Feb

Is Corvel a TPA or a managed care company?

Posted by Joe Paduda on Thursday, February 12th, 2009 | Comments

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.

Feb

Why did Coventry’s medical loss ratio increase?

Posted by Joe Paduda on Wednesday, February 11th, 2009 | Comments

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.

Jan

What now for Coventry?

Posted by Joe Paduda on Wednesday, January 28th, 2009 | Comments

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.

Jan

Why is Minnesota increasing work comp hospital costs?

Posted by Joe Paduda on Tuesday, January 27th, 2009 | Comments

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.

Jan

The Ingenix settlement – you wanted details…

Posted by Joe Paduda on Thursday, January 15th, 2009 | Comments

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.

Jan

So, what does the UHC Ingenix settlement mean?

Posted by Joe Paduda on Wednesday, January 14th, 2009 | Comments

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.

Jan

Who benefits from universal coverage?

Posted by Joe Paduda on Thursday, January 8th, 2009 | Comments

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.

Jan

Bill review companies – will they be the solution?

Posted by Joe Paduda on Wednesday, January 7th, 2009 | Comments

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.

Jan

Why big comp networks won’t do the smart thing

Posted by Joe Paduda on Monday, January 5th, 2009 | Comments

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.

Jan

Predictions for Comp managed care in 2009

Posted by Joe Paduda on Thursday, January 1st, 2009 | Comments

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.

Category: Workers Comp