Coventry released its financial results for Q1 2009, and the work comp financials are, to say the least, strong.
Revenues were up almost 10% quarter over quarter to $188 million, while gross margin actually declined by a couple points to $130 million. The 10-K states that the growth in revenue was driven primarily by an increase in the company’s work comp PBM revenues.
I’m more than a little surprised by the gross margin number. Coventry’s PBM, FirstScript, has been aggressively expanding, slashing prices to do so. Margins in the WC PBM business have been declining of late, under pressure by the dynamics and market forces of a rapidly maturing market. Yet Coventry’s gross margins are holding up quite well.
It is likely that the company’s well-documented efforts to raise prices on network rental services have helped keep the gross margin number where it is. Kudos to Coventry for this success; it’s taken a lot of work and come despite strong resistance from many clients.
The slight drop in gross margin dollars (understanding it is a larger decline in percentage terms) will likely turn around in Q2, as Coventry has recently laid off a number of managers and directors in the work comp business.
Work comp is – by far – the most profitable business for Coventry. Although comp only accounted for 5.3% of Coventry’s revenues for the quarter, it delivered about 19% of gross margin.
Those are pretty strong numbers, and shows exactly why the new management team is enamored with the business. Any business that produces $520 million in gross margin on $850 in annual revenue is going to have lots of Board support.

If you thought the first few posts from NCCI were esoteric, here comes one that makes them look amazingly general. You’ll either yawn or be right on the edge of your chair…
Chris Brigham, MD, senior editor of the AMA Guides to the Evaluation of Permanent Impairment (the Guides), had the coveted post-lunch speaking slot at last week’s NCCI meeting on Thursday. For those not conversant with this issue, the Guides are used in workers comp to determine when, and how much, a person’s medical condition is a disabling condition.
Note that Brigham, and the new edition of the Guides, are controversial and the object of assault by many who claim to be on the side of the claimant (I’m not saying they’re not, I’m saying that’s what they purport to be. I have no opinion re the utility or appropriateness of the Guides).
Brigham started off by noting that most of the initial impairment ratings he reviewed were subsequently corrected. And in the vast majority of cases, the original rating was an over-rating of disability. That is, the subsequent review showed the person was not as disabled as the original impairment rating asserted. Brigham used a database comprised of 866 California cases, out of which 83% were incorrectly rated, at a cost of over $15,000 per case (cost is the award amount for the initial impairment rating v the subsequent rating).
Notably, impairment ratings in Hawaii tended to be more consistent than in California – a lot more consistent.
Errors in CA were overly concentrated in LA, less so in others. There is also a variation in ratings done by different types of physicians and for different diagnoses.
A couple key concepts – impairment is not the same as disability. Impairment is the result of the medical condition – what physicial impact occurred. Disability is somewhat more subjective, as it addresses what that person can do. For example, Steven Hawking (the brilliant physicist) is completely impaired due to ALS. He is also a prolific author and practices his craft every day. Thus he is ‘impaired’ but not ‘disabled’.
To paraphrase friend and colleague Jennifer Christian, MD, “there is no medical condition that is so disabling that there is not a person in this country with that condition working full time and being paid well.”
The new Guide was developed in an effort to add consistency across the ratings, a response to criticism of past editions. The new Guide is more diagnosis based, using evidence to substantiate the diagnosis, and provides rating percentages that factor in clinical and functional history as well as an exam of the patient. It also factors in new, more current medical research and clinical studies.
According to Brigham, the new Guide eliminates such historical factors to rating including the occurrence of surgery and range of motion for spine patients, as the clinical research indicated no linkage between those ‘factors’ and actual impairment.
Notably, physicians polled for their reactions to the new edition were generally favorable, while plaintiff attorneys and chiropractors were not.

What does this mean for you?
Expect the use of the new Guides will be controversial, and will likely be subject to legal action in many jurisdictions due to the changes, and stakeholders’ reactions to those changes.

IAIABC President Peter Federko had twenty minutes to discuss the impact of health reform on workers compensation. I’ve posted on this several times, for those interested here’s where a summary post.

Before we delve into Mr Federko’s comments, I’d be remiss if I didn’t note that there already has been, and almost certainly will be, ‘health reform’ initiatives that will impact workers comp – to greater or lesser degrees. These include S-CHIP and the Medicare Set-Aside language inserted into that bill at the very last minute (for those who thought that health reform would have little impact on comp, the insertion of MSA language into a bill for poor kids’ health care is a big bucket of icy water smack in the face).
On to Mr Federko, President of IAIABC. Mr Federko is Canadian, CEO of the Saskatchewan Workers Comp Board, so knows a lot about the relationship of universal health care and workers comp. (I’d note that there are a variety of health reform proposals before Congress today, some of which call for universal coverage, others do not).
Speaking from his perspective as the boss of a comp regulator/seller/administrator. he noted that the fundamental principal of universal care is the access to medical necessary care regardless of the ability to pay. Canada, Norway, Denmark and Sweden use single payer systems, where money comes from the government and is paid to private providers. In the UK and Spain, the government owns the payer and providers. In Germany and Switzerland, there are many insurers which employers and individuals contribute to, who pay independent private providers to deliver care.
Note that in those systems that include ‘private providers’ the providers are not government employees. Most of the hospitals in Canada are privately owned by regional authorities or not for profit organizations. Physicians are independent, for-profit providers who bill and receive payment from the government.
In Canada, the same amount is paid for any procedure regardless of the payer type. Thus payment for a hernia is the same whether it is through workers comp or ‘regular’ health. However, the work comp board negotiates with providers to ensure quicker access to care to facilitate quick scheduling, completion of reports, and compliance with communications standards. There are additional payments for reporting and communication, and in some instances the Board sends claimants south of the border to get treatment more quickly.
Federko noted that the US spends considerably more than the US for health care, while life expectancies in Canada are a couple/three years longer than in the US, infant mortality rates are lower in Canada, and the WHO reports that Canada ranks slightly higher than the US (30 v 36) on a ranking of industrialized nations’ medical quality (paraphrasing here).
He also noted that the cost per claim in Canada for comp can sometimes be higher than in the US. Federko said this is due to their intense focus on return to work, which leads to the Board doing whatever they can, paying for whatever services may be suggested, in an effort to get their injured workers back on the job. However, this intense focus has led to significant savings in indemnity expense, and therefore, according to Federko, it is well worth it.
A couple other observations worth mentioning. First, Federko said that it is indeed possible that universal health care in the US may well reduce cost shifting to workers comp resulting from underpayments to providers by medicare/medicaid/the uninsured.
Finally, Federko reiterated a key point – universal coverage is not socialized medicine, in Canada 95% of care is delivered by private providers.

Here’s the non-substantive view of the conference.
Very well done. Lots – and I mean lots – of good data and information about trends, costs, cost drivers, potential impact of political and economic developments, broken up with entertaining and thought-provoking presentation on global trends.
Very good speakers with very deep knowledge on their topics. As an example, I learned a lot about the use of Medicare RBRVS in workers comp reimbursement – a topic of critical importance in comp that I thought I knew pretty well.
The dinner last night was not the typical formal sit-down but a casual outside affair with various Italian delicacies on tables surrounding stand-up and sit-down dining tables. This allowed for lots of mingling, discussion, and was a lot of fun to boot.
Two quibbles. In the Medicare presentation yesterday there was no discussion about the potential impact of the pending changes to Medicare physician reimbursement fees. This is a big issue as it will dramatically impact workers comp medical expense, likely in several ways.
One of the morning presenters yesterday, Robert Hartwig of III, allowed (what I perceived to be) a political bias to intrude on an otherwise excellent presentation. Hartwig talked about ‘wealth redistribution’ at some length, and even made the statement that we might see workers comp used as a mechanism for ‘wealth redistribution’. His slides also included a reference to the pending socialization of health care. As I’ve noted repeatedly, that is not what is proposed in Washington by the Administration nor is it consistent with the proposals that have any chance of passage.
These memes – wealth redistribution and socialized medicine – are not helpful nor are they accurate.
But these were minor compared to the solid substance throughout the day.

Dennis Mealy, Chief Actuary at NCCI, got into the details with his State of the Line address at NCCI’s annual conference. We’ll focus on workers comp, but it’s important to remember comp is a part of the overall property and casualty industry .
The P&C industry saw a ten point jump in the net combined ratio from 2007 to 2008, with NCCI predicting a 105% 2008 combined ratio.
That’s big news. But as bad as that is, there may well be more bad before things turn around – historically the PC market does not turn around until the combined ratio hits 116%. And, it is still slightly lower than the average ratio over the last 22 years, which was 106.1%. So we may well have more bad news before the sun comes out.
So, how’s comp doing?
Well, as noted in a post earlier today, for the fourth year in a row, work comp premium declined to $39 billion after three consecutive annual declines. From 2005, premiums have dropped almost $8.5 billion – with a big chunk of that decline in California and Florida.
The combined ratio stayed static at 101 after a stellar 93 in 2006. After accounting for investment results, the industry returned a pre-tax operating gain of nine percent in 2008 (predicted) – a solid result to be sure, although a significan drop from 2007 (12%) and 2006 (17%). And, it is still higher than the average return of 6.5% (from 1990 to 2007).
There’s more data that indicates we may still be a ways from the bottom of the soft market. Reserve deficiencies are still relatively low, the accident year loss ratio remains historically low (although my personal opinion is 2008 and 2009 medical costs will come in significantly higher than most industry folks expect. The industry’s predictive accuracy is pretty poor – private carriers projected the AY loss ratio would be 84 in 1999 and 83 in 2000; when the final numbers came in, the rates were 106 and 102 respectively. that’s rather a large miss) See the 2009 SOL report on their website – particularly slides 20 and 22.
Medical costs
Mr Mealy stated that medical costs, while not solved, appear to be moderating. Mealy mentioned that further development (looking back at past predictions after collecting more data) of projected medical costs have indicated medical inflation rates are moderating. He backed up his assertion (perhaps assertion is too strong a term; opinion might be more accurate) by noting that medical costs as a percentage of claims costs look to have dropped from 59% to 58%. Mealy noted this is by no means proof that medical costs are under control, and he does expect medical to reach 60% of costs.
In a follow up discussion with Mr Mealy, we discussed this issue in more detail. The net is although some payers (specifically HSA’s payer clients) are seeing significant increases in medical costs, driven in large part by facility expense, Mr Mealy’s numbers (which include about half of the nation’s workers comp dollars) don’t indicate medical inflation is trending up.
I’m struggling with this, as it goes against I’m seeing. Then again, I tend to work with payers who are working hard to manage medical costs, so my world view may be skewed.
What are you seeing? (Anonymous responses welcomed)

NCCI President Steve Klingel led off the NCCI Annual Issues Symposium (AIS) with a discussion of reform.
Regulation
Notably, despite the sweeping wins by Democrats at the state level, the actual number of reform bills likely to become law decreased.
From the Federal perspective, one of the more significant potential issues is the advocacy by CA Rep Joe Baca (D) of a National Commission on Workers Compensation to evaluate state WC laws and regulations to determine the equity and fairness of the states’ comp systems. There’s not much support on the Hill for Baca’s initiative – but given the pace and variety of issues under consideration in DC it is possible – if only slightly – that the bill gets some attention (it also doesn’t cost anything, which is kind of rare these days).
The overall message? We are very much in a wait-and-see mode regarding changes in regulation. oversight, and potential impact of reform and Medicare changes.
Recession
Payroll (which has a dramatic impact on work comp premiums) looks to be somewhat flat; if unemployment hits double digits, expect payroll to decline for the first time in decades. Watch this closely…
If employers continue to cut wages across the board, premium will decrease – but the underlying risks, and the cost of those risks, will not. There appears to be anecdotal evidence of these across the board wage cuts; insurers would do well to monitor this carefully.
The decline in frequency is logical during a recession – in fact in six out of seven recessions frequency declined (note I’ve posted on this several times in the past). However this recession is deeper, broader, and nastier than almost any others on record, and therefore it’s harder to predict what the impact will be. There’s no doubt – in my mind – that the recession has prolonged an already-too-long soft market. Despite rising medical costs and increases in overall lost time claim costs, comp premium rates remain historically low.
As some economist long ago said, if something can’t go on forever, it won’t. The obvious question is the timing of ‘forever’. For many comp writers, ‘forever’ may come too late. Their ongoing decisions to write comp at low rates despite upward pressure from medical expense may well result in a shake-out similar to the one we old folks saw after the end of the soft market of the late nineties.
There will be much more detail on these issues in later sessions – stay tuned.

I’m covering the Annual Issues Symposium at the NCCI Conference in Orlando…
The agenda looks pretty strong, and attendance is solid as well – at 98% of 2008 levels (a big contrast to the RIMS show last month).
NCCI released their State of the Workers’ Comp Line report this morning (available at their website www.ncci.com. Highlights include:
– Frequency declined four points in 2008, evidence that the recession is impacting work comp claims
– As further proof of the continued existence of the soft market, comp premiums declined by 12% last year to $39 billion.
– The accident year combined ratio (claims plus admin expenses) increased to 100%
in 2008, up four points from the prior year.
The agenda includes a discussion of the impact of health reform – and Medicare – on workers comp. Hallelujah. It is long past time for the comp industry to look up and out, to realize we are the flea on the tail of the dog, and that dog is moving in new and different directions, and moving fast.
More to come…