health contracts to process work comp scripts. If they hold firm, and if other chains follow their lead rather than seeking to benefit from RiteAid's principled position, order will be restored to the market, rule-abiding PBMs will no longer be penalized, and rule-ignoring PBMs will get their comeuppance.

Hang in there, RiteAid. And to the rest of the chains, do the right thing.

Posted by at 1:07 PM | Permalink | Comments (3)

Note - The public version of the First Annual Survey of Workers Compensation Bill Review will be released Friday. If you would like a copy, do NOT comment here, but send an email to infoATHealthStrategyAssocDOTcom.

I'm finishing up the survey report, need a break from analysis and writing - and some of the results are just too interesting to keep to myself till Friday. (I know, I need to get a life)

One of the less-obvious but more-interesting findings is the way the market's perceptions about bill review firms have shifted of late. The industry has seen a lot of change at a rapid pace, with Mitchell's acquisition of SmartAdviser, Coventry's acquisition and ownership of the code for their bill review system, new management at Medata, CS Stars' announced departure from the business, the purchase of Stratacare, and Ingenix' troubles with UCR.

All of these events/transactions have influenced respondents' views of the industry, and certainly of individual vendors within the industry. Some have risen in stature, while others have declined, and the changes aren't necessarily what one would think.

One of the last questions in the survey asks respondents to rate each firm on a scale of 1-5, with 5 being best/highest. While respondents' views of the various BR firms tend to lump them in a fairly narrow band, their statements paint a more complex and more nuanced view.

Couple the individual BR firm ratings with the responses to another question "is the bill review industry meeting payers' needs?" and the picture that emerges is of an industry that is viewed in general as mediocre, focused more on processing speed and throughput than effective medical management (yes, bill review does have a lot to do with med management), and more reactive than innovative.

Among the vendors reviewed there are a couple notable exceptions, and it is important to note these views are general: depending on the payer's market, technical abilities, business model, and strategic orientation, one or more vendors may be a great fit. The 'fit determination' process is key to successful vendor selection, and according to several respondents that had recently gone through the RFP process, requires much more interaction, discussion, and sharing of information on the part of the payer than they had anticipated. Instead of the typical RFI-RFP-finalists selection-onsite presentations-reference checking/offsite visits-battle over pricing and terms-contracting process, to a person these respondents talked about the need to engage much more deeply with potential bill review vendors than they had anticipated. In some cases this was acceptable to management, but in others a more rigid process prevailed, resulting in (in a couple cases) a less than optimal outcome.

Posted by at 7:21 AM | Permalink | Comments (0)

Retail pharmacy giant RiteAid is no longer accepting work comp claimants administered by PBM FirstScript. RiteAid, which owns almost ten percent of all retail pharmacies in the nation, decided to terminate their relationship with FirstScript due to a dispute over processing of work comp scripts.

Despite reports to the contrary, RiteAid is still working with other work comp PBMs.

FirstScript uses CVS/Caremark's network of pharmacies;FirstScript was allegedly processing work comp scripts through the CVS/Caremark group health network, thereby getting lower prices than if the scripts had been identified as workers comp. This has long been a bone of contention among PBMs and retail chains alike, as those PBMs that use work comp contracts typically pay significantly more for their drugs than they would pay under group health (or Medicare) contracts. PBMs that play by the rules (only processing comp scripts via their comp contracts) contend that some PBMs do not play by the same rules, a situation that puts the 'rule-abiding' PBMs at a distinct disadvantage.

Retail stores charge more for comp scripts because it costs them significantly more to identify the correct payer, establish eligibility, and comply with utilization review edits and processes. That's entirely reasonable and appropriate.

Price compression in the comp PBM business has driven down margins, and is likely behind this alleged conflict. As PBMs compete for business in what is a rapidly-maturing market, they make price concessions to get new deals. This drive for share has come smack up against the reality that the PBMs' cost of goods sold is pretty consistent across all PBMs; thus the ones that want to continue to slash price to gain share have to figure out another way to reduce their cost.

RiteAid is still in the business of filling work comp scripts - just not for FirstScript claimants.

The chain continues to work with other workers comp PBMs, including ScripNet, Progressive, Cypress Care/Healthcare Solutions, Express Scripts/MSC, Aetna, Modern Medical, PMSI/Tmesys, Cogent Health, and MyMatrixx.

Of note, FirstScript claims their network includes 61,000 retail pharmacies. This may not have been updated to reflect the RiteAid termination, as it is next to impossible to have that many retail outlets without RiteAid.

Sources indicate other chains are closely monitoring this situation, as they too have been frustrated by PBMs processing work comp scripts under their group health pricing arrangements. Industry watchers (including your author) have been waiting...and waiting...and waiting for the chains to actually do something to stop this practice. Perhaps other chains will follow RiteAid's lead and force compliance with their contracts.

Their failure to do so has - and continues to - penalize(d) those PBMs and payers that complied with their contracts.

Kudos to RiteAid for stepping up. About time.

Posted by at 6:51 AM | Permalink | Comments (0)

We've completed the First Annual Workers Comp Bill Review Survey and there are several highlights worthy of mention. (If you've requested a copy of the results you will receive it by the end of next week)

Bill review is considered significantly 'more important' than other managed care services by survey respondents (TPAs, carriers, managed care firms, and self-insured employers). While this isn't consistent across all respondents, most are of the opinion that bill review is where the proverbial rubber/road meeting occurs, and if UR or PPO determinations don't show up in bill review, they are irrelevant.

Which leads to the next finding - most of the more sophisticated respondents are very, very cognizant of - and frustrated by - the difficulties inherent in integrating BR and other medical management systems, platforms, and vendors. There is a sense that not all UR determinations (numbers of visits for PT, hospital stay duration, epidural steroid injections) appear in the final payments, with many unauthorized services actually performed, billed, and paid.

(note - this is consistent with the result of some, but not all, audits of client data performed by HSA)

Respondents decried the lack of understanding of the complexities of bill review, and the commoditization of the service, on the part of senior management and policyholders alike. Their sense is there is little to no appreciation of the difficulties inherent in staying on top of fee schedule and rule changes, increasingly sophisticated provider billing techniques, and impact of bill review on claims costs. Pressed to reduce costs and staff during this soft market, respondents are frustrated by their inability to convince C-level personnel of the relationship between effective (i.e. well-done and not cheap) bill review and ultimate claims costs and combined ratios.

The ratings of bill review vendors and application providers show respondents are quite current and aware of changes at the various suppliers. Vendors that would have been rated poorly as recently as a year ago are viewed more favorably today, with respondents very much open to considering bill review application vendors that would not have made their first cut twelve months ago.

There were notable differences among and between the various bill review vendors and application providers, differences that 'didn't appear until well into the implementation phase'. The perception among respondents was that these differences were due in part to a failure on the front end to be very clear and precise about semantics (what, exactly, is a 'bill', what is a 'rule', what is a 'duplicate bill', when does the clock start and end for turn around time, whose responsibility is it to ensure the DRG grouper complies with and is consistent with specific state regs, and on and on). As a result, costs, throughput, efficiency measures, 'savings' and other metrics had to be re-adjusted, causing more than a little agita for program managers.

Finally, some bill review applications and vendors were perceived to be better positioned to address likely changes in the overall health care system. Respondents viewed these vendors as more flexible, more adaptable, and more cognizant of the broader systemic issues and their potential impact on workers comp. One knowledgeable respondent noted "some of these vendors are so focused on comp that they aren't paying attention to current and likely future changes in Medicare physician and hospital reimbursement...and their systems just won't support some of the likely changes in Medicare-based fee schedules.."

Posted by at 7:36 AM | Permalink | Comments (26)

Expect the Texas legislature to pass laws tightly restricting PPOs before the end of the biennial legislative session June 1. According to WorkCompCentral, the Senate is making considerable progress on a compromise bill that will closely follow the NCOIL model.

The NCOIL model act includes strong disclosure requirements, standards for network contract and discount disclosure, penalties for PPO's failure to disclose clients to providers, allows providers to refuse discounts taken without a contract and provides for enforcement under Texas' unfair trade practices laws. (see the WorkCompCentral article for details)

This is good news for payers and providers alike.

Silent PPOs have long been a major bone of contention, leading to countless lawsuits and counter suits by payers and providers, tying up claims in seemingly endless litigation. Not only will the bill - if enacted - reduce legal hassles and the cost of same, I'm also hopeful that it will force payers to stop their endless, pointless, counter-productive discount-shopping.

Picking providers base on how much they'll cut their rate is beyond dumb,for reasons laid out in detail elsewhere on this blog. Beyond that obvious problem is the damage that process dies to the payer-provider relationship. It tells the provider they are merely a vendor, a bill, a cost. It devalues their role entirely, transforming what is often an already-tense relationship into open warfare.

Payers have to treat providers intelligently, seek to understand their situation and motivations, and try to work with them. Sure some providers are crooks and frauds, but treating all of them as such just ensures claims will be contentious, difficult, and more costly.

Posted by at 8:28 AM | Permalink | Comments (0)

I've fielded several calls over the last few days from clients and colleagues asking about the potential implications of the Obama Administration's vow to more rigorously enforce antitrust regulations.

During the eight years of the Bush Administration, not one case was brought against a large company charged with attacking a smaller rival. If anything, Bush et al bent over backwards to help big business, doing little to stop mergers and acquisitions that significantly consolidated market share. The change in policy by the Obama Administration came about Monday, when antitrust boss Christine Varney explicitly rejected Bush's September 2008 rule-making that directed the government to avoid interfering in "the rough and tumble of beneficial competition." In order to initiate action, the Bush rule required that the government determine that a merger or action's negative impact on competition was "substantially disproportionate to any associated pro-competitive" benefit.

Speaking at an event sponsored by the Center for American Progress, Varney said the Obama administration's approach to antitrust will be based on the understanding that the marketplace alone should not dictate what is fair competition. That implies the Feds will be taking a more active role.

Antitrust regulation is based on the Sherman Antitrust Act, wherein "a monopoly power is defined as the ability of a business to control a price within its relevant product market or its geographic market or to exclude a competitor from doing business [emphasis added] within its relevant product market or geographic market. It is only necessary to prove the business had the "power" to raise prices or exclude competitors. The plaintiff does not need to prove that prices were actually raised or that competitors were actually excluded from the market." (FreeAdvice.com)

Implications for comp

The work comp network business is dominated by Coventry Healthcare. They have the largest network used by almost all of the larger payers and most of the mid- and smaller ones. The network was based on the First Health PPO, augmented by the acquisition of Concentra's managed care business, and enhanced when Coventry removed Aetna Work Comp Access from the market by signing an exclusive deal.

Coventry then implemented their "all or nothing" strategy, wherein customers who wanted to use other rival networks in certain jurisdictions were told they could not do so; if they wanted Coventry anywhere, they had to use Coventry everywhere. Other customers were given more flexibility, but at a much higher price - using a 'foreign' network meant the customer had to pay more, and in some cases much more, to Coventry.

I'm no attorney and certainly not more than superficially knowledgeable about antitrust issues, regulation, and history. With that disclaimer, here's a mostly uneducated opinion. It seems to me that Coventry's ability to consolidate the comp network business and, via pricing and contracting practices, shut out competition gives them a huge advantage in the marketplace. An advantage that has driven very nice financial results. Whether those actions qualify as anti-competitive under the law is something I'm not qualified to judge. But from a layman's perspective, the comp network business fits the definition of a monopoly.

Will the Administration look into the comp network business? I very much doubt it. Not only is this a relatively tiny market, the market consolidation, and approval thereof (to the extent Bush's people even looked at them) occurred well before President Obama took office. Obama has demonstrated a reluctance to revisit decisions made by his predecessor; I just don't see Varney and her attorneys re-examining the consolidation of the comp network business.

Disclaimer - After several years of attempts to engage with Coventry to hear their perspective, attempts that were ignored (except for one conversation with Jim McGarry two years ago) I don't even try any more. If anyone from Coventry wants to discuss this, feel free to contact me.

Posted by at 6:46 AM | Permalink | Comments (2)

Coventry released its financial results for Q1 2009, and the work comp financials are, to say the least, strong.

Revenues were up almost 10% quarter over quarter to $188 million, while gross margin actually declined by a couple points to $130 million. The 10-K states that the growth in revenue was driven primarily by an increase in the company's work comp PBM revenues.

I'm more than a little surprised by the gross margin number. Coventry's PBM, FirstScript, has been aggressively expanding, slashing prices to do so. Margins in the WC PBM business have been declining of late, under pressure by the dynamics and market forces of a rapidly maturing market. Yet Coventry's gross margins are holding up quite well.

It is likely that the company's well-documented efforts to raise prices on network rental services have helped keep the gross margin number where it is. Kudos to Coventry for this success; it's taken a lot of work and come despite strong resistance from many clients.

The slight drop in gross margin dollars (understanding it is a larger decline in percentage terms) will likely turn around in Q2, as Coventry has recently laid off a number of managers and directors in the work comp business.

Work comp is - by far - the most profitable business for Coventry. Although comp only accounted for 5.3% of Coventry's revenues for the quarter, it delivered about 19% of gross margin.

Those are pretty strong numbers, and shows exactly why the new management team is enamored with the business. Any business that produces $520 million in gross margin on $850 in annual revenue is going to have lots of Board support.

Posted by at 6:30 AM | Permalink | Comments (0)

If you thought the first few posts from NCCI were esoteric, here comes one that makes them look amazingly general. You'll either yawn or be right on the edge of your chair...

Chris Brigham, MD, senior editor of the AMA Guides to the Evaluation of Permanent Impairment (the Guides), had the coveted post-lunch speaking slot at last week's NCCI meeting on Thursday. For those not conversant with this issue, the Guides are used in workers comp to determine when, and how much, a person's medical condition is a disabling condition.

Note that Brigham, and the new edition of the Guides, are controversial and the object of assault by many who claim to be on the side of the claimant (I'm not saying they're not, I'm saying that's what they purport to be. I have no opinion re the utility or appropriateness of the Guides).

Brigham started off by noting that most of the initial impairment ratings he reviewed were subsequently corrected. And in the vast majority of cases, the original rating was an over-rating of disability. That is, the subsequent review showed the person was not as disabled as the original impairment rating asserted. Brigham used a database comprised of 866 California cases, out of which 83% were incorrectly rated, at a cost of over $15,000 per case (cost is the award amount for the initial impairment rating v the subsequent rating).

Notably, impairment ratings in Hawaii tended to be more consistent than in California - a lot more consistent.

Errors in CA were overly concentrated in LA, less so in others. There is also a variation in ratings done by different types of physicians and for different diagnoses.

A couple key concepts - impairment is not the same as disability. Impairment is the result of the medical condition - what physicial impact occurred. Disability is somewhat more subjective, as it addresses what that person can do. For example, Steven Hawking (the brilliant physicist) is completely impaired due to ALS. He is also a prolific author and practices his craft every day. Thus he is 'impaired' but not 'disabled'.

To paraphrase friend and colleague Jennifer Christian, MD, "there is no medical condition that is so disabling that there is not a person in this country with that condition working full time and being paid well."

The new Guide was developed in an effort to add consistency across the ratings, a response to criticism of past editions. The new Guide is more diagnosis based, using evidence to substantiate the diagnosis, and provides rating percentages that factor in clinical and functional history as well as an exam of the patient. It also factors in new, more current medical research and clinical studies.

According to Brigham, the new Guide eliminates such historical factors to rating including the occurrence of surgery and range of motion for spine patients, as the clinical research indicated no linkage between those 'factors' and actual impairment.

Notably, physicians polled for their reactions to the new edition were generally favorable, while plaintiff attorneys and chiropractors were not.

What does this mean for you?

Expect the use of the new Guides will be controversial, and will likely be subject to legal action in many jurisdictions due to the changes, and stakeholders' reactions to those changes.

Posted by at 10:33 AM | Permalink | Comments (1)

IAIABC President Peter Federko had twenty minutes to discuss the impact of health reform on workers compensation. I've posted on this several times, for those interested here's where a summary post.

Before we delve into Mr Federko's comments, I'd be remiss if I didn't note that there already has been, and almost certainly will be, 'health reform' initiatives that will impact workers comp - to greater or lesser degrees. These include S-CHIP and the Medicare Set-Aside language inserted into that bill at the very last minute (for those who thought that health reform would have little impact on comp, the insertion of MSA language into a bill for poor kids' health care is a big bucket of icy water smack in the face).

On to Mr Federko, President of IAIABC. Mr Federko is Canadian, CEO of the Saskatchewan Workers Comp Board, so knows a lot about the relationship of universal health care and workers comp. (I'd note that there are a variety of health reform proposals before Congress today, some of which call for universal coverage, others do not).

Speaking from his perspective as the boss of a comp regulator/seller/administrator. he noted that the fundamental principal of universal care is the access to medical necessary care regardless of the ability to pay. Canada, Norway, Denmark and Sweden use single payer systems, where money comes from the government and is paid to private providers. In the UK and Spain, the government owns the payer and providers. In Germany and Switzerland, there are many insurers which employers and individuals contribute to, who pay independent private providers to deliver care.

Note that in those systems that include 'private providers' the providers are not government employees. Most of the hospitals in Canada are privately owned by regional authorities or not for profit organizations. Physicians are independent, for-profit providers who bill and receive payment from the government.

In Canada, the same amount is paid for any procedure regardless of the payer type. Thus payment for a hernia is the same whether it is through workers comp or 'regular' health. However, the work comp board negotiates with providers to ensure quicker access to care to facilitate quick scheduling, completion of reports, and compliance with communications standards. There are additional payments for reporting and communication, and in some instances the Board sends claimants south of the border to get treatment more quickly.

Federko noted that the US spends considerably more than the US for health care, while life expectancies in Canada are a couple/three years longer than in the US, infant mortality rates are lower in Canada, and the WHO reports that Canada ranks slightly higher than the US (30 v 36) on a ranking of industrialized nations' medical quality (paraphrasing here).

He also noted that the cost per claim in Canada for comp can sometimes be higher than in the US. Federko said this is due to their intense focus on return to work, which leads to the Board doing whatever they can, paying for whatever services may be suggested, in an effort to get their injured workers back on the job. However, this intense focus has led to significant savings in indemnity expense, and therefore, according to Federko, it is well worth it.

A couple other observations worth mentioning. First, Federko said that it is indeed possible that universal health care in the US may well reduce cost shifting to workers comp resulting from underpayments to providers by medicare/medicaid/the uninsured.

Finally, Federko reiterated a key point - universal coverage is not socialized medicine, in Canada 95% of care is delivered by private providers.

Posted by at 8:57 AM | Permalink | Comments (2)

Here's the non-substantive view of the conference.

Very well done. Lots - and I mean lots - of good data and information about trends, costs, cost drivers, potential impact of political and economic developments, broken up with entertaining and thought-provoking presentation on global trends.

Very good speakers with very deep knowledge on their topics. As an example, I learned a lot about the use of Medicare RBRVS in workers comp reimbursement - a topic of critical importance in comp that I thought I knew pretty well.

The dinner last night was not the typical formal sit-down but a casual outside affair with various Italian delicacies on tables surrounding stand-up and sit-down dining tables. This allowed for lots of mingling, discussion, and was a lot of fun to boot.

Two quibbles. In the Medicare presentation yesterday there was no discussion about the potential impact of the pending changes to Medicare physician reimbursement fees. This is a big issue as it will dramatically impact workers comp medical expense, likely in several ways.

One of the morning presenters yesterday, Robert Hartwig of III, allowed (what I perceived to be) a political bias to intrude on an otherwise excellent presentation. Hartwig talked about 'wealth redistribution' at some length, and even made the statement that we might see workers comp used as a mechanism for 'wealth redistribution'. His slides also included a reference to the pending socialization of health care. As I've noted repeatedly, that is not what is proposed in Washington by the Administration nor is it consistent with the proposals that have any chance of passage.

These memes - wealth redistribution and socialized medicine - are not helpful nor are they accurate.

But these were minor compared to the solid substance throughout the day.

Posted by at 8:39 AM | Permalink | Comments (1)

Dennis Mealy, Chief Actuary at NCCI, got into the details with his State of the Line address at NCCI's annual conference. We'll focus on workers comp, but it's important to remember comp is a part of the overall property and casualty industry .

The P&C industry saw a ten point jump in the net combined ratio from 2007 to 2008, with NCCI predicting a 105% 2008 combined ratio.

That's big news. But as bad as that is, there may well be more bad before things turn around - historically the PC market does not turn around until the combined ratio hits 116%. And, it is still slightly lower than the average ratio over the last 22 years, which was 106.1%. So we may well have more bad news before the sun comes out.

So, how's comp doing?

Well, as noted in a post earlier today, for the fourth year in a row, work comp premium declined to $39 billion after three consecutive annual declines. From 2005, premiums have dropped almost $8.5 billion - with a big chunk of that decline in California and Florida.

The combined ratio stayed static at 101 after a stellar 93 in 2006. After accounting for investment results, the industry returned a pre-tax operating gain of nine percent in 2008 (predicted) - a solid result to be sure, although a significan drop from 2007 (12%) and 2006 (17%). And, it is still higher than the average return of 6.5% (from 1990 to 2007).

There's more data that indicates we may still be a ways from the bottom of the soft market. Reserve deficiencies are still relatively low, the accident year loss ratio remains historically low (although my personal opinion is 2008 and 2009 medical costs will come in significantly higher than most industry folks expect. The industry's predictive accuracy is pretty poor - private carriers projected the AY loss ratio would be 84 in 1999 and 83 in 2000; when the final numbers came in, the rates were 106 and 102 respectively. that's rather a large miss) See the 2009 SOL report on their website - particularly slides 20 and 22.

Medical costs

Mr Mealy stated that medical costs, while not solved, appear to be moderating. Mealy mentioned that further development (looking back at past predictions after collecting more data) of projected medical costs have indicated medical inflation rates are moderating. He backed up his assertion (perhaps assertion is too strong a term; opinion might be more accurate) by noting that medical costs as a percentage of claims costs look to have dropped from 59% to 58%. Mealy noted this is by no means proof that medical costs are under control, and he does expect medical to reach 60% of costs.

In a follow up discussion with Mr Mealy, we discussed this issue in more detail. The net is although some payers (specifically HSA's payer clients) are seeing significant increases in medical costs, driven in large part by facility expense, Mr Mealy's numbers (which include about half of the nation's workers comp dollars) don't indicate medical inflation is trending up.

I'm struggling with this, as it goes against I'm seeing. Then again, I tend to work with payers who are working hard to manage medical costs, so my world view may be skewed.

What are you seeing? (Anonymous responses welcomed)

Posted by at 11:12 AM | Permalink | Comments (1)

NCCI President Steve Klingel led off the NCCI Annual Issues Symposium (AIS) with a discussion of reform.

Regulation

Notably, despite the sweeping wins by Democrats at the state level, the actual number of reform bills likely to become law decreased.

From the Federal perspective, one of the more significant potential issues is the advocacy by CA Rep Joe Baca (D) of a National Commission on Workers Compensation to evaluate state WC laws and regulations to determine the equity and fairness of the states' comp systems. There's not much support on the Hill for Baca's initiative - but given the pace and variety of issues under consideration in DC it is possible - if only slightly - that the bill gets some attention (it also doesn't cost anything, which is kind of rare these days).

The overall message? We are very much in a wait-and-see mode regarding changes in regulation. oversight, and potential impact of reform and Medicare changes.

Recession

Payroll (which has a dramatic impact on work comp premiums) looks to be somewhat flat; if unemployment hits double digits, expect payroll to decline for the first time in decades. Watch this closely...

If employers continue to cut wages across the board, premium will decrease - but the underlying risks, and the cost of those risks, will not. There appears to be anecdotal evidence of these across the board wage cuts; insurers would do well to monitor this carefully.

The decline in frequency is logical during a recession - in fact in six out of seven recessions frequency declined (note I've posted on this several times in the past). However this recession is deeper, broader, and nastier than almost any others on record, and therefore it's harder to predict what the impact will be. There's no doubt - in my mind - that the recession has prolonged an already-too-long soft market. Despite rising medical costs and increases in overall lost time claim costs, comp premium rates remain historically low.

As some economist long ago said, if something can't go on forever, it won't. The obvious question is the timing of 'forever'. For many comp writers, 'forever' may come too late. Their ongoing decisions to write comp at low rates despite upward pressure from medical expense may well result in a shake-out similar to the one we old folks saw after the end of the soft market of the late nineties.

There will be much more detail on these issues in later sessions - stay tuned.

Posted by at 8:44 AM | Permalink | Comments (0)

I'm covering the Annual Issues Symposium at the NCCI Conference in Orlando...

The agenda looks pretty strong, and attendance is solid as well - at 98% of 2008 levels (a big contrast to the RIMS show last month).

NCCI released their State of the Workers' Comp Line report this morning (available at their website www.ncci.com. Highlights include:

- Frequency declined four points in 2008, evidence that the recession is impacting work comp claims

- As further proof of the continued existence of the soft market, comp premiums declined by 12% last year to $39 billion.

- The accident year combined ratio (claims plus admin expenses) increased to 100%
in 2008, up four points from the prior year.

The agenda includes a discussion of the impact of health reform - and Medicare - on workers comp. Hallelujah. It is long past time for the comp industry to look up and out, to realize we are the flea on the tail of the dog, and that dog is moving in new and different directions, and moving fast.

More to come...

Posted by at 8:33 AM | Permalink | Comments (0)

Bill review vendor Stratacare announced the closing of their financing deal this morning. An investment group led by long-term industry veteran Paul Glover now owns a majority stake in the company; SV Life Sciences and Beecken Petty O'Keefe are the private equity firms behind the deal.

Sources indicate the deal is for a majority stake, but significant equity has been retained by the original owners.

Stratacare's bill review customers tend to be mid-tier and smaller payers; the company's application has strong auto-adjudication capabilities and was one of the first to integrate the ODG treatment guidelines, essential to processing medical bills in Texas. Most clients utilize their hosted services, although a few have loaded the Stratacare application on their own hardware.

Bill review companies have long been at the mercy of big network vendors who could, and have, altered the terms of their network rental arrangements at will. Stratacare and giant Coventry battled over price increases last year with Stratacare eventually paying significantly higher access fees.

Stratacare will be the foundation of a significantly expanded work comp managed care firm. Expect Stratacare, under new chairman Glover, to rapidly expand into the network business; network rental fees are often a major contributor to bill review company profits and represent a significant growth opportunity for the company. Sources indicate Stratacare is evaluating several initial market opportunities with initial focus likely on Texas, where the larger networks are having challenges meeting payers' needs.

More details to follow: I have a query into Stratacare.

For now, off to the NCCI annual conference...

Posted by at 11:40 AM | Permalink | Comments (0)

Hospitals are in dire shape. 31% of US health care costs are from hospitals, and by almost any measure, they are hurting badly.

Revenues are declining, profitable services are way down, layoffs are announced weekly (layoffs, in healthcare!!), more and more patients are uninsured, and donations have declined dramatically. Those hospital systems that are reporting decent results seem to be doing so through one-time asset sales and other non-operating measures.

As to what's driving the crisis; if you'll forgive the creative math, here's how the calculus works:

Rising unemployment -> more uninsured -> fewer profitable admissions + more charitable (i.e. non compensated) care + more Medicaid (i.e. money-losing) care = big financial trouble for hospitals

Almost all hospitals make their margins on private pay patients. According to Tenet Health's CEO, (paraphrasing) 'Tenet's profits come from the 27% of patients who have commercial managed-care coverage; it breaks even on Medicare patients, and loses money, to varying degrees, on patients with Medicaid coverage, self-paying uninsured and those who qualify as charity cases'.

The latest bad news comes from Massachusetts, via FierceHealthcare and the Globe.

Here's how the Globe put it:

"59 percent of hospitals statewide reported a drop in elective surgeries in 2008 and into the beginning of fiscal 2009...as more people forgo treatment, hospitals are suffering financially, industry specialists say. Their profits depend heavily on lucrative surgical procedures paid for by private insurers." And that's in a state that has fewer folks without health insurance than just about any other state in the country.

On the west coast, the problem is even worse. according to a CalPERS study, "One-third of private payers’ costs went to hospital profits and to subsidize a revenue gap". Health plans paid hospitals $18 billion in 2005 for care that cost the hospitals $13 billion.

A hidden, but nonetheless significant contributor to hospitals' woes has been the growth of high-deductible health plans. Patients with these plans seeking elective surgery often don't have enough money in their deductible accounts to cover the deductible; hospitals are turning these patients away, unwilling to accept the risk of non-payment.

Impact on health plans

Health plans have been dealing with increasing hospital cost inflation for several years; what's new is the worsening economy has significantly exacerbated the problem. Price has been the primary driver of hospital cost inflation; back in 2003-2004 prices jumped eight percent annually.

Healthplan giant Wellpoint saw hospital trend rates last year above ten percent; in their Q1 2009 earnings call they reported "Inpatient hospital trend is in the low double-digit range and is almost all related to increases in cost per admission. Unit costs are rising due to an elevated average case acuity and higher negotiated rate increases with hospitals."

Aetna is also seeing significant cost inflation, driven by more services per admission, while HealthNet is enjoying cost inflation just under ten percent

The same trend hammered Coventry Health last year, leading to a big increase in their medical loss ratio, and eventually a management shakeup and re-ordering of priorities.

Impact on workers comp

Unlike group and individual health plans, workers comp patients don't have to worry about deductibles and copays. Comp is 'first dollar, every dollar'. And hospitals just love workers comp. Recall that workers comp generates one-fiftieth of a hospital's revenues - and one-sixth of hospital profits It's no wonder workers comp medical costs are starting to jump again - driven by cost shifting from hospitals desperate to make up for lost private pay patients

In recent audits (including a large self-insured employer and a workers' comp municipal trust) the greatest year over year increase in their medical expenses was due to facility cost inflation (primarily hospitals and ambulatory surgical centers). Other clients are experiencing hospital cost trends above 10% year over year, and some are in the 12% range.

Post script - for a detailed review of the hospital perspective on the issues, click here.

Posted by at 6:26 AM | Permalink | Comments (2)

A couple weeks ago the good folks at PMSI sent a copy of their excellent Drug Trends Report over for a preview before the 'official' release at RIMS. There's some interesting stuff in the Report, lots of good info about cost drivers, the impact of re-branding OxyContin; the effects of price and utilization on total drug costs, and other wondrously fascinating material (I know, get a life...)

A few days ago the fine people at ExpressComp (the workers comp PBM unit of PBM giant Express Scripts) published their Drug Trend Report - and while it is noticeably shorter than their friendly competitor's, it is nonetheless packed with insights and information.

But don't make the mistake of trying to compare the two PBMs' reports, as their client bases, analytical methods, data definitions, and analytical methodologies tend to be different - in some ways, quite different.

Here's a couple ways the Express Scripts business may show different results from PMSI's.

1. ESI services some of the largest state funds - including California and New York. With significant variation in prescribing and dispensing patterns across the country, it would be surprising if their data did NOT show differently than PMSI's (which has some significant market share in the southeast as well as extensive national coverage).

2. PMSI doesn't include out of network transactions; others do. Neither methodology is good or bad, they just reflect a different approach. Yet this can skew the data significantly, and make a PBM look 'better' or 'worse' depending on how you view the data.

3. Some payer clients are more sophisticated, employing strong prior auth and clinical drug management programs, and thereby reducing utilization for expensive drugs. Other payers are lazy and/or indifferent. PBMs don't control payer behavior, rather they have to adapt to that behavior. I'm NOT saying ESI's customers or PMSI's are more or less savvy, just that they are undoubtedly different. And that difference is reflected in the results delivered by each PBM.

On the positive side, both companies use the same title for their publication..."Drug Trend Report" - demonstrating that consistency can actually lead to more confusion!

What does this mean for you?

When comparing two programs, or two vendors, dig deep into the data to make sure you really understand the methodologies and definitions. Otherwise you'll not have the right info to make the correct decision.

PostScript

CompPharma LLC has been asked to help develop standardized data definitions and methodologies to enable PBMs to produce reports that will allow inter-company comparisons. If the PBM members agree to pursue this, expect the standards will be out in time for next year's Reports.

(note I am affiliated with CompPharma)

Posted by at 6:31 AM | Permalink | Comments (0)

"it’s all a fee-based business, so actually the workers’ comp business, the more bills there are, the more claims there are, the better that we do." [emphasis added]

Allen Wise, CEO, Coventry Healthcare, Q1 2009 earnings call

That was the chairman's response to an analyst question about workers' comp claim frequency declines - and he's right. Coventry's networks, bill review, case management, and other services deliver more revenue and profit when there are more injuries generating more bills.

As plain as the nose on your face, a crystal clear explanation of how Coventry profits when workers comp medical costs go up. By the company's chair, no less.

(To quote my wonderful bride, Coventry's incentives are "diabolically opposite" those of its clients.)

In his opening comments, Wise noted "I do feel confident that we’ll be able to improve our operating margins in the short term [emphasis added] and when the employment market returns that we will be able to demonstrate revenue growth. In summary, it’s a good business and we’re absolutely committed to it. The chairman went on to talk about the business bouncing back with the economy. Wise expects a 300 basis point 'margin opportunity' in comp over the next 24 months.

He didn't say where that increased margin was coming from, but the company's recent layoffs and price increases give a pretty good indication of what we can expect.

Wise also expressed confidence in the new management team, led by David Young. It is quite clear that the work comp unit will operate almost autonomously, with great flexibility and control over their own destiny.

No one from corporate is going to be watching over their shoulders.

According to Wise, "we have given the management group the resources of a large company in terms of IT and some of our favorable network locations but made them more autonomous, and their earnings and their bonus depends on EBITDA targets, and so, I think now that they have better control of their expenses or rather more accountable for their expenses, they’re making better business judgments..."

Can it be sold?

At RIMS I had several conversations with individuals opining that Coventry would sell off the work comp division. I think not. While it would be easy to just quote Wise's statement of commitment, we all know how corporate-speak works - it could very well be a smokescreen to cover a transaction in the works.

But I doubt it, for a simple reason - what's to sell?

Bill review - well, Coventry's application is OK (see upcoming results of bill review survey for more details) but the market is limited, competitors including Medata and Mitchell are doing quite well, Coventry's BR has always been a low margin business, they recently laid off key support staff and EDS will not support the application after this September.

Case management - seriously? who would buy a CM business these days? Perhaps for 3x ebitda, but perhaps not. This business, on the downslope for years, is cratering.

Medicare Set-Asides - what's left to sell? What was a $30 million business is now projected to do $5 million in 2009. That, and the overhanging liability of First Health's ill-conceived 'guarantee' program is causing major problems with several customers, as the customers have started to ask for payment on the basis of those 'guarantees'. Much as they'd like to stick that in a box at the bottom of a very long mine shaft, it's not going away.

Networks - ah, the crown jewel. Except hospital discounts are fading, the Aetna (which provides the actual network in sixteen or so states) is seeking to renegotiate their contract, and Wise himself has alluded to his concern about using goup health to get workers comp discounts (which has been causing problems since 2003). Even if they could leverage the group business' buying power, how could they then turn around and sell the 'workers comp network' to another entity? Answer - they couldn't.

FirstScript PBM - the network is accessed thru a group PBM (Caremark), pricing is low, and there isn't much in the way of value-add. Still, the sales force under Matt Padden is pretty good, and Padden is well respected throughout the industry. On balance, one of the stronger offerings Coventry work comp has.

This is not to say Wise is not actually enthusiastic about comp - even if it is only 6% of Coventry's total revenues. But he has way bigger fish to fry, and he's leaving this to run on its own.

Let's recap.

We have the dominant player in the work comp managed care business being told to increase profitability. We have an express acknowledgment by the CEO that the more bills their workers comp clients have, the better for Coventry. We have several months' experience with the 'kinder, gentler' Coventry.

What does this mean for you?

Price increases, service decreases, higher medical costs.

post script - Once again I reached out to Coventry to seek their views. And once again - no response.

Posted by at 6:06 AM | Permalink | Comments (0)

As the biennial Texas legislative session nears its end, it looks like the legislature may pass a bill that would have a dramatic effect on workers comp PPO networks.

According to WorkCompCentral (subscription required):

"HB 223 would regulate “discount brokers” that are engaged in (for money or other consideration) “disclosing or transferring a contracted discounted fee of physician or health care provider.”

A broker could not transfer a physician's or health care provider's contracted discounted fee or any other contractual
obligation unless the transfer is authorized by a contractual agreement that complies with the provisions of the bill.

Those provisions include notifying each physician and provider of “the identity of the payers and discount brokers authorized to access a contracted discounted fee of the physician or provider.”

The notice must be provided at least every 45 days through “electronic mail, after provision by the affected physician or health care provider of a current electronic mail address” and posting of a list on a secure Internet website."

Now that's a huge change, one that would effectively stop much of the rental network business cold. The dirty secret of the work comp PPO business (well, one of the dirty secrets) is that networks don't have direct contracts with providers in all states - every 'national' PPO uses another network's contracts in at least a few jurisdictions.

Docs sign contracts in return for direction - they are trading a discount for the promise of more volume. Yet few networks actually drive any significant volume to the vast majority of their contracted physicians.

We've been seeing a rapid rise in the volume of litigation from providers contesting reduced reimbursement due to PPO contracts, with three payer clients reporting a significant upsurge in the last twelve months.

What does this mean for yuo?

Find a better, and more sustainable, way to reduce medical expense. The days of cutting costs by slashing provider reimbursement on the basis of some flimsy network contract are rapidly ending.

Posted by at 6:51 AM | Permalink | Comments (1)

Workers comp PBM and medical services company PMSI released its annual Drug Trends Report at RIMS earlier this week. I noted a couple highlights in an earlier post; you can download a copy here.

One of the more notable findings is the increase in the rate of inflation in drug costs, this coming after several years of decreasing inflation rates. A key contributor was per-script price increases which amounted to 6.1% in 2008.

There's lots of good information in the Report, and you can't beat the price.

My firm will be conducting the Sixth Annual Survey of Prescription Drug Management in Workers Comp next month; this survey focuses on tools and techniques employed to manage costs as well as payer executives' views on cost drivers and PBMs.

For the fourth consecutive year the Survey is sponsored by Cypress Care.

Send an email to infoAThealthstrategyassocDOTcom if you'd like a copy of the report.

Posted by at 7:43 AM | Permalink | Comments (0)

In my post earlier this week that mentioned developments with Coventry's bill review services, I incorrectly stated:

Reports are that Coventry will 'own' the bill review application source code and related assets as of October 1 2009; what they will do then appears to be up in the air.

Well, that's not exactly incorrect, as Coventry will own the application after that date, but sources indicate they already own it.

The significance of the 10/1/2009 date is that It marks the day that EDS will no longer support the application. EDS has provided IT support for BR 4.0 and the previous iterations of the program for years; as of October 1 they no longer will.

Which leads rather quickly to the next question - who will?

My assumption is Coventry. However, as I'm all too familiar with what happens when you make assumptions, I've reached out to Coventry and asked them what their plans are.

I'm not sanguine about the chances of a response.

Posted by at 5:47 PM | Permalink | Comments (0)

RIMS is in Orlando this year, a rather ironic location. The P&C insurance industry is in a bit of a fantasy world these days, with increasing reports of reserve inadequacy (anecdotal to be sure) while the soft market continues with few signs of firming pricing.

Monday was a bit of a blur; back to back meetings in the exhibit hall, interspersed with the inevitable encounters with old friends and colleagues passing on the latest news about who's moved where and what deals are in the works.

The private equity folks are here as well, scouting for promising companies they can buy and use as a 'platform' to build a bigger company. There's talk of several potential deals in the works - more on those as they develop.

The conference itself looks to be rather sparsely attended. Exhibit hall traffic is noticeably light, and few sessions are filled. This is likely due to a combination of the 'AIG hangover'; big insurance companies are reluctant to send lots of folks to nice destinations (yes, some do think of Orlando as a 'nice' destination); the continuing soft market and financial impact thereof (more than a few insurers and vendors have recently laid off staff); and the lack of solid, new information delivered at the conference itself.

I'm using twitter to post brief comments/observations throughout the day - for updates sign up for my feed (Paduda). Here are a few quick takes from Monday.

The PBM world is consolidating at the top, and growing at the lower end. Some of the newer entrants are seeking to carve out niches based on clinical expertise in pain management (MyMatrixx), innovative pricing (PMOA), a focus on smaller payers (don't use our name) or a push into the mid-tier (don't use our name either).

There's a lot of turmoil around Coventry Work Comp, with recent layoffs in their MSA division and in the IT support area (bill review specifically). Reports are that Coventry will 'own' the bill review application source code and related assets as of October 1 2009; what they will do then appears to be up in the air. While they would undoubtedly like to move all their payer clients over to BR 4.0 (their platform) from Ingenix' PowerTrak (the system used by former Concentra clients) there is significant resistance to that move from PowerTrak users. That resistance, coupled with the expense of maintaining BR 4.0 and the recent layoff of BR support staff are clouding the crystal ball.

I'll try once again to get a read from Coventry staff as to their strategy and direction; I don't expect much as my repeated requests for information and dialogue have been met with silence. That's too bad, as they have been and continue to be the dominant player in the comp managed care business, and their directional changes will dramatically impact their current - and potential - customers...

Posted by at 6:30 AM | Permalink | Comments (0)

I'm about half-way through the first annual Survey of Workers Compensation Bill Review, and already there are a few somewhat surprising findings. These are very preliminary, but nonetheless intriguing.

1. The range of pricing for payers using external bill review vendors is broader than I expected, even after accounting for differences in services provided and volume. The range is over four dollars per bill.

2. Payers' views of bill review vendors are diverse, with some payers enthusiastic about a particular vendor and others disdainful.

3. A majority of respondents voiced concern about their vendor's inability to keep up with fee schedule and regulatory changes, and the negative impact this has had on the payer.

4. Regarding the use of UCR databases, some respondents are quite concerned, while others (primarily ones who are not using the Ingenix MDR/PHCS databases) are much less concerned. All respondents are well aware of the issue.

5. Most respondents view bill review as unnecessarily complex, difficult, time-consuming and expensive. The perception is much more of the bill intake, triage, review, repricing, and transmittal processes should be automated, with far fewer bills requiring human intervention.

The survey final report will be completed in mid-May; non-respondents can request a public version of the report by sending an email to infoAThealthstrategyassocDOTcom (substitute symbols for CAPS).

Posted by at 8:02 AM | Permalink | Comments (0)

Word in the industry is a majority interest in bill review company Stratacare has been sold to a California private equity firm. Stratacare had been in and out of the financing market for over a year, and reports are that the investment firm purchased a majority stake. Several sources report industry veteran Paul Glover is also involved in the deal.

Glover has a long history in the workers comp business, most recently concluding a stint as CEO of Interplan (which merged with the Parker Group in October of 2007). Glover then served on the board of the successor company, HealthSmart.

That's all for now; details when they become available...

Posted by at 2:55 PM | Permalink | Comments (0)

Today we take a deep dive into the very tiny pool of workers comp pharmacy benefit management - where there's a recent development worthy of note.

The latest iteration of factoring company Third Party Solutions recently unveiled their new marketing strategy - at least it's new to parent Stone River.

Stone River Pharmacy Solutions (SRPS) is repeating a strategy employed in the past by previous owners of TPS and WorkingRx - partner with retail pharmacies while simultaneously selling itself as a pharmacy benefit manager.

The pharmacy partnership's value proposition is straight forward; less paperwork, faster pay, fewer hassles for the retail shops if they'll sell their work comp scripts to SRPS.

Here's their pitch to pharmacies:

"The bottom line is your bottom line. StoneRiver Pharmacy Solutions helps you build your business by containing administrative costs, increasing revenue and therefore profits..."

No mystery who their customer is - the retail pharmacy. Nothing new there.

What is somewhat new, well, at least new to SRPS, is the boldness of their approach to employers and other work comp payers. Remember, these are the folks who have been driving up pharmacy costs, reducing network penetration, suing insurance companies and PBMs, hassling adjusters and employers for payment, and otherwise making payers' lives miserable for years.

But all that's changed...

Here's how SRPS puts it...

"Helping employers and payors care for injured employees while managing and reducing pharmacy-related cost is more than our mission. It is a commitment we live daily by delivering our industry-leading solution in workers' compensation pharmacy care management.

We Ask. We Listen. We Carefully Consider. We Deliver!"

There's a logical disconnect here; on the same webpage, SRPS claims to deliver "improved revenue and profits" to retail pharmacies. How, pray tell, can a vendor increase a provider's revenues and profits while reducing payers' pharmacy-related costs?

Anyone?

There's more.

"Despite participation in workers’ compensation prescription programs, many employers and payors fail to achieve anticipated cost savings. Injured worker’s routinely don’t know or fail to identify the pharmacy program through which to process their workers’ compensation prescriptions; therefore, the pharmacy uses a default billing service. Until now default billing services have been unable to apply financial or clinical controls to these prescriptions. Without these controls prescriptions are processed out-of-network and higher priced medications or medications unrelated to the patient’s injury are dispensed."

Hmmm, perhaps the copywriters haven't kept abreast of the latest information on drug trends in workers comp. In fact, the trend rate for pharmacy has decreased each year for the last five years, and was below 5% last year. This at a time when PBM penetration was growing dramatically, clinical management programs were starting to deliver real results, and payers were aggressively contesting third party biller business practices.

Oh, and SRPS' predecessor organizations were claiming they could apply 'clinical and financial controls' to scripts years ago. What's different now? Well, SRPS has cleared out all the old management, so perhaps they have some new whiz-bang process, or, more likely, they don't have the benefit of knowing what was tried - and failed - in the past.

What does this mean for you?

You've got to admire their chutzpah. Just make sure to keep your hand on your wallet.

Posted by at 10:15 AM | Permalink | Comments (1)

PMSI will be releasing their annual Drug Trends Report at RIMS in a couple weeks; they were kind enough to send a pre-release copy and give me permission to highlight a couple note-worthy items.

The lead story is cost. After moderating significantly in 2007, drug costs were up by over five percent in 2008, driven primarily by increased price. That is, while each injured worker got more drugs in 2008 than they received in 2007, most of the cost increase was driven by higher prices. But not for generics.

AWP, which remains the basis for drug unit pricing, went up over nine percent for brand drugs last year. (Generic inflation was negligible) With brand accounting for almost two-thirds of spend, the effect was rather significant in overall price inflation.

Interestingly, the introduction of new drugs had almost no impact on drug cost inflation in 2007 - but neither did the release of new generics.

There's a lot more detail in the report, which should be available shortly. I'll post a link as soon as it is.

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

PPOs, or Preferred Provider Organizations, have been around for a couple dozen years. They are networks of credentialed (with varying degrees of rigor) doctors, hospitals, and ancillary providers that have agreed to provide lower rates for 'members' in return for some measure of exclusivity/promise that patients will be directed to use them. I'd note that this 'promise' is often not fulfilled, at least in the eye of the provider. That's a whole separate issue, one we will likely get to in a future post.

As one good friend puts it, 'PPOs are a box of contracts', and not many PPO firms do much more than recruit, credential, negotiate, and contract.

Their popularity waxes and wanes, roughly in line with the underwriting cycle (as cost trends decrease, PPOs tend to grow, as cost trends increase, buyers seek more controlled networks and medical management systems).

Typically PPOs are owned by a large group health plan or specialty company such as a workers comp managed care firm. Many PPOs were built to market/sell to health plans and workers comp payers - Rockport, Coventry, and Interplan are examples of 'vended PPOs', as opposed to those built for the exclusive use of a healthplan.

The problem

There can be several issues with PPOs; lack of direction by the payer, inaccurate data, failure to maintain credentialing standards and 'stacking' are some of the more prevalent.

But of late another issue has been appearing more and more frequently - providers claiming they are not subject to a PPO contract and therefore should be reimbursed at U&C, or in the case of workers comp in many states, the state fee schedule.

Digging into the disagreements that arise when payers assert the providers are subject to a contracted discount, it looks like there are a few contributing factors.

First, some providers have contracts with many health plans and networks, and it canbe tough to keep them all straight. And, the PPO may have changed its name, merged with another firm, or been acquired since the original PPO contract was signed.

Those are the easy ones.

A knottier issue is caused by the mechanism of 'provider selection'. When the provider's bill comes into the healthplan/bill repricer, it is 'checked' against a database to determine if it is from a contracted, or participating, provider (known as a 'par' provider). This checking could occur either at the health plan/repricer, or the bills could be electronically sent to the PPO for the PPO to check par status and apply the discount.

What determines 'par' status is often the source of the problem. For example, PPOs want as many 'hits' as possible, so they err on the side of counting a provider as par if at all possible. The more hits, the more money they make (often), and the better they look to the payer. Payers like more hits because then the managed care folks can show the savings they deliver due to the discounts. So the payer side of the equation is motivated to use logic that assigns as many bills as possible to the par bucket.

To do that, payers often use a provider TIN (tax identification number) as the only criterion to determine par status. If a bill is from a provider with a TIN that matches some contract somewhere in the PPO company's database, than the discount is taken. Payers may also use address, provider first name last name, and/or phone, but most try to use as few criteria as possible.

But large provider groups and hospitals and health systems often use the same TIN for many different service areas - outpatient surgery, inpatient, rehab, pharmacy, hospitalists, occupational medicine. And they rarely offer the same discount deal across all service types and locations. Some service types may not even participate due to the internal structure and demands of the health system.

Here's real world example, provided by a consulting client. A bill from an occ med clinic hits a payer, who determines it is a par provider due solely to the TIN match. A 30% discount is taken, and the check cut. But the occ med clinic is not part of the original contract, which specifically states that discount is for inpatient medical services only.

The provider complains to the payer, who contacts the PPO, who eventually pulls the contract, says 'oh, yeah, here's the problem', asks the occ med clinic to resubmit the bill, after which the bill may - or may not - be paid correctly.

Now multiply this by the hundreds, and it is easy to understand why some providers, fed up by the paperchase, are getting downright litigious. This leads to providers suing payers over a few dollars on an office visit - not to get those few dollars, but to force the payer to apply the correct repricing methodology.

If the PPO is the one doing the repricing (as is often the case), there is considerably less incentive to fix the problem. The PPO doesn't have to handle all the calls (although in many cases they are involved at some level), figures many providers will not fight it as it isn't worth it, and even if they do that's a small price to pay for all those fees.

And that's one major reason there's so much litigation in the PPO world these days.

Posted by at 3:20 PM | Permalink | Comments (2)

TPAs and employers and insurance companies send out requests for proposal - to each other, to managed care firms, specialty providers, voc companies, IT providers, law firms. All have been on the receiving end of a voluminous, detailed, structured and rigorous RFP - so big that it clogs their virtual and/or physical mailbox.

The erstwhile vendor is initially happy. Hey, we made the cut, we're on the list, we 'get' to respond. We have an opportunity.

Then the work starts. Even if the vendor is big, and has staff to help write the responses, and even if it has a ready-made library of canned responses, it is still a lot of work. We aren't talking a couple hours here and there by a junior staff writer - every question has to be reviewed and assigned, then the answer checked for accuracy, grammar, and consistency with other answers. Then someone has to find all the reports and IT flow documents and disaster recovery plans and professional certifications and insurance coverage documents and CVs and make sure they have the right appendix numbers and are in the right format. Then it has to be collated, checked one more time, signed by an executive, and shipped out. All on the prospect's schedule.

And that's if it's a big vendor; if it is a small company, the folks who are doing this work are also the folks who are supposed to be doing the 'real' work - handling the tasks that actually deliver value to customers and owners alike.

The point is there is a lot of work involved, and most of the vendors who are doing the work are not going to get anything out of it - at least in terms of revenue. No, they're going to have to savor the joys of a job well done, even if not done well enough to actually win the business.

I know, the 'customer' has also put a lot of work into the process - no argument there. Just understanding what it is you want, what restrictions exist, what the timeline should be and who should be involved in the process from initial specs to final decision means meetings on top of meetings.

But just for a minute think about it from the vendors' perspective. We'll take your perspective on tomorrow.

The erstwhile vendors want to deliver for your company, they think they can do a better job of anyone else, yet they're forced to only answer what they're asked, not allowed to demonstrate their abilities and insights and expertise and knowledge. Yes, they may be able to - in response to the "is there anything else we should know, or other ideas you have". But the responses to these questions don't fit the scoring methodology. Even if they are creative and innovative and fresh, and look promising, it's tough for them to see the light of day in the typical RFP process.

Now comes the waiting...and the waiting...and the waiting...

Sure, there's a deadline. But more often than not, the deadline comes and goes, unmarked by the award, or announcement of a potential award. Instead, there's news that the prospect needs more time to review the proposals, or more information has come in, or...

At the risk of being accused of unfairness, ask yourself - how often has an RFP process ended when it was supposed to, with a decision made, vendor selected, and losers notified, according to the original timetable?

I'll go out on a very solid limb and say the answer is 'not very often'.

Let me suggest this. The more a prospective customer delays the decision, the less credibility it will have, and the less willing potential vendors will be when the next RFP comes out. Some decisions are seemingly never made, until the queries from once-hopeful vendors trickle away.

If and when the award is announced, those potential customers who are willing to have the tough conversation with losers - despite what their lawyers say - are doing the right thing. This is a small world, and treating losing vendors professionally is just the right thing to do. It will also make them better when next they respond to the 'customer's' RFP.

It is also a recognition of the work invested by all vendors, not just the winner. It provides the losing vendor with valuable input and knowledge, and delivers at least some return on all that effort.

What does this mean for you?

Do unto others.

Posted by at 2:23 PM | Permalink | Comments (2)

There's little doubt hospital reimbursement methodology is going to change dramatically over the next few years.

We're going to see a shift from fee for service to global episodic reimbursement, a shift that has already begun. I'll get into that next week, but for now, there's increasing evidence that private payers' hospital costs are rising in large part due to several recent changes in reimbursement policies.

Over the last year, there have been three major changes in hospital reimbursement: the implementation of MS-DRGs (increase in the number of DRGs to better account for patient severity); a 4.8% cut in Medicare hospital reimbursement spread over three years; and the decision by the Centers for Medicare and Medicaid Services (CMS) to stop paying for 'never ever' events - conditions that are egregious medical errors requiring medical treatment.

The net result of these changes has been a drop in governmental payments to hospitals, the decision by several major commercial payers to not pay for never-evers, and increased cost-shifting from hospitals to private payers.

The implementation of MS DRGs and the accompanying decrease in reimbursement looks to be the most significant of the changes, and is already having a dramatic impact on hospital behavior patterns. By adding more DRG codes, CMS is acknowledging there are different levels of patient acuity - that performing a quadruple bypass on an otherwise-healthy patient takes fewer resources than doing the same operation on an obese patient with diabetes and hypertension. While these different levels were somewhat factored in to the 'old' DRG methodology, the new MS-DRGs better tie actual costs to reimbursement. (for a more detailed discussion, see here)

Here's one example.

CMS projected that these changes would reduce Medicare's total reimbursement for cardiovascular surgery by about $620 million, while orthopedic surgeries are projected to see an increase in reimbursement of almost $600 million.

Orthopedic reimbursement is increasing because there are now more MS DRGs for orthopedic surgery, and the additional DRGs will likely mean hospitals will be able to get paid more in 2009 and beyond than they were last year.

Hospitals are going to work very hard to get more orthopedic patients in their ORs, and they are going to carefully examine these patients to make sure they uncover every complication and comorbidity - because a 'sicker' patient equals higher reimbursement.

What does this mean for private payers?

Orthopedic costs will likely rise because hospitals will get better at allocating costs. But cardiovascular costs will also increase due to cost shifting.

Heads they win, tails you lose.

Posted by at 6:47 AM | Permalink | Comments (1)

It just won't stop.

Over the last few years, long-suffering TPAs, hammered by the soft insurance market, went from making a few bucks on managed care services to earning most if not all of their profits from commissions on same. Some TPAs provide managed care services themselves, others have preferred partners, and a few are willing to work with any vendor their employer customers bring to the table.

There are good reasons for each model, and I can argue in favor - or against - each of them. But from a broader perspective, there is a bigger issue, one that has been missed in most of the discussion about managed care fee-sharing.

That issue is simple - does the managed care program offered, or enabled, by the TPA actually work? Does it reduce total claims cost? Does it result in fewer extended disabilities?

That's where the discussion needs to begin. If a TPA doesn't have managed care expertise, if their executives can't talk in detail about how their approach addresses total cost, their managed care business model is irrelevant. Unfortunately, there aren't too many TPAs that have intelligent, effective managed care programs - the original objective has been sublimated to the demand for revenues and profits. Not all TPAs have lost their way (or were never on the right path to begin with); a few are innovating, breaking away from the same old same old discredited model as they search for a true long term solution.

There's no question many TPAs have expertise in managed care. There's also no question many risk managers think they know it all, and love to pontificate about their 'ideal' model - and force the TPA to implement their brain child, ignoring the TPA's advice (and then blaming the TPA when the 'can't fail' program fails). But that discussion should start, and end, with the overall goal of the program - lower total claims costs.

Yes it is critically important to know where your workers comp dollars are going. One way to do that is to require the TPA CEO to sign a document (after your attorneys polish the language) stating words to the effect that "We will fully disclose any and all financial transactions involving (TPA) and any and all managed care entities providing services to (employer) and employer's claimants. This disclosure includes but is not limited to service fees, commissions, implementation fees, RFP and proposal assistance charges, transaction fees, connection fees, membership fees, and any and all other transfer of monies from managed care entities to (TPA)."

That's a start, the initial requirement that must be met before any substantive discussions can begin. And once that attestation has been signed, step back and ask what the TPA is doing to attack total claims costs.

Because that's where the big bucks are.

Posted by at 7:58 AM | Permalink | Comments (3)

The work comp TPA business is at last beginning to emerge from a very long, and very cold, winter. The soft market drove many of their customers back into the arms of insurers, as premiums were very competitive with the projected costs of self-insurance, with few of the risks.

It's about time, as more than a couple TPAs were driven out of business by the precipitous decline in self-insurance, particularly in Florida and California.

As the market begins to harden (a transition somewhat delayed by AIG's continuing effort to buy business), those TPAs that were able to survive the last few years will find their endurance rewarded, as more prospects come to them looking for bids.

TPAs will also find prospects have evolved, matured, become more intelligent and more demanding. Large employers are (with some notable exceptions) going to ask a lot more of their TPA in 2009 than they did in 2003. And chief among their demands will be smarter, faster claims adjusting and data-driven medical management.

Employers have had just about enough of the same old same old. Their experience with generic, one-size-fits-all approaches to cost containment is not good - many have come to realize that what works in one area, for one type of claim/care/condition may be counter-productive elsewhere. Increasingly buyers are looking for solutions customized to their specific situation, and flexible enough to adapt when those needs change.

It all starts with accurate, consistent data - data about injuries, treatments, disability and functionality. These data provide the foundation for broad decisions about what networks to use where - factoring in where injuries occur, what types of injuries are most common, and which become the most problematic. And here's where most TPAs are falling well short.

TPAs tend to do what's easy for them - keeping it simple, uniform, consistent across customers makes it easier for their IT departments, adjusters, managers, compliance folks, vendor management departments and nurses. But that's not why they're in business. TPAs are in business to serve the needs of their customers, to provide customer-specific solutions. To do that, they have to invest in people and IT that will enable them to understand their customers' cost drivers, and build customized medical management solutions unique and specific to each client.

These solutions must allow the TPA to provide claimants with 'best-in-area' networks, networks that carefully select physicians based not on how deep a discount they'll give but how well they manage comp injuries and return to work. There is no single national network that has the best answer in all areas; Horizon is very strong in Jersey, Rockport in Texas, Kaiser on-the-job in much of California.

That's nice, you say, but in many areas the generic networks - Coventry, CorVel, etc look like the only game in town. That's not the case - specialty hospital bill repricing services can deliver savings far greater than that available from the generic networks; specialty vendors in PT, imaging, Rx, and DME/HHC provide much better savings and much better outcomes than the generics.

This requires IT flexibility - the ability to plug in and pull out networks, individual providers, and provider groups as customer needs evolve. And to have different answers for different customers in the same jurisdiction - because at the end of the day, TPAs are there to deliver results, not do what's easy for them.

What does this mean for you?

Before you roll your eyes and complain about how hard this is, know this - a few TPAs are already well down the path on precisely this strategy. And if you can't do it, they'll eat your lunch.

Posted by at 8:27 AM | Permalink | Comments (3)

In my last post I reported my findings that former North Dakota state fund boss Sandy Blunt's conviction on charges of authorizing sick leave, failing to get moving expenses repaid, and authorization of payment for small gifts and meeting coffee and danish is nothing short of outrageous.

But perhaps these were sought because the guy is a raving incompetent, and under an employment agreement the state couldn't fire him unless he was a convicted felon, so they got what they could to kick him out.

Further investigation proves that this couldn't be the case. Documents from an audit conducted by Marsh in Q1 2008 and other sources indicated the WSI made significant progress under Blunt's leadership. A few of the findings are below.

- the percentage of claims reported in one day (one day!) increased from 6% before he got there to 45% due to a reporting incentive program he initiated.

- revisions to WSI's safety programs led to a reduction in severe claims from .81/100 workers to .67.

- claim frequency dropped after Blunt created a financial incentive program for employers - before the program, frequency had averaged a 3% annual increase; after claims dropped 3.7%.

- Under Blunt, the fund's operating ratio, or administrative expense ratio, was 16.2%, dramatically lower than the average state fund operating ratio of 24.5%. (Conolloy and Associates Report, 3/5/08)

- Paid loss trend was less than half of one percent per year, a remarkable result given medical trend in workers comp.

- WSI's performance enabled North Dakota's employers to enjoy the lowest work comp premium rates in the nation - a full 52% below the average state (Oregon Dept of Consumer and Business Services study)

There are lots of workers comp insurers, TPAs, and large self-insured employers that would love to have these kind of results.

Clearly the people who brought down Sandy Blunt did so for reasons other than incompetence. Outside the inevitable complaints from claimants complaining about mistreatment at the hands of their insurance company, the evidence seems to be squarely in Blunt's favor.

Performance at WSI got better when Blunt was there.

Here's hoping the new guy - you know, the one who was at least tangentially involved in the 'investigation' that resulted in Blunt's dismissal, the one with zero experience in workers comp, can continue to build on Blunt's successes.

Because he sure has a tough act to follow.

I don't know why Blunt was targeted with trumped up charges, and fired despite his obvious strong performance. And I'm not going to try and find out.

The more I learn about this, the more I think I'd have to don a hazmat suit before digging any further, because this just stinks of something rotten in North Dakota.

And that smell is coming from whomever decided for whatever twisted and sick reason that a competent manager needed to be fired and have his life ruined.

Posted by at 7:20 AM | Permalink | Comments (2)

I'm still befuddled by the North Dakota state fund situation. Recall that former CEO Sandy Blunt was tossed out amidst accusations of malfeasance, corruption, theft - pretty much everything bad a CEO could be accused of. I've been digging into this, and it turns out the charges against Blunt were discussed in detail in a local ND publication, the Dakota Beacon.

The charges that led to conviction of Blunt on felony charges were in three areas -

- unauthorized use of sick leave by a senior employee. Sources indicate Blunt allowed a departing senior exec to take sick leave when that employee was not actually ill, but was on his way out of the organization. An investigation by the ND State Auditing Organization of the sick leave indicated the exec likely would have qualified for FMLA - and the sick leave authorization was not illegal. As a state agency required to report any potentially illegal activity, this is instructive, as the SAO's determination came over two years before Blunt was charged and the agency never reported the authorization as problematic.

- failure to get moving expenses repaid - The same employee noted above left before hehad been with WSI for two years, and thus should have been required to repay about $7000 in moving expenses. Blunt had asked the WSI's internal counsel for her opinion on requiring reimbursement, and in a written memo she advised that she "did not feel comfortable" seeking reimbursement becuase the employee had been asked to leave, and therefore the legal requirement to repay moving expenses did not apply.

- unauthorized use of state funds to pay for meals, gifts, trinkets, and entertainment purposes. Turns out Blunt merely continued to use the same processes that had been in place at WSI before he got there. And, as soon as he determined these might be against WSI's policies, he stopped them. We aren't talking trips to Pebble Beach here; we're talking coffee and pastries for employee meetings, a welcome cake for his own welcoming party (that had been ordered before Blunt even arrived), a flower and small gift certificate for workers on their employment anniversary. These expenditures had been in place for years, had never been questioned before Blunt arrived, and had actually been authorized by WSI's purchasing department.

This guy is now a felon because he continued purchasing practices that had been in place before he got there, stopped them when he found out they were questionable, perhaps authorized sick leave for an employee on the way out who would have qualified for FMLA, and somehow was responsible for getting that employee to repay moving expenses that the state's own attorney didn't want to go after?

My conclusion?

Blunt was railroaded on the basis of charges that at best look to be incredibly nit-picky, and at worst political manipulation of law enforcement by a prosecutor gone nuts.

I've changed my mind.

I'm not befuddled. I'm outraged.

Posted by at 6:35 AM | Permalink | Comments (4)

Frank Pennachio is one of the smartest people in workers comp. His piece on the complicity of employers in screwing up their own claims published in Risk and Insurance is just terrific.

TPAs are making a lot of money on managed care. At least in part, that's because employers are hammering them on claims handling costs. There is just no way that a TPA can effectively adjudicate a lost time claim for $1200 for the life of the claim/contract.

So, they have to make up the margin somewhere, and managed care is that 'somewhere'.

Here's Frank's summary:

"Claims administration contracts between employers and their insurance companies or third-party administrators have created a cycle of misaligned incentives and unintended consequences.

Many employers have lost sight of what a workers' compensation program is supposed to do, and vendors have created products and services that often drive costs up instead of down."

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

One of the more successful reforms in work comp over the last decade was in Florida. But there are two major issues getting lots of attention that may well overturn much of the good achieved in the Sunshine State.

Dennis Ross, one of the primary authors of the reform plan that became law in 2003, has written an excellent article summarizing these two problems. In brief -

Litigation expense was slashed dramatically under reform. That happy result looks to be in serious trouble, and legal costs may once gain skyrocket.

Before reform, attorneys would litigate anything, no matter how minor, because they would get paid their hourly rate for all work on the claimant's case. As a result there was litigation around 'underpayments' of a few dollars, where the legal fees would be ten times the actual 'underpayment'. Now, due to a recent court decision, some parts of the reform look to be in jeopardy - the very parts that eliminated the incentive to litigate everything all the time.

The specific case I'm referring to is Murray v Mariners Health/ACE USA. As things stand now, we can expect litigation costs to increase dramatically, and we'll likely see a big upsurge in medical utilization as attorneys will once again be incentivized to push claimants to get as much care as possible.

Ok, that's bad. What's going to happen with hospital costs may even be worse.

Medical costs came down dramatically as well, thanks to changes in the fee schedule that actually increased reimbursement for physicians and should have cut facility costs (but apparently didn't). As a result, more docs participated in comp, and the ones that did were doing good work (amazing how that happens when you pay docs a fair rate...) But the decision by the three member panel to fundamentally change facility reimbursement will likely add several hundred million dollars to employer's work comp claim costs.

I've posted on this before - here's the net. The proposed change to the Fee Schedule 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. There are four issues here.

First, 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, as a result, 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?

Work comp costs in Florida are going to go up - a lot.

Posted by at 8:22 AM | Permalink | Comments (0)

Yesterday I posted on the hiring of a former state trooper as head of North Dakota's Workforce Safety and Insurance (WSI) entity - the state's sole work comp agency. For those unfamiliar with ND, they are one of the few states where the state is the exclusive provider of workers comp insurance - they, and Ohio and Washington, are 'monopolistic' states.

A bit of googling brought up a bit more information about the new boss - Bryan Klipfel. His background is law enforcement, he does not appear to have any comp experience, and was actively involved in the investigation of the former head of the agency, Charles Blunt. Blunt was terminated after an investigation into an alleged theft of state funds. Blunt was subsequently convicted by a jury of one felony charge of misappropriating state funds.

A quick google of the Blunt case raises more questions than answers. After watching the fiasco at the Ohio fund brought on by a few criminals in the executive suite, I was prepared for another orgy of self-dealing at the public trough.

Apparently not. In fact there aren't any charges that Blunt took money himself, but rather authorized sick leave for an executive that may not have been ill, and, according to a news report, used somewhere around $26,000 of "WSI funds to pay for employee meals and drinks and buying illegal gifts and trinkets for staff...".

Ok, so Blunt made a few bad decisions and/or didn't follow all the rules by the book. But a felony conviction for a sick leave authorization and some apparently inexpensive 'gifts'?

Boy those Dakotans are brutal. But even if they are, I can't imagine Blunt was the only exec in the entire history of WSI to run afoul of the employee handbook. So, why the big expensive investigation?

I'm really curious. The investigator who has no experience in work comp and no P and L experience (never ran a business) is the head of a big comp insurer after helping convict the former occupant of his new office of using state funds to pay for meals, sick leave, and gifts?

Posted by at 7:38 AM | Permalink | Comments (2)

In my post earlier this week I reported on the change at the top of Coventry's workers comp division, saying "Young came into the organization in the Concentra deal. Generally well regarded by customers, his promotion has been characterized by several as a good thing; he is viewed as more customer-oriented than execs from First Health."

Well, it looks like there are two very different perspectives regarding Mr Young. I received several emails questioning my positive statements about Young and a couple of calls as well. All disagreed specifically with my 'customer-oriented' claim.

I've met Mr Young a couple times, do not really know him except by reputation, and defer to those who know him better than I. I'll retract my earlier characterization and replace it with this "it is safe to say that Mr Young has supporters and detractors among coventry customers." I'd also note that people generally complain more than they compliment, so perhaps my correspondents were not representative.

And thanks to all who shared their opinions, even those who blistered my inbox in the process.

Posted by at 3:20 PM | Permalink | Comments (0)

The folks at WorkCompCentral find the most interesting stuff. Today's edition featured an item about the new head of North Dakota's work comp agency - here's how they put it:

"Highway Patrol Director Bryan Klipfel [was named] as director of Workforce Safety and Insurance (WSI) and U.S. Department of Agriculture executive Clare Carlson as deputy director and public affairs officer for the agency."

The announcement, which came from the Governor's office, quoted the governor: "in his 30 years with the Highway Patrol, Klipfel had a strong record of accomplishments and was highly regarded for his knowledge and integrity in both the Highway Patrol agency and law enforcement statewide.”

WorkCompCentral noted "Klipfel currently is the human resources manager for Job Service North Dakota. He has a degree in public administration from the University of North Dakota."

Is it just me, or does this look like political patronage?

What does a former patrolman know about workers comp? Turns out he admittedly doesn't know anything.

According to a local paper in ND, "Bryan Klipfel says he knows little about workers compensation, but the former state Highway Patrol commander believes his management and listening skills will help him do well as director of North Dakota's Workforce Safety and Insurance agency..."I'm going to work with Bruce (Furness) for a couple of weeks, and I'll just have to learn some of that information as time goes on," Klipfel said. "My strong points are that I have leadership ability, and I understand human resources, how to deal with people. And I think that's the big part (of the job) right now."

Huh?

He's going to learn on the job? While getting mentoring for a 'couple of weeks"? In a business that is incredibly complex? At a time when investments and reserving practices are critically important?

And his qualifications are his understanding of human resources and leadership ability?

Yikes. This bears further investigation.

Posted by at 8:50 AM | Permalink | Comments (4)

Jim McGarry has moved on, and David Young has moved in. That's the quick report on changes at the top of Coventry's work comp unit - but more is coming.

McGarry, who reportedly has a solid relationship with Allen Wise, will be working on other tasks within the company. And no, this isn't one of those executive sinecures hiding an internal exile. By all accounts McGarry is well respected and liked by his colleagues on the senior management team, and bigger things are in the offing.

Young came into the organization in the Concentra deal. Generally well regarded by customers, his promotion has been characterized by several as a good thing; he is viewed as more customer-oriented than execs from First Health.

The change was relayed to several Coventry work comp customers Friday and today, along with news about a restructuring of the IT support and maintenance functions. These were consolidated along with other product line support in the Coventry IT department; going forward work comp will have dedicated resources. No surprise here; there have been indications for several weeks that new CEO Allen Wise has been seeking to better allocate costs by product. More specifically there has been ongoing concern about SG&A expense for work comp.

The restructuring of provider contracting and relations is not yet final. That said, there are signs that work comp contracting will be handled by separate staff. While this will likely help reduce facility costs for other lines (that deliver over 80% of Coventry's total revenues) without the market share of group and Medicare, comp contracting staff will find it very hard indeed to negotiate with facilities. Remember, comp only amounts to 2% of the typical hospital's revenues.

With the hiring several weeks ago of Pat Scullion as work comp CFO at Coventry, the new management team is almost complete. And the timing of the Scullion hire was nothing if not fortuitous, as several sources indicate Aetna is seeking to renegotiate its PPO contract with Coventry. As Aetna is the de facto network for Coventry in multiple jurisdictions (Coventry has exclusive marketing rights for four more years), it is negotiating from a rather strong position - Coventry would be in a very tough spot without Aetna.

What makes this particularly interesting is the Aetna exec seeking to renegotiate the deal is Dan Fishbein, the same Dan Fishbein who ousted Scullion from his prior role as president of Aetna's work comp unit. And yes, that was the same Pat Scullion who negotiated the original deal on behalf of Aetna.

Now that must make for a very fun negotiation session; Aetna is negotiating for a higher price (that's just a guess) or better terms while sitting across the table is the guy who knows more about their financial position than anyone left at Aetna.

Posted by at 6:46 PM | Permalink | Comments (8)

In no particular order, here's what I'm hearing about goings-on at Coventry's workers comp division.

Coventry has told several clients it is hiring dozens of staff to improve the quality of provider data; interestingly this message has gotten to some customers but not to all. This message was out there for a few months, and has been repeated recently - but again, not all have heard the same message. If this is indeed happening, kudos, albeit belated, to the company for recognizing that bad data not only frustrates customers but reduces Coventry's own revenues and profits.

Much more recently there seems to be movement within the provider relations/contracting units to split work comp provider contracting out separately from the other lines of coverage - group, PPO, and Medicare. There had been some indication Cvty was considering just adding WC specific contracting staff, but this seems inconsistent with senior management's push to restrain SG&A expenses. This is a little puzzling, as the other lines added much needed bargaining power to Coventry's efforts to get attractive work comp rates from hospitals and other providers. If it is indeed splitting the negotiations, Coventry seems to be following through on CEO Allen Wise's stated desire to emphasize its core business - small group HMO.

There are also indications that the company is getting ready for a re-organization of its work comp business, a re-org that will likely affect operations in the [correction] Burlington MA, Sacramento, and Dallas offices. No specific word on timing, but my guess is sooner rather than later.

There's more swirling around, but these data points are the only ones that have been confirmed by multiple sources.

Posted by at 7:42 AM | Permalink | Comments (0)

My post yesterday regarding Coventry's workers comp business generated a few emails - some asking what exactly was my point? For those unwilling to click back, my closing sentence was "The work comp business accounts for 6.2% of [Coventry's} total revenues."

My point was workers comp amounts to less than one-sixteenth of Coventry's total revenue ergo it is not nearly as important/significant/vital as those in the work comp field might think. Yes, it may be inordinately profitable (helped by price increases over the last couple years, but hurt by bargain pricing on the pharmacy business), but it is still only 6.2% of total revenue.

Now lets think about that.

The new CEO, Allen Wise, has publicly stated his desire to focus more closely on the core business (small group HMO). To that end, Wise has slashed spending intended to expand Medicare networks, begun a close examination of SG&A spending in the work comp business, and asked a lot of tough questions about provider contracting, and more specifically, hospital contracting. As reported here earlier, He was quite vocal about his concern over rising hospital costs, and their impact on the HMO medical loss ratio (MLR).

In the work comp business, Coventry has committed to hire (or is already hiring) dozens more staff to help clean up their provider database - a task that is, according to some clients, long overdue. It is also working on several significant upgrades to its bill review application. They are also continuing to try to build a carve-out network comprised of expert physicians, and are reportedly marketing that to several large payers.

These efforts, while laudable and necessary, are also expensive, and will further increase SG&A expenditures.

So, the question you have to ask yourself is, if you were Allen Wise, and you were running a company that was really good at small group HMO, and had kinda lost its way, and you looked at this other business which was generating six percent of your revenue and eating up resources, and distracting your provider relations people and perhaps increasing your HMO hospital costs, what would you do?

What does this mean for you?

If you haven't figured it out by now...

Posted by at 6:28 AM | Permalink | Comments (0)

A detailed review of Coventry's latest 10k provides a little perspective on the size of the work comp business. here are a few numbers to consider (all figures for 2008).

- Total WC revenues - $737 million

- PPO revenues - $86 million

- PBM revenues - $230 million (estimated)

- Bill Review, case management, UR, IME, MSA etc revenues - $421 million

By way of comparison, total revenues amounted to $11.9 billion. The work comp business accounts for 6.2% of total revenues.

Any questions?

Posted by at 11:34 AM | Permalink | Comments (0)

NCCI's newly released report on fee schedules provides interesting reading. If you don't have the time right now, here's the key quote:

"For comparable injuries, when WC pays higher prices than GH for specific services, those services tend to be used more often in WC than in GH. [emphasis added]"

No kidding.

Before you dismiss this as common knowledge, remember that (in most states) work comp hospital reimbursement is much higher than for group health. That's why hospital costs are the fastest growing sector of comp medical expense.

Here's another quote: "Reimbursement for care that physicians provide at hospitals and other facilities is more likely to exceed the fee schedule than care provided in their offices."

So, physician reimbursement is usually higher in facilities, and the facility's costs are typically higher as well.

Yet regulators in Florida are adopting fee schedules that continue, if not worsen, this situation by dramatically increasing reimbursement for outpatient services. The reimbursement scheme will pay hospitals 74% more than Medicare for surgeries and four times Medicare for other outpatient services. And the comp system in South Carolina is deteriorating daily, due in large part to overpayment of hospitals. The state adopted a Medicare+40% hospital fee schedule on 10/01/06. Now, per NCCI, there is a 23.7% WC rate increase filed and pending.

Minnesota is considering similarly suicidal behavior, specifically a hospital inpatient payment standard that would pay smaller Minnesota hospitals about 90% of their billed charges; larger hospitals would get about 85% of their billed charges on higher-dollar inpatient bills.

What does this mean for you?
Clients are reporting hospital expenses are rising faster that at any time in recent memory. Don't look for any help from the regulators.

Tip of the hat to workcompcentral.com for the NCCI report info.

Posted by at 7:15 AM | Permalink | Comments (1)

Last week's announcement that the FDA is considering requiring physicians' to obtain additional training in order to prescribe certain Schedule II narcotics is welcome news - for payers and patients. Physicians aren't so welcoming.

The list of drugs includes several varieties of morphine (e.g. Avinza, MS Contin), fentanyl (including Duragesic patches), methadone, and that old favorite, OxyContin. As a group, the listed drugs accounted for 21 million prescriptions written for 3.7 million patients in 2007.

The rationale behind the FDA's move is concern over the adverse consequences suffered by many patients on the medications - consequences the FDA - and others - believe could be reduced by more thorough training of prescribing physicians. The FDA's move came as a result of a law passed in 2007 enabling the agency to selectively address certain medication issues utilizing 'Risk Evaluation and Mitigation Strategies'. In the past, the FDA's powers were sort of all-or-nothing; they could either require warnings or pull a drug off the market.

According to the NYTimes, the head of the FDA's initiative, Dr. John K. Jenkins, said:
“What we’re talking about is putting in place a program to try to ensure that physicians prescribing these products are properly trained in their safe use, and that only those physicians are prescribing those products..."

This is good news for many payers, who have expressed concern over physicians' apparent willingness to prescribe very powerful drugs for conditions that didn't appear to merit them. Workers comp payers have long held that prescribing patterns are a major driver of extended disability as well as high costs. I'd cite the use of OxyContin as a major issue for comp payers. Purdue Pharmaceuticals, OxyContin's manufacturer, has been hammered by the FDA and others for its egregious, and illegal, marketing activities. While Purdue was fined $600 million, reports indicate the manufacturer's OxyContin revenues totaled almost $3 billion during the time it was illegally marketing the drug.

What does this mean for you?

Unfortunately, it looks like in some instances, crime does pay. The good news is the FDA's new initiative will likely help reduce not only costs, but more importantly adverse outcomes.

Posted by at 10:32 AM | Permalink | Comments (3)

With the passage of the stimulus bill, it's timeti consider the implications fir workers comp. I'll get to the details next week, but there are a few broad statements we can make today.

First, the unemployment rate will not drop much more. Comp insurers, Occ Med clinics, managed care firms and TPAs started feeling the effect of a rapid drop in frequency last summer, a drop that would have accelerated throughout this year. For carriers, the decline was good news/bad news, as fewer claims meant lower claims expense, while fewer employees produced lower premiums.

The funding for COBRA and Medicaid will help keep folks insured, thereby decreasing cost shifting (below what it would have been without the bill). This is very good news indeed; although it is impossible to calculate what cost shifting would have done to comp, it would undoubtedly have driven medical costs up significantly.

Over the long term the effectiveness research funding will be a big help to payers and providers. Solid guidelines for back injuries will be most welcome.

There's much more to come.

Posted by at 3:42 PM | Permalink | Comments (0)

Both. At least that's how company execs want to 'brand' Corvel - but it isn't what their TPA customers want to hear.

Me? I'm not so sure.

Here's how Corvel described itself in a recent SEC filing:

"CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers' compensation and auto policies."

Interestingly, the company's website does not describe itself as a TPA, and combines its TPA business with case management in case management. While this hasn't changed since this time last year, it does muddy the waters - is Corvel a TPA with managed care services, or a managed care company that does a bit of claims adjusting?

In last week's earnings call, CEO Dan Starck said "We also continued with our Enterprise Comp expansion; our strategic initiative of bringing a new approach to claims management and our overall transition to becoming a full service provider to the workers' compensation market...The addition of our claims administration product expands our service offering in this area and continues to open new opportunities."

Starck went on to say a lot about Enterprise Comp:

"Moving forward in 2009, we will continue to focus on our four key initiatives and their role in transitioning the organization to a full service provider. The first initiative is the continued expansion of Enterprise Comp. Despite the continued decline in the overall volume of claims; we believe that this initiative is on point. In fact in this market environment, we believe that this initiative continues to grow their importance.

Traditionally, through our managed care services, CorVel has only had access to a small number of employer customer opportunities. The employers that purchased their TPA services and managed care services separately. This group of employers is the minority in the workers comp market.

Enterprise Comp provides the ability for CorVel to meet the needs of the larger segment of the employer market, the employers that buy their services in a bundled format. By owning all of the major components of the workers' compensation continue, claims administration, managed care and the software applications needed to integrate and execute the different business lines. We feel we are in a strong position to bring the truly differentiated product to the market.

Over the course of the past few quarters, our field operations have been busy with the all of the integration activities that must take place after acquisitions have been completed. At the same time, our IT team has been busy developing our claims management software application into one that begins to realize the vision of Enterprise Comp in the future.

Much of the December quarter involved laying the foundation of the software into our production systems and the beginnings of field implementation. Although I discussed the Enterprise Comp imitative [sic] at times it's just getting started, our claims administrations today as a company are strong.

We currently administer workers' compensation claims in 45 states, and have the ability to deliver service in all 50 today. We expect to see improving growth in this product line as our software and system's integration process continues and our sales force gain the momentum."

Whew. That's a lot to digest - but the net is the two guys who run the place obviously believe Enterprise Comp is a big part of their future.

After reading all that, I contacted Corvel. Here's what they had to say about the TPA business, their strategy related to that business, and where they're headed.

"...selling services to employers is where we’ve moved some emphasis. We didn’t really choose this path so much as the managed care market matured. Beginning in the mid-‘90’s the TPA’s began to see that they could control the managed care business if they first won the claims administration business. So, they priced the claims work down to control accounts and then began to participate economically in the managed care subcontracting that had previously just been purchased from independents such as CorVel or Intracorp or the many others...CorVel continues to expand in our Enterprise Comp initiative and to gradually reduce our older more commoditized services. I believe we have a unique new technology for claims management and that we’ll see a breakthrough in that area over the next two years similar to the big changes we enjoyed in what we call Network Solutions."

From a financial perspective, Corvel looks like a managed care company with a small presence in the work comp/P&C TPA business. Corvel paid about $15 million apiece for two TPAs (Schaffer, Baltimore MD and Hazelrigg, SoCal). Corvel's TPAs account for 8.6% of annual revenues. The company reported both TPAs produced $24 million in revenues; annualizing that number to account for the partial year for Schaffer gives an annual TPA revenue of just under $26 million. It is highly doubtful their revenues have been increasing; TPAs have been under tremendous price pressure over the last two years. It could be the TPAs are driving more network, bill review, and case management revenues to the parent company, but the revenue picture doesn't support that view. Corvel paid about 1.2x revenues for the two TPAs, a reasonable number - although the deals were done during a soft market when valuations are typically lower than normal.

As a side note, the TPA acquisitions aren't mentioned in the company's history.

Financially, Corvel has been hampered by the decline in claims frequency; revenues were essentially flat last quarter from the previous year's quarter at around $77 million. This was noticeably better than the profit picture as EPS dropped from $0.43 to $0.34. The news was better for the last three quarters, with revenues increasing a few points from the same period in 2007 ($225 million to $233 million). However, gross margins declined over that time from 25.5% to 24.2% primarily due to a 9.5% increase in G&A costs.

The company's stock is also pretty low these days - not that stock value is related to actual value today, as pretty much anything that doesn't have 'beer' in its name has been hammered recently.

Which leads back to the original question - what is Corvel? From here it looks like the TPA strategy hasn't generated growth or profits to date - overall revenues are flat over the last few years and profits down, while the patient management segment (where TPA revenues are reported) declined from 44.4% of revenues in 2005 to 42.4% in 2008. The company is investing heavily in Enterprise Comp, and perhaps this investment will pay off in a couple years. With that noted, as I've said before, Corvel's entry into the TPA business infuriated some customers - including a couple very big ones. It remains to be seen if their managed care business will stabilize, or at least shrink slowly enough to allow Corvel enough time to build their TPA capability and business.

What does this mean for you?

Be very careful not to antagonize current customers when you change strategies.
But be equally careful your customers don't move your services inhouse.

thanks to SeekingAlpha for the transcript.

Posted by at 7:47 AM | Permalink | Comments (0)

Because they allowed workers comp and national accounts to dictate provider contracting strategies, a decision that drove up the core group business' medical loss ratio.

Here's how.

The beginning of the tough times for Coventry came last spring. Up till then, things had been moving along quite nicely - just a year ago, I noted "For Coventry, 2007 was an excellent year. Total revenue (including group and medicare) came in just short of the $10 billion mark, the commercial group medical loss ratio (MLR) was a stellar 77.3%, and there was modest membership growth in group, Part D and the individual health lines."

Just before the wheels came off, I said "this is a company that, justifiably, prides itself on its ability to predict and price for medical trend. It is not expert in nor does it even emphasize medical management, chronic care management, outcomes assessment, provider profiling, or any other form of 'managed care'. Coventry is expert at managing the balance between pricing and reimbursement."

Well, I was half right - and half wrong. Coventry may be expert in managing pricing but it is now obvious that it doesn't understand reimbursement.

Now that new CEO Allen Wise is on the job, Coventry's staff is conducting a top to bottom review to determine, in part, what drove medical costs up so high without anyone noticing/understanding/fixing it early on. Here's how Wise characterized what happened in the earnings call earlier this week, as provided by the good folks at SeekingAlpha in the transcript.

"When I was conducting a review of the company, I was trying to determine the cause of the 300 or 350-basis point deterioration in the commercial medical loss ratio, and I think it is impossible for me to determine precisely what happened there. You heard a little bit about the flow and you heard a little bit about MSDRGs [new medicare hospital pricing methodology], and you heard a little bit about [hospital] unit costs, and I think it’s a probably a little bit of every thing, but there was not any question there was stress at the local health plan of a contractual nature by some of our other businesses, and by that I mean the network rental business, the Workers’ Comp business. I am not sure on the Medicare front, but when you interviewed people here and in the field, look at our litigation count on litigations for network-related issues, there was stress enough there, and enough of frequency to people recounting stops among major providers they started off with that until you solve X or Y problem, none of which were connected to the commercial health risk thing that your rates are going to go up or something....[emphasis added] I think there was a bit of pressure on unit cost. I expected to find some deterioration in local patient management activities. I did not find that. The core competency of the company, while there is plenty of clutter with new activities and a feeling of a lot of things going on at one time, I did not find a loss of focus at the local health plan levels. Many of those medical directors have been with us for a decade, and I didn’t see much change there. If you take the unit cost level, I just think in meeting with our new guy Allen Karp and best practices in each of the plans and having more quantitative information on what really happens on a month to month basis out there, I think there’s just room for improvement there."

Shawn M. Guertin, Coventry's CFO, went on to say "...There is no doubt that the facility unit cost experience was worse than it had historically been and worse than we had expected in ’08..."

Coventry's local provider relations folks were tasked with getting contracts with providers, contracts wherein providers would agree to discount their prices to patients affiliated with Coventry - either health plan members, employees of larger employers who used Coventry's PPO contracts, workers comp claimants, and Medicare members. It appears the contracting effort was hampered by the need to include all these 'products' in provider contracts - especially for hospitals. As Wise said, during the contracting process, "[recruiting and contracting] people [were] recounting stops among major providers they started off with that until you [Coventry] solve X or Y problem, none of which were connected to the commercial health risk thing that your rates are going to go up or something..."

Coventry has determined that their group health MLR was higher than it should have been because their hospital costs were too high. This was driven by their hospital contracts - and the contracted rates were too high because Coventry wanted their payers to accept all products. When hospitals dug in their heels, Coventry's staff gave away some discount for the group health rates in return for discounts for workers comp and PPO claimants.

Remember group health is the big business at Coventry - work comp accounts for less than 7% of the company's total revenues. I get the sense that Wise is wondering why the needs of the workers comp and PPO businesses were allowed to take precedence over his core business - and increase the group business' MLR.

Good question.

Posted by at 10:05 AM | Permalink | Comments (3)

Friday will be Dale Wolf's last day at Coventry. After diversifying the company into workers comp, Medicare Part D, Medicare Advantage and private fee for service, and individual insurance, he leaves behind a much different Coventry than the one he took over in 2005. Don't shed too many tears for Mr Wolf, he leaves after earning over $13 million last year alone.

The health world is also much different. Insurance itself is rapidly approaching the unaffordable level, participation rates are dropping (fewer employees signing up at companies that offer insurance), the Bush administration's massive attempt to privatize Medicare and Medicaid will likely be reversed, hospital costs are exploding, and national health reform is around the corner.

And Coventry's stock is a quarter what it was a year ago, while solutions to the company's problems look ever further away.

Lots to consider, but I offer these thoughts.

The CEO is out, two weeks before the company releases its 2008 earnings report. The 65 year old former CEO is back. The company is not looking for a new CEO. Coventry's commercial business is hamstrung by the factors noted above. It is not doing so well in Medicaid and Medicare growth will likely slow considerably. The company has not shown any expertise in managing care; it appears to rely solely on price increases to manage medical inflation. It has stumbled badly twice in the last year, both times failing to accurately forecast medical costs.

There is some thought that the company may be for sale. I'm one who leans in that direction. Recent news makes it more likely the company will not be sold in its entirety, but rather sell off pieces/markets/health plans. There are just too many moving parts in the 2009 version of Coventry; this complexity would make a comprehensive due diligence effort long and miserable - and given Coventry's historical inability to predict health costs, potentially inaccurate.

But it is cheap.

Never one to forgo an opportunity to say something that will come back to haunt me in the future, I'm going to go out on a thin and ice-bound limb and opine that Coventry will sell off some health plans, and perhaps the work comp and other specialty businesses (e.g. mental health). A little less likely is a sale of the entire company.

What is unlikely is Coventry is essentially unchanged a year from now.

Posted by at 7:49 AM | Permalink | Comments (7)

South Carolina* is a great example of what happens when hospitals are financially incentivized to treat workers comp claimants. Costs go up dramatically, and - surprise! premiums quickly follow.

That hasn't stopped Florida from merrily marching off the cliff.

But suicidal behavior isn't limited to those who listen only to southern rock. No, even folks in the frozen north can succumb. The latest victims are in Minnesota, where hospitals and insurance companies are haggling over a hospital inpatient payment standard that would pay smaller Minnesota hospitals about 90% of their billed charges; larger hospitals would get about 85% of their billed charges on higher-dollar inpatient bills.

Are they nuts? Has the cold frozen their brains solid? Too much time in the ice-fishing shack?

Whatever the reason, the result will be the same. Hospitals, which have been absolutely hammered by the recession and accompanying decline in reimbursement, drop in elective surgeries, and increase in the uninsured, are going to be relying on comp to offset their losses and shortfalls, and with fees based on a reduction below billed charges, what's to stop hospitals from just raising their billings as high as they want?

(the real answer is there are some very tenuous and weak controls, but they will have little effect - hospitals are pretty much free to bill what they wish)

And that's not all: Minnesota hospitals’ billed charges are rising far faster than hospitals’ costs. Ignored is the fact that, as WCRI’s analyses have shown, it is those states (such as Maryland, Massachusetts & Connecticut) that have made WC a reasonable but not generous payer for hospitals where the WC system is most cost-effective for employers.

And injured workers have better outcomes, too.

*South Carolina put in a Medicare+40% hospital fee schedule on 10/01/06. Now, per NCCI, there is a 23.7% WC rate increase filed and pending.

What does this mean for you?

Higher hospital costs in Minnesota. A lot higher.

Posted by at 6:00 PM | Permalink | Comments (3)

The phone and email has been buzzing today. So has the blog-o-sphere, at least among those bloggers who follow this. Both of us.

Today's follow up announcement by Ingenix' parent UHC revealed the giant health plan will pay $350 million to settle a class action lawsuit directly related to the use of the Ingenix UCR database. This brings the total (to date) cost for legal settlements to $400 million after yesterday's NY settlement. Here's the key language from UHC's statement today.

"UnitedHealth Group (NYSE: UNH) announced today that it has reached an agreement to settle class action litigation related to reimbursement for out-of-network medical services. The agreement resolves class action litigation filed on behalf of the American Medical Association (AMA), health plan members, health care providers and state medical societies.

Under the terms of the proposed nationwide settlement, UnitedHealth Group and its affiliated entities will be released from claims relating to its out-of-network reimbursement policies from March 15, 1994, through the date of final court approval of the settlement. UnitedHealth Group will pay a total of $350 million to fund the settlement for health plan members and out-of-network providers in connection with out-of-network procedures performed since 1994. The agreement contains no admission of wrongdoing."

The real problems with the Ingenix UCR database weren't the subject of much discussion in the settlement documents or the various analyses of the settlement. But underlying the case are some significant problems with the database, how it is put together, and its uses. These issues were highlighted in the Davekos case in Massachusetts, and are discussed in the court record. Among the problems are:

- the accuracy and consistency of the underlying data is questionable. Ingenix cannot assure that the entities (health plans and claims administrators and insurance companies) that supply the data that Ingenix uses to determine what usual customary and reasonable charges are in specific areas are all using the same criteria, are coding consistently and accurately, and are aggregating the data in the same way.

- Ingenix may not always have enough charge data to provide a statistically valid sample for every CPT code. In that case, it appears that Ingenix may aggregate data from similar codes to produce a large enough sample. The potential issue with this work-around is obvious. In some instances, Ingenix actually called medical providers in specific areas where it did not have enough data to ask what they would charge for specific procedures. Thus they were combining telephonic survey data with actual charge data in their UCR databases, a commingling of very different data from very different sources with varying reliability.

- Ingenix itself defines the sociodemographic region boundary lines that are used to determine which charges are relevant for which geographic areas. In the Davekos case, the court appeared to be concerned when Ingenix could not give a defensible rationale for the logic or process they used to determine the boundaries for charge areas.

- Ingenix scrubs the data to extract charges that they decide are outliers for reasons that appear to be subjective. It also appears Ingenix removes high end values but not low end outliers. If this is the case, it would likely skew the charge data towards the lower end.

Those are some of the details behind the Ingenix UCR settlements. As to what will happen next, Bob Laszewski's perspective provides insights as only he can.

What does this mean for you?

If you are using the Ingenix UCR database, you may want to look for other options.

Posted by at 3:55 PM | Permalink | Comments (5)

Likely quite a bit. But not for a while.

Here's the quick and dirty. NY Attorney General Andrew Cuomo has been after UHC sub Ingenix for over a year, accusing them and other insurers of defrauding consumers by manipulating reimbursement rates. Yesterday the first round came to a conclusion with the announcement of a settlement. According to the NY Times, Cuomo "ordered an overhaul of the databases the industry uses to determine how much of a medical bill is paid when a patient uses an out-of-network doctor".

Ingenix will pay $50 million to help fund development of an independent charge database by a not for profit; until the new vendor is selected Ingenix will continue to provide the UCR data through its MDR and PHCS products. Cuomo is still pursuing negotiations with other payers including Aetna.

Cuomo voiced concern that UHC, a very large payer, owned the company that determined how much it should pay in some circumstances to some providers (out of network physicians primarily) and therefore an inherent conflict of interest existed.

Some background is in order. Years ago, the health insurance industry's lobbying and service arm (HIAA) aggregated and compiled physician charge data as a service to its members. HIAA collected the data and fed it back to members, who then used the data to determine how much they should pay providers in specific areas for specific services (services defined by CPT codes). HIAA was taken over/disappeared about a decade ago, and Ingenix took over the aggregation and distribution of the data, which has become known as "UCR" for "Usual, Customary, and Reasonable".

For about ten years, all was fine, at least as far as most insurers were concerned. Sure, physicians complained at times and consumers railed about the low reimbursement paid by companies citing their UCR, but the complaints didn't really make any difference until Cuomo got involved. The problem arose when a few folks in New York complained about the amount they still owed providers after their insurers had paid their portion - according to Ingenix' UCR. After a lengthy investigation, Cuomo found reason to charge UHC and other insurers, and that action resulted in yesterday's announcement.

It is too early to tell how this will affect insurers, but there's no doubt it will. Here are a couple things to consider.

= providers that are paid by UCR will find it much easier to challenge the reimbursement, and payers will likely be plenty nervous if all they have to stand behind is a largely-discredited Ingenix database. Expect higher payments to providers and claimants.

- attorneys in other states may see this as a big opportunity for class action on behalf of physicians and claimants.

- payers will redouble their efforts to negotiate reimbursement prospectively with out of network providers.

- policy language is going to change, and change fast. Look for significant changes in the SPD (summary plan description) and other plan documents more clearly describing the payer's liability for non-network provider charges. There may even be some movement back to scheduled payments.

- in the work comp world, there's going to be turmoil and drama in states that do not have physician fee schedules (e.g. NJ, MO). Expect employers and insurers to work much harder to get claimants to network providers, where the UCR issue is much less significant.

There's some precedence here for the property casualty industry. Last year in a suit in Massachusetts, a court found that Ingenix could not prove that the underlying data was accurate, that it was a fair representation of provider charges in an area, or that the results were anything more than "dollar amounts resulting from the statistical extrapolations from whatever bills were actually included in its database."

What does this mean for you?

More power to the providers, higher cost for payers, and more business for attorneys.

Posted by at 7:11 AM | Permalink | Comments (7)

As Bob Laszewski trenchantly notes, covering everyone will not reduce costs in and of itself - at least not on a system-wide basis. Absent major changes in reimbursement and demand management, covering more people will just increase total costs.

That said, universal coverage should significantly decrease costs for private payers and their members, as well as the employers who fund most group coverage. Most significantly, a substantial portion (about eight percent, or over $1000 per family) of health insurance premiums go to cover the cost of uncompensated care. Note that this includes costs for both the uninsured and underfunded care; Medicaid is the most often cited example of inadequate compensation.

Covering everyone would not eliminate the inadequate compensation and resulting cost-shifting, but it certainly would reduce providers' need to recoup lost revenue from treating the uninsured.

Among the beneficiaries of universal coverage, workers comp payers might see the most benefit. Not only is comp a very soft target for cost-shifting, it is also likely claimants without other health insurance receive treatment for their non-occupational conditions in the course of treatment. This is not due to laziness or incompetence or fraud, but rather because the insurer understands that the injured worker cannot return to work unless the injury and any complicating medical conditions are resolved.

What does this mean for you?

The pluses of universal coverage are not often obvious.

Posted by at 8:29 AM | Permalink | Comments (3)

Think about what bill review and generalist network and specialty bill review and negotiation firms do. All have the same value proposition - discounted medical bills. (most networks don't deliver value in the form of better docs or outcomes, their business model is reduce cost by slashing bills retrospectively.)

All are in the cost reduction business although each take a different approach. A useful analogy is transportation; trains, trucks and ships all transport goods; each has its strengths and weaknesses, and at different times one model is more successful than the others. Right now, trucks transport most goods, even though they cost more because they can deliver convenience by moving goods to the precise location on time. This model has gained in large part due to low fuel costs, heavy investment in roads, and customers' adoption of just-in-time inventory management. As the economics of transportation evolve, we may see a resurgence of rail and/or shipping; the cost per ton/mile for rail and shipping is significantly lower than trucking.

For several years bill review has been a commodity. Despite vendors' best efforts to differentiate, most buyers place great emphasis on price. As a result, bill review vendors have worked hard to squeeze out cost through automation, auto-adjudication, streamlining and offshoring. None of these technologies are 'bad', rather the rationale behind employing them may well be misguided.

In an effort to compete bill review vendors have lost sight of their reason for existence - to ensure their customers pay only what they legally are required to. Instead they compete on the basis of how cheaply they can write checks out of their customers' checkbooks.

This is not entirely the bill review vendors' fault. Their customers bear much of the responsibility for the situation, playing vendors off against each other in an effort to reduce the payer's admin expense. And the payers have succeeded. That success has come at a cost which some payers are only recently beginning to grasp. Here are a few examples.

For some procedures, the amount reimbursed is dependent on modifier codes. At least one large payer has instructed its bill review staff to ignore the modifiers as their entry slows down the bill review process.

A vendor known for its very competitive pricing often charges extra for 'nurse review' of items that are commonly audited and repriced within the bill review process. This allows the vendor to recoup the margin it gives away with its low per-bill pricing.

Another large payer's bill review process actually requires claims personnel to authorize payment of each and every bill, no matter how routine, no matter how many times that provider has been paid for the same procedure in the past. This step has been put in place because the bill review process can't be trusted; instead of fixing the process the company uses its expensive staff to do something the system should.

Payers want national solutions yet don't want to take the time to understand some of the state-specific intricacies that can dramatically influence costs. For example, hospital reimbursement in PA is based on each hospital's chargemaster, requiring repricers to have access to current data. In CT, payers are required to reimburse hospitals at cost, yet very few payer or bill review vendors have invested the energy required to determine each hospital's costs.

Sure, payers have been able to cut their bill review costs, but the price they are paying is, in many instances, much higher than the reduction in administrative expense.

More and more, payers have come to rely on their networks for cost reduction; bill review is a necessary part of the bill flow and a way to get bills repriced to network rates, and a source of data for state reporting. In large part this reflects the change in pricing methodologies for bill review from a percentage of 'savings' below billed charges to a flat fee per bill or per line. In the transition, the purpose of bill review has been lost.

As payers look for better solutions to address rising medical costs, they should go back to the basics. There's nothing more basic than making darn sure you are only paying what you are legally and contractually obligated to. Simple, yet this will require significant investment on the part of vendors, investment that will have to be recouped from their payer customers.

What does this mean for you?

Bill review vendors should not be competing on the basis of price per line or bill. Payers should buy smarter, but won't until and unless they realize what they're buying; technology, people, and processes all focused on writing checks out of the payer's checkbook. Only then will bill review vendors be able to do their job effectively.

Note: my firm, Health Strategy Associates LLC will be surveying payers on bill review this spring. If you would like a copy of the public report send an email to infoAthealthstrategyassocDOTcom. Substitute symbols for AT and DOT.

Posted by at 7:25 AM | Permalink | Comments (3)

Because they are more interested in their profits than their customer's needs.

The big comp network companies (with "big" referring to the size of the network, not the company, as there's only one BIG NETWORK COMPANY - Coventry) have a problem.

They've been selling their network based on the "thump" the directory makes when it hits the managed care execs desk ("wow, now THAT's a big network") followed closely by the price ("And if you act now, I'll get my boss to commit to a rate below 20% of savings!!"). While this has made them lots of money, it hasn't saved their payer clients much, if anything, in the way of medical costs. Now, some payers are wiping the sleep from their eyes and noticing that those whopping network-access fees have gone up just about as fast as their medical costs.

And that ain't no small thing.

Payers have been hearing for years about the small network solutions the big boys are just about ready to launch. They've been a few months away for about four years now; four years and counting. So, why so late? Why aren't the big networks innovating? Coventry et al have been selling essentially the same network model the same way to the same markets for fifteen years. The market has moved on, with the early risers amongst the payer community looking for very small networks of physicians who can not only spell w-o-r-k-e-r-s c-o-m-p-e-n-s-a-t-i-o-n but pronounce it as well.

That's no small challenge, as the payers' network "partners" haven't exactly made their business thrive by identifying the docs who treat less, write fewer PT scripts, don't admit claimants for lengthy hospital stays or order multiple epidural steroid injections. In fact, those are the docs the big networks want to stay far, far away from. Because the more bills there are, the more "savings' are generated, and the more network access fees are collected.

Ka-Ching!

Therein lies the core reason the big networks haven't done the right thing - it won't make them near as much money as their current high-cost, low-benefit big-directory network.

The technical term for the problem faced by these companies is the "Innovator's Dilemma". This more-than-a-theory holds that companies that are very successful in their fields keep improving their products, believing that what their customers want is more and better versions of the same. What these companies don't do is think up new ways of meeting their customers' needs; ways that are cheaper/faster/easier. Instead, they work diligently on making their existing product a tiny bit better every year. And in the process, they don't pay attention to what their customers actually need - the problem they are trying to solve.

The leading proponent of the theory, as well as the one who coined the term, is Clayton Christensen. Christensen's research shows it is often entirely rational for existing companies to ignore new and disruptive innovations, because those new innovations don't compare well with existing technologies or products. Even if a disruptive innovation is recognized, existing businesses are often reluctant to take advantage of it, since it would involve competing with their existing (and more profitable) technological approach. (in this instance, several large Coventry clients have asked them repeatedly when they are going to develop a physician-centric model. As of late last year, Coventry had nothing to show, or talk about, or demo...)

Here's an example from Christensen's book, the Innovator's Dilemma. Back in the early- and mid-nineteen hundreds, the only way to dig big holes efficiently was to use a cable-actuated shovel driven by coal (initially) and later diesel. The cable shovel manufacturers got really good at making larger and larger shovels that could move yards and yards of dirt. Meanwhile, other companies began developing hydraulically-driven shovels. At the start, these were small, puny affairs, barely able to move a third of a yard of dirt. Not surprisingly, the big cable shovel companies (e.g. Bucyrus Erie) laughed at the upstarts, knowing their customers were not interested in the toy version of their behemoth shovels. But lots of residential contractors and utilities could use the smaller shovels; their only alternative was hand-powered shovels. The new market entrants gradually improved their hydraulic shovels, until they could effectively move as much dirt as the biggest of the big boys. And do it more efficiently, with far fewer breakdowns, and much more safely.

Of all the big steam shovel companies in the business mid-century, only a small handful survived the onslaught of hydraulics, and the survivors did so by adopting the new technology. They found that the smaller end of their market was gradually taken over by the "toy" manufacturers, which then moved relentlessly up-market, until the only market left for Bucyrus et al was the hundred-yard plus strip mining shovel. Most of Bycyrus' competitors went out of business, including the Marion Power Shovel Company. Marion employed over 2500 workers at its peak, when it made the largest steam shovels in the world to build the Panama Canal. When it was finally sold off in 2003, Marion had fewer than 300 employees.

Back to our little world. The small, physician-only network doesn't deliver big "savings" (in the form of discounts) and "penetration" (in the form of a really thick provider directory with most live and some dead docs listed therein) and therefore is not, in the view of the big network companies, something worth developing. Moreover, these big network companies believe the market for the small networks is quite small compared to the market for their established network offering. And they are right - today.

What the big network companies are missing is what their customers want to buy - not "savings" defined as discounts below fee schedule, but lower medical expenses. After a decade-and-a-half of more and more networks delivering higher and higher medical expenses, big payers need, and want, a different answer.

But the big network companies have an even bigger problem, one that did not affect the cable shovel manufacturers. At the height of their business, there were no fewer than twenty companies making shovels, all working as hard as humanly possible to develop better and better cable shovels. They were innovating, all right, but their innovations were designed to make their core product better at moving more and more dirt.

What's different in the comp network business is the almost complete lack of competition. Coventry controls upwards of 60% of the generalist network business, with the rest spread thinly between CorVel, Wellpoint, Horizon, Prime, and a few others. By all accounts, Coventry is not even bothering to improve their current product offering. Instead, they are raising prices and ignoring customer complaints about data quality.

What does this mean for you?
It took the hydraulic shovel companies a good three decades to all but destroy the cable shovel business. I don't expect Coventry's work comp offering, nor those of its competitors, will have that long a horizon. Not by a long shot.

Posted by at 5:20 AM | Permalink | Comments (4)

Much against my better judgment, here are my predictions - in no particular order - for the work comp managed care world in 2009.

1. Coventry will be acquired.
Currently trading just under $15 per share, Coventry Health looks to be an attractive target for another second-tier health plan company. They have solid operations in many secondary and tertiary markets, some decent business in Medicare and other governmental programs, and their work comp sub is wondrously profitable. Expect it to get bought some time this year - likely after the credit markets loosen enough for potential acquirers to feel a little more comfortable. As to what happens with Coventry's comp business, more on that when the time comes.

2. Aetna's work comp network business will slowly dissipate.
Now that the provider relations, sales, compliance, and other support services are not all reporting up to one leader, it is inevitable that the focus on work comp will diminish. For customers hoping for improvements in the quality of provider data, this isn't good news; nor is it for payers looking for solid networks in key states.

3. Corvel's transition to a TPA with managed care services will accelerate.
As the company's TPA customers continue to depart, pressure will mount on Corvel to demonstrate the viability of the TPA strategy. For a company that has seen sales increase slightly more than 3% over the last three years and profits decline over the last four quarters, 2009 will be a key year. Either the company is able to make a go of it as a TPA, or investors will weary of the "its coming soon" meme and cash out. The timing is a little better, as the hardening market may make the TPA business more viable in 2009 than it has been the last two years. Then again, there's lots of other TPAs that are going to be fighting for that business too.

4. Several of the larger payers will announce their own, small physician-centric network products.
Beyond frustrated, large payers have given up hope that the Coventrys will ever do anything meaningful in the small, EPO-type physician-based network product line. Several large payers have been working diligently to do things on their own or in partnership with vendors; expect these to hit the market in Florida and several other states by Q3 2009.

5. - Correction- Oregon will do a do-over.
The state's misguided, ill-informed, and illogical stance on workers comp network reimbursement is going to blow up, big time. Many carriers are carefully considering their options, as Oregon's new regs require comp payers to reimburse at fee schedule for those services subject to the FS. Non FS services are to be reimbursed at billed charges. When I asked when a top carrier's managed care exec what they would do if a bill for a non-FS service came in at a billion dollars, he said, after a pregnant pause, "according to the State, we'd have to pay it."

6. Innovation
Uh, wrong industry...there will be precious little in the way of innovation, unless you count a few "aggregators" trying to become the "pipe" for payers to connect with various managed care vendors.

7. Specialty managed care
There will be new entrants into the various specialty managed care areas, as private-equity funded companies seek to take advantage of the ground-breaking work done by the innovators. These follow-on firms will do fine for a couple years, after which their customers will figure things out.

8. Medical costs
Will continue to increase far faster than they should, driven by lousy managed care models poorly implemented by payers more concerned with "savings" than claims costs.

If that isn't a safe prediction, I don't know what is.

Posted by at 2:03 PM | Permalink | Comments (2)

The workers comp world has certainly had its problems over 2008, and often these problems have overshadowed the successes, and victories both big and small that were achieved this year. Here without further preamble are a few of the more significant 'wins' for work comp in 2008.

1. Frequency declines continued this year, building on a fifteen-year downward trend that has cut the US comp injury rate in half. By any measure, that's great news. I'd also note that somehow the rate keeps declining, despite various experts (myself included) opining that it has to stop somehow.

2. Pharmacy costs have leveled off, due in no small part to efforts on the part of payers to mine their data, identify trends, and put in place programs to attack over-utilization. Good work to all; your efforts led to the fifth straight year of a decrease in the rate of pharmacy inflation in comp.

3. Predictive modeling continues to progress, albeit in fits and starts. Mistakes are being made, false leads chased, and assumptions proven wrong, but that's actually good news. This is a new, complex, and weird business tool that will require a lot of trial and error. Mistakes are necessary and vital as the industry learns.

4. More and more payers are actually building new networks and adopting new strategies, either on their own or with new market entrants. These strategies are based on smaller, highly select networks of work comp expert docs, the kind of physician who can drive better outcomes at lower costs. After too many years of relying on the promises of the big networks, these payers are taking matters into their own hands, driving innovation and progress. it may not be as fast or as extensive as some would like to see (me being one of the some), but progress it is.

5. Disclosure of financial relationships among and between managed care firms and TPAs has significantly expanded, with companies including Gallagher Bassett, SRS, and Broadspire leading the charge (in fairness these firms were doing this long before 2008).

6. Specialty managed care has exploded, with carve-out vendors doing an exemplary job managing costs and delivering results in physical medicine, DME/home health, facility bill review, and cat claims. The more they do, the better they get.

7. Regulators in several states are working hard to do the right thing. New York's willingness to change the pharma fee schedule and increase in benefits, California's pursuit of lower costs, better medical care, and better benefits, and Texas' (somewhat clumsy) attempts to fix their system all have been welcome signs of progress. We aren't there yet, and all have their warts, but the needle is pointing in the right direction.

8. Solvency - unlike other insurance lines, the core solvency of the work comp insurance industry has not been in doubt this year. While parent companies, other insurers, and blue-chip, white-shoe Wall Street firms were imploding on a weekly basis, we in the work comp world have chugged along, hitting a few bumps on the way, but nothing like the rest of the financial world.

We have a long way to go, but in many areas, we're heading in the right direction.

Good work.

Posted by at 9:43 AM | Permalink | Comments (3)

From the world of workers comp comes a crystal clear picture of what's wrong with America's health care system, and how difficult it will be to get it right.

WorkCompCentral has a piece this morning about California's proposal to not recommend topical analgesics - creams and ointment that are compounded at the pharmacy.

The pharmacy community doesn't like the proposal, claiming "there's [sic] prescriptions for these medications, patients have been getting relief, and we think that they should continue to be reimbursed for the medications that are being prescribed for them".

Opponents of the proposed language also noted that it "conflicts with the DWC's written policy stating that only “evidence-based, peer-reviewed research concerning the efficacy of a treatment can be the basis for recommending or not recommending a treatment.”

I'd suggest the opposite is the real issue - there is no evidence-based peer reviewed research documenting the effectiveness or efficacy of compounded medications. The pharmacists want to be paid for preparing and dispensing a medication which has not been shown to work. And they are pulling out the lobbyists and PR folks and 'inhouse experts' in an attempt to get California to back down.

Further. compounded medications are outside the scope of the the FDA's authority.

About a third of US health care dollars are spent on treatments that are likely not effective. One has only to look at the history of MRIs, carotid endarterectomy, and angioplasty to identify billions of dollars that have been wasted on treatments that did not help, and may well have harmed, thousands of patients. These treatments, devices, and providers make money for their purveyors and manufacturers, dollars that they are loathe to give up.

Yet the approval process for these treatments/drugs/devices is is almost laughably low. Here's how a UK researcher put it:

"the FDA dossier showed that the average improvement produced by drugs introduced in the 1960s was 17%, whereas with the drugs introduced in the 1990s it was 16%![emphasis added]...If one looks at the medical interventions we have for many diseases, whether they be psychiatric or neurological disorders, cancer, cardiovascular or respiratory or gastrointestinal problems, or almost any type of illness other than bacterial infections, what evidence-based medicine shows is that, as my colleague found, many of our interventions are pitifully inadequate. Our studies, although beautifully conducted, have been done on patient populations that bear only a limited relationship to those patients we actually see. The number needed to treat to achieve one success over and above that which could be achieved by placebo may be 10, 20, or even as high as 50. Thus, the trials actually give us almost no guidance as to the likely outcome of an intervention in the individual patient who sits in front of us. For many conditions, therapeutic effects are so small that neither the patient, nor the relative, nor the doctor is likely to be able to recognize any differences in the patient's state as a result of our intervention. We pride ourselves on our large, well-conducted, immaculately analyzed trials that give significant results. But we have forgotten that we need to conduct such enormous trials only because our interventions are so minimally effective. If we were making a really large difference to the outcome, small trials would suffice and provide clearly significant results."

That's one side of the argument. Here's the other.

I give you the condition known as 'chronic lyme disease'. This tick borne ailment is pretty common in my area (central coast of Connecticut), in fact I live about twenty miles from Lyme. Walk down the main street in Madison and chances are you'll encounter at least one person who has had recurrent Lyme disease - the mechanic, artist, college student, mom. Yet try to find a doctor who will treat chronic Lyme and you'll find very few who will risk their reputation and medical license, as several physicians have been disciplined for just that.

The battle over chronic Lyme (and it is a battle) has been brutal, nasty, and vicious. Nay sayers claim no such disease exists, and cite research and articles in prestigious publications such as the New England Journal of Medicine as support for their opinions. Their opponents decry the poor quality and selective nature of that 'research', accuse the authors and study leaders of conflicts of interest, and note the successes - patients treated for chronic Lyme that get better.

Anecdotally, I know at least a half-dozen friends and neighbors who have suffered from some condition that robbed them of their energy, caused great pain, and prevented them from doing many of the things the rest of us take for granted. After extensive treatment (we're talking over a year) with antibiotics, all have gotten better. Much better.

It is abundantly clear that medicine is an art as much as a science, and art is, as famously described, in the eye of the beholder.

And that's one reason health reform, which must attack cost, will be so very difficult.

Posted by at 7:38 AM | Permalink | Comments (0)

Back in September the good folks at the Texas Department of Insurance published a most interesting report (shows what a geek I am) - the 2008 Workers' Compensation Network Report Card. Let's start with the overall numbers.

Medical costs were about $130 lower for the Texas Star network (a Coventry product) than for the other networks (with non-network claims second least expensive, and all other networks more expensive(!)).

There's a lot more here, but I'm going to focus on one page in particular - 15 (23 in the pdf file).

More specifically, the top half of that page. It shows (adjusted) average hospital cost per claim, six months post injury, for non-network and several networks. The Texas Star Network's hospital costs are 5% higher than non-network costs. Corvel's network costs are significantly higher than Texas Star, and only slightly lower than all the rest of the networks included in the analysis (except Liberty, which has the lowest costs in the study group). Digging deeper into the report, one finds that Texas Star's higher hospital expense are due to inpatient hospital stays, which are about $3000 more than non-network costs.

By comparison, Corvel's inpatient costs are a rather stunning twice as high as Texas Star, and over five times higher than Liberty's HCN.

Like any report, the results generate as many questions as answers. Here are a few of the more intriguing.

Why are Texas Star's hospital costs higher than non-network?

Texas' comp regulations require networks include hospitals. Hospitals know this, and according to sources, most refuse to offer any discount, with many forcing networks to pay above the fee schedule. The Texas Star network is priced at around $12 per bill (not including bill review services) or $110 per claim. Thus, the additional cost of using the network is both the access fee, and the 'premium' paid to the hospital for the privilege of having them in the network.

Why are Corvel's inpatient hospital costs so high?

The Corvel numbers look awful, but they have far fewer claimants treated in facilities (a third less than Texas Star, and even fewer than non-network claims). Corvel's inpatient utilization is very low; most hospital-based care (it appears) is delivered in ambulatory surgical centers and other types of facilities (p. 32). But, the volume of outpatient facility care is off-the-charts higher than non-network claims or any other network's results.

Which setting delivers the lowest cost per claim?

Too early to tell. Remember, these data are from six months worth of bills. All the expensive claims take years to develop, so we won't know what the results are for some time. That said, a good chunk of hospital bills hit in the first year of a claim as the acute phase of the injury is treated. While we don't know what the ultimate result is, it could well be that the inpatient hospital picture doesn't change much over time.

And what does this mean for you?

Follow this closely, and watch claim development for non-network v network claims. The numbers should start to diverge in favor of networks.

Posted by at 11:20 AM | Permalink | Comments (1)

This has been a work-comp intensive week, for mostly the wrong reasons (little good news to report, little innovation, you know, typical WC...)

I'll close this overly long trip down WC way with good news - about which vendors will flourish in the coming tough times for WC managed care.

With the number of claims likely to drop precipitously in 2009, the folks least at risk are those least dependent on a continuous flow of new claims. As claims age, the need for hospitalizations, surgeries, MRIs, and frequent and extensive physician visits and procedures drops off. Physical therapy also declines, or at least should if it is managed appropriately (PT should be focused on return to functionality and not palliative services). What's left is the type of services needed to keep long term claimants, with what have become chronic conditions, as comfortable as possible. Realistically, these folks are not returning to work, so the need for functionality-improving treatment has been replaced with symptom mitigation.

That would be the purview of home health and pharmacy companies, as well as the non-commodity DME (durable medical equipment).

NCCI has published a study documenting the change in medical services over time. Notably, the study, Relative Cost of Medical Services By Age of Claim and Accident Year, shows that pharmacy, supplies, home health, and DME costs go from a relatively small part of the medical dollar in the initial year after the claim is incurred to almost 50% of medical expense for claims more than four years old.

There's another positive indicator for the purveyors of chronic condition services - there's some evidence that during recessions, severity increases as claimants stay out on disability longer. Some may not have jobs to return to, others may not be able to find new jobs, but regardless of the cause, claims appear to persist.

These two factors, coupled with the rule-of-thumb that a third of medical dollars are spent more than three years after the date of accident, means there will be lots of dollars spent for 'chronic care purveyors' services for years to come.

Posted by at 7:50 AM | Permalink | Comments (0)

I've gotten several queries about the future of work comp if/when health reform occurs. The real answer is - no one knows. But I'm happy to take an educated guess.

I very much doubt comp will be directly impacted by or addressed in any health reform bill. It is going to be difficult at best to pass health reform legislation; adding comp is unlikely to increase support but would almost certainly drive work comp stakeholders to lobby against the bill. There's just no upside for including comp in health reform.

Back in the Clinton health reform days, comp was part of health care reform, where it ran into objections (most warranted) from employers, industry types, insurers, and providers. Work comp was addressed in Title X, which "would have required that employees receive all of their health care through the same insurance plan, regardless of whether the injury or illness occurred at home or at work." For lots of reasons, this was a non-starter.

President Elect Obama may well have learned from his future Secretary of State's errors: nowhere do the words 'workers compensation' or similar terms appear in President Elect Obama's website, policy papers on health reform, or in the several speeches he has made on the subject.

Finally comp is not linked to/mentioned in the Baucus plan, Wyden/Bennett Healthy Americans Act, or on Sen. Kennedy's policy pages. These should be viewed as drafts of final bills; if policymakers were actively considering incorporating work comp it is likely we'd have seen it appear in one or more of these bills.

What does this mean for you?

Don't expect to see work comp directly addressed in reform legislation on the Federal level.

But, any reform initiatives will undoubtedly affect workers comp. Here are a couple specifics.

Physician reimbursement
The fall will be highlighted by a debate over Medicare physician compensation. With docs scheduled to see their reimbursement drop by around 20% in 2010, the caterwauling will be heard loud and clear inside the Beltway. Don't look for a major policy change, but rather something to satisfy the physician community and build a little equity for the future. My sense is CMS will increase reimbursement for E&M codes (cognitive services). Almost all WC fee schedules are based on Medicare, so any change in Medicare directly and immediately impacts comp reimbursement. Watch Capitol Hill carefully; if Congress passes legislation signed by future President Obama affecting Medicare reimbursement, clinic companies may be big winners.

This will also be good news over the long term for comp in general. Good work comp medical care requires physicians to spend time listening to patients, and talking with employers, adjusters, and case managers. Docs don't get paid (at least not adequately) for this time, therefore any increase in reimbursement for office visits will encourage docs to spend time with claimants instead of doing procedures. Well, at least not discourage doctor-patient discourse...

Medical care delivery
If there is a major reform initiative passed, there will likely be fundamental changes in the way health care is delivered, the virtual ‘location’ delivering that care, and the evaluation of care.

And that would dramatically affect workers comp.

Today, health care is delivered episode by episode; diagnosis, care plan, treatment, assessment, and repeat steps 2-4 until the situation is resolved. This episodic model of care will (over time) change to one based on functional outcome management – care focused on returning the patient to functionality, and maintaining that functionality.

This will be in large part driven by the growing influence of chronic care and need to develop a better care model to address chronic care, one that will heavily emphasize patient education and monitoring. It will also require a different ‘location’ of care – the medical home.Dr Kathryn Mueller of the University of Colorado sees the medical home model as a big part of the solution in workers compensation, as the medical home may well be the dominant model for delivery of care throughout the health system in years to come. Studies indicate the home decreases medical errors and improves the quality of care delivered. Notably, the medical home model is NOT a primary-care gatekeeper model – but rather a model wherein the physician is tasked with and responsible for coordinating care and educating the patient.

Drugs
If Congress calls for the Feds to negotiate drug prices, this will affect comp in one of two ways. Either comp payers will be able to piggyback on the Feds' negotiated rates, in which case per-pill prices will come down, or (more likely) comp payers find their per-pill prices increase due to cost shifting.

Posted by at 8:33 AM | Permalink | Comments (2)

The decline in work comp claims frequency is worrying many in the workers comp managed care business - as well it should. As I noted last week, a drop in the frequency of claims will mean fewer cases to manage, bills to process, and provider bills to profit from.

There is an 'upside' to the recession - claim duration could go up. That's likely true. But the second part of our conversation may well be more important.

During a conversation with the head of a large TPA earlier this week, my colleague made the point that during a recession, claim duration may well increase for a couple of reasons - the folks who are still working are likely older (younger workers with less seniority get laid off first) and we older folks take longer to heal, and have other medical conditions that make the treatment process more complicated, longer, and more expensive.

So claim severity (the medical cost per claim) may well bump up as a result of the recession. But, and it's a big but, there may be a more dramatic drop in the number of claims than anticipated. The key, as the exec noted, is while there has been a decade-plus long decline in the injury rate, the decline in frequency has been somewhat offset by an increase in employment.

While the economy was expanding, more jobs were being created. The increase in the number of people working offset the decline in claim frequency. (Frequency is measured in terms of injuries/illnesses per 100 FTEs, so the more FTEs the more injuries). Now, jobs are disappearing, with a disproportionate loss from jobs that have higher-than-average injury rates - construction (down 780,000 since December 2007), manufacturing (down 604,000), logistics.

The comp managed care industry has been protected from the decline in frequency by growth in employment, but this growth masked the structural, long term decline in frequency. Now that growth has been reversed, there's a 'multiplicative effect'; loss in high-injury-rate jobs times a decline in frequency = bad news for (most) managed care vendors.

What does this mean for you?

Tough times for some vendors; some, but not all. Tomorrow I'll look at which sectors may be less vulnerable.

Posted by at 7:19 AM | Permalink | Comments (2)

As if the declining frequency rate wasn't bad enough, managed care companies are now looking at significantly lower claims volume in 2009, a decline that will spell trouble for work comp managed care.

When the number of injuries goes down (which it does during economic recessions), managed care vendors are directly affected. There are fewer bills (bad news for bill review), fewer treatments and visits to providers (bad news for PPO networks and UR vendors), fewer prescriptions (not as bad news for PBMs as you might think), and fewer cases to manage (bad news for case management firms).

This recession, currently in its twelfth month, may well be tougher on managed care vendors than prior ones. The jobs that are disappearing tend to be those in higher injury rate classes - retail, manufacturing, construction (24 consecutive months of declining employment), transportation/logistics. The auto industry is in freefall with sales down 37% last month, bringing suppliers along for the ride. The unemployment rate has rocketed to 6.8%, the worst result in over sixteen years, and may be headed to 8.5%.

Fewer workers, fewer injuries. Those fortunate enough to keep their jobs tend to be more experienced, better trained, and less likely to report an injury for fear they'll lose their job. And, the pace of work is slower with much less overtime- all contributing to lower injury rates.

As if that wasn't bad enough, payers are looking to move more managed care services in-house.

For some time, big (and medium) TPAs and insurers have been internalizing their managed care. Gallagher-Bassett, Liberty Mutual, AIG, Broadspire, and Sedgwick are but a few of the big boys that have long handled much of their own managed care (with the exception of networks - more on networks in a minute). Services such as bill review and telephonic case management are easily handled by the payer, and system vendors usually have modules ready for payers moving in this direction. Payers are able to capture more revenue and profit, while contending (with, in some cases, justification) that their results are better than vendors can deliver. Of late this trend has accelerated, primarily due to the soft market. First Cardinal is one TPA that recently brought case management in-house, others are internalizing bill review and UR as well. Expect this trend to accelerate.

As I noted a couple weeks ago, the network business is under increasing pressure from regulators. In addition to the legal issues in Oregon and Louisiana, is is highly likely the 'networks of networks' will find their business model under attack as states adopt legislation/regulations forcing greater disclosure of rental network agreements, requiring positive agreement from providers (providers have to sign off on a document before they can be added to a network). This will mean more work for provider relations, legal, and customer service departments at network vendors, driving up costs.

There is also increasing chatter in the industry about big payers moving towards much smaller, more specialized networks focused around key workers comp physicians. We are seeing significant movement in this direction in California, Florida, and Texas, three states that combined account for a big chunk of workers comp medical spend.

There is a bright spot. Specialty vendors in the DME, Home health, and pharmacy sectors will be least affected. As reported by NCCI, the big dollars in these sectors are spent by long-term claimants. The recession will not affect these companies much, if at all, as most of their business is coming from claimants that were injured years ago.

What does this mean for you?

If you are a vendor, batten down those hatches. Demonstrate your value, service your customers, and get your employees on board.

Posted by at 6:48 AM | Permalink | Comments (2)

The PPO world is about to get more complicated, and likely less profitable - for the PPOs.

The National Conference of Insurance Legislators (NCOIL) has developed model legislation tightly regulating PPOs, legislation that looks to be on the docket in at least two states next year, and likely others as well.

According to Bill Kidd in today's WorkCompCentral, the model act "allows unlimited “downstream” rentals of PPO contracts and physician discounts, but requires that network access information be made available to providers.

The model establishes criteria for network and discount access and contract termination; sets out contracting entity rights and responsibilities, requires disclosure to providers and contracting entities of third-party access; provides for registration of unlicensed contracting entities; prohibits and penalizes under a state’s unfair trade practices act unauthorized access to provider network contracts and allows physicians to refuse a network discount without a contractual basis."

The key is the notification requirement. The model act calls for PPOs to periodically inform providers of all the networks and 'access brokers' who can access the network contract. Providers have to be kept informed of changes to the list, and the list has to be emailed, mailed, and/or posted on a secure website.

While the issue of silent PPOs has been on a slow boil for years in many jurisdictions, It has been much more contentious in several states including Louisiana, Texas, California, and Oregon. Provider groups have complained that the managed care contracts they enter into have been sold and resold multiple times without their permission or agreement. That complaint is arguably minor; what is definitely not is providers' belief that the payers accessing the contracts 'downstream' are not doing anything to direct patients, but are simply accessing contracts to get a discount.

This is the core issue - PPOs trade volume for discounts. For far too long, big, yellow-pages PPOs have done little to actually increase a provider's patient volume. Many claim they have contracts with and/or access to hundreds of thousands of providers. If that's the case, and I have no reason to doubt that it is, there is no way the PPO can claim it is actually directing care to a selected group of providers.

If everyone's a member of the PPO, then it isn't a 'Preferred' Provider Organization.

The bill under consideration in Texas provides a window into what other states may see on their legislative agendas.

Posted by at 5:24 AM | Permalink | Comments (3)

The comp conference ended (for me) last Thursday; the passage of time allows for the individual impressions to meld into an overall picture of the current, and near-term future, of the comp managed care industry.

Here's what it looks like.

The decade-and-a-half decline in frequency that has slashed the injury rate in half is causing real pain among occ health clinics. Sources indicate industry leader Concentra is seeing a decline in work comp patients, a trend that will likely be exacerbated by the steep drop in employment (when the number of people with jobs drops, so does the number of workers comp claims - for more on the impact of recession on workers comp click here). It is likely that other occ health companies such as US Healthworks are also experiencing declines in patient counts.

Together, Concentra and USHW together have almost 450 occ health clinics, and both have been adding clinics in 2008. It is too early to tell if the additions have been worth the added cost in cash or debt, but the current economic situation makes it unlikely they will be looking to expand aggressively over the near term. Unless they find clinics that are finding it difficult to make it on their own, in which case this may well be a good time to expand on the cheap.

The big game-changer will be health care reform. If, as I've predicted, Medicare increases reimbursement for E&M codes (cognitive services), then the clinic business could well get a major boost. Almost all WC fee schedules are based on Medicare, so any change in Medicare directly and immediately impacts comp reimbursement. Watch Capitol Hill carefully; if Congress passes legislation signed by future President Obama affecting Medicare reimbursement, clinic companies may be big winners.

Meanwhile, work comp managed care industry leader Coventry is continuing to hurt (due to non-workers comp issues), with rating agencies downgrading their outlook on the company. If anything, the workers comp business at Coventry is a plus, as the fee revenue helps to offset some of their problems in the health insurance, Part D, and Medicare Advantage sectors. Several people I spoke with at the conference confirmed Coventry is continuing to get price increases on their network and bill review products, although pricing for PBM First Script and other services (e.g. MSAs and case management) is soft.

The network business is under increasing pressure from regulators. In addition to the legal issues in Oregon and Louisiana, is is highly likely the 'networks of networks' will find their business model under attack as states adopt legislation/regulations forcing greater disclosure of rental network agreements, requiring positive agreement from providers (providers have to sign off on a document before they can be added to a network).

The future of networks that are mostly amalgamations of other network contracts is not promising. They will have to convince payers that their liability is under control and their value (to the payer) is greater than networks with direct provider contracts.

Good luck.

The PBM sector continues to grow, with the biggest player - Express Scripts - looking to add to the distance between itself and its rivals. Despite claims to the contrary, ESI is not winning business by using its group health contracts; a well-informed source adamantly refuted that assertion, stating that all workers comp scripts are processed under their workers comp agreements. Expect this sector to get even more competitive as ESI fights for business with newly-purchased PMSI (second largest PBM by volume), Progressive (excellent reputation for customer service), Cypress Care (aggressive, innovative marketing and strong clinical offering), ScripNet (expanding into the eastern US), and Aetna (cross-marketing to their large group health employer customers). MyMatrixx (focus on pain management) and Modern Medical (highly disciplined and responsive) are also in the mix.

Expect pharmacy to remain highly competitive, with vendors adding value through clinical services, first fill capture, and upgraded reporting and communications capabilities as companies seek to survive and prosper in what has become one of, if not the most, competitive segments of the work comp managed care industry.

I'd also say we need to pay attention to DC. If Congress calls for the Feds to negotiate drug prices, this will affect comp in one of two ways. Either comp payers will be able to piggyback on the Feds' negotiated rates, in which case per-pill prices will come down, or (more likely) comp payers find their per-pill prices increase due to cost shifting.

Case management firms are facing the same issues confronting occ health clinics, with several folks at the major CM firms bemoaning the decline in volume. With volumes declining, and more big insurers and TPAs taking CM inhouse, expect continued pressure on pricing as Genex, Intracorp, Corvel, and Coventry struggle to 'feed the monster in the basement'.

What does this all mean?

External factors are the primary driver of workers comp. Medicare, the economy, and politics are all way more important than internal happenings in comp.

Look up and out if you want to know and understand.

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

While I and a few thousand other industry folks have been conferring in Las Vegas, the world (most inconveniently I would add) has been marching forward without us. In Florida, it looks their progress is headed right for the edge of a metaphorical cliff.

Florida's workers comp regulatory bosses yesterday approved a change in the way workers comp payers will reimburse outpatient facility bills. According to WorkCompCentral, Florida regulators will:

"begin drafting a rule to base outpatient fees paid to hospitals on the Medicare Outpatient Prospective Payment System. But the fees would be adjusted using Florida-specific multipliers based on the usual-and-customary charges now employed to establish outpatient fees...Under the new system, the Medicare-based fees would be adjusted by a new factor created by a hospital's usual and customary charges, by 174% for outpatient surgeries and 395% for other outpatient services."

Okay, here's why this is a bad idea.

First, Medicare fees are for treatment of elderly folks. Not working age, employed people. As a corollary, providers treating Medicare patients are not concerned with functionality or return to work. CMS has repeatedly stated their reimbursement methodology is specific to their population, and discouraged use of that methodology by other payers.

Second, The reimbursement scheme pays hospitals 74% more than Medicare for surgeries and four times Medicare for other outpatient services. This is insane. Workers comp is already the most profitable line of business for Florida hospitals, and this methodology makes it even more lucrative. It is indeed unfortunate that the Sunshine State has the second highest percentage of working folks without health insurance, but why make workers comp payers cover their medical bills? No, there's not a direct link, and no, this wasn't expressly addressed (as far as I know as I wasn't at the hearing) but from here it sure looks like workers comp payers are being asked to help facilities cover the underpayments from Medicaid and provide funds to help treat the uninsured.

Oh, and these costs will now be the highest in the country.

Third, basing reimbursement on charges is just nutty. Providers increase charges around 14% every year This methodology now locks in a 14% trend rate for outpatient hospital services in Florida. Take it to the bank (if yours is still in business) - the slope of the inflation line is about to steepen dramatically.

Fourth, according to sources present at the hearing, there are serious problems with the methodology and data used to support the three member panel's decision. Florida State University health economics guru Gary Fortier submitted a brief that stated that the methodology being used by the Department was “fundamentally flawed,, and in my opinion the study and methodology used cannot be relied upon….to make policy." Fortier also warned that once this payment system, which encourages greatly increased utilization of hospital services to treat WC patients, is put in place it will be hard to change even if payments become more tight-fisted in the future.

Mike Malloy, former managed care analytics expert at E&Y, gave details about how easy it will be for hospitals to game their charges and drive up employers’ costs under the proposed system.

And FairPay Solutions (HSA consulting client) presented industry statistics illustrating how paying hospitals 333% more to treat WC patients than they are paid by FL group health plans creates such significant financial incentives that it will inevitably lead to greatly increased treatment of work comp patients by hospitals and cost Florida employers several hundreds of million of dollars more.

As I've noted here and here and here this is going to end up costing the comp industry in Florida a lot more than many think.

What does this mean for you?

the end of the happy times in the Sunshine State.

Posted by at 7:15 AM | Permalink | Comments (3)

My quest for an actual provider-centric network is not complete. But there are a couple of companies that look to be off to a good start.

By way of background, most networks tout their huge directories of lots of providers, their discounts, and not much else. They sell their network by electronically matching their provider database against the prospect's 1099 data (historical payments to providers). The better the match, the better their chances of landing the deal. At one level this makes perfect sense.

I'd suggest that this methodology is fatally flawed; the payer is asking the wrong question. By identifying networks that have as many docs as possible that already treat the payer's claimants, the payer is asking for nothing other than a cheaper per-unit price. Yes, they will get a lower price per service from the docs they like, but they will also keep in the network docs they do not like at all - the ones who don't return adjusters' calls, don't understand workers comp, do lots of unnecessary PT in their offices, and dispense drugs at outrageous markups.

Harbor Health takes a different approach - they have developed a process and analytical capability that enables HH and their clients to analyze sort thru their gigabytes of data to identify the providers that meet their definition of 'good'. The analysis includes claims data as well as patient satisfaction and claims satisfaction information and billing/admin data to identify physicians who meet (customizable) criteria. HH is also building networks. To date, most of their customers have been large self insured employers (SoCal Edison was one of the first, and Sears is their latest).

After spending a half hour discussing Harbor Health's process, methodology, ranking system, and approach, I'm impressed.

FairPay Solutions (current HSA consulting client) has built a physician-only network in Florida that is currently being evaluated by several large payers and soon to be implemented in Florida by one. FairPay also has access to a wealth of data, and has mined that data using sophisticated criteria as well as local knowledge in their development effort. The folks FPS brought in to develop the network came out of the old Choice Medical Management, acknowledged as the premier network company in the Sunshine State.

FairPay is, quite intelligently, building a physician-only network. There are any number of companies that do an excellent job of managing physical medicine, drugs, DME/HHC, imaging, and hospital costs. What FPS is focused on is the physician who controls how these other services are utilized.

Posted by at 6:04 PM | Permalink | Comments (1)

Las Vegas is a weird setting for a workers comp conference. The hyperactive, eternally lit, wildly exciting town that is 'Vegas' makes for a bizarre counterpoint to the world of risk management - a business that works very hard to be steady, buttoned-down, predictable, and is certainly not glamorous.

Then again, the boom-and-bust that plays out every minute on the felt of the craps tables and poker games is workers comp in miniature.

Right now the sense seems to be the comp industry is starting to recover from the years-long soft market. Vendors throughout the hall are seeing employers and insurers focusing more tightly on cost drivers, on risk management and loss prevention. Risk managers are looking for new answers, different ways to attack the problem of rising medical costs that has been the one constant in this highly cyclical industry. The vendors' perspective is borne out in conversations with managed care execs, who are getting much more attention from large employers interested in 'real managed care', who want to delve into the details, the workflows, outcomes, and results. No longer satisfied with 'yeah, we've got that managed care stuff', employers are (finally) getting serious.

About time.

For too long employers have been satisfied with 'me, too', cookie-cutter approaches to managed care. Most every large payer uses the same network, the same case management and UR schemes, pretty generic bill review and some amalgamation of specialty managed care vendors. They've been talking about outcomes oriented networks for years, and far too complacent when vendors have consistently failed to deliver on their promises to actually build them.

Yet employers haven't been completely complacent. While the market's been soft, employers have beat the bejesus out of their TPAs and carriers, demanding more and more coverage and service at ever-lower costs.

Now it's coming back to them. Medical costs are rising, the power is shifting to the other side of the table, and there are few new and promising answers.

The good news - there are a few answers. I'll talk about them later today.

Posted by at 8:12 AM | Permalink | Comments (0)

The annual gathering of the tribes is happening, in Las Vegas this year, as the National Workers Comp and Disability Conference opens this evening.

Here's what I'll be looking for.

1. any palpable evidence of outcomes-based physician networks - or any networks that do not have large, yellow-pages-sized directories of physicians who are selected based on their ability to fog a mirror and give a discount below fee schedule or U&C. Coventry talked about such a network at their annual client meeting in Naples, but it has yet to make an appearance.

2. the next big thing - a few years ago it was emergency preparedness and recovery, then pharmacy management, then imaging and workflow, then brand spanking new networks. What will it be this year? outsourced claims? medical tourism for orthopedic surgery?

3. which company will get the award for most blatantly misogynistic marketing? Will it be cheerleaders, women in skintight superhero costumes, or shoeshine ladies? Don't these vendors know that many risk managers are female? that more than a few companies are woman-owned and/or run?

4. will the private equity companies once again be wandering the halls, buttonholing entrepreneurs and grilling booth staff on performance, competitors, and new customers and products?

5. will we hear the same old stuff about return to work, teaming case managers with adjusters, safety and loss prevention or will there be something new and fresh?

Any bets?

Posted by at 8:27 AM | Permalink | Comments (3)

Once again the fall is here, which means it is time for the Workers Compensation Research Institute’s annual meeting (today and tomorrow in Boston) and the National Workers Comp and Disability meeting (next week in Las Vegas).

Today’s kickoff began with a review of how the system has evolved since the WCRI’s inception in 1983. Peter Barth PhD began with the historical perspective.
A presentation on worker outcomes and variation in medical treatment patterns by Dr Sharon Belton indicated there were significant variations in the treatment patterns for back injuries across states. Dr Belton suggested that the design of the work comp system may be what is affecting both treatment patterns and outcomes. That sparked a question from your author regarding the potential impact of external factors unrelated to workers comp, such as practice pattern variation that have been documented in the Dartmouth Atlas. With workers comp accounting for less than 2% of national medical costs in a system dominated by Medicare, Medicaid, and private payers, the other, larger payers are likely to have more impact on treatment patterns than work comp.

Responding to my question and a similar one from Peter Rousmaniere, Dr Rick Victor, Executive Director of WCRI, said the Institute has looked into this. Although they are not ready to publish the results, Dr Victor said words to the effect that, when looking at state level data, there is almost no correlation between practice pattern variation as documented in the Dartmouth Atlas and workers comp back surgery rates. The (possible) implication is that reimbursement and other workers comp system idiosyncrasies are causing physicians to vary their treatment patterns.

My sense Is the degree of interstate variation is a result of the aggregate of local medical treatment patterns. What I'd really like to know is does the back surgery rate for workers comp mirror that reported in the Dartmouth Atlas. One example of this variation is this: The back surgery rate in Miami is less than one-fifth the rate in southwest Florida.

Historically there is solid evidence illustrating the impact of compensation and reimbursement on practice patterns; the treatment of insured v uninsured patients at hospitals is but one example. The real question is this: "is the variation among/between states as important or significant as the intrastate variation?"

Posted by at 9:06 PM | Permalink | Comments (0)

Perhaps the most insightful presentation of the entire WCRI conference was this morning’s session, where Dr Kathryn Mueller of the University of Colorado gave a detailed summary of the current, rather pathetic (my word not her’s) state of the medical care delivery system, population health, and the health care financing system. Dr Mueller’s central contention (and one with which I wholeheartedly agree) is that health reform is coming, and with it will come fundamental changes in the way health care is delivered, the virtual ‘location’ delivering that care, and the evaluation of care.

And this is going to dramatically affect workers comp.

Dr Mueller noted that today health care is delivered episode by episode; diagnosis, care plan, treatment, assessment, and repeat steps 2-4 until the situation is resolved (again, my summary of episodic care, not her’s). Her view is that this episodic model of care will change to one based on functional outcome management – care focused on returning the patient to functionality, and maintaining that functionality.

This will be in large part driven by the growing influence of chronic care and need to develop a better care model to address chronic care, one that will heavily emphasize patient education and monitoring. It will also require a different ‘location’ of care – more on that in a minute.

Where the mainstream, i.e. non-workers compensation health care delivery system has not been focused on function or outcomes, these issues have been central to workers comp. Dr Mueller observed that physicians are not trained to deal with functional recovery, and don’t take this rather significant issue into consideration when treating patients.

As my kids would say, ‘True that’.

She also believes, with reason, that most high cost claims are not medically catastrophic, but rather are chronic, high cost cases due to the management of the case. (see Bernacki JOEM 2007 July).

Think about this. While there are undoubtedly really horrible injuries – significant third degree burns over a large part of the body, crushing injuries, multiple trauma, some of the more potent blood-borne disorders caused by needle sticks – most of the high cost claims are not ‘high cost’ due to the medical condition itself, but because we in the workers comp industry just don’t manage medical well.

Dr Mueller sees the medical home model as a big part of the solution in workers compensation, as the medical home will be the dominant model for delivery of care throughout the health system in years to come. Studies indicate the home decreases medical errors and improves the quality of care delivered. Notably, the medical home model is NOT a primary-care gatekeeper model – but rather a model wherein the physician is tasked with and responsible for coordinating care and educating the patient.

One other takeaway from Dr Mueller’s talk. She noted that “provider networks are not necessarily medical homes”; to date, provider networks have been based on changing/reducing fees, and have not been based on “quality”.

Amen.

Posted by at 7:43 AM | Permalink | Comments (0)

Dave North, CEO of Sedgwick CMS was one of the morning panelists. He began with a rather strong statement about workers comp, a statement that was also an indictment of the industry’s complete inability to manage medical – the fact that medical costs have increased 892% over the last 25 years.

North’s presentation reviewed the history of medical management, evolution of managed care, and changes in regulations that have occurred over the last 25 years and then made a few suggestion about hat the comp industry should focus on over the next ten years. North said that despite changes in society, business, and medical care, the types of injuries we see today are similar to the injuries we say 25 years ago.

He made two particularly trenchant observations. First, the unintended consequences of regulations. Specifically, North noted that when the CA pharmacy fee schedule was changed several years ago, it had the unintended consequence of increasing costs - specifically, the repackaging of drugs and dispensing by physicians and clinics at much higher rates due to a loophole in the regulations.

Second, North stated (this is close but probably not word for word) “Discounted networks have underperformed and will someday be regarded as first generation, primitive efforts to address costs."

Agreed. The question is, when will the industry stop decrying the problem, studying potential solutions and implementing tiny pilots and launch 'second generation', outcomes based networks?

Posted by at 9:41 AM | Permalink | Comments (3)

Yesterday I opined that health care costs are on the way back up, driven by a worsening economy. Premiums will also rise due to cost-shifting by providers seeking compensation for underpayments by Medicaid and Medicare and no payments from the uninsured.

Those providers will also cost-shift to workers comp payers, driving up medical expenses, claims costs, and premiums. Physician income has been stagnant or declining for years, and many docs are struggling to keep the doors open. Here's what comp payers can expect.

As a provider's patient mix (Medicare, Medicaid, commercial, work comp) changes, their income is affected. The price per service is relatively fixed - either by Medicare's RBRVS, the Medicaid fee schedule, their commercial contracts, or the workers comp fee schedule (most states have a physician fee schedule) or their comp PPO contracted rate. A provider seeking to increase his/her income has to either see more patients (pretty tough to do when many are already working sixty hours per week) or figure out how to do more services for the patients they see.

Increasing utilization is the key driver behind rising Medicare costs, with physician service volume up 11.3% in 2006.

Workers comp is particularly vulnerable to increasing utilization, as managed care models actually incentivize networks to drive up utilization by paying networks based on discounts per service delivered. The more services performed, the greater the “savings,” and the more revenue and profit for the network. Everyone benefits from this arrangement; that is, everyone except the payer.

There's already evidence that comp medical costs are on the upswing in California, and my prediction is that true to legend, California's experience foreshadows what we'll see in the rest of the country.

What does this mean for you?

Expect medical to become an even larger part of the claims dollar, expect to pay your PPO network more for the 'savings' they deliver, and expect your combined ratio to deteriorate.

Posted by at 7:09 AM | Permalink | Comments (0)

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.

Posted by at 6:17 AM | Permalink | Comments (0)

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.

Posted by at 8:51 AM | Permalink | Comments (2)

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.

Posted by at 7:20 AM | Permalink | Comments (1)

More accurately, here's a report about the meeting, held this year at the Ritz Carlton in Naples, Florida.

The annual client meeting, which is always held at a very nice place with lots of golf courses, finished up Thursday last. You may be shocked to hear I wasn't invited; maybe Coventry knows about my aversion to golf...

But a bunch of folks were, and here's what a few experienced/thought/took away.

The shocker came early, in the kickoff speech delivered by Work Comp boss Jim McGarry. According to several attendees, McGarry led off by apologizing for Coventry's poor responsiveness, lack of customer focus, and general 'our way or highway' attitude. He acknowledged the Coventry work comp's poor reputation for customer service was well earned, and promised that the company would be working diligently to change its ways.

There's some actual evidence of Coventry's commitment - the hiring of Pat Sullivan back in September. Sullivan, a long time and well respected industry veteran, surveyed Coventry's market position for the company earlier this year and told McGarry et al that Coventry's image was, well, lousy. (I don't have inside knowledge of this so am likely not getting the characterization exactly correct.) So, McGarry hired Sullivan to help redo the company's image.

Meanwhile, the announcement was in large part shocking because outside of the Sullivan hire, no one I spoke with saw any evidence that Coventry was at long last actually attempting to change its ways. One client commented (paraphrasing here) "we sure haven't seen any evidence of any change."

It is possible that the ex-Concentra folks are finally making their voices heard. First Health, the other predecessor company that is now under Coventry, was never noted for its customer orientation. After Concentra was merged into Coventry work comp, there was some expectation on the part of a few customers that things would get better. That expectation has not (yet) become reality.

Sources indicated Coventry did not say anything in public about the changes at Aetna Workers Comp Access; (AWCA lost its separate business unit status a few weeks ago in a move that may , or may not, result in improvements or a decline in its workers comp network). In private, a couple heard that AWCA's representatives were telling everyone that it's business as normal, no changes, moving forward on all fronts, full commitment from senior management, and other calming words.

There was some discussion about pending regulatory changes in Texas and the potential for revisions to California's work comp law, with Coventry assuring its clients the company was on top of matters (which it probably is).

And a good bit of golf, sailing and spa-ing as well.

Notably, there was no one from AIG or Travelers in attendance. Seems like AIG is hunkering down and trying to avoid anything that remotely appears to be a boondoggle.

(Note - I contacted Coventry early this morning to get their take on the meeting but did not hear back by press time)

Posted by at 7:54 PM | Permalink | Comments (1)

Many benefits professionals and risk managers evaluate networks based, at least to some degree, on the thickness of the directory and the depth of the discount. The logic is - hey, the more hospitals in there, and the better the discounts, the better it is for my employees/claimants and the better it is for my bottom line.

Logical, and likely wrong.

Let's take Tenet Hospitals as an example.

I recently completed an analysis of several networks for a client, who was initially impressed that one of the networks under consideration featured their national contract with Tenet, a large for-profit health care system with facilities in the southeast, Texas, California, and southeastern Pennsylvania. In total, Tenet has about 56 hospitals (some are in the process of being sold) and about $9 billion in revenues.

They also have one of the highest charge-to-cost ratios of any hospital or health care system in the nation.

A very thorough, albeit dated, report on hospital charge to cost ratios was underwritten by the California Nurses' Association and published in 2004. Although the data is somewhat old, it is nonetheless revealing. For example:

• Of the nation's hospitals with the highest charges compared to costs, seven of the top ten were Tenet facilities (three were soon to be sold)
• Tenet's charge to cost ratio typically was several times higher than the national average
• 64 of the top 100 hospitals ranked by charge to cost ratio were Tenet facilities
• the top hospital was a Tenet facility with a ratio of 1092%

I'd note again that these data are old and Tenet has sold off some of these facilities. However, data from client medical bill repricing reports indicates high charge to cost ratios are still quite prevalent among Tenet facilities.

There is additional evidence that charging a lot has been a core business practice at Tenet, which has been charging more than other hospitals for identical procedures since at least 2000. According to one report describing an analysis of Tenet charge policies by the SEIU:

"Tenet's California hospitals charged an average of $73,038 for pacemaker implants, 81 percent more than the $40,452 charged by non-Tenet hospitals, according to state government figures analyzed by the Service Employees International Union. Tracheostomies, at $569,672, were 69 percent higher at Tenet than in the rest of the state, where they average $336, 579. "Tenet is engaged in turbocharging," said Steve Askin, health care research coordinator for the union in Los Angeles."

And:

"From 1996 to 2001, Tenet's average daily inpatient charge in Orange County grew 101 percent, compared with 28 percent for non- Tenet hospitals. Tenet's charges for outpatient services here rose 119 percent, compared with 43 percent for its competitors, according to the data.

Last year, [2006] eight of the county's 10 highest-charging hospitals belonged to Tenet. The Orange County hospital at the top of that list was Tenet's Western Medical Center in Santa Ana. It billed an average of $9,453 a day per patient. That was $2,500 more than the highest non-Tenet hospital -- UCI Medical Center -- and nearly twice the countywide average."

Look at Tenet's website (or, for that matter, any other health care systems) for information about cost and cost-effectiveness . There are very few statements (and even less supporting data) regarding cost effectiveness, efficiency, or competitiveness. Lots of words about quality and patient care and how great their people are (all of which are important, and significant, and appropriate to be considered in evaluating network facilities).

What does this mean for you?

Discounts are not important - net costs are. Do not evaluate networks on the basis of how thick the directory is and how deep the discounts are. Hospitals that charge a lot can 'discount' a lot more than hospitals that don't engage in charge inflation.

This is obviously critically important for group benefits administrators as well as work comp payers. It also is instructive when considering the potential for national health reform. I'll dig into that tomorrow.

Posted by at 6:21 AM | Permalink | Comments (3)

If you've been wondering why your company is paying so much for high-powered pain medications, here's why.

Cephalon, manufacturer of Actiq and Fentora, has:

"agreed to plead guilty to promoting off label use of its painkiller Actiq--which was widely used for purposes outside of its original FDA approval--as well as narcolepsy pill Provigil and epilepsy treatment Gabitril. Cephalon has admitted that it had been marketing Actiq, a highly addictive narcotic lollipop produced to treat certain cancer patients, for off-label uses including migraines, sickle-cell pain crises and injuries.[emphasis added] (Fierce Healthcare)

Cephalon is the poster child for everything that is wrong with medicine in this country. They make me-too drugs; reformulate drugs to extend the patent life (fentora); aggressively market their drugs to docs who have no business prescribing them for purposes the drugs were never approved, nor are appropriate for; bribe docs to promote their drugs; and charge unbelievably high prices. Then, when the drugs do go off patent, they manipulate the price of the brand (doubling it in the case of Actiq), raising it and thereby creating a very high price for the generic. Oh, and their drugs have awful side effects - Actiq, which rots patients' teeth is but one example.

In my work with workers comp insurers, TPAs, and self-insured employers, I see a lot of data on prescription drugs. Actiq and Fentora are almost always in the top five in terms of drug spend - (a month of Actiq easily runs $2500). Why is Actiq a big part of workers comp, you ask, because it is only FDA approved for breakthrough cancer pain, a medical condition that for all intents and purposes does not exist in workers comp? Because Cephalon has been pushing the drug to general practice docs.

In fact, only 1% of Actiq scripts were written by oncologists during the first half of 2006. So who's dispensing the drugs?

Physical medicine and rehabilitation specialists were the second highest-dispensing specialty, accounting for 16 percent of scripts during the first six months of 2006, when oncologists and pain specialists accounted for less than 3 percent.

Cephalon will have to pay a $425 million fine, and (here's the good part), publish the names of physicians it has paid to promote/research its drugs. The fine resulted from acase brought after a Cephalon employee refused to promote Actiq and Fentora to general practice docs, a decision that led to his termination by the company. That's not chump change, but that shouldn't be the end of Cephalon's penance.

I'm hoping, really hoping, that payers will evaluate the settlement and perhaps (selectively) use the physician list to determine if they should disqualify docs from their networks, flag them in their published physician ratings, and carefully scrutinize their practice patterns.

Thanks to FierceHealthcare for the heads up on the settlement.

Posted by at 8:16 AM | Permalink | Comments (5)

At the behest of readers and clients, I've been working to get some answers from Aetna on what exactly the 'restructuring' of their workers comp business division means for customers and prospects. I'm not having much luck.

I'd note that many AWCA customers learned of the restructuring of AWCA from my post earlier this week. That's not to blow my own horn (well, perhaps a modest toot) but rather to point out that Aetna did not make any external announcement - and still has not made any public statement - about the changes. Nor has any there been any attempt on the part of the new management to reach out to (at least some and perhaps all of) the largest users of AWCA. AWCA Account management staff has been calling their customers, but beyond the "it's business as usual, I'm your contact", they don't have much to report.

Here's the text of a recent email from an Aetna communications staffer in response to a blog post re the changes. The author is Dr. Dan Bernstein, the head of the New Product Businesses unit. (Bernstein graduated from medical school but never practiced medicine)

"We would like to take the opportunity to clarify a few of the points you made in today's posting [referring to this post]. We want your readers to understand that the New Product Businesses network and operations areas have not been merged with Aetna's Group Health network and operations organizations. We have brought together the network and operations teams for the Cofinity, AWCA and Aetna Signature Administrators businesses under two leaders because these businesses all serve business partners, including other Insurers, TPAs and Bill Review companies, that are outside of Aetna's traditional business channels. [ok, but the markets are completely different, with different providers, different 'quality' measures, different buyers, different reimbursement methodologies] Importantly, the network and operations functions described are still separate for AWCA.

[sources indicate the comp network staff now report up to an exec in Maine, sales reports to Denver, operations staff to personnel in the PPOM business (now called Cofinity) in Michigan, and account management to a different person in Maine; Bernstein is located in Maine as well]

The changes we announced this week will help us maximize our resources to create better value for our customers. We see these changes as benefiting our customers by allowing us to concentrate on building our network, providing consistently superior customer service and offering our customers innovative solutions to address their business needs."

This left me, and others, looking for just a bit more depth and detail. So, I emailed the quite-helpful PR staffer; here's the 'conversation':

Paduda question
Does he [Bernstein] mean there are staff dedicated to WC within each unit? If so, what is their relationship with the larger Aetna provider relations units? Do they work together? Who decides on negotiation strategy and tactics? If not, how does Aetna leverage it's group health buying power to benefit WC customers?

Aetna response
The AWCA Operations and Network teams are still distinct, dedicated units. They simply report up to new managers, alongside other similar units.

The AWCA Network team has always worked collaboratively with the larger Aetna provider contracting teams, and will continue to do so. The negotiation strategy is jointly developed. The combined size and strength of the relationship with providers across all businesses benefits all customers, including Workers Comp customers.

Paduda question
How will this change affect the network development process? Florida has been an ongoing challenge for awca; is the new structure going to help Aetna address FL?

Aetna response
We are always striving to improve the network development process and strategy. The new leadership team is focused on both strategic and process improvements for our network activities.

So, no answer to the Florida question, nor any sense for how this change will affect network development. A good bit of corporate-speak, and no specifics. I tried one more time to get more specific answers, and got this back: "at this point, we can't share additional information."

Either they haven't thought this through (my bet), or they have and haven't finished telling the affected parties (doubtful), or they just don't want to tell me (possible). If the latter is the case, they aren't telling some of their biggest customers, either.

Here's a bit of background. Despite the conjecture of several, myself included, that Aetna would get out of this business, Aetna has stuck by its work comp unit for five years (to date). Reports indicate the business has been financially successful, profitable, and achieving success defined as "aspiring to be a rounding error" at mother Aetna (remember Aetna's annual revenues exceed $24 billion). This success has occurred despite the unit being bounced around the org structure at Aetna, with former AWCA president Pat Scullion reporting up to (at least) five bosses over the last four years.

I'm from Missouri on this. Many health plans/insurers that got into work comp (United Healthcare in FL, with Focus and MetraComp, Travelers with Conservco, UNUM with Genex) got out. Some, such as UPMC, Wellpoint and Horizon, have done pretty well. The ones that have succeeded have almost always had WC as a separate business unit with P&L responsibility reporting up to a 'special products' department (that likely had dental, vision, etc). They also had a strong executive sponsor, someone who could, and would, go to bat for the WC network development staff when the group health folks (understandably) started to cave on WC rates to get a better discount for their group health business.

But that's not the most important reason to have a separate WC division. The most important reason is simple - WC is so fundamentally different from group health that the network development/provider relations, operations, compliance/legal, customer service, and sales staff will find themselves spending most of their time explaining WC basics to their support staff/management/peers - first dollar every dollar coverage; treatment is limited to procedures related to the disabling condition; focus on return to work; and the primacy of fee schedules, that they won't have much time to resolve issues related to California cascading rules for PT, Florida limits on chiro visits, pre-cert requirements in MA and NY, MPN access requirements in California, EDI requirements in Texas and the gazillion other small but critical-for-compliance comp rules.

The ones who should be the most nervous/interested in this have "Coventry Workers Comp" on their business cards. Coventry has essentially turned network development and management in more than a few states over to AWCA. If Aetna decides to get out of the comp network business (again, I doubt this will happen), Coventry is going to have to scramble.

Aetna's a good company. Even good companies make mistakes, and they've made a few here. This has not been handled well; from here it looks like AWCA management was ousted in a cost-cutting move, replaced by folks who don't know much, if anything, about workers comp, or about managing a transition.

What does this mean for you?
Be careful and have a Plan B.

Posted by at 4:51 PM | Permalink | Comments (1)

Last week's post on Connecticut hospitals' temper tantrum elicited no public comments but quite a few private ones. Several payers were rather upset that their bill repricing/network vendors have not been applying the laws correctly, resulting in higher payments than the law requires.

The issue of 'fiduciary responsibility' and liability therefore came up a time or two...

One person familiar with the State employee workers comp program confirmed that the State is paying Yale-New Haven and its affiliated hospitals billed charges (or something close to), while paying other facilities about 30-35% less than billed charges. That corrects my misstatement in last week's post that implied the state was paying facilities their billed charges. That said, the state is still paying (somewhat) more than it legally must. Like most states CT is in a bit of a budget crunch, with the Governor and legislature looking for cuts to make up a $300 million deficit.

Workers comp costs for State employees are around $80 million a year; that doesn't include municipalities and school boards which are covered through the towns (there are over 110 towns in CT).

Posted by at 7:43 AM | Permalink | Comments (0)

The short answer is - it got combined with other sorta-kinda related businesses and put under one boss - Dan Fishbein, MD, in the "New Product Businesses" unit.

According to an Aetna Communications staffer;

"AWCA is part of the New Product Businesses area, which also includes the Cofinity, Aetna Signature Administrators, Pet Insurance and Worksite Health businesses. The former PPOM business, is part of Cofinity. All 5 businesses (including AWCA and Cofinity) now have a common reporting structure in the New Product Businesses area.

These changes will help Aetna identify and successfully execute strategies for new distribution channels, business models, partnerships and products and generate substantial growth for the company. The AWCA business is an important part of this strategy."

Up until Monday, AWCA (Aetna Work Comp Access) was a separate business unit, with its own leader (Pat Scullion), operations head (Shawn Fisher) and sales leader (Tom Shivers). AWCA also had a network management function, account management, and other support housed within the unit. In the new structure, network management and operations for work comp will be handled by two units also responsible for Aetna's group health TPA and PPO businesses headed up by Mark Granzier. Here's how Aetna's internal announcement put it "All network functions in these businesses will be realigned to Mark. This will enable us to have a single area focused on contracting and provider relations, and to leverage these resources efficiently across our businesses."

Sounds good in an announcement, and here's hoping Aetna figures this out. Unfortunately, other companies' attempts to integrate work comp functions with group health haven't fared so well, as the contracting staff usually doesn't 'get' work comp; work comp is usually a relatively small part of the overall business; and network negotiators tend to use WC as a bargaining chip, giving away discounts there to get a better group health discount. This can be particularly problematic for hospital and facility contracts, where work comp is a big profit maker for hospitals (while generating higher loss costs for payers).

This isn't idle speculation. It's based on personal experience within the old Travelers, MetraHealth, and UnitedHealthcare. I've also been privy to hospital negotiations - from the provider side - and watched the big networks cave on comp to get a slightly better deal on the group side.

Sales and account management will be the responsibility of Michael Ciarrocchi who has been named the General Manager for the three businesses. There is no real need for a de facto sales force for AWCA, as the network is being sold (pretty much exclusively) through Coventry. There is a big need for upgraded customer service, as there continue to be issues related to data quality (inaccurate provider data, particularly in Pennsylvania) and AWCA's historical responsiveness has been less than stellar.

Reporting will be handled by a unit headed by Mike Kane that will service all the businesses (the three mentioned above, plus Aetna's Pet Insurance and Worksite/Direct2you units). I'm not sure how this benefits AWCA's customers. Although a common reporting platform would likely be beneficial, there is little other synergy. AWCA customers access network discounts via electronic feeds, and there is no 'outcomes' data to be aggregated or mined as the payments, claim records, and bill detail data are housed on customers' systems.

From a business management perspective, it's understandable that Aetna decided to cut costs and reduce overhead on a (relatively tiny) business unit that essentially serves one customer with one product. Remember this is a company with annual revenues of $25 billion; it is unlikely AWCA's revenues were more than two-tenths of a percent of that total.

Work comp just isn't material.

I'd note that Aetna is perhaps the only big managed care firm that is positioned well for the long term. Their investments have been smart (PPOM, Schaller Anderson), their initiatives in transparency and consumerism are well thought out and (mostly) well done, they have solid people who strive to do the right thing (other health plans also have a lot of good people; Aetna's workforce seems to have more of them), and they are willing to admit mistakes and work hard to rectify them.

That said, many big work comp payers are relying on Aetna to help them manage their medical expenses. And this move makes many of those payers very nervous.

Click below for the full text of Aetna's internal announcement on AWCA.

Continue reading "What happened to Aetna's work comp division?" »

Posted by at 6:53 AM | Permalink | Comments (0)

Some hospitals in Connecticut are throwing what amounts to a temper tantrum. They are outraged that workers comp payers are actually paying them according to state law.

Strange, but true.

Sources indicate that Yale-New Haven Hospital and their affiliates have informed several payers that they will no longer provide elective procedures for the offending payers' insureds. There are also reports of an effort on the part of Y-NH to get other hospitals to join in the fun.

The reason for their displeasure is several payers have ditched their hospital networks and begun paying hospitals according to the Workers Compensation Act.

The Act reads, in part, "The liability of the employer for hospital service shall be the amount it actually costs the hospital to render the service".

But many payers in Connecticut (including the State itself) are not paying costs, but paying billed charges, or something close to it, and they've been doing it for years. Workers comp has been a huge moneymaker for Connecticut hospitals; on average commercial payers reimburse between 41.65% and 45.14% of charges.* Contrast that with comp payers' reimbursing hospitals at billed charges or a few points off (in a network arrangement).

*(The variation between 41.65% and 45.14% depends on which measure you use; the former is based on recent data, the latter from data reported to the State). I'd also note that commercial payers are paying 122% of costs (again from CT State statistics).

Sources also indicate the good folks from Yale (several of whom live in my town) understand, and even agree with, the methodology the payers are using to reimburse the hospital. But they don't want to accept that reimbursement, as they would rather go back to the good old days when they were making a fortune off all workers comp payers (when hospitals were being paid three to four times more than they should have been). (Most payers are still paying billed charges or close to it)

I'll leave aside the obvious fiduciary responsibility issue here, except to note that as a CT taxpayer, I'm not too happy that the State has been paying way more than it should to hospitals for State employees' workers' comp bills. Instead, I'll note that this amounts to a hidden tax on employers - all of whom are forced by regulation ot buy workers comp insurance. Those employers (and their insurers) that are paying billed charges, or a discount off billed charges, are helping those hospitals to pay for care delivered to those without insurance, make up the underpayments from Medicare and the state's HUSKY program (kid health insurance), buy big new machines and build new facilities.

That's nice, and its also grossly unfair to employers.

Workers comp insurance companies need to "Man Up" and not give into what is tantamount to blackmail on the part of providers. Policyholders need to tell their insurers not to spend one dime more than legally required.

The US health care system is incredibly screwed up, unfair, and dysfunctional, and hospitals are a key part of that system. But it's not up to Connecticut employers and taxpayers to solve hospitals' financial problems by paying a hidden tax.

Posted by at 12:07 PM | Permalink | Comments (0)

Peter Rousmaniere's column this month in Risk and Insurance addresses the dirty not-really-secret practice of TPAs getting kickbacks from their managed care 'partners.

This unseemly practice has been going on for years; perhaps the most notable example is the Broward County Public Schools scandal, where TPA Gallagher Bassett was allegedly paid by CorVel for referrals to case management and other services. This isn't small potatoes; the scope of this debacle earned it a prominent place in an article in CFO magazine.

Peter notes that SRS (the Hartford's TPA) is one that specifically rejects doing business this way; pledging "Specialty Risk Services, as a fiduciary of our clients' money, does not participate in any so-called wholesale-retail relationships with our vendors nor do we request or accept administrative fee arrangements from them."

Broadspire also doesn't take kickbacks/commissions/admin fees. But the Florida-based TPA also sells an integrated medical and claims management service so customers don't require much in the way of outside medical management support. According to a highly-placed source; "we do not do a lot of unbundled arrangements for managed care services...most of the services for managed care [are] provided by our own staff, priced and charged separately from the claim service. On the rare occasion that we are requested to go outside by a customer, we will consider it on a case by case basis but, do not make any requirements from the managed care vendor that they provide us any "commission" or anything else of that nature for the pleasure of working with us."

I'd note that the TPA business has gotten hammered lately - the soft market has driven down loss costs, and with it admin fees. The reductions in frequency have resulted in fewer claims to adjust, and therefore fewer fees to charge. Employers have been able to get TPAs to bid against each other, thereby lowering admin costs by forcing TPAs to cut pricing.

It's not entirely fair to blame TPAs for this; their customers share the guilt. While employers are saving admin costs over the near term, this is a short-sighted tactic at best. TPAs, like any other business, have to make a margin, and if they can't make it thru admin expense they'll have to make it up in other ways.

What does this mean for you?

Demand full disclosure of pricing and cash flows from your TPA and managed care vendors. And expect to pay a fair price.

Posted by at 10:15 AM | Permalink | Comments (3)

There's yet another reason for work comp payers to pay a lot more attention to surgical implant pricing - CMS has reserved the right to use its own methodology if it finds the payer's methodology lacking.

WorkCompCentral reported piece [sub req] on ">today "if the workers' compensation medical set-aside proposal includes the cost of an implantable device but does not include enough of the CMS required cost information about the device - and it is determined an implantable device such as a spinal cord stimulator is needed - CMS will use its own methodology to determine the cost of the device."

CMS' methodology is discussed here. (scroll to bottom of page and click on "august" download)

The folks at WorkersCompInsider have an excellent piece on implants and motivations of (some of) the physicians that use them.

I doubt the 'look at what these cost us in the past' methodology is going to fly with the good folks at CMS. They will certainly want something more substantial, something based on actual cost and not conjecture and what was paid in the past.

btw, WorkCompCentral is one of the go-to sources for comp-related information and news.

Posted by at 7:11 AM | Permalink | Comments (0)

After spending the last part of last week and the better part of this one preparing for two major presentations on 'US health care 2009' (both requiring predictions about health reform efforts and results thereof) I've been anxious to get back to the comparatively sedate world of workers comp.

Here, in no particular order, are a few of the 'not enough for a full post' items. There's more going on which I'll focus on next week.

The good news is rates continue to decline in most states, with the notable exception of California (where if rates had gotten much lower insurers would be paying employers). The so-far not terribly bad hurricane season has certainly helped; here's hoping Ike and colleagues stay out at sea, away from the shipping lanes and fishing grounds.

As long as cat(astrophic) costs stay modest we can expect the market softening to gradually taper off and then start to harden - say this time next year.

The good news has been the result of a continued decline in frequency, payer success in managing ancillary medical costs (particularly drugs and physical medicine), and relatively low wage inflation. Oh, and that's all been minor compared to the impact of the dramatic cost reductions in CA (which are due in part to tight limits on the number of physical medicine visits).

Florida has also been enjoying several consecutive years of rate reductions, brought on (at least in part) by the 2003 reforms. Word from the Sunshine State is that one of the key components of the reform law, limitations on plaintiff attorney fees, may be overturned. If that happens, it's 'Katie bar the door', as the plaintiff bar in FL has long been champing at the bit to return to the halcyon days pre-reform, when they could bill hourly fees at will. Yikes.

While rate reductions and soft markets have been great for employers, TPAs, managed care firms, and carriers are having challenges. Several TPAs have closed shop, been acquired, or suffered dramatic losses in business, and most (particularly in Florida and other states with big premium drops over several years) are doing their best to hang on and hope things turn around soon. CorVel has added a couple TPA customers - one an existing managed care client and another new business. These deals have also required CorVel to do quite a bit of programming and IT development, work that was responsible for higher costs for the company in the most recent quarter.

I remain skeptical about CorVel's business model and attempt to sell to, while competing with, TPAs.

On the managed care side, several network companies are vying to be industry leader Coventry's chief competitor, with little success to show for all their effort - so far. This may change soon, as Coventry's continued heavy-handed, my-way-or-highway approach to customer relations is wearing a bit thin. One of their larger self-insured employer customers was handed an eight point rate increase. Not percentage but points. Word is the folks delivering these new rates, contracts and addenda are not exactly comfortable doing so. Coventry has also been expanding its staff, adding long-time industry vet Pat Sullivan in an effort to improve its image in the market.

A new firm (NovaNet) announced it's presence just this week; when I get more info will pass it on. I would note that their press release talks about some direct provider contracts and rental of other networks; there are several other PPOs with similar models already in the space. One observation - the company touts its huge network of docs - while this may be an asset in group health, the huge network model is losing followers in the comp space of late.

MedRisk has been awarded the contract to handle the Pennsylvania state fund's entire managed care program, a major win for the company. (MedRisk is an HSA consulting client).

Internal sources at the 'old' Fair Isaac, now Mitchell Medical bill review firm report the new owners are investing, listening, and supporting their efforts to revamp the WC bill review products. That's a good thing and bodes well for MM's future in work comp.

Posted by at 7:01 AM | Permalink | Comments (2)

There's an obvious connection between hurricanes and work comp - people get hurt while working, injuries that are covered by workers compensation. But there's a less visible, but nonetheless significant link between big weather events and comp.

Capital is mobile; it moves quickly, shifting to find the best opportunity with the least risk. Right now, it's a safe bet that investors are looking for better returns to offset their fears about increased risks from what looks to be a pretty active hurricane season. And that desire for better returns may well mean an increase in reinsurance, as well as primary insurance, rates.

The work comp market has been flat recently, with claims costs edging up slightly, premium rates declining in many states, and frequency dropping yet again. Employers have seen work comp costs decline in Alabama, Kentucky, Tennessee, Florida, California, Pennsylvania and New York, not to mention many other states. The National Academy of Social Insurance reports that nationally, claim costs actually dropped in 2006, due primarily to the dramatic reductions in California.

That was 2006. As I've reported previously, there are clear indications that medical costs are on the way up again, led by increasing hospital expenses. WorkComp Central reported (sub req) today that NCCI is warning about medical cost inflation in Alabama, where medical now accounts for almost three-quarters of total claim costs.

The combination of higher medical expenses and a (potentially) tighter market for reinsurance may well make for higher costs in 2009. And even if the hurricanes blow themselves all out to sea, the soft market can't go on much longer. Really.

Gustav's weakening and change in direction resulted in damage that at least at this point looks to be significantly less than expected. By way of comparison, predictions are that the bill for Gustav will be about an eighth of that for Katrina's.

What does this mean for you?

The work comp industry dodged a bullet - but more are on the way.

Posted by at 8:38 AM | Permalink | Comments (0)

If you're looking to build a workers comp network, you'll want to focus on WC specialists - occ med docs, orthos, neuros, physiatrists, primary care docs, and a smattering of other specialties - along with ancillary care providers.

And you most definitely don't want every Dr. Tom Dick and Mary - the ones that can't spell 'workers comp' and think 'return to work' is what happens after lunch.

While including these docs in the network will make the directory nice and fat, they won't know what to do if a claimant actually presents.

In fact, the fatter the directory, the further away you should stay. Growing evidence indicates there's a lot of good reasons to limit the docs who treat workers comp claimants:

• claimants feel more comfortable with docs who can actually explain how the comp system works; physicians tend to be trusted by their patients, and this trust can translate to lower litigation rates
• docs who know disability management know that getting injured workers back to the job asap facilitates recovery
• comp docs know they are only supposed to treat the comp injury, and although they have to factor in comorbidities, understand that the comp payer isn't liable for all treatment

Another consistent problem in the comp network world is lousy data - directories are full of docs who no longer take patients, don't take work comp patients, have moved, are dead, or can't recall ever signing a network participation contract. (in this last instance, it is likely someone in their office did, at one time, but can't remember doing so).

Expect to pay the docs you want a reasonable rate. "Reasonable" may be above or below the state fee schedule (in the 30+ states with fee schedules) or an RBRVS-based fee, or some discount based on published U&C data. Make sure, really sure, that the basis for reimbursement is clear, precise, and accurate. There have been an increasing number of lawsuits from providers alleging underpayment by work comp payers. This is a trend that by all indications is going to continue. Without a clear contractual definition of payment terms, networks open themselves, and their payer customers, to a much higher risk of litigation.

Which leads to the final recommendation - payers are getting a discount, or at least an agreed-upon reimbursement rate, and therefore must promise to do something to get that rate. In most cases, that 'something' is the promise by the network that it will work diligently to direct patients to the contracted provider. Again, make sure the contractual terms are clear - what will payers do to direct patients to providers, how will they push this 'downstream' to their policyholders, and how will this be verified.

Keep the data up to date, carefully select the docs who are in it, have fair and clearly defined reimbursement terms, and hold up your end of the bargain - send the providers more patients.

Posted by at 6:27 AM | Permalink | Comments (5)

According to market research firm Supplier Relations LLC, the total US surgical appliance and device industry's revenue for the year 2007 was "approximately $30.4 billion USD, with an estimated gross profit of 46.15%".

Note that this total includes more than just implantable devices - sutures, surgical dressings, and prosthetics and other stuff are also counted towards the totals. Without buying the report for $600, you won't know exactly how much is spent on which categories. But research indicates the orthopedic and surgical device share of the total has been quite significant - well above 50%.

The growth of the implant market has been marred by allegations of illegal kickbacks, sleazy business deals between manufacturers and physicians, and hugely inflated prices to payers.

That hasn't slowed the market.

Another report (more specific to orthopedics) predicts total implant demand will rise "9.8 percent annually to $23 billion in 2012. The four major product segments -- reconstructive joint replacements, spinal implants, orthobiologics and trauma implants -- will all provide strong growth opportunities."

But the big growth will come from spine. According to an excerpt from the report,

"Spinal implants will show strong growth due to advances in product technologies and related surgical techniques, coupled with an increasing prevalence of chronic back conditions. Fixation devices and artificial discs used in spinal fusion and motion preservation surgeries, especially procedures for the repair of vertebrae and replacement of degenerative discs, will account for the largest share of the market and best growth opportunities."[emphasis added]

What does this mean for you?

Higher costs with uncertain results.

Posted by at 8:08 AM | Permalink | Comments (1)

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 (1)

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 (8)

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 em