There’s been a boatload of health policy stuff out of late – PPACA, pharma pricing, narrow networks – you name it. read all about it here – courtesy of Steve Anderson at MedicareResources.org.
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!
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.
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.
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.
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.
that the predictions of employment declines due to ACA have turned out to be wrong.
Right up front, let’s agree that it is pretty much impossible to completely separate the impact of one factor from all the others. Employment is affected by interest rates (still historically low), international trade, consumer demand, construction, and consumer confidence among other things.
That said, the latest research shows no negative impact on:
- hours worked;
- labor force participation;
- employment; and/or
- the probability of part-time work.
One of the demographic groups of most concern was non-elderly adults with a high school or less education; the fear was employers would slash jobs and hours worked as employment costs would increase under ACA. Yet the data indicates there have been “very small shifts in part-time hiring”; employers have not shifted full-time workers to part time to avoid paying insurance premiums.
Claims that 2.5 million jobs, mostly low-wage, would be lost have been shown to be hyperbole at best; flat-out-wrong would be kind.
What’s pretty entertaining is several of the current crop of GOP Presidential candidates have been touting their states’ employment growth – and in the next breath claiming ACA was a job killer.
IF that was the case, job openings wouldn’t be at their highest level in 15 years…
So, while there’s no evidence ACA is hurting employment, there is lots of evidence that employers cannot find qualified workers.
What does this mean for you?
The reality is this – the claims that “Obamacare” would be a job-killer have been shown to be wrong.
I’m off for a few days; back to work next Wednesday.
Here are a few items of note you may have missed.
First up, thanks to Ohio BWC Pharmacy Director John Hanna who sent me this MedPage piece on medicine in India in response to my post on generic drug pricing (scroll down for the info on pharma). A lot of generic manufacturing is done on the sub-continent; one possible reason generic prices increased over the last couple years has been the FDA’s extreme caution in allowing drugs manufactured in India into the US.
Given the horrifically bad track record of medicine and pharma in India, methinks I’d rather pay a few dollars more for my meds than allow defective drugs into our health system.
Looks like California’s efforts to reform medical delivery for work comp are paying off. CWCI reported medical costs declined from 2013 to 2014 by 5.7% to 7% (depending on valuation point). This is a significant improvement; report author John Ireland attributes the reduction to:
- the phase-in of the RBRVS fee schedule beginning in January 2014;
- the reinstatement of lien filing fees,
- the reductions in ambulatory surgery center fees, and
- the adoption of the IMR dispute resolution process.
Notably cost containment and medical management expenses increased substantially; this is to be expected as the flood of IMR requests.
WCIRB’s Greg Johnson reported similar results (hat tip to WorkCompCentral’s Greg Jones); the rating bureau saw medical costs per claim decrease 4.7% from 2013 to 2014. The change in fee schedule to one based on Medicare’s RBRVS for physician services looks to be one of the main drivers. What’s very interesting (really!) is the percentage of payments going to specialty docs declined last year, while dollars going to general and occ health providers went up significantly.
This is good news; it is entirely consistent with national trends to better compensate primary care providers.
A closely-related item comes from the esteemed Steven Feinberg M.D., one of the most thoughtful physician observers I know. Dr Feinberg provides a template for health care providers seeking to obtain a favorable ruling on a utilization/IMR request.
Another thought-provoking piece about the impact of automation on insurance: an analyst sees a distinct possibility that the auto insurance industry will not exist in 20 years.
Here’s the brief findings:
Epidural corticosteroid injections for radiculopathy [pain radiating from the spine] were associated with immediate reductions in pain and function. However, benefits were small and not sustained, and there was no effect on long-term surgery risk. Limited evidence suggested no effectiveness for spinal stenosis.
In a follow up, Dr Feinberg provided this:
I have a 68 year old physician colleague who is highly functional both at work and recreationally. He has rather severe cervical and lumbar degenerative disease and stenosis and a very damaged left knee. He has undergone a number of injections (more than would be allowed via EBM) and takes Vicodin 10/325 3 times a day and uses some oxycodone for “breakthrough” pain. He lives on 5 acres and takes care of 10 horses and the property. He told me that working on his property makes him hurt more but that he is not going to stop being active just because of the pain/discomfort. He has been on the same opioid dose for years and has no obvious negative side-effects. He told me that without his medications, he would have trouble practicing as a physician and he certainly would not be active on his property.
Dr Feinberg closed with:
“I ask myself everyday if so little works, what are we left with to treat?”
A colleague of the good doctor provided this as well: “Could it be that Osler’s words from over a century ago continue to direct our best efforts? “The job of the physician is to entertain the patient while nature takes its course?”
I bring this to your attention as a reminder to all that medicine can be as much art as science, that we often don’t know what works for whom why and when and how.
However, make no mistake that treatment can and should be guided by evidence-based clinical guidelines. There should be a way to navigate the care management and authorization process to allow Dr Feinberg’s colleague access to the treatment that works for him, just as there should be a high standard for approval of “non-standard” care that puts patients at risk.
I’d close with this note – there is far too much use of procedures similar to ESIs, and far too little challenging of that use.
What does this mean for you?
Promote EBM, and ensure your authorization processes work well.
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.
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”).
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?
Over the last couple of years, generic prices increased rather substantially, spurring Congress to open an investigation after reports indicated retail pharmacy generic prices increased 37% over three months. Congress is a bit late to the party, as it appears prices may be stabilizing after a rather dramatic run-up; more on that in a minute.
Generics make up about 80% of all drugs dispensed in the real world, and a slightly higher percentage in workers comp.
Usually, generic prices for specific drugs decrease over time. The “usual pattern” changed about two years ago, when a popular and generally accurate price measure showed median generic prices were essentially flat over a twelve-month period ending in July 2014.
More tellingly, the same assessment showed the average price increase for drugs that went up in price was almost twice as much as the average decrease for drugs with prices that dropped.
Of course, there’s a lot of variation among and between drugs. Workers comp generic prices jumped from as much as 19% across the board according to TPA Broadspire. And the largest work comp PBM, Helios, reported generic prices increased 10% in their most recent drug trend report.
So, what’s going on and why?
First, let’s stipulate that drug “price” is a very complicated term. “price” is supposed to be what one pays for one unit of a service, or in this case, a good.
Things are a lot less clear in the world of drugs; there are many different pricing methodologies and definitions, all with pluses and minuses. For our purposes, we’ll look at two generally-accepted metrics – AWP and NADAC.
AWP – known as “average wholesale price” or perhaps more accurately “ain’t what’s paid” is the price the drug’s manufacturer reports to the national drug price compendia – Medispan et al. There is no auditing, no validation, no way to determine if an AWP actually reflects reality – and in many cases it doesn’t.
AWP is the basis for workers’ comp drug fee schedules in those states that have fee schedules.
NADAC is the national average drug acquisition cost, and is seen as a more accurate reflection of the real price buyers pay.
A shortage of some key drugs is a major contributor. Tetracycline and acetaminophen/ codeine drugs are among those in short supply; prices for tetracycline have exploded, up 7400% to 17,000% from 7/2103 to 7/2014.
There are anecdotal reports of shortages of chemicals needed to manufacture some drugs as well.
Some very old drugs have very few manufacturers. Investors, seeing this as an opportunity, have snapped up companies making these drugs, consolidated the manufacturing, and gained pricing power.
Another reason for generic price inflation is a lack of competition among manufacturers. The FDA has to approve new generics, and of late they’ve been quite backed up in their approval process for new generics. In addition, there are reports that the FDA is loathe to approve many offshore drug manufacturers. While this is in all likelihood due to significant concerns over processes and safety and other manufacturing and consumer protection issues, if many Indian manufacturers are not able to sell into the US, price competition suffers.
There’s also been significant consolidation among generic manufacturers, leading to fewer companies making specific drugs. In turn, that means buyers have less success pitting one manufacturer against others.
Finally, my sense is drug manufacturers are raising prices for a simple reason – because they can. With more Americans now covered by health insurance, there is a bigger market of buyers less concerned about price than they were before they had coverage. And, there’s pent-up demand as people who needed but weren’t taking drugs now have access to those medications.
Recent price increases are no surprise to those who saw the same thing happen after Medicare Part D implementation; when seniors got their drug cards, the drug industry got a windfall.
Of late, price increases have moderated significantly; about half of the generics increased in price (averaging 5.3%). For those that declined in cost, the drop was almost the same at 5.1%.
I’d expect generic drug price inflation to continue to moderate; the FDA has committed to decreasing the approval backlog and new manufacturers will almost certainly see an opportunity, thereby adding suppliers.