Two faulty assumptions and a big change in fee schedules have combined with management missteps to make OneCall Care Management’s brief history a painful one.
The latest financials indicate things have deteriorated significantly over the last few years.
How did OneCall get here?
The original One Call was focused solely on the WC imaging space. Under Kent Spafford’s able leadership, the company was highly profitable, very creative, and pretty much without any significant competition. One Call was purchased by Apax, then merged with other companies in transactions valued at around $3 billion (some equity and a lot of debt financed the transactions).
The fee schedule change noted above was California’s switch to the CMS fee schedule in 2014, which occurred simultaneously with CMS’ significant cut in reimbursement for imaging. The result was a dramatic drop in margins in California; other states followed suit and the result was a significant decline in earnings.
While the fee schedule change was an unpredictable event, other problems have been self-induced.
Founded in its present form 2013, OCCM struggled since its inception to validate investors’ belief that A) the whole is greater than the sum of the parts, and B) there is lots of “whitespace” open to service providers (not so much).
(I’ve written extensively about these challenges; previous posts are here.)
Fact is most payers don’t see added value in buying everything from one entity – unless each service line is itself best-in-class. Rather, most buyers want to be able to pick and choose the networks, specialty networks, UR and CM providers they work with – and change them when they find better options.
At its height, OCCM’s earnings were reported to be around $280 million. Those days are long past: sources indicate EBITDA has dropped by almost a third, and my take is it will continue to decline.
2018 has been a tough year; an investment industry source indicated Q3 EBITDA was down 15% from the prior year’s quarter, while revenues actually increased 3%. Annual EBITDA saw a smaller decrease of about 10% for the 12 months ending 9/30/18.
Reports indicate total debt is just shy of $2 billion, and debt service (the interest OCCM pays to its creditors) is about $160 million annually.
Here’s the important stat – with Pro Forma EBITDA (EBITDA increased by management adding stuff that isn’t normally accepted by accountants) of $190 million, there’s not a ton of free cash (about $30 million) available for investments in staff, marketing, and other expenses.
Reportedly total leverage is 10.3x based on total debt just shy of $2 billion.
A big chunk of expense is for Polaris, the much-anticipated platform solution that saw an initial “rollout” of what was described to me as an abbreviated version a couple months ago. Evidently, full rollout is scheduled for 2020, when the company will realize the majority of the costs of the project.
While the company is looking to Polaris to improve efficiencies and reduce costs, my opinion is Polaris is intended to address investors’ problems – not customers’.
This from a post on MedRisk’s resurgence a couple years back [MedRisk is a consulting client}:
One Call is all-in on a technology solution, investing millions in a customized application intended to deliver on the “One Call” promise (currently the seven different services offered by OCCM have separate systems and processes). “Polaris” is slated to be “fully implemented” in Q1 2018, although it’s not clear what “fully implemented” means.
I don’t believe “automating” and off-shoring key customer-facing functions is the right answer, not in a high-touch business where adjusters, therapists, physicians, and patients all are key parts of the rehabilitation process.
Cost cutting is a necessity if the firm is going to continue to invest in technology and other critical areas; a staff reduction in 2016 significantly reduced client-facing staff. Four sales reps were let go last week, a move company representative said was in keeping with OneCall’s intention to shift account management and related functions from the field to internal staff.
So, getting more efficient may be at the cost of improved customer service. If it is, that’s the recipe for further trouble.
Investors may take heart from one very successful turnaround. PMSI was teetering on the edge of the abyss when Eileen Auen took over. Several years later it sold for about ten times what it was worth when Ms Auen started. The company then became the core of what is now OptumRx’s work comp PBM.
That said, the situations are quite different, the changes needed even more dramatic, and executives with Eileen’s talent and abilities are rare indeed.
What does this mean for you?
For investors, listen to people who actually understand the business before spending your gazillions. Many saw this coming.
This also brings to the fore the issues inherent in private equity investors’ fascination with work comp services over the last decade, chiefly what happens when things don’t go perfectly. High debt loads can choke off critical investment in customer service and product development, especially when revenues start to decline.