Year: 2014

Jan
27

Sedgwick’s been acquired

Posted by Joe Paduda on Monday, January 27th, 2014 | Comments

Investment firm KKR will buy a “majority interest” in TPA Sedgwick for $2.4 billion in a deal announced officially minutes ago.

The transaction is the latest of several high-multiple deals for workers’ comp assets, second only in size to Apax’s total cost for the combined OneCall/Align transactions. Estimates of the valuation are in the 11-12x on a trailing basis or perhaps around 10x of forecast earnings.  However, what isn’t known is exactly how much of Sedgwick KKR bought. It is likely management owns a piece of the company; I’d be somewhat surprised if the sellers – Hellman & Friedman and Stone Point – retain any significant stake.  I would speculate that the total valuation – after accounting for minority ownership – is between 10x – 11x of forecast earnings.

(I need to revise my expectations, as I’d forecast a sale price of “as much as $2.4 billion.”

Regardless, a double-digit valuation for a TPA is a pretty rare occurrence.

So, what does this mean?

First, there’s been no decrease in deal flow in the work comp space, and there are at least two others in process.  At some point this will slow down/end, perhaps because there’s nothing left to buy and/or prices get so high that even the most enthusiastic will stop bidding.

Second, investors that have been bidding on assets are now selling into the market. This tells me they see the opportunity as pretty darn attractive, making it hard to hold on to investments when they can sell them for double digit multiples.  Arguing with myself, perhaps this implies the deals will continue as today’s owners find the returns just too good to pass up.

Third, I’d expect current management will stay at Sedgwick.  Dave North et al have made the current investors happy indeed (doubling the value in four years), and KKR will want to continue that trajectory.  I don’t see North as ready to ride into the sunset just yet.

Fourth, don’t look for any combination of Sedgwick and KKR’s other recent P&C acquisition, Mitchell International.  Too much channel conflict, very different companies, little overlap, and synergies would be relatively small.

Fifth, times are relatively good for TPAs these days; that said the competition should see this as a loud and sustained wakeup call. New owners will demand even more top-line and bottom-line growth from Sedgwick, so expect they’ll be as competitive as ever – if not more so.

 

 

Jan
25

It’s (un)official – KKR is buying Sedgwick

Posted by Joe Paduda on Saturday, January 25th, 2014 | Comments

The deal is close to done, a $2 billion transaction that will make KKR one of the biggest investors in the workers’ comp transaction business.  If it goes thru, Sedgwick will join bill review technology company Mitchell on KKR’s list of investments, raising questions about:

  • how/if/where the two companies will join forces or work together, and
  • what else is on KKR’s acquisition radar.

Sedgwick’s current owners, Hellman & Friedman and Stone Point, are going to do quite well on this transaction.  As I said a couple weeks ago,

Reports indicate Sedgwick’s earnings are around $200 million. With current multiples above 10x, a price in the $2 billion range is certainly possible; don’t be shocked if the final deal is worth as much as $2.4 billion.

There are a host of reasons for the TPA’s current owners to sell the company, with the primary reason likely the high valuations currently on offer.  Doubling one’s money over four years is reason enough for the owners to consider a deal; when one considers the (high) likelihood that H&F and Stone Point undoubtedly leveraged the deal, the RoI picture becomes even more compelling.

KKR is clearly betting big on P&C transactions – the Mitchell purchase and this deal represent over $3 billion in total investment, almost as much as Apax paid for OneCall Care Management and Align Networks. (however most of the price is likely debt as investors almost always leverage their investment capital).  To buyers, this makes sense, as bill review and claims processing are both “sticky” businesses; customers don’t like to move unless they HAVE to, making for good long-term relationships that, properly managed, generate increasing profits.

I’d expect the relationship between Mitchell and Sedgwick to become closer, however there may be some channel conflicts as other large payers may not like the joint ownership.  Undoubtedly Mitchell and KKR will move as quickly as they can to assure clients there will be no such issues, however competitors will, however subtly, raise doubts.  Recall there will be a “quiet period” during due diligence during which Mitchell et al won’t be allowed to say anything about anything.

Finally, Stone Point is still an investor in this space – they, along with lead investor Kelso, own PBM PMSI/Progressive.

What does this mean for you?

There’s no decrease in the private equity industry’s focus on workers comp; expect more deals in coming months.

Jan
24

Friday catch-up and fast reads

Posted by Joe Paduda on Friday, January 24th, 2014 | Comments

Physician dispensing – it’s not just for Americans any more!

From the Harvard Business Review comes this item; Chinese docs prescribe waaaay too many antibiotics – because that’s how they make money.

Antibiotics are often prescribed unnecessarily for colds in China, in part because hospitals sell medications directly to patients and doctors’ bonuses often depend on drug revenue, says a team led by Janet Currie of Princeton. In a past study by other researchers, two-thirds of patients visiting clinics with mild cold or flu symptoms received inappropriate prescriptions for antibiotics, and many were advised to take powerful “second-line” antibiotics that are supposed to be reserved for serious illnesses. These prescriptions impose substantial costs on patients, raise the risk of side effects, and foster growth of drug-resistant “superbugs,”

Here’s hoping WC docs don’t “reverse engineer” Chinese business practices.

Hiring

The Hartford is looking for a medical director; evidently Rob Bonner MD will be retiring.  This is one of those great opportunities for business-oriented work comp docs; the Hartford’s Medical Director has real authority and responsibility.

Journalism

Much as I respect the folks at R&I, their latest “editor’s choice” had me scratching my head about a piece from the Washington Examiner – It’s a climate-change denier piece asserting that we may be in for a century of cooling due to…wait for it…sunspots.

C’mon.  There have been 2528 peer-reviewed articles about climate change over the last year.  A grand total of one – yes, that’s one – rejected man-made global warming.  And that lone article was in the Herald of the Russian Academy of Sciences.

Principled and soundly-researched discussion is critically important – but only when it is reality-based.

Exchange enrollment

Exchange enrollment data is pretty mixed; numbers are way up in California and New York but most folks who are eligible for Medicaid or for subsidies via the Exchanges don’t know they are eligible.  Not surprisingly, the Latino enrollment data in California has been disappointing – to say the least.

On the federal side, enrollment seems to be much below expectations, even after the end-of-the-year push.  Whether things will pick up a lot before the March drop-dead date remains to be seen…

One factor affecting enrollment in many states may be that fourteen have enacted so-called “navigator suppression” laws; legislation that hinders/prevents/makes it difficult for the people who are supposed to help the uninsured enroll do their job. (thanks to Julie for the tip).

Impairment ratings

In one of the more esoteric  – but nonetheless significant conversations of the last week, I learned that many of the impairment ratings done in Texas are wrong – for a multitude of reasons.  Evidently those done by chiros are often (like 80% often) much higher than they should be, and medical doctors aren’t a whole lot better.  TX payers that aren’t reviewing ratings to make sure they are right may be paying out a whole lot more than they should – especially if those ratings are above 15%, the “magic number” where big payouts kick in.

Enjoy the frosty weekend – high this week in upstate NY has been 8 degrees.  Get out and enjoy!

 

Jan
22

More states will expand Medicaid

Posted by Joe Paduda on Wednesday, January 22nd, 2014 | Comments

Even those dominated by Republicans.

To understand why, here’s a quote from a conservative GOP legislator from Michigan:

State Rep. Al Pscholka: “When people say Medicaid expansion, I think to a lot of us that meant bigger government, and it meant expanding a program that doesn’t work very well…When I understood how it worked, and what we had done in Michigan in the late ’90s, that was actually pretty smart, we’ve privatized a lot of that already, which I think a lot of folks didn’t understand.”

But it’s more than that.

Hospitals and health care systems will be in dire shape without expansion.  Already the feds are reducing the amount of funds they are transferring to hospitals that provide a lot of uncompensated care and Medicaid services. The federal DISH (disproportionate share) allotments are established, HHS has a formula in place for rolling out those changes but that formula doesn’t account for states that don’t decide to use expansion. States that don’t expand Medicaid will see a reduction in these payments, and no increase in Medicaid, leaving the hospitals in a financial bind.

Without Medicaid expansion, hospitals and health systems will find it increasingly costly to care for the uninsured  – and they will pass that cost along to privately insured patients and workers’ comp payers.  This already happens, and is one of the arguments in favor of universal coverage.

More significantly, the poor uninsured with chronic conditions (diabetes, asthma, hypertension, depression) will become increasingly expensive to care for.   The lack of primary care will mean when they do get care, it will be much more expensive than if they’d been able to effectively manage their health and thus avoid hospitalization.

Unhealthy people find it harder to get and keep a job, don’t do well in school, and thus are less able to contribute meaningfully to society than those of us with insurance.

That’s not to say that Medicaid shouldn’t be modified; for example, some sort of nominal copay or coinsurance so services aren’t just a freebie makes sense to me. That’s happening in some states.

Finally, there’s a bit of history here; when Medicaid was originally introduced, many states opted out.  Within a few years, each one had signed up.

What does this mean for you>

History will repeat itself, and that’s good news indeed.

Thanks to Kaiser Health News for the heads’ up.

Jan
21

Why don’t workers’ comp payers have pharmacists on staff?

Posted by Joe Paduda on Tuesday, January 21st, 2014 | Comments

I’m only aware of three major work comp insurers (Travelers, BWC-Ohio, Washington L&I) that have pharmacists on staff; the North Dakota State Fund does as well.

With pharmacy costs accounting for somewhere around 15% of total medical spend, that seems like a “miss”.  Yes, pharmacy costs have been flat in recent years, but the impact of drugs on work comp claim duration and the medical and indemnity expense associated with long-term drug use is quite significant.

Many payers have medical directors, nurses, and other clinicians on staff to help address medical issues; in some instances ALL medical issues are the purview of clinicians. Yet these payers don’t have pharmacists on staff, relying instead on medical folks.  Sure, they have knowledge of pharmacy, but nowhere near the depth and breadth of expertise resident in even the greenest pharmacist.

As physician dispensing of medications increases, payers begin (yes, most are just beginning) to address their long-term opioid users, off-label prescribing continues to grow, new medications come on the market, and compounding spreads, payers will find themselves at a disadvantage if they don’t have inhouse expertise.

Sure, PBMs have pharmacists on staff, and most are very, very experienced, understand pain management, and know work comp.  They have the added benefit of being “free”; they don’t increase overhead expenses.  But they work for the PBM, aren’t available on an ongoing basis to address the issues listed above, and if the insurer switches PBMs, that experience and corporate history disappears.

Twenty years ago rare was the insurer with any real medical expertise on staff. Claim adjusters were quite capable of handling medical issues, thank you.

It won’t  – at least it shouldn’t – take that long for insurers to see the wisdom of hiring pharmacists.

 

 

Jan
17

Friday catch-up and heads-up

Posted by Joe Paduda on Friday, January 17th, 2014 | Comments

Lots happening this week – here’s a few notable events.

First, WCRI’s webinar on physician dispensing, opioids, and physician prescribing patterns.  A couple key takeaways:

  • after FL banned doc dispensing of potent opioids, almost all the docs who were prescribing and dispensing Schedule II and III data switched to NSAIDs; far less potent pain killers.  Which leads one to wonder…how scummy is a doc who does this?
  • Prescription Drug Monitoring Programs – properly designed and implemented – dramatically reduce doctor and pharmacy shopping.

Much more was discussed; the underlying research on Florida’s changes can be found here.

One of the more creative marketing campaigns was launched this week by Acrometis; the Year of the Adjuster. An excellent infographic is here; pay attention to the campaign and offshoots thereof.   My bet is this dramatically raises Acrometis’ profile…

12 of the nation’s 50 most expensive hospitals are in California; thanks to California Healthline for the heads-up. To find out which are in your state, click here.

The Sedgwick sales process is well underway, with bids due (I’m guessing here) within the next week or two.  Don’t expect this will close quickly as there’s a lot to review.

Finally, a tech research firm has a rather bizarre piece out on Google Glass, the next “Killer App” in insurance.  Bizarre because:

  1. there hasn’t been a Killer App out yet, so this would be the First…
  2. given the rather slow tech adoption rate (to be kind) in the P&C insurance industry, I wouldn’t expect companies that spent a year approving MIcrosoft Office upgrades to jump on the Glass platform; they’ll spend much of their effort figuring out how to prevent employees from mis-using the technology before assessing how hard it will be to tie the device and output into their systems.

See you Monday!

 

Jan
15

Did Illinois’ work comp costs go down after reform?

Posted by Joe Paduda on Wednesday, January 15th, 2014 | Comments

Yes – at least medical prices did, but the drop wasn’t as much as the reduction in the fee schedule, and it was a LOT less for expensive procedures.  Those are the quick takeaways from WCRI’s report (published yesterday).

The reforms brought a 30 percent reduction in the medical fee schedule as of September 2011, yet:

  • Professional service prices dropped 24 percent, with the 6 percent difference driven by lower provider participation in networks (thus fewer providers delivering care at a discount) and higher prices from in-network providers.
  • Radiology prices dropped 13 percent for MRIs and 22 percent for X-Rays, and ER services also only dropped by 18 percent; other than that, most service groups saw prices decrease somewhere in the mid-twenty-percent range.
  • Utilization appears to be on the increase, as WCRI’s research found “more complex office visits with higher prices were billed more frequently in Illinois.”
  • Surgeries are still waaaay more expensive in IL than in the median study state 2 1/2 times to be precise.  That’s 242 percent more than employers pay in Michigan...

What does this mean for you?

1.  Reducing prices does not lead to a corresponding decrease in costs as providers figure out how to make up for lost revenue by doing more, and more expensive, services.

2.  Kudos to WCRI for getting this info out so quickly; in the past it has taken much longer, so they’ve upped their game considerably. This makes the information much more actionable for payers and regulators alike who can figure out where potential issues lie and take steps to mitigate problems.

 

Jan
13

Are California’s work comp claimants denied necessary care?

Posted by Joe Paduda on Monday, January 13th, 2014 | Comments

One study published in the Spine Journal says no.

In fact, the opposite may well be the case; compared to Washington State, workers’ comp back patients in California get way too much unnecessary surgery, leading to higher costs and worse outcomes – including more wound infections, life-threatening complications, and device complications.  

The study used a case-mix adjusted of patients undergoing an inpatient lumbar fusion for degenerative disease in 2008 – 09, and produced the following results:

  • the rate of lumbar fusions in CA was 47% higher than in WA.
  • the complexity of procedures was much higher in CA.
  • CA costs were more than 20% higher in CA than WA.
  • CA costs were influenced by the (since fixed) double payment for surgical devices and coverage for bone growth enhancers (which have decidedly mixed reviews)

So, we have too many and too complex procedures performed on too many patients at too high a cost, with worse outcomes.

Why?

Well, the limits on lumbar fusion in WA are pretty tight, for very good reason.  In contrast, CA only required a second opinion to approve the procedure.

The financial incentive inherent in CA’s high payments for the procedure may (!) have had something to do with it.

What does this mean for you?

More surgery is often not better care, and in many instances means worse care – and a pretty crappy life for the patient.

 

Jan
10

Friday fast facts and catch-up

Posted by Joe Paduda on Friday, January 10th, 2014 | Comments

Here in no particular order are items of interest that have come up this week.

  • Heath care spending growth in 2012 was a low 3.7 percent – the fourth consecutive year it has been under 4 percent.  Moreover, health spending grew less than GDP growth, so health care’s percentage of the economy actually decreased.

  • Rumors persist that bill review and auto insurance tech company Mitchell International is buying bill review tech company Stratacare.  Word from multiple sources is the deal is close to done – that said, this one is especially tough to pin down… That said, there’s a lot of buzz out there.  IF this pans out we’ll dive into the implications – but as of now that’s a definite “IF”.

  • There’s a new book out on insurance regulation; it isn’t specific to WC however it is a good quick reference on PPACA, Dodd-Frank, and other timely topics.  It’s the Insurance Regulation Answer Book 2014.

  • On a much narrower but critically important issue, I direct you to the current issue of The Back Letter.  A colleague described the key takeaways thusly: “the ongoing Medtronic food fight around BMP (bone morphogenic protein)…The Back Letter has done a nice job identifying that the core issues here go way, way beyond a single product, and focuses appropriately on the pervasive evils (OK, those are my words) that conflicts of interest bring.”
    There’s also an excellent piece on doctor shopping for opioids in this issue; Thanks for the tip Doc.
  • A terrific paper by Milliman addresses the “adverse selection” and “Obamacare death spiral” nonsense.  Briefly, newborns, adult females, and older folks look to be the most profitable members – turning the industry on its head.  Back in the good old days – two weeks ago – insurers wanted healthy folks only.  Now, thanks to risk adjustment baked in to PPACA, things are a LOT different.

Enjoy the weekend!