Coventry’s acquisition of First Health represents a critical point for the WC managed care business.
As the market leader with some $190 million in annual revenues in WC bill review and network services, FH has long been a strong, and somewhat self-possessed, “vendor”. Carriers and TPAs have found FH to be inflexible, and in some cases dictatorial, regarding terms, conditions, pricing, and services. Some are hoping that the new management will adopt a more “customer-friendly” approach. Early reports from FH customers are that their FH contacts and account managers are saying the right things, but have no in-depth information about Coventry’s future plans for Workers Comp.
Coventry’s latest presentation may shed a little light on this issue. In it, Coventry notes the growth opportunities inherent in WC, the strong “bench strength” of FH WC management, strong growth opportunity in WC (mid teens to low twenty percent range), and potential for reform-driven growth.
I am highly skeptical. FH has, if not poisoned the waters with the market, at least rendered them highly distasteful. Their product offerings are primarily a large, deep discount network and a bill review system that they do not own nor effectively manage. Many payers, facing rising medical costs despite their long relationship with FH, are looking elsewhere for the next generation of managed care.
In the final analysis, Coventry’s future in WC will depend as much on the analysts’ opinions, and therefore the stock price, as anything. If analysts see no synergies, Coventry may decide to “pursue other options” with the WC assets.

The Workers’ Compensation Research Institute is one of the leading research organizations focused on WC. Their annual conference in Cambridge MA just concluded, and once again WCRI produced some interesting and thought-provoking studies.
This year’s conference used a slightly different format, focusing on individual states rather than comparing several, or many, states in a single presentation. Stakeholders from TX, TN, and CA presented after summary data presentations by WCRI staff.
Here’s the highlights as I saw them.
1. Drs. Peter Barth and David Neumark discussed the impact of Provider Choice on Costs and Outcomes. Interesting findings included:
— Costs were lower, and outcomes better, when the employer chose the provider, than when the injured worker chose a provider they had not previously seen.
–When an injured worker chose to use a provider they had previously seen, costs and outcomes were equivalent to those delivered by the employer-selected provider.
–The “new provider”‘s outcomes and costs were significantly worse.
2. The CompScope 4th edition was previewed; this is a summary of medical costs, disability duration, benefit amounts and other outcomes for lost time claims (and others, but we’ll only discuss LT claims) in 12 states. Items of note include:
–Of late, medical costs have been growing rapidly; with costs in all but 3 of the 12 states increasing by more than 10% from 01/02 to 02/03. California saw the highest increase at about 17%. Considering that CA is the largest WC state, that is a truly frightening number.
–There appears to be a strong correlation between medical costs and medical cost containment expenses, with most states favored by low medical costs also enjoying low cost containment expense, and high cost states also burdened by high cost containment expenses. My take is this may be heavily influenced by the percentage of savings model used in PPO deals; the higher the medical costs, the greater the “discounts”; the greater the discounts, the larger the PPO fees; and thus the greater the “cost containment expense”.
So, the higher the medical expense, the more money the deep-discount, percentage-of-savings PPOs make. Interesting incentives…
3. Disability duration factors – Worker age, education level, part-time and/or seasonal workers, and employee-supervisor trust factor were all key factors influencing disability duration. Workers over 60 had much worse return-to-work results than younger workers. There was also wide variation among states, with Texas hampered by RTW rates substantially lower than the median. Regarding education, workers with high school diplomas returned to work much sooner than drop-outs.
The full CompScope 4th edition will be available from WCRI in 2005; while somewhat weighty, it is a “must-read” for managers and executives involved in WC.
Underwriters should also pay close attention to the report; there are a wealth of “indicators” that the insightful underwriter can use to better select, and de-select, risks.

Mari Edlin in “Managed Healthcare Executive” highlights some of the factors driving inflation in prescription drug expense in workers comp.
Edlin’s article includes interviews with a number of industry sources (your humble author included), but perhaps the most insightful piece relates to the role of the physician in managing drug costs.
“George Furlong, director of medical payment products for CHOICE Medical Management Services in Tampa, agrees that managing utilization is key to controlling costs and places the onus on physicians. “Since no copayment exists in workers’ compensation, there is no incentive for the patient to ask for a less expensive drug

Tom Lynch’s “Workers’ Comp Insider” blog provides interesting news related to return to work, safety and risk management among other topics. The latest post is a synopsis of state-specific WC news.
A good site to bookmark and check frequently; the archives are a treasure trove of information on these topics.

CMS, the federal agency that oversees Medicare, announced yesterday that it will be increasing payments to physicians across the board effective 1/1/05. The increase will directly affect Worker Comp fee schedules, which (in large part) are based on Medicare’s fee schedule.
CMS’ announcement includes the following:
“The Physician Fee Schedule sets rates for how Medicare pays more than 875,000 physicians and other health care professionals. In 2005, CMS projects that aggregate spending under the fee schedule will increase 4 percent to $55.3 billion, up from $53.1 billion in 2004. The spending increase is due in part to an MMA provision that increased physician payment rates by 1.5 percent, a move that negated a previous law’s planned cut of payment rates by 3.3 percent for 2005.”
We have been telling clients and state agencies for years that basing fee schedules on Medicare is a bad idea for several reasons. Here is a clear demonstration of one of them – the state effectively cedes control over pricing to the feds.
Others include a much different mix of services (comp – musculoskeletal, Medicare geriatric, oncology, cardiac) and completely different communications requirements (none in Medicare, intensive in comp for RTW, care management, etc.)
Here’s the net. Comp insurers and self insured employers will be paying more for physician services (on a unit cost basis) than they did this year. Moreover, with the change from the planned reduction to an increase, the impact is almost 5%.
The news is not all bad for the simple reason that price per unit of service is but one of the drivers of medical inflation in workers comp. But therein lies the rub; with the overwhelming emphasis on price controls in the WC managed care industry, many have neglected utilization and frequency which are significantly more important contributors to medical trend increases.

NCCI recently released the 2004 WC Prescription Drug Survey update. Key findings include:
– Rx costs now account for over 12% of WC medical expense, up from 11.8% last year and 10.1% in 1997
– Price has overtaken utilization as the primary driver of inflation, although utilization is still a significant contributor
– PBMs are seen as part of the answer, but certainly not all
The survey also notes that three classes of drugs account for 87% of scripts – painkillers, muscle relaxants, and antidepressants, with Celebrex(r) and Vioxx(r) holding down the top and third spot in terms of total dollars paid.
Watch this space for updates on HSA’s Second Annual Survey of Prescription Drug Management in Workers’ Comp(sm). This Survey will expand on the First Annual Survey.