Managed Care Matters

NCCI Conference - the Rousmaniere Report

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.

]]> How big is the workers compensation sector?

Dennis Mealy, chief actuary, gave his annual state of the line presentation. He started off by estimating the entire size of the insured market -- $88 billion in 2007, compared with $59 billion ten years ago in 1998.

The growth tracked very closely to steady trends in no-farm wages and salaries. Accounted for are private carrier premiums, large deductibles, state funds. The cyclical nature of premiums was accounted for by an entry called “adjustment for premium and price changes. I don’t really understand the components. Since the monopolistic state funds such as OH and WA are not included, it is fair to say that total premium (including the value of large deductibles) is higher than $90B.

This of course leaves out self-insureds. I would venture to guess that the self insured market has an ** equivalent premium** of one third the size of the insured market, which would be $30B for 2007. This brings the total to $120B. This is to me a very, very large figure, far more than what I have been carrying around in my head. I'll use the amount of $100 Billion, but would not object strenuously to a higher figure.

John Burton, the dean of workers comp researchers, has estimated that in 2005 (I think, perhaps in 2006) total benefits paid nationwide was about $55 Billion. The NCCI did not estimate total losses. However, its estimates of total losses, should it make one comparable to Burton’s would be higher because Burton’s estimate is on a cash basis, not an actual estimate of 2007 claims. NCCI would estimate losses on an incurred basis plus IBNR -- incurred but not reported, i.e. using inflation adjustments for future payouts – and its figure would be higher. So I would say that total losses in WC for 2007, on an incurred basis, are in excess of $60 - $65 Billion.

Frequency trends

Both the NCCI and the Bureau of Labor Statistics report that the frequency of claims or injuries have been declining by 3 or 4% for many years, since about 1991. The reduction in frequency has been across all major sectors. NCCI doesn’t have an explanation and in the past I have not read an explanation. Personally, I think it is a function of steady re-engineering of the workplace which has boosted productivity and safety improvements have ridden on the coattails. Note that the reduction is in frequency. As the employed workforce increases in size (2% per year?) the absolute number of claims may be dropping at a lower rate.

As noted below, losses per claim are rising at a high rate, eclipsing the flat or declining number of injuries, thus we are in a modestly growing industry dollar wise.

Premium trends

A simple, partial way to measure premium trends is to track “rate/loss cost” approvals over time. These are figures produced by various workers comp bureaus independent of NCCI and NCCI’s own figures for states it directly covers. Mealy grouped all years since 1990 in four phases: 1990-1993, plus 36%; 1994 – 1999, minus 28%; 2000-2003, plus 17%; 2004 -2008 (est.) minus 24%.

Because of rate deviations, below or above the premium figures suggested by loss costs, the path of premiums has been more volatile. For instance, in 2004 – 2006, premiums stayed high while loss costs declined. This produced very good returns to insurers in recent years, on both an accident year and calendar year basis (don’t ask for an explanation of the difference, it will take too long).

There is a widespread assumption, mentioned by Mealy among many others, that premiums are heading down. But, as I will note in a moment, loss cost estimates may be flat or perhaps even heading up, even as competitive premiums decline in the immediate future. The consensus is that premiums will start heading up in about 2010.

Premiums as experienced by the insureds presumably are heading down for two reasons, neither of which is NOT higher interest rates, that old chestnut which is often exclusively used among insurers to explain changes in the insurance cycle. (Sometimes it explains a lot, sometimes little.) One valid reason is that the capital allocated to workers comp is high. The other is that reserve deficiency, which was a very scary $21 billion in 2001, has declined to $2 billion in 2007. Total reserves among insurers today is about $100 billion. A reserve deficiency of $2 billion is thus peanuts. Insurers as a group can feel in strong financial shape.

Plus, combined loss ratios are good – 92 in 2006, 96 in 2007, and return on equity relatively high – 14% in 2006, 12% in 2007. (I say relatively high, because only one other time it has been 12% of higher since 1987, and the industry’s cost of capital as estimated by NCCI is slightly above 10%.) Note: return on equity in the California market in 2005 – 2006 probably averaged in excess of 20%.

Indemnity and medical cost trends

Mealy says that indemnity claims cost have been “quite well behaved.” They rose below wage inflation in 2004 and 2005. In 2006 and 2008 they rose above wage inflation – 4% in 2007 in indemnity, vs, 3.3% in wage inflation. The average indemnity cost of a lost time claim in 2007 was $20,000, compared to about $15,000 in 2000.

However, medical expenses have been growing substantially higher than medical cost inflation – between 50% and 100% higher. In 2007, medical costs rose 6% vs. 4.4% for medical cost inflation. The medical costs of a lost time claim in 2007 was about $25,000, compared to about $15,000 in 2000.

This means that the total cost of a lost time claim in 2007 was about $45,000. Claims costs are rising at a faster rate that frequency is declining. Therefore we are in a modestly growing industry.

From Mealy’s data and other data presented at the conference, it appears that in the late 1990s and the first few years of this decade – say 1997 through 2001 – medical costs really surged. This applies to non drug and drug costs, and to surgery frequency, diagnostic tests, and PT. This is when medical costs really took off. The NCCI people have not talked with the medical community to find out what happened. My guess is that during that time, the medical community became more aggressive in treating, partly due to greater resources such as more trained surgeons and more drugs, and partly due to economic pressures within the medical community.

Accordingly, medical costs as a percentage of total costs rose from 46% in 1987 and 53% in 1997 to 59% in 2007.

A note on drug costs

Drug cost increases have flattened or even declined in the past two years. This is due according to NCCI primarily to what they call “going down the formulary” – inducing doctors to prescribe lower cost drugs. This is not going from brand to generic, since virtually all the shift from brand to generic has already taken place in prior years. There is no evidence that drugs themselves are being used less.

Peter Rousmaniere
Peter is preparing an article which will show that prescribed drug use is far more pervasive among injured workers than we implicitly expect.

Shooting yourself in the head

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

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

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

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

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

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

Price per Unit x Number of Units = Total Costs

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

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

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

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

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

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

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

The cost of ignorance

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

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

And most will be wrong.

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

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

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

(Source, Stacy M. Eccelston et. al., The Anatomy of Workers' Compensation Medical Costs, 6th Edition, 2007, WCRI).

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

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

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

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

Ingenix can't catch a break

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

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

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

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

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

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

Thanks to Fierce Healthcare for the heads' up.

Health care reform - what are the chances?

Pretty good. I'd say better than 50:50; probably 60:40 or better that there will be major reform in the next Congress.

Here's why.

Sen Ron Wyden's (D OR) Healthy Americans Act has six D and six R Senate cosponsors, including Bob Bennett (R UT). There is broad bipartisan support for the bill, which mandates universal coverage.

WalMart and the SEIU back the bill.

The National Federation of Independent Businesses backs some form of 'universal' reform.

Both Democratic Presidential candidates back major reform.

Congress has been stung by criticism of its inability to get much done - and health care reform is something big that needs doing.

Many of the Fortune 500 back reform, including automakers, service companies, and manufacturers. And the unions that represent their workers do too.

This impressive array of supporters is opposed by...well, it must be opposed by some groups, companies, politicians, lobbies, but it is hard to find much in the way of opposition, at least using internet search engines. We can look to California to find out how and why their efforts to pass reform failed. A loose coalition, comprised of Republican legislators, Blue Cross of California [WellPoint], the state Chamber of Commerce, and the tobacco industry joined together to oppose the bill, and their efforts got a major push from legislators' deep concerns about the cost of the initiative and the Golden State's financial straits. A closely related issue is the concern by many that states, acting alone, cannot enact meaningful reform for the simple reason that 1/3 of all health care dollars are controlled (to a great extent) by the Feds, and if these dollars, and the care they pay for and members they cover aren't integrated into a comprehensive reform measure, the effort is doomed to fail. Cost shifting, contradicting priorities, differing measures of success and evaluation methodologies will result in a confused, bifurcated system that serves neither population well.

Similarly, the problems emerging in Massachusetts and Maine make it less likely that states will successfully pursue reform measures. Instead, the states, a powerful lobbying group in and of themselves, will likely join others to support national reform.

As General Eric Shinseki, former Chief of Staff, U. S. Army, said "If you don't like change, you're going to like irrelevance even less."

Agents who get it

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

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

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

Weather and recovery from it - the hot thing at RIMS

the new big thing at RIMS this year seemed to be weather; the prediction of it (both long and short term forecasting), and the closely related business of disaster recovery. There were several vendors marketing sophisticated technology that ostensibly enables users to predict the date time and precise location of tornado touchdowns, along with the precise path and extent of destruction and list of addresses that will be affected (well, I may be exagerating just a touch).

Just in case an insurer hadn't taken advantage of that new technology, there were several disaster recovery firms pitching their incredible ability to make disaster damage disappear overnight. Perhaps they should market themselves to parents of teenagers for those inevitable parents-out-of-town-party cleanups. Now that would be a test...

If it is any consolation, there were dozens of security firms at the 2002 RIMS: they've all but disappeared from the show floor, perhaps due to the lack of unfortunate events in 03, 04, 05...

McCain's health reform plan - More costly, less coverage

I and others have taken Sen McCain to task for his wildly expensive health reform plan that somehow manages to cost more than the Obama or Clinton plans, while insuring far fewer people.

How does he do this?

By relying on tax breaks and the existing completely broken health care system, making no changes to insurers' current ability to medically underwrite, deny coverage to those with pre-existing conditions, and allow insurers to write policies across state lines, thereby contributing to the likelihood that adverse selection will speed the death spiral of plans that take all comers.

Brilliant.

Bob Laszewski provides us with a trenchant review of Mccain's latest attempt to justify/explain his 'plan'. Hint - it is neither a justification or explanation, but then again, it isn't a plan.

Medcor's value

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

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

The value? Avoided ER admissions and reduced claim frequency.

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

News from the Workers Comp pharmacy world

Here, in no particular order, are some findings gleaned from my wanderings around the show floor at RIMS in San Diego.

MSC has rebounded nicely from the loss of Liberty Mutual's pharmacy business last year (awarded entirely to Progressive Medical). Sources indicate MSC's run rate is back above where it was when Liberty terminated the business, primarily from a few wins and no appreciable losses in the interim. Kudos to CEO Joe Delaney, COO Mitch Freeman et al - while the ship may not be altogether righted, they have done a remarkable job in turning the company around.

Progressive Medical is also doing well, adding some incremental business while maintaining its reputation for stellar customer service.

Cypress Care (an HSA consulting client) is on a strong growth track, closing major deals with the California Insurance Guarantee Ass'n and Pennsylvania's state fund (SWIF). Sources indicate Cypress is close to a couple other significant deals.

Express Scripts has released its annual workers comp drug trends report. Here's the link. Maybe that's why all the red-shirted ESI staff were plastered with smiles.

Larry Marsh of Lehman Brothers issued a scathing report on AmerisourceBergen, taking company management to the woodshed for their inability to sell off sub PMSI/Tmesys. Marsh hammered ABC, lowering his eps forecast by $0.05 on the basis of the no-sale of PMSI alone. The PMSI folks are doing their best to ignore the goings-on at Corporate HQ; as noted earlier today their MSA division is pressing ahead and delivering solid results despite downward pressure on pricing in that fast-maturing sector.

Finally, one of the last remaining third party billers, Third Party Solutions, is reportedly on the block - again. Loyal readers (and industry geeks) will recall TPS was for sale about a year ago, with no takers. Now that TPS has bought WorkingRx, it looks like owner Fiserv is thinking someone will pony up big bucks to own a monopoly in that space.

Where innovation can be found

The periphery of the trade show floor at RIMS is where you'll find innovators - new companies, with new ideas and concepts, new solutions to old problems, all described by their owners, founders, and top execs. To give credit where credit is due, this isn't my observation but rather one made by friend and colleague Peter Rousmaniere.

The choice spots on the exhibit floor are occupied by the seniority; RIMS assigns spots according to how many years an exhibitor has been attending, These spots are taken up by the big carriers, brokers, software suppliers, and managed care firms. Not a lot in terms of innovation here, although there are a couple of interesting new solutions to old problems.

Medata's at RIMS with a new booth, new team, and renewed commitment to customer service. Long hampered by a (to be generous) lackadaisical approach to customer service, Medata is back, looking to take advantage of the turmoil in the market created by Coventry's aggressive push to consolidate share; ACS' acquisition of CompIQ; and the sale of FairIsaac's bill review unit to Mitchell Medical.

Coventry is promoting a medical triage/first notice/network direction product that they've been working on for over a year. Early indications are the service can help reduce frequency - significantly. Kudos to the 900 pound gorilla; although the product looks a lot like Medcor's version (which was developed earlier) at worst it shows Coventry knows a good thing when it sees it.

Medcor's service combines the best of nurse triage, first notice and provider network direction, reducing the number of calls the payer (or its designees) need to make and the calls the injured worker needs to answer.

Datacare has a unique data aggregation platform, enabling payers to capture and integrate all documents in one location and automate links between UR and bill review - an all-too-often ignored but nonetheless critical part of the medical management process.

Paradigm has been in business for 15+ years, but this is the first year they've exhibited at RIMS. The company's newest offering is a chronic pain program, which has shown strong results after a five-year development effort.

More tomorrow after my feet recover.

MSAs - what next?

Medicare Set Asides were a hot business for a couple of years with NuQuest HealthAdvocates and Gould and Lamb dominating the industry. Then Coventry entered the market thru its priority services sub, quickly moving up to the fourth spot. Coventry stumbled with its guarantee recently, losing a couple of clients (namely AIG and Macy's).

Today the MSA business is growing but not nearly as fast as in 2006. The big jumps in volume in the sector are pretty much over; while most vendors are seeing some increases in volume, the double-digit growth of the past looks to be gone.

There are still new entrants but the show floor isn't nearly as crowded with erstwhile MSA vendors as it was last year.

What's next? Depends on the Feds and adoption rates in other lines of business. Expect to see MSAs become more prevalent in other P&C lines especially GL and other liability lines.

RIMS begins

Last week it was the World Health Care Congress (perhaps the best conference I've ever attended in terms of content and quality). This week it is RIMS, the annual property and casualty get together, where brokers schmooze and vendors vend and risk managers are feted by carriers, TPAs, managed care firms and consultants.

Here's what I'm looking for at RIMS 2008. New and different approaches to managed care, approaches that are not merely based on discounted care, but outcomes. And not just lip service or 'we're seriously studying this' but programs that are in place, working, and delivering results.

Straight talk from vendors - what they can, and cannot, do. Results they've been able to deliver, and the keys to that performance. (Knowing that vendors can't be successful unless payers work cooperatively with them)

Evidence that payers are not just talking about outcomes and smaller networks and 'the right docs' but actually doing something.

New trends, products, ideas, and companies - something that has been in short supply in this industry for too long.

Stay tuned.

Wall Street gets a butt whippin'

Friend and colleague Bob Laszewski has shined a very bright light on Wall Street's ignorance about the health insurance business.

Bob notes: "We are way past the time the really smart people on Wall Street (that would be all of you) needed to start asking just what the future of this business is. If the answer you get is that the future of managed care is just to ride an unsustainable health care cost trend rate many more years into the future[bold is mine] you might just want to dig a little deeper this time."

As usual, Bob is dead on. Health plans make their money by pricing just above trend, selecting risks, and avoiding claims wherever and whenever possible. They are getting (justifiably) hammered by regulators and the press for claims avoidance, and Wall Street may have finally woken up to the inherent problems in the standard health plan business model.

There are far too few health plans that actually do anything remotely resembling 'managing care" - they manage risk, they manage reimbursement, they manage analysts - but they do not manage care.

I've said before, and repeat here - health plans that know how to manage care, particularly for the previously-uninsured, are going to do really well when universal coverage becomes the law of the land.

Unfortunately, there are few plans that qualify.

Liberty Mutual acquiring Safeco

As I reported last week, the softening market will inevitably lead to a significant increase in the number of mergers. Add another deal to the list.

In a deal just announced, Liberty Mutual is buying Safeco, the Seattle-based P&C carrier, for $6.2 billion in cash. The transaction is valued at $68.25 a share, and marks the second major acquisition by Liberty in the last few months.

Safeco will be part of Liberty's Agency Markets business, a venture that was initiated by Liberty Chairman Ted Kelly several years ago. Prior to that, Liberty was a direct writer, and only sold thru its captive sale force (disclosure - I sold for LM for several years). The Agency Markets unit has been quite successful in helping Liberty land clients that would not buy direct, but had strong relationships with brokers.

Safeco joins America First, Indiana Insurance, Montgomery, Ohio Casualty, Peerless, Colorado Casualty, Golden Eagle, and Liberty Northwest as well as Wausau and Summit Holding.

The current financial state of the P&C market makes it highly likely, and I would even say inevitable, that more deals get done, and soon. There is more capital out there than places to park it, and with organic growth difficult and very expensive (the market is soft enough, and even Liberty can't keep cutting prices forever) insurers looking to grow are going to have to do so thru acquisition.