Insight, analysis & opinion from Joe Paduda

< Back to Home

Nov
17

Private equity and work comp services…lessons learned

After 15 years working with private equity firms looking to invest in workers’ comp service companies, I’ve learned a couple of things.

  • Work comp is attractive primarily because it is viewed (accurately) as horribly inefficient, with admin expenses that are many multiples of those in group health, medicare, medicaid, and Exchange healthplans. PE firms LOVE inefficient industries…think old-school logistics replaced by just-in-time supply chain management; small physician practices snapped up by ever-growing health systems; and now rental housing.
    BUT…work comp is inherently inefficient because:

    • when you’ve seen one state you’ve seen one state. If you want to be a big player, you need coverage in South Dakota and Vermont as well as New York and California. So, you have to comply with constantly evolving regulations, reporting requirements, reimbursement standards, certifications and licensing.
    • each large employer has its own list of wants needs and must haves, which make “standardization” inherently impossible.
    • it is a shrinking industry, which means an investment today has to be evaluated against the reality that one out of twelve claims will not exist in three years.
  • High-touch service is absolutely mandatory. This flies in the face of “improving efficiency”… you can’t have people on the phone if you want to cut admin expenses. What many (but not all) PE execs don’t understand is adjusters and case managers and risk managers and injured workers and providers need quick accurate answers.
    Think calling your health plan, cellular carrier, tech service and on and on…an immensely frustrating experience certain to make you cranky for the rest of the day.
    Enough  adjusters complaining about endless automated responses (in order to best serve you I’ll have to ask a few questions, click one if you are in Pennsylvania, two if you’re in New York…cue cell phone being thrown at the wall) will get the managed care execs’ attention, and its off to RFP!
  • Firms that push their companies to create “value” defined as more revenue will ultimately destroy the value of the company.
    PE execs (again not all) define “value” purely in financial terms – how much EBITDA/free cash flow does a company generate – because the more earnings, the higher the price.
    This is nonsense. 
    “Value” is ultimately determined by your customers. Sure the quarterly numbers will look rosy for a quarter or two, but all those cost reductions, layoffs, and other “efficiency” measures will bite you in the butt when customers leave.
  • Decisions to sell/not sell companies are often driven by PE execs’ personal financial and “reputational” concerns and not by what’s smart and best for PE investors.
    Think Apax’ investment in One Call; after a couple of years pretty much everyone in the industry knew it wasn’t going to be a success, yet One Call’s board refused to recognize the obvious anti…to no one’s surprise, they had to write down their entire $700 million investment.
    Individual PE execs with decision power don’t want to admit their mistakes – or don’t want to sell for less than X times what they paid for the company. In the latter case, PE execs typically don’t get a big bonus – or any bonus at all – unless the company sells for 2.5 or more times what they paid.
    Meanwhile company execs and staff with stock options – who would get a nice payday if the company sells for less than that 2.5 number – get frustrated/angry/demotivated with obvious impact on their enthusiasm and work quality.

What does this mean for you?

Understanding what really creates “value” is critical – happy customers and happy staff. If you’re buying or own a company, focus on those two things and not on some BS number. 


4 thoughts on “Private equity and work comp services…lessons learned”

  1. Great article with some excellent points. While many, like myself, moved into workers’ comp from group health, we quickly realized that workers’ comp is NOT group health, that the inefficiencies that exist in worker’s comp can’t be solved with technology alone and that taking care of our clients is paramount. Automation is critical, but it can’t replace human expertise. As business owners, we must recognize when automation intersects with the need to escalate to an expert. Below is a link to a blog i wrote recently that explores some of the points made in your blog. https://towermsa.com/2022/10/03/automation-has-its-place-but-it-cant-replace-people-in-msp-compliance/

    Thanks for sharing!

Comments are closed.

Joe Paduda is the principal of Health Strategy Associates

SUBSCRIBE BY EMAIL

SEARCH THIS SITE

A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.

 

DISCLAIMER

© Joe Paduda 2022. We encourage links to any material on this page. Fair use excerpts of material written by Joe Paduda may be used with attribution to Joe Paduda, Managed Care Matters.

Note: Some material on this page may be excerpted from other sources. In such cases, copyright is retained by the respective authors of those sources.

ARCHIVES

Archives