Author: Joe Paduda

Mar
6

AIG – a problem the size of France

Posted by Joe Paduda on Friday, March 6th, 2009 | Comments

That’s how NYS Insurance Commissioner Eric Dinallo characterized AIG’s derivative business during testimony yesterday. Mike Whitely of WorkCompCentral reported on the Senate hearings this morning, saying:
“American International Group’s financial products unit amassed a portfolio of shaky credit default swaps, futures and other derivatives with a notional value of $2.7 trillion before regulators stepped in to stop the bleeding last September, New York Insurance Supt. Eric Dinallo said Thursday.
“For context, that is equal to the gross national product of France,” Dinallo told the U.S. Senate Banking, Housing and Urban Affairs Committee. “Losses on certain credit default swaps and collateral calls by global banks, broker dealers and hedge funds that were counterparties to these credit default swaps are the main source of AIG’s troubles.”
There are lots of moving pieces here, but the most current problem is the inability of AIG to sell off assets to meet credit obligations. I discussed this issue in a series of interviews on Fox Business News earlier this week; the video is here and here.

Mar
6

Coventry’s work comp developments

Posted by Joe Paduda on Friday, March 6th, 2009 | Comments

In no particular order, here’s what I’m hearing about goings-on at Coventry’s workers comp division.
Coventry has told several clients it is hiring dozens of staff to improve the quality of provider data; interestingly this message has gotten to some customers but not to all. This message was out there for a few months, and has been repeated recently – but again, not all have heard the same message. If this is indeed happening, kudos, albeit belated, to the company for recognizing that bad data not only frustrates customers but reduces Coventry’s own revenues and profits.
Much more recently there seems to be movement within the provider relations/contracting units to split work comp provider contracting out separately from the other lines of coverage – group, PPO, and Medicare. There had been some indication Cvty was considering just adding WC specific contracting staff, but this seems inconsistent with senior management’s push to restrain SG&A expenses. This is a little puzzling, as the other lines added much needed bargaining power to Coventry’s efforts to get attractive work comp rates from hospitals and other providers. If it is indeed splitting the negotiations, Coventry seems to be following through on CEO Allen Wise’s stated desire to emphasize its core business – small group HMO.
There are also indications that the company is getting ready for a re-organization of its work comp business, a re-org that will likely affect operations in the [correction] Burlington MA, Sacramento, and Dallas offices. No specific word on timing, but my guess is sooner rather than later.
There’s more swirling around, but these data points are the only ones that have been confirmed by multiple sources.

Mar
5

What about physician reimbursement

Posted by Joe Paduda on Thursday, March 5th, 2009 | Comments

As Bob Laszewski points out today, the current Obama budget does little to actually reduce health care costs. But, as I pointed out last week, the only sacred cow yet to be gored is that of physician reimbursement.
Bob notes:
“The Obama budget did not tackle physician payment reform or call for any physician payment cuts but said, “The Administration believes that the current physician payment system, while it has served to limit spending to a degree, needs to be reformed to give physicians incentives to improve quality and efficiency. Thus, while the baseline reflects our best estimate of what the Congress has done in recent years, we are not suggesting that should be the future policy[emphasis added]. As part of health care reform, the Administration would support comprehensive, but fiscally responsible, reforms to the payment formula. ”
Last week I thought that this might have been intentional, noting “Is it possible that the absence of physician reimbursement cuts from the proposal is part of an overall strategy whereby everyone else complains about docs not doing their part? Is this a calculation on the part of the Administration, who recognizes that the physician lobby is the strongest it will have to contend with? Have they deliberately set up a physicians v. everyone else ‘discussion’?”
Before my physician friends start throwing electronic rocks at me, realize I am reporting, not advocating.

Mar
5

HWR is up, running, and entertaining

Posted by Joe Paduda on Thursday, March 5th, 2009 | Comments

We welcome a new host to the pantheon of Health Wonks, Brady Augustine of Medicaid Front Page. Brady’s initial effort is a winner – the Watchmen edition.
Brady writes very well, and has a flair for design, too.

Mar
5

Coventry’s work comp business – what’s my point?

Posted by Joe Paduda on Thursday, March 5th, 2009 | Comments

My post yesterday regarding Coventry’s workers comp business generated a few emails – some asking what exactly was my point? For those unwilling to click back, my closing sentence was “The work comp business accounts for 6.2% of [Coventry’s} total revenues.”
My point was workers comp amounts to less than one-sixteenth of Coventry’s total revenue ergo it is not nearly as important/significant/vital as those in the work comp field might think. Yes, it may be inordinately profitable (helped by price increases over the last couple years, but hurt by bargain pricing on the pharmacy business), but it is still only 6.2% of total revenue.
Now lets think about that.
The new CEO, Allen Wise, has publicly stated his desire to focus more closely on the core business (small group HMO). To that end, Wise has slashed spending intended to expand Medicare networks, begun a close examination of SG&A spending in the work comp business, and asked a lot of tough questions about provider contracting, and more specifically, hospital contracting. As reported here earlier, He was quite vocal about his concern over rising hospital costs, and their impact on the HMO medical loss ratio (MLR).
In the work comp business, Coventry has committed to hire (or is already hiring) dozens more staff to help clean up their provider database – a task that is, according to some clients, long overdue. It is also working on several significant upgrades to its bill review application. They are also continuing to try to build a carve-out network comprised of expert physicians, and are reportedly marketing that to several large payers.
These efforts, while laudable and necessary, are also expensive, and will further increase SG&A expenditures.
So, the question you have to ask yourself is, if you were Allen Wise, and you were running a company that was really good at small group HMO, and had kinda lost its way, and you looked at this other business which was generating six percent of your revenue and eating up resources, and distracting your provider relations people and perhaps increasing your HMO hospital costs, what would you do?
What does this mean for you?
If you haven’t figured it out by now…

Mar
4

Coventry’s work comp business

Posted by Joe Paduda on Wednesday, March 4th, 2009 | Comments

A detailed review of Coventry’s latest 10k provides a little perspective on the size of the work comp business. here are a few numbers to consider (all figures for 2008).
– Total WC revenues – $737 million
– PPO revenues – $86 million
– PBM revenues – $230 million (estimated)
– Bill Review, case management, UR, IME, MSA etc revenues – $421 million
By way of comparison, total revenues amounted to $11.9 billion. The work comp business accounts for 6.2% of total revenues.
Any questions?

Mar
3

The AIG breakup – implications for workers comp

Posted by Joe Paduda on Tuesday, March 3rd, 2009 | Comments

With yesterdays announcement that AIG will be consolidating it’s P&C businesses under a single business (American International Underwriter Holdings, or AIUH), the picture is strtimg to get a little more clear. Or perhaps more accurately, a little less cloudy.
AIUH is comprised of the underwriting/insurance unit (AIU) and the administrative unit (Commercial) of the ‘old’ AIG. As such, it is now a separate and distinct insurance company with none of the add-ons such as airplane leasing. It is too early to tell how the business will operate differently from the old ways, but not too early to speculate. Here goes.
Im the past, AIG’s insurance companies had to make money on an underwriting basis. They had to operate at a combined ratio of less than 100. The proceeds from premiums, or investment income, accrued to other AIG subs. This forced the insurance companies to become very very good at underwriting. Two takeaways; if the underwriting expertise stays, AIUH will be a formidable competitor. And as the company will now be allowed to ‘keep’ its investment income, it’s financial results should be quite attractive.
Historically AIG has under-invested in technology and systems. Perhaps the company will now take the long-overdue measures necessary to give its employees the tools they need, and customers the access to information they are demanding.
The new company should also have the tight management focus necessary to prosper. In the past execs were sometimes distracted by the other goings-on at the parent. This distraction did not help keep staff focused and on top of the WC business.
What does this mean for you?
A rejuvenated, focused AIG with a strong WC business will be a formidable competitor.

Mar
2

AIG’s domestic business to be spun off; will be known as AIU Holdings

Posted by Joe Paduda on Monday, March 2nd, 2009 | Comments

The announcement today of the largest ever quarterly loss in US history hit the market hard, and will result in massive changes at AIG. These changes will include continued efforts to sell off assets, transfer of more control to the Federal government, and the spin off of domestic insurance operations.
A town hall meeting for all employees hosted by CEO Edward Liddy is in process even as I type this, and there are several key takeaways so far. First, the company will combine the American International Underwriters and Commercial operations units into one entity to be called AIU Holding; it will include 44,000 employees and operate in130 countries; this latter is somewhat surprising, but sources confirm AIU Holdings will retain foriegn P&C operations. The new entity’s CEO will be Christian Moore. This is a bit of a surprise as many employees expected Nicholas Walsh (the current AIU leader) to head up the new business. Moore is currently President and CEO of AIG P&C group; Walsh will be vice chairman and the chair will be named later.
At this point AIG has not publicly announced how they will handle employee stock, but the company is looking to implement increases in compensation and pay bonuses in March as previously announced. These comp changes are pending approval of the Feds, who will be consulted before any plans are finalized. Sources did indicate there appears to be some effort to establish a mechanism to provide stock and/or options to employees of AIU Holdings, but no details were available.
Liddy did not announce extensive staff reductions. However, earlier internal communications asked managers to take a look at their budgets and see where they can cut. No goals were provided; management was just asked to reduce wherever possible.
Beyond that, no other new news came out during the call, but Liddy did say that ‘the goal is to keep as many people as possible’.
Given the company’s desire to demonstrate it is doing all it can to raise capital, do not be surprised if there is movement on this fairly quickly. As I noted last week, these operations are profitable and solid, and as soon as the credit markets return to something approaching normalcy, there will be plenty of folks willing to buy into what is a strong business.
What does this mean for you?
That would be a good move. Operations could continue, policyholders would be protected, and a big chunk of money given back to the taxpayers.

Mar
1

How bad is the United Kingdom’s National Health Service?

Posted by Joe Paduda on Sunday, March 1st, 2009 | Comments

A very good friend sent me this email after reading others’ comments about the Brits’ NHS. This gentleman has had numerous experiences with the American health care system, none due to lifestyle issues.
Here’s his story.
Five hours into an 11-hour flight to London last month I had a heart-related medical “incident” that caused me to faint, hitting my head on a trolley on the way down giving myself a concussion in addition to whatever else was ailing me. Although I (stupidly) refused the wheelchair and ambulance the airline had waiting for me at Heathrow, upon arrival at my hotel I was sent to the emergency room at St. Mary’s Hospital in London where I spent the next 24 hours.
I have to say that I received the BEST medical attention I have ever had or witnessed anywhere in the U.S. Upon arrival in the emergency room I was immediately seen by an administrator who did the necessary paperwork with a sense of urgency I’ve never seen in the U.S. I never even had a moment to take a seat. I was then admitted to the treatment area where for the next 3 hours I received a steady stream of nurses and – not one – but THREE doctors in rapid succession as checks and balances against each other. (At one point the three doctors convened and argued about my diagnosis just like the doctors on television who only have one patient to care about – and actually care.)
In addition to a battery of blood tests, temperature-takings and blood-pressure checks, I had THREE ECGs, TWO X-rays and a CAT-scan before being admitted for an overnight on a heart monitoring machine. After repeated attempts and many delays, they were finally able to get my cardiologist in L.A. on the phone to consult my records and get his opinion. The next day I continued a battery of tests all day long and was told they wanted to keep me for 3-4 days for monitoring and more tests. I refused and demanded to be released as I had to get to the business meetings I was there for – but promised to follow-up with my cardiologist when I returned to L.A. For the next ten days, I received phone calls every couple of days from one of the doctors who had seen me (not a nurse, a real DOCTOR) to make sure everything was alright and that I wasn’t experiencing symptoms.
The hospital was the cleanest I’ve ever seen, was stocked with the latest technology and the most attentive and empathetic staff I’ve ever seen. Had I been an EU resident, all of this treatment would have been free. As an American, I was allowed to walk out without a bill, but was later mailed a bill for — get this — $600. That’s right – six hundred dollars! ONE NIGHT in Cedars Sinai Hospital in Los Angeles – without any tests – starts at $15,000. The last time I paid for a CAT-scan it was about $1,800.
I am no stranger to hospitals in the U.S. I’ve had more than my share of emergencies and have been rushed twice by ambulance with life-threatening conditions only to be kept waiting on a gurney in a hallway for up to five hours. One unforgettable incident was being kept waiting five hours at St. Joseph’s Hospital in Santa Monica while my organs were in shut-down mode. The doctor later told me I was hours from death. Another time I was rushed unconscious while tumors had caused blockages of my large and small intestines. They wrongly thought I might have a ruptured appendix. While waiting five hours to be admitted, I was given an enema to try to clear the blockage. Had I had the ruptured appendix they suspected, this would have killed me.
I can only hope that the American health care system will become like the UK’s. Even the hospital food was good!
Oh – and by the way – when I got home and saw my cardiologist, he completely ridiculed and belittled the Brits for “over-reacting” and “throwing mud at the wall”. He explained that the reason they reacted as they did was because “they didn’t know what they were doing”. He offered the tests they recommended, but I’d have to wait 6-8 weeks to get on the docket at an outpatient facility and it was going to cost many thousands of dollars and he doubted my insurance would cover it. No thanks! I’m planning on getting the tests when I return to London next month.

Feb
27

AIG – what happens on Monday.

Posted by Joe Paduda on Friday, February 27th, 2009 | Comments

AIG is set to announce a fourth quarter loss of some $60 billion. That’s a huge, immense, devastating number. And one that likely spells the end of what was once the largest commercial insurer.
Most of the attention has focused on the Asian business, auto lines, and other financial operations. Amidst all the speculation about breakup, sale, outright takeover by the Feds, or business termination there is one missing element – a recognition of the value of the core business – AIG’s domestic operations.
The domestic commercial insurance operations and underwriting companies (Commercial and American International Underwriters (AIU)) are in generally good shape. Reserves are solid, and share is excellent. While the company suffers from chronic under-investment in claims technology and a managed care strategy that could best be described as old-fashioned, there is a lot of value in the domestic business.
AIG is justifiably renowned for its underwriting skill; distribution is solid, and management is generally strong. It is the largest underwriter of workers comp, a line that has been quite profitable of late. AIG is also a large writer of property and general liability coverages. There’s a nice, big business here, one that will undoubtedly be very valuable when the dust settles. But right now, no one wants to buy anything remotely associated with AIG. Intracompany relationships at AIG are tangled, interwoven webs – difficult to understand much less separate out. Any acquirer will have to be very sure they have extricated what they want, and left the rest behind, before closing a deal.
And right now there’s just no interest in starting the process. Couple that risk aversion with the sense among many big carriers that it will be cheaper and less risky to just take over customers as they flee AIG, and oyu start to understand why a sale to another insurer is unlikely over the near term.
The Feds sure don’t want the business. That leaves one other way to capture value – an IPO. Sure, that’s a crazy idea – who would want to do an IPO these days? You’d have to be nuts, or desperate, to do an IPO. That’s exactly the position AIG management finds themselves in – desperate.
The problem with an IPO – in addition to the obvious – is there has to be something left to sell – and that something includes management and staff. AIG is due to pay bonuses in a couple weeks, and if it doesn’t, the exodus of talent will turn into a flood of Biblical proportions. That will strip AIG of the people it would need to make an IPO work. But, as anyone who’s been paying attention will tell you, big financial companies that are getting big taxpayer bailouts better not pay any staff any bonuses.
There may be a pony in here. If deserving employees get shares in the new business, that may help convince them to stick around and recover some of the equity they lost as AIG’s stock cratered.
Desperate times call for desperate measures. And the folks at 70 Pine Street are nothing if not desperate…