Pay to Play – Just because you haven’t seen it doesn’t mean it isn’t real

Friend and colleague Bob Wilson has penned a piece essentially dismissing my claim that pay-to-play exists in the work comp services world.  Responding to my series and a great column from WorkCompCentral’s Dave DePaolo, Bob said:

my impression is that major, blatant “payola” in workers’ compensation is rare. At least it has not existed within my personal experience.

In fact, my impression has been completely the opposite.

Bob’s a lucky man, fortunate indeed to not have encountered this sleaze.

I do know of several instances where it has occurred, and Dave described one in detail. And I am convinced there’s a lot more of this than the few instances Dave and I have heard of.

The fact that someone doesn’t know about them isn’t a surprise; by their nature they are entirely secret. If and when these transgressions are discovered by the payor, there is no reason for the payor to publicize the finding and every reason to cover it up. Such is the nature of white collar crime.

I’ve had several conversations with vendors after my series of posts where they described veiled and not-so-veiled requests for services, trips, and other consideration from buyers. It’s real, it exists, and the examples I cited are from conversations with individuals with direct knowledge of these events.

Some have asked why I don’t name names.  It is NOT my responsibility to do so. The entities paying these bribes are well aware of the practice yet choose to pay. I am not going to pit my meager resources against those of corporations with hundreds of millions in revenue and legions of lawyers at their beck and call.

That’s part of my disagreement with Bob’s column.  The other is that his piece doesn’t address the far more common practice of corporate pay-to-play.

Bob didn’t address the TPA industry’s common practice of charging fees to service companies to do business. That is ubiquitous, and was the subject of a rather contentious debate between Sedgwick CEO Dave North and I at the NWCDC several years ago. At the end of that debate, Mr North a) said Sedgwick doesn’t take much in the way of fees from vendors and b) agreed to share all his vendor contracts with his customers.

I lauded Mr North from the stage and in a blog post for his willingness to publicly offer to share those contracts with customers.  I don’t know that any contracts have been shared or any fee-sharing arrangements acknowledged.  I certainly haven’t heard about any such disclosure.

To be clear, I’d reiterate a key point made in one of my pay-to-play posts:

What’s not fine is not disclosing the fee-splitting arrangements between the TPA and service providers.  Actually, let me refine that – what’s not fine is telling employers no such splitting occurs when it does.  Some TPAs tell their customers that they get paid by vendors, and aren’t going to disclose those payments.  Again, that’s OK – employers know they are paying “extra” to the TPA for claims and related services, and they know they won’t find out how much “extra” that is.  Caveat emptor.

Based on his experience, Bob notes “Are we rife with corruption, with executives on the take and intentional efforts to defraud millions?
Of course not. ”

I suppose it depends on how you define “corruption” and “intentional efforts”.

What does this mean for you?

Employers, are you absolutely, positively, 100 percent certain you know what you are paying for claim-related services?

Pay to Play – who’s at “fault”?

There are plenty of candidates – work comp TPAs who solicit fees from service vendors, vendors who offer to pay fees to get on a “preferred” vendor list, individual buyers with their hands out.

But when you get right down to it, the folks that are most at fault are also the ones most affected – employers.

Employers are the ones who demand ever-lower per-claim fees from TPAs, and TPAs who want their business have to play that game.  Truth is, it is impossible for any claims organization to deliver professional, solid, responsible claims handling for $1200 per lost time claim. They have to make their money somewhere, and that “somewhere” is with more fungible, less visible, claim-specific services.

Case management, utilization review, bill review/network access are just a few of the categories that escape close scrutiny yet add up quickly.  Many of these services are categorized as medical services and thus hit the file as non-administrative.  That category is almost always all but ignored during audits or file reviews, and thus is ripe for…margin making.

Before you start yelling about the dastardly TPAs and their evil ways, stop and consider why they do this.  It’s pretty simple; if your core service is commoditized and you’re constantly under rate pressur, you’ve got to do something to stay in business.  So, you find other ways to generate the dollars needed to deliver the level of service your customers demand.

I place the blame squarely at the feet of employers and their brokers and consultants.  There’s just not enough effort to really understand how TPAs differ, why one costs more and what their value propositions are.  It’s too easy to plug all the numbers into the spreadsheet and not try to figure out why TPA A does things this way, and TPA B does it this other way.

Nope, claims is claims.

There’s another reason employers have to accept a big chunk of the blame.  Many know fee splitting occurs, but don’t have the energy/motivation/ability/professionalism to pursue it.

What does this mean for you?

Is this acceptable?

Note – I heard from more than one colleague who wants me to “name names”.  It is NOT my responsibility to do that.  I’m not harmed by nor do I benefit from the practice of fee splitting.  Moreover, don’t act like this is “new news”; this is hardly a revelation.  It has been going on for years, and everyone knows it.

I will admit to being quite frustrated with stakeholders who somehow feel I – and others – need to try to fix problems with the work comp world, problems neither of our making nor solvable by anyone other than those affected by them.

As our son’s high school lacrosse coach often said – you’re either a finger or a thumb. The finger assigns blame to someone else, while the thumb points back to you.

Are you a finger, or are you a thumb?

Pay to Play – the corporate version

Monday we discussed the sleazier side of work comp services sales – payer decision makers with their hands out and the creative ways they profit from their positions.

Today, it’s back to a topic we covered years ago – fee sharing between services companies and payers – mostly TPAs.

It is no secret that almost all TPAs profit from managed care services – some by providing those services with internal resources, others from access fees paid by external vendors for the privilege of working with the TPA, still others do both.

That’s not a problem; TPAs have to make a profit, and their per-claim fees are under constant pressure from employers and brokers looking to demonstrate their ability to negotiate ever-better deals from their TPA.

Those per-claim fees are easy to measure, negotiate, and display.  What’s much tougher to track are the costs of add-on services; bill review, network access, PBM, specialty managed care, case management, UR, litigation support, investigative services, MSAs, and on and on.

Almost all claims use some of these services, some use all.  And when they are provided by external vendors (or internal suppliers, for that matter), the employer pays more.  Again, that’s fine – these services add value (in most instances) and are needed.

What’s not fine is not disclosing the fee-splitting arrangements between the TPA and service providers.  Actually, let me refine that – what’s not fine is telling employers no such splitting occurs when it does.  Some TPAs tell their customers that they get paid by vendors, and aren’t going to disclose those payments.  Again, that’s OK – employers know they are paying “extra” to the TPA for claims and related services, and they know they won’t find out how much “extra” that is.  Caveat emptor.

And that happens – a lot more than you’d think, and in very creative ways.  There are per-service fees, IT connection fees, rebates of fees, marketing fees, you name it – all kinds of descriptions of charges that increase costs for employers.

Some TPAs tell their customers there are no such arrangements, either outright lying or dissembling by creatively avoiding the question. They do this by interpreting the question as literally as possible. Thus the TPA can say “no we don’t get paid commissions” because the vendor pays the TPA an “IT connection fee.”

Kind of like Bill Clinton and his definition of “sex”.

So, what’s an employer to do?  I’ll address that in detail later this week.


Pay to Play – yes, it’s still here.

Pay to Play – charging work comp service vendors to do business with payers – was a big part of the industry a couple decades ago.

It still is.

Way back when, bagel boys and babes looking for files to service would bring goodies to claims offices; food, trinkets, tickets to the Red Wings game, you name it. Anything transportable was fair game. Didn’t matter if they were repping drugs, DME/HHC, case management, or investigation services, the boys and babes would load up their cars each morning before heading out to do their rounds.

There was also some pretty smarmy activity back then – big parties with lots of booze and entertainment at local/regional claims meetings, even envelopes left on adjusters’ and claims managers’ desks.

Most of the really obvious activity has gone the way of the green screens. Now that work comp payers have limited access to claims offices – and many have home-based their adjusters – the “retail sales” folks have a much tougher time getting access.

Alas, pay to play persists, its just moved up the corporate ladder.  That’s not to say there weren’t unethical practices in past years – there most certainly were.  What’s changed is awareness and top-down vendor management.  There is much more control of many vended services from payer HQ, allowing payer execs more insight into what’s happening at the adjuster level.  As a result, the locus of decision making has (partially) shifted from the desk level up the corporate ladder.

Now, we see P2P occurring in two ways – overt fee sharing, where vendors pay commissions/rebates/fees to the payer, and the much-less-talked-about, but nonetheless far-too-common direct payment to decision makers.

We will discuss the payer payments later this week…for now, the focus is on the decision maker payments.  Note I’m NOT talking about social events – golf outings, dinners and the like, relationship-building events long accepted, commonly practiced, and openly acknowledged. No, this is about highly unethical if not outright illegal payments and practices, such as:

  • untraceable gift cards, bought with cash, given to payer decision makers.  One decision maker demanded cards to “help his boys with their college expenses.” He asked (and likely still does) for cards for specific retailers as the price to get a meeting with him to even discuss a vendor’s services.
  • consulting fees paid to the decision maker’s significant other.  This is happening today, with the vendor forced to keep the cash flowing to keep the referrals coming.

I don’t believe work comp is any better or any worse than any other industry – there are always going to be scummy sleazebags with their hands out, creatively enriching themselves at the expense of their company, their claimants, their employer and/or taxpayers.

I do believe we need to do a much better job ferreting this out, and payers bear a big part of the responsibility.  When a payer discovers a decision-making exec has been lining their pockets at the expense of vendors they rarely (actually never) make this discovery public.  In hiding their embarrassment, the payer abrogates their societal responsibility – and ensures they will get screwed again.  Until and unless payers prosecute and/or publicly discipline these sleazebags we aren’t going to see it stop.

In fact, given what’s been going on over the last two years, it looks like it’s more widespread than ever.

What does this mean for you?

Time to stand up to sleaze.

California’s going to have a work comp drug formulary

And that is good news indeed.

WorkCompCentral reported this morning that the state legislature passed the enabling bill late yesterday; the Governor will sign it.

California will join four other states that have formularies in place today, and it is highly likely others will follow suit soon.

As good as that is, please do not make the all-too-common mistake of declaring victory and moving on.  The formulary bill is just the first step.  Here’s what has to happen to make a formulary actually work for all stakeholders.

  • UR – binding utilization review processes and rules that require compliance.  Otherwise you have speed limits with no police or laws to enforce them.
  • Flexibility – enable payers and PBMs to use rule-based processes and procedures to ensure patients get the drugs they need and aren’t dispensed drugs that may be harmful or counter-productive.
  • Specificity – blanket Y/N formularies are blunt instruments – allowing percocet for all claims just isn’t good medical care.  Instead, the formulary should be disease/condition/injury specific.
  • Timing – Texas’ phased-in rollout of their formulary made a lot of sense.  Handling new claims differently from legacy claims is appropriate and sensible.
  • Assessment – Monitor, track, and report on changes in prescribing and dispensing patterns, single out potential irregularities, identify problems and publicize same.  Fortunately, California has the best state-specific reporting and analysis entity; CWCI will be instrumental in this process.

What does this mean for you?

Wait…are we seeing actual progress in workers’ comp?  Hope springs once again!

Predictions for work comp; how am I doing?

Way back in January I posted my 10 predictions for work comp in 2015.  Usually I do a mid-year review how things are going; it was such a busy summer I haven’t had time till now.

So, here we go…

1.  Aetna will NOT be able to sell the Coventry work comp services division.  In fairness, doesn’t look like the huge healthplan has tried.

2.  Work comp premiums will grow nicely. There’s been some states where premiums have increased and a few have seen reductions, but bigger states seem to be experiencing more of the increases.

3.  Additional research will be published showing just how costly, ill-advised, and expensive physician dispensing of drugs. Yes indeed.  WCRI has continued to help regulators and others understand just how costly and damaging this practice is.

4.  Expect more mergers and acquisitions; there will be several $250 million+ transactions in the work comp services space.

5.  A bill renewing TRIA will be passed. Yes.

6.  Liberty Mutual will continue to de-emphasize workers’ comp. Yes again.

7.  After a pretty busy 2014, regulators will be even more active on the medical management front.  Work comp regulators in several more states will adopt drug formularies and/or allow payers/PBMs to more tightly restrict the use of Scheduled drugs. Yes times three.

8. There will be at least two new work comp medical management companies with significant mindshare by the end of 2015.  Well, not quite yet.

9. Outcomes-based networks will continue to produce much heat and little real activity.  Actually, haven’t seen much of either this year.

10.  Medical marijuana will be a non-event. So far, not much smoke or light here!  (sorry, that’s a terrible pun)

We’ve got about a hundred days till the ball drops and I have to deliver the final verdict.

We shall see!


Another transaction in work comp

Reuters reported Friday that Apax partners, owners of One Call Care Management and Genex, is “preparing to bid close to $2 billion for peer Helios, people familiar with the matter said, in what would be one of the workers’ compensation sector’s biggest mergers.”

The story indicated private equity firms Hellman & Friedman and TPG Capital are also looking at Helios.  Word is there is quite a bit of interest in the big PBM.

Leaving aside the Reuters reporters’ confusion about ACA and workers’ comp, what’s notable is the timing – the bid will be in later this month – and the valuation – a very hefty price indeed.

Helios, the product of a merger between Progressive Medical and PMSI, is the largest workers’ comp PBM.  The company also has ancillary businesses in MSAs and DME/HHC; in total revenues are likely above a billion dollars.  That makes for perhaps a two-times revenues valuation.  Of course, that might not be “high” at all; valuations are based not on top line but on earnings, and Helios is a very well run firm in a profitable space.

Given PMSI was bought by H.I.G. Capital some years back for about $40 million, then purchased for probably 8-10 times that figure a couple years ago and merged with Progressive, that’s a truly remarkable accomplishment.  Kudos to Executive Chair Eileen Auen and co-CEOS Tommy Young and Emry Sisson – and their very talented and focused staff.

Before anyone jumps to any conclusions, let’s recall that Apax is reportedly “preparing” a bid – and other investment firms are also very much in the running.  This is a very attractive asset, so do not be surprised if the process takes a bit longer than expected, and a different firm comes out on top.

What does this mean for you?

perhaps more industry consolidation.  perhaps not.


Work comp medical spend and other fun facts

In my ongoing effort to serve the public good, here are current facts and figures related to how many dollars are spent on medical care in worker’s comp. 

Total medical dollars

In 2013 workers comp medical spend totaled $31.5 billion.  Source – NASI’s Workers’ Compensation 2013 Report.  NASI is the definitive source for this data; their primary sources are NCCI for the 38 states where NCCI is the rating agency and state rating agencies/bureaus for the other 13.

Worker’s comp medical trend rate

NCCI’s Annual State of the Line presentation at the firm’s Annual Issues Symposium provides the earliest – and most complete – insight into medical inflation.  For 2014, initial indication was medical severity for lost time claims increased 4 percent.

A couple of caveats – this is for lost time claims only; while LT claims account for the vast majority of medical spend, medical only claims account for perhaps 15% of spend.  In addition, NCCI’s data does not include self-insureds; about a quarter of comp benefits are self-insured.

Pharmacy spend

Work comp pharmacy spend accounts for somewhere around $5.5 – $6 billion.


  • Internal HSA data from research projects (my consulting work)
  • NCCI – by their estimate drugs accounted for 18% of all medical expenses in 2011; note that this is based on total incurred cost, or for the layperson, their estimate of what the total including already-paid and future drug costs. Therefore this isn’t actual annual “spend”. And, the data comes from 2011 reports.  There’s a lot more to this, but suffice it to say the $ range above is solid.
  • note – some claimants are submitting their work comp scripts to their group health plans.  While this won’t affect “spend”, it does impact the addressable market.

There are a lot of other sub-categories out there – and just as much confusion about what services, codes, provider types, or locations of service belong in what buckets.

If you are attempting to categorize spend, make very sure you understand your sources’ definitions.  E.g., script count; how do you define a “script”?

  • Is it the prescriber’s prescription written out for a patient?  If so, understand that most “scripts” include 2+ drugs.
  • Is it each individual medication prescribed?  If so, understand that some “scripts” are for 3 days’ supply, others for 90.
  • Is it for a certain number of days’ supply?

Different stakeholders use different definitions – and not just for pharma.  How is “surgery” captured, and what is included?  CPT codes? Facility fees?  Associated office visits? Bills submitted by providers with a surgical specialty?

I could go on, but hopefully you get the (cloudy) picture by now.  If not, your bad.

What does this mean for you?

Work comp data is dirty, inconsistently categorized, and there are no single sources for all categories/spend types.

If you want to really understand the space, get granular, precisely understand definitions, and do NOT make any assumptions that other non-primary sources have got it right.  

Is UnitedHealthcare going to stay in the workers’ comp services business?

I don’t see why not.

Those who don’t track these things that closely likely don’t know that UHG is in the work comp services business.  Back in the spring, the company’s Optum subsidiary purchased PBM Catamaran, who had just bought work comp PBM/network/bill review firm Healthcare Solutions.

Catamaran (now OptumRx) has substantial share in the workers’ comp PBM space, with total Rx revenues likely in the $650 -$750 million range, spread among its network rental business, PBM Cypress Care, Ohio BWC services and other governmental work. Adding Healthcare Solutions’ other services pushes total work comp revenues closer to the billion dollar mark.

While that may sound like a lot, recall UHG’s 2015 revenues are projected to be $143 billion.  It is possible, indeed likely, that there’s more work comp business in that figure; when companies get to the size and complexity of UHG, it’s pretty hard to precisely identify sources of revenue.

Historically, UHG has been in and out of the work comp business several times.  Back in the early nineties, the company tried to be a risk-taker in the Florida work comp market.  That did not work out very well, and the company abandoned the space after losing a bunch of money. At various times, UHG also owned a technology business focused on bill review (Power-Trak) and two work comp services businesses; MetraComp (a former employer) and Focus.  Power-Trak was sold to Mitchell; the others were also sold almost a decade ago.

One could well look at UHG’s history and draw the conclusion that UHG may choose to dispose of their current work comp business; while that would be consistent, it would also ignore several key differences between then and now.

First, UHG management has changed.  Most of the senior folks who decided to exit work comp are gone or in very different roles.

Second, the health plan world of today is fundamentally very, very different from the world of 2006. ACA has dramatically altered the landscape and will continue to do so. There is far more regulatory risk for health plans these days; with the expanded influence of CMS and federal regulators, decisions made in DC (or more accurately suburban Maryland) have far-reaching consequences for health plans.

In contrast, work comp regulatory risk, while significant, is limited to what individual states do.  If one state makes a change, it has zero impact on the others, thereby minimizing regulatory risk.

There are a number of other nice things about UHG’s work comp business:

  • it’s a fee business, without insurance risk
  • margins are pretty healthy; a lot higher than group/governmental programs
  • it has scale; when all the dollars are combined it’s a substantial player
  • minimal investment is required as the businesses are mature and operating pretty successfully with experienced management and solid brands

While I know the folks at Healthcare Solutions and Catamaran (both are members of CompPharma, a work comp PBM consortium of which I am president), I have no inside information about UHG’s or HCS’ plans, company strategy, or current integration efforts.

I do know that the benefits of keeping this business far outweigh the benefits of disposing of it.

One last consideration. I find it revealing that UHG announced it’s pending acquisition of Catamaran just days after Catamaran revealed the purchase of Healthcare Solutions. It is hard to believe the Healthcare Solutions deal would have happened if UHG didn’t want to be in the work comp services business.


I don’t get Examworks

More accurately, I do understand their business, what I don’t understand is how the company’s stock can trade in the mid-thirties.

And that’s because I do understand the market, their services, and the growth or lack thereof, and I just don’t see the upside investors obviously are banking on. Their stock price makes sense for a high-growth business in a sector with a lot of upside.

That is not how I would describe the IME/peer/MSA business.

EXAM’s primary business is providing Independent Medical Exams to insurance companies – mostly workers comp, some auto, some disability.  Mostly domestic, some in other English-speaking countries.

In their latest earnings call, Chairman Richard Perlman’s comments were totally confusing; here’s a sample (thanks SeekingAlpha):

Starting with the U.S. our largest market, reported revenues grew 12.6% and organic growth was 4.3% compared to the prior year quarter. The organic growth rate was negatively impacted by sales mix with volumes increasing by approximately 10%. National accounts contributed roughly 40% of the growth and the balance coming from singles and doubles. I think it is important to comment on the U.S. growth in greater detail.

The impressive results in the U.S. during 2013 and 2014 reflect a unique confluence of events that resulted from what we believe is an unsustainable sales trajectory [emphasis added] on a quarter-to-quarter basis. The timing of new accounts wins, the initiations of rollouts, the velocity of compliance coupled with the consequential impact of our national account wins and the smaller amount of top competitors allow us the opportunity to have outsized growth for seven quarters in a row. This was a perfect storm.

We believe that we are currently in a period of normal long-term growth which we feel is a pause before the next wave of the positive events I just described. [emphasis added] This is consistent with our repeated guidance of mid to high single-digit sustainable growth in the U.S. for the longer-term.

After puzzling thru those several paragraphs, I still have no idea what he is talking about.  It appears that some big wins, new client rollouts, less competition made for solid growth, but that isn’t going to continue..until it happens again (the “next wave”).

Or, not…?

In the earnings call management cited financials based on “adjusted EBITDA”, a metric foreign to and not understood by most accountants or analysts. Management said this metric amounted to 17.4% of total revenue for the quarter – a rather hefty margin indeed.

A few other items of interest.  CEO Jim Price claimed the Medicare Set Aside Market is $300 to $400 million [!!], with the 30 largest payers only accounting for 30% [!!] of that volume. And while organic growth (same business growth) increased 4.3% in the US, the number of services increased 10%.

It looks like the mix of business changed, with lower-cost services taking a larger slice of the services delivered by Examworks.

So, here’s what’s got me stumped.  My best estimate indicates the US IME and peer review market is less than $2 billion.  Likely a lot less. So, if Exam currently has $450 million in US revenue, how much more can it grow?  And what will that growth cost?

Some growth will be organic – that is, more revenue from the same customers.  But, as almost all payers refuse to single-source their IME and peer business, each additional dollar of revenue is going to be a tougher win than the previous additional dollar of revenue.

Acquisitions are still on tap, and management believes they will be able to pay about the same for new deals as they have historically – 5x earnings.

I don’t think so.  Prices have gone up rather substantially of late, driven by both strategic and financial buyers.  I’d expect prices to be in the mid-to-upper single digits (as a multiple of earnings)…and that’s at the bottom end.

Next, maintaining, much less improving margins (management expects they will get somewhat better in future quarters) depends on lowering cost of goods sold and increasing prices.  At least in the US, the latest quarter shows the price for their average service fell.  I’d expect that to continue, or perhaps level out.  Winning national accounts requires very competitive pricing, as well as, in many cases, payment of “management” or “administrative” fees to the payer customer.

Then there’s the cost end of things.  This is a pretty simple business with relatively low administrative expense and not much opportunity to reduce that expense. While Examworks may try to reduce payment (the biggest component of their cost of goods sold) to IME and Peer Review docs, those docs can just refuse to go along.  As claims adjusters and attorneys on both sides have very definite preferences for docs, those docs do have some pricing power – and if those physicians aren’t in an IME company’s network, than that IME company likely won’t get that adjuster/attorney’s referral.

Finally, workers comp claims volumes across the country continue to decline.  We are in a long-term structural decline of 2-4% every year.  That means there are fewer claims that need IMEs or peer review.

Over the longer term, I expect auto claims involving IMEs to decline markedly as well.  My sense is there aren’t all that many (compared to work comp), and the reduction in bodily injury claims that will result from more vehicle automation bodes well for passengers and pedestrians – but not for auto IME vendors.

All that said, I have no idea why or how equity investors value a stock at a certain level; long ago I came to the realization that I have zero ability to pick stocks.  Then again, a lot of supposedly professional investors do a lousy job despite getting paid to do just that.

What does this mean for you?

It doesn’t mean much to me, as I don’t own the stock nor have any financial position of any kind it it.  You?