Jan

Coventry Health – it’s about medical, folks!

Posted by Joe Paduda on Wednesday, January 21st, 2009 | Comments

It’s no secret that Coventry Health had a tough 2008. After several years of continued growth in profits, revenues, and market cap, management was nothing if not self-confident. Perhaps not self-aware, but certainly self-confident. That ended a little less than a year ago, with the announcement that financial results had suddenly plummeted due to higher medical loss ratios.
The earnings debacle of 2008 started in the spring and recurred in October with additional bad news. The overall impact was more analogous to total immersion in the Barents Sea (think Deadliest Catch) than a dash of cold water in the face. The result is not heightened alertness and awareness, but rather a serious case of hypothermia, with the accompanying symptoms of lethargy, impaired decision-making, and a rather tenuous prognosis.
As I said back in June; my sense is that Coventry’s management has been spending way too much time managing the numbers and nowhere near enough time managing medical. Those are not the same thing. Reflecting back on the calls I’ve listened to and management reports I’ve read, I can’t recall any detailed discussion of disease management, hospital expense management, outpatient utilization, or centers of excellence. There was a bit more discussion of facility costs in a lengthy equity analyst presentation last week, with CFO Shawn Guertin and Chairman Dale Wolf noting (this isn’t an exact quote but pretty close) “it is really clear that it [the biggest cost driver] continues to be facility [costs] – facility patterns of care and units cost – and we are going everything to plug any leak we can find to tighten everything down. It is a unit cost issue…” In response to a follow up question, Wolf said Coventry’s network discounts look “very very competitive” (compared to other larger competitors).
That’s great. Yet Coventry’s medical trend is still projected to be higher than (most of) the competition, and it doesn’t look like this is due to pricing.
I’d also note that (yet again) there was precious little in the way of insightful questions from the assembled equity analysts. A couple individuals asked questions that sorta addressed underlying cost drivers, but there was no real due diligence, no digging deep into the facility cost issue, and absolutely no question about or reference to utilization. This is particularly surprising; it is abundantly clear to anyone who has spent more than a few minutes examining health care cost drivers that utilization is THE key driver.
I’m also a little confused given Wolf’s comments that Coventry’s network discounts look good, yet in an earlier statement, Guertin noted facility unit costs were problematic. Perhaps I misunderstood.
Here’s the net. A somewhat-chastened management team wants analysts and investors to look forward to 2010, as that’s when all their efforts will bear financial fruit. Yet I don’t see any real evidence that they are paying any attention to their ‘cost of goods sold’. Sure, they know the numbers, the loss ratios, pricing, and the impact of all that on EPS, but there’s precious little evidence that they understand, or are addressing in any meaningful way, the underlying drivers of technology, chronic illness, utilization.
What does this mean for you?

Network discounts are not a managed care strategy.
Tomorrow we’ll address Coventry’s Medicare strategy.

Jan

The Ingenix settlement and physician income

Posted by Joe Paduda on Monday, January 19th, 2009 | Comments

FierceHealthcare reported last week that Aetna paid $20 million to settle charges related to its use of the Ingenix UCR database (their term is MDR). There will likely be announcements from other health plans of their settlement amounts; expect them to be in the Aetna range or less.
This is related but not really to the $350 million settlement for damages related to out of network claims dating from 1994. The settlement, announced last week, will result in UHC paying AMA $300 million to distribute to physicians. However, physicians will have to file claims to receive compensation; one MCM reader noted that in a related case her six-physician practice will receive a whopping $225.
In a related note, I’d remind readers that physician income has been flat to declining over the last several years. Why? Medicare increased fees by 13% from 1997 to 2003, while the underlying inflation was 21%. And, private payers’ reimbursement declined from 143% of Medicare’s rate in 1997 to 123% in 2003.
I’m thinking we now know at least part of the reason physician income was declining; unfairly low reimbursement from payers using the Ingenix databases.
We already know about health play overpayments – they’re called Medicare Advantage.

Jan

The future of health plans – predictions for 2009

Posted by Joe Paduda on Monday, January 12th, 2009 | Comments

This is one tough year to be putting on the swami hat and dusting off the crystal ball. There are so many moving pieces affecting the group health/individual/Medicare/ Medicaid world that it will be hard enough to analyze what happened after the fact, much less before.

Enough with the dissembling. Here goes.
1. Consolidation will accelerate. After a hiatus due to the still-slushy credit markets, big health plans will start acquiring second tier ones. Expect this to happen after mid-year, for reasons due not only to the credit markets but also to goings-on on Capitol Hill. Among the health plans likely to get attention are Humana, MVP Health Plan, AmeriHealth, and Priority Health.
1.a. Coventry will also be on the list; it has solid penetration in a number of second-tier and tertiary markets along with a strong workers comp managed care business. The company has been hamstrung by operating issues; if these appear to be under control it will likely be in play in 2009. Check their talk at the JP Morgan conference later this week for an early indication of progress. (Note I own shares in Coventry)
2. Health plans will split in their reaction to legislation pending in DC. Some will wail and whine, while others will look for the opportunities. Among those already reasonably well positioned are Aetna and UHG (particularly their AmeriChoice unit). Count on AHIP to bemoan the unfairness of it all, and ask for subsidies in the form of risk pools and governmental coverage of high cost claims.
3. Expect more scrutiny of healthplans serving Medicaid and Medicare populations, as the Feds are ramping up their efforts to crack down on abusive and fraudulent practices. The new Administration will want to send a message to health plans that an expansion of S-CHIP and other governmental programs is not a license to steal. There will likely be more Wellcares hitting the headlines in 2009.
4. Health plans will begin to focus more effort on being easy to work with – especially for providers. Increasing frustration with the administrative burden placed on them by health plans is causing providers to become more selective about participation; the health plans that are ‘low-maintenance’ will have better relations with more providers, and the ones on the other end of the spectrum will not. See the Verden Group’s reports for a heads-up on how health plans stack up in the eyes of providers.
5. The Medicaid population will grow substantially, as well the percentage enrolled in some variation of a managed care plan (currently above 60%). Health plans active in this market will do well – if they are priced right.
6. The economic stimulus plan is critical for health plans. Enrollment depends on jobs; with unemployment at a sixteen-year high at 7.2% and smaller employers dropping coverage as they attempt to stay afloat, expect enrollment to continue to drop thru mid-year. This will hit the big commercial plans hardest, although a few are somewhat insulated as the drop in commercial will be offset by growth in Medicaid.
7. Don’t expect much growth in the individual plans; they are unaffordable for many and restrictions on pre-ex make them unattractive for others. Until and unless the pre-ex and medical underwriting issues are resolved, growth will be slow – at best.
Check back in twelve months.

Jan

Misleading managed care headlines

Posted by Joe Paduda on Tuesday, January 6th, 2009 | Comments

Last week a study hit the wires indicating that managed care plans did not have better outcomes for carotid endarterectomies (CEs), a surgical procedure ostensibly intended to reduce the risk of stroke.
Here’s the headline from UPI – “No managed care link for stroke-prevention”.
A quick read of the headline and abstract leads the reader to the conclusion that managed care is ineffective. But there’s much more to it than the headline and brief synopsis. For starters, the data was ten years old. It was from one state (NY), that is not exactly known as a hotbed of managed care. And it lumps all kinds of ‘managed care’ – from group model HMOs to PPOs under the same category.
And the study’s conclusions are muddy. In fact, there had been a good bit of research into the procedure itself (it involves cleaning out the carotid artery (the big one in the neck that bad guys are forever threatening to cut in movies), and the data used indicated “the rate of inappropriate surgery dropped substantially from 32 percent in 1981 prior to the RCTs [randomized controlled trials] to 8.6 percent in 1998/1999 after publication of the clinical trials [by AHRQ].” Clearly, medical practice had changed dramatically over that period, due primarily to publication of data indicating the procedure “reduced the risk of stroke and death compared to medication alone among carefully selected patients and surgeons.”; the research also showed many patients did not benefit from the surgery.
It wasn’t that simple. In fact, the surgery rate had dropped in the mid-eighties after publication of research indicating the procedure had high complication risks. A decade later, additional research seemed to show that CEs did benefit some patients, and the rate shot up again, only to start a gradual decline.
What happened? Generally accepted medical practice changed. Was the rate different within “managed care’ plans? No. But why would it have been?
I worked for large managed care/health plan companies during the late eighties and early nineties, with responsibilities in customer reporting and managed care product development. We all knew there were probably too many carotid endarterectomies performed, but we didn’t really know which ones were inappropriate. The indications were rather uncertain, and it did appear the procedure helped some patients. What was not clear was which patients would benefit and which would likely not. The ‘choice’ we made was to encourage/mandate/require second surgical opinions (at that time the state of the art in managed care) to ensure the patient got at least one other physician’s views on the potential risks and benefits. There wasn’t much in the way of clinical guidelines that we could use to deny the procedure outright, and the legal risks of a denial were so high that this option was never seriously considered.
Truth be told, the managed care firms I worked for had little ‘control’ over medical practice. Sure, we had contracts with physicians, but our influence was minimal – we were ‘two inches deep and a hundred miles wide’. With little ‘market share’ in any one physician’s office, it was unlikely most of ‘our’ docs would pay much attention to directives from one of our Medical Directors. We did notice that our rate of surgeries was dropping, but did not have the data to know if this was occurring across the board and thereby due to our efforts (I’m pretty sure we took credit for the decrease…) or was driven by external factors.
Contrast our very loose ‘managed care’ with the much different model exemplified by group and staff HMOs – Kaiser Permanente, Group Health of Puget Sound, HIP, etc. I don’t know what the group/staff model HMO rates were, but I’d bet they were lower than my employers’.
In retrospect, it is obvious that external factors were the reason for the decline in my employer’s number and rate of carotid endarterectomies. In retrospect.
What does this mean for you?
There’s far too much superficiality in the press, superficiality that can distort public views of managed care and the effectiveness thereof. In this case, the headline, although nominally accurate, is highly misleading.

Jul

Coventry earnings call – the analysts blew it

Posted by Joe Paduda on Friday, July 25th, 2008 | Comments

I think I’ve figured out why analysts have been unable to accurately forecast health plan financials – they don’t know what questions to ask.
That’s the only conclusion I can draw after listening to the latest earnings call from Coventry Health. The mid-tier health plan company is still reeling a bit from last month’s announcement that it had been surprised by a sharp increase in medical costs, an increase that evidently had caught management by surprise.
Folks, this is a health plan company – one that claims “We deliver exceptional value every day, driving solutions that help people enjoy optimal health.”
One might think that a health plan company makes money by managing medical care for hundreds of thousands of Americans. Near as I can tell, Coventry isn’t a health plan, it is a transaction processor that makes money by pricing its insurance far enough above medical costs to administer the plans and make a bit of margin.
And from the questions that were asked ,and the ones that weren’t, it is pretty obvious Wall Street analysts think Coventry is a transaction processor as well. Out of the twenty or so questions after the management presentation, there was one – yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in teh 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.
That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.
The entire conversation was about medical trend and how Coventry was fixing its pricing model to reflect higher trend, and if enrollment was going to decrease as a result. Not the factors causing medical trend and what Coventry was doing about it. Well, to be fair, there was a little dialogue about higher inpatient utilization and unit costs in Medicare, and higher hospital utilization on the commercial side. But if you were interested in Coventry’s solution to same, you’re out of luck. Not one analyst even asked.
If analysts don’t know to ask the company why their costs are going up and what they are going to do about it and how that will play out, what, exactly, are they ‘analyzing’?
There’s this thing in business called a sustainable competitive advantage – something you do really well, that is hard to do, that others don’t do well. This gives you an edge in the market, one that makes you a perennial winner. Coventry doesn’t have one, and neither do any of the other health plans. Because all they do is process transactions, adding no value.
Here are some of the questions they should have been asking.

What key indicators of medical trend do you watch closely?
Exactly what is your average inpatient days per thousand for each block of business and how does that compare to industry standards?
How about admissions per thousand?
what is driving trend? Is it unit cost (price per service), utilization (number of those services received by a member when they do get those services), frequency (percentage of members that get that service) or intensity (higher cost version of a technology or more expensive procedure type than expected)?
Which types of medical care are the biggest drivers; ancillary, physician services, pharma, inpatient, outpatient?
What is your plan to address those issues?
How will you measure results and when will you know if you’ve been effective?
What is Coventry doing about members with chronic conditions? How have your results compared to industry standards?

And the big one:
How would Coventry compete and win if it could not risk select and had to take all comers at a community rate?
Because that may well be the scenario Coventry, and all its competitors, face in two short years.
Note – this applies almost equally to most every health plan. In fact you could just about replace ‘Coventry’ with Wellpoint, Cigna, Humana, Blue Cross, etc and the same perspective would hold true.
Now I really am going on vacation.

Jul

New York gets real

Posted by Joe Paduda on Friday, July 18th, 2008 | Comments

Bowing to the reality of the market, the New York Work Comp Board has issued a revised pharmacy fee schedule for workers comp.
The previous fee schedule based WC pharmacy fees on Medicaid – a linkage that was problematic for at least a dozen reasons. Here are the major ones.
1. Medicaid has ‘positive enrollment’ – members’ eligibility is determined instantly, electronically. In WC, there is no upfront enrollment, therefore retail pharmacies don’t know where to send the claim, or even if the claim has been accepted by an insurer. Work comp requires a lot of manual work, while Medicaid is electronic and instant.
2. The Medicaid reimbursement schedule has been a political football of late, as state legislators, under pressure from declining revenues and increasing service demands, have looked to cut Medicaid costs by cutting prices paid for drugs. California’s decision to cut reimbursement by 10% has resulted in a political/judicial back and forth that is apparently still not resolved. By tying WC reimbursement to Medicaid, pharmacies, PBMs, and payers would be batted back and forth, not knowing from day to day what they should pay for drugs.
3. Medicaid has a formulary which reduces the cost of the drugs to the pharmacies. There is no such formulary in WC (except in a very few states such as Washington), and therefore drug manufacturers won’t give discounts in return for preference in a therapeutic class.
4. The Medicaid FS is actually significantly lower than the contracted prices PBMs pay retail pharmacies. Thus there is no benefit to payers, or retail pharmacies, in working with PBMs. This despite the strong evidence that PBMs, properly implemented and managed, can dramatically reduce utilization (the volume of scripts dispensed).
What drove NY to make the change? Access issues. Claimants were not able to get their scripts filled as pharmacies could not afford to do so under Medicaid reimbursement, and PBMs could not afford to operate in the state while losing money on every script.
That’s not to say the revised FS is much better. In fact, as the second lowest fee schedule in the nation, it represents an incremental improvement at best, and may not be sufficient to keep all stakeholders participating.
Cynics may point to California, and note that PBMs and pharmacies stayed in that market after the FS was based on Medicaid. True, but each state’s Medicaid FS is unique, and CA’s is significantly more reasonable than NY’s.

Jun

Health plans feeding at the Medicare trough

Posted by Joe Paduda on Thursday, June 26th, 2008 | Comments

Bob Laszewski has a great post today debunking the myth of Medicare Advantage and Medicare private fee for service.
Both were supposed to help reduce Medicare’s costs via a short-term subsidy enabling private insurers to get into the market, figure it out, and use their free-market skills to improve on a moribund, bureaucrat-run government health care program.
Instead it has turned into a gravy train for insurers, who have been getting fat on the subsidy. Meanwhile, physicians are facing a cut of 10% in Medicare reimbursement.
For once it would be nice if the so-called free market advocates would wipe the (taxpayer-subsidized) gravy off their multiple chins before they start spewing peans to capitalism.
Bob asks this key question:
“If the HMOs really want to effectively defend Medicare Advantage they need to demonstrate value. Where is the industry data showing that after five years in this recent version of Medicare Advantage, and 20 years all told in the program, the private sector delivers a better cost/quality result?”
I’d add they damn well better come up with a strong case and soon; health reform is coming. Between recissions, medical underwriting, and medicare advantage/pffs private insurers are making a compelling case – for single payer.

Jun

Coventry’s stumbled – badly

Posted by Joe Paduda on Thursday, June 19th, 2008 | Comments

The notice for the teleconference popped up in my email inbox a mere hour and a half before the telecon was scheduled to begin. That was the first indicator of potential trouble.
The second was the opening line from Coventry’s CEO: “To say we’re disappointed with the news we shared earlier this afternoon is an understatement…”
The source of Mr Wolf”s disappointment was Coventry’s report that it will miss its financial projections – by a wide margin.
For a company that has long been (justifiably) proud of its ability to tightly monitor and manage its business, the disclosure that it had significantly underestimated Q1 and Q2 medical costs was a bitter pill indeed, all the more so as it came a few weeks after Wolf’s recent efforts to pump up internal morale by comparing Coventry’s management discipline favorably to competitors.
Earnings will fall short due in large part to higher than expected medical costs in Coventry’s Medicare private fee for service and core group health businesses. In explaining the failure to meet the Medicare program’s projected MLR, CFO Shawn Guertin described the problems inherent in the claims submission and processing flow. Guertin went on to note that the company also had identified some problems in Coventry’s internal claims processing. Curiously, management blamed part of the problem on ID cards not being used by claimants, which delayed claims flows internally. Evidently some members don’t bother to show their Coventry cards when leaving the doctor’s office. The office sends the bill to Medicare, who returns the bill with a note that the patient is not a member. The office then contacts the patient, gets the correc claims submission info, and sends the bill to Coventry.
This takes time, and has led to Coventry under-estimating claims volume and expense for its Medicare private ffs business. I’d note that in prior calls management has been effusive in its self-praise for its ability to operate this business with statements like ‘we couldn’t be more pleased with how this business is running’.
For the Medicare business, the MLR is up 300-340 basis points over prior guidance. This isn’t even close enough for horse shoes or hand grenades. From comments by management on last night’s call, it appeared this popped up in April and May, after things appeared to look pretty solid earlier in 2008.
Again, this is a pretty big surprise.
On the group health front, higher trend in group outpatient utilization and inpatient unit cost, or price per service appear to be the problem. Instead of the forecast 100 basis point reduction in MLR, management is now expecting higher medical costs – with a potential swing of 400 basis points for outpatient expense. Inpatient costs are also up 100 basis points, so the combination is driving up total MLR by 150 basis points.
Another significant contributor to the higher MLR is an increase in the number of more severe (more costly) claims – not more claims, but more high cost claims, specifically between 50k and 150k in dollars paid.
In contrast hospitals are not seeing increased utilization. Facility revenue numbers are not trending up. Coventry wasn’t able to figure out why their hospital costs were going up while overall hospital utilization nationally is not.
Admittedly Coventry has not yet determined all the factors causing these increases in MLR. They do appear to have a grasp on the major factors; from the tone and delivery
of management comments I’d expect there’s a lot of yelling at Coventry HQ, likely to be followed shortly by the distinctive sound of heads rolling. (During the call Wolf did allude to staff reductions in a response to an analyst’s query.)
Lastly, management reported that the work comp business is not meeting projections due in part to lower fee revenue for bill review.
As the market closed, Coventry’s stock price had dropped to $40.97, resulting in a P/E just under 10. Coventry has long been rumored to be a potential acquisition target, and if the stock price declines further (a not unreasonable expectation) suitors will likely emerge.

May

Why are there so many spinal implants?

Posted by Joe Paduda on Thursday, May 29th, 2008 | Comments

Disclaimer – This is the kind of post that makes one want to take a shower after reading. My apologies to readers without convenient access to bathing facilities.
One of the fastest growing segments of the surgical industry is the spinal implant business. In what may be the most comprehensive review of the problem, the Orange County Register reported:
“About 70 percent of U.S. adults — or 153 million people — have lower back pain, according to Millennium Research Group. Of those, about 15 million require medical treatment, and most eventually get spinal implants.” My take is that is a wildly overstated estimate; one survey reported that the total world market for devices was $4.2 billion; note this study used 2006 data. Another indicated the market was $5 billion in 2005, and predicted growth to $20 billion by 2015. Stryker, one of the major manufacturers, expects growth of 16% per year in the spinal implant market. Yet another report(note opens .pdf) indicated the 2007 worldwide market was $7 billion, with the US accounting for $5.4 billion of that total.
And boy is it profitable. One manufacturer (Allez Spine) sold screws to an implant device company for $79.31 each – screws that were then sold to hospitals for $1000 each (who then marked them up even more when billing insurers).

Yep, there are $480 worth of screws in this xray (wholesale), $6000 retail, and probably $9-12,000 to the insurer/patient. And that doesn’t include the other parts…
Medtronic, one of the larger device companies with about 45% market share in the US and the same worldwide, reported sales of $869 million for spinal implants last quarter, driven in part by a big jump in sales of its Kyphon technology. The $869 million represents growth of 35% from the same quarter last year.
The Kyphon story is an ugly one, and points to one potentially significant problem in the spine surgery industry – the focus on devices as a tool to maximize reimbursement.
Kyphon (the company) was acquired by Medtronic in 2005. The company settled a lawsuit filed by the Feds, agreeing to pay $75 million in fines. Kyphon agreed to stop providing inappropriate advice on reimbursement to providers, advice that resulted in hospitals filing inflated claims with Medicare for a spine procedure with the otherworldly name of kyphoplasty.
The details of the case, as reported by the New York Times, are revealing.
Kyphon “persuaded hospitals to keep people overnight for a simple outpatient procedure [bold added] to repair small fissures of the spine. Medicare then reimbursed the hospitals much more generously than it otherwise would have for the procedure, which was developed as a noninvasive approach that could usually be done in about an hour.
By marketing its products this way, Kyphon was able to artificially drive up demand among hospitals, bolstering its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, greatly enriching Kyphon’s senior executives. ”
Margins for Kyphon’s devices approached 90%, due in large part to the high price the company charged, a price that hospitals offset by extending hospital stays (as advised by Kyphon’s sales reps and reimbursement experts), thus generating higher bills and much higher revenue.
Another major contributor to the rapid increase in spinal implant surgeries may be the growth of device companies that have spine surgeons as stockholders. The OCR article reported that physician-owned companies are now under investigation by HHS’ Office of the Inspector General (OIG). In testimony before the Senate Special Committee on Aging, Gregory E. Demske, Assistant Inspector General for Legal Affairs at the OIG said:
“These financial relationships [between device manufacturers and physicians] can benefit patients and Federal health care programs by promoting innovation and improving patient care. However, these relationships also can create conflicts of interest that must be effectively managed to safeguard patients and ensure the integrity of the health care system…during the years 2002 through 2006, four manufacturers (which controlled almost 75 percent of the hip and knee replacement market) paid physician consultants over $800 million [bold added] under the terms of roughly 6,500 consulting agreements. Although many of these payments were for legitimate services, others were not. The Government has found that sometimes industry payments to physicians are not related to the actual contributions of the physicians, but instead are kickbacks designed to influence the physicians’ medical decisionmaking [bold added]. These abusive practices are sometimes disguised as consulting contracts, royalty agreements, or gifts.”
All this growth may well be based on a focus on surgical treatment that is just not supported by research. Some studies indicate surgery is not the best treatment for a substantial number of patients. According to the OCR article (source above);
a “2005 study of patients with back pain published in the journal of the British Medical Association concluded: “No clear evidence emerged that primary spinal fusion surgery was any more beneficial than intensive rehabilitation.”
“You look at the number of procedures and the rate of growth and it seems to far outstrip the number of patients who need this,” said Dr. Steven J. Atlas, a back specialist and Assistant Professor of Medicine at Harvard Medical School.”
And that old nemesis, provider practice pattern variation, is nowhere as obvious as with back surgeries. Looking at Medicare data, the back surgery rate in Fort Myers, Florida was 5 times higher than in Miami. Same population demographics, same state, but different providers.
Perhaps the best explanation for the considerable growth in the use of implants and spine surgery is the lack of evidence either for or against these procedures. There are some reports that indicate positive or negative outcomes, but nothing definitive has been published that could be used by payers and providers to judge the appropriateness of surgery for most patients with back injuries or degenerative conditions.

May

Today’s SAT question

Posted by Joe Paduda on Tuesday, May 27th, 2008 | Comments

Medicare is to Workers Comp as:
a) Mars is to deck stain
b) surgery is to literature
c) a jelly sandwich is to Colorado
d) all of the above
e) none of the above
If you chose (d), congratulations, you understand there few similarities between the two systems, other than both involve paying health care providers to deliver care.
Beyond that, Medicare and Work Comp are, as the Brits say, chalk and cheese. Yet many regulators and legislators still try to base reimbursement under workers comp to Medicare’s RBRVS system (resource based relative value scale). The latest effort is in California, where a recent study by the Lewin Group has come under fire from providers in the Golden State. Critics contend Lewin’s analysis does not accurately assess the inherent differences between the two systems or the way providers deliver care, and bill for that care, and therefore the study’s conclusion is inappropriate.
I think the critics are right. As I’ve noted before, the additional paperwork, different procedures, complex and dynamic treatment rules and approval process, additional communications requirement, and different demographics make work comp a very different animal from Medicare.
I’ll have more on this later, as the reports and analysis require more time than I’ve got right now.
But there are two more (very) current examples of the problems inherent in linking WC reimbursement to governmental programs. Both involve drugs, and in both cases WC drug costs are linked to Medicaid. The states are NY and CA. In both cases, the FS will also drop in July; to AWP-16.25% in NY for brand and an across-the-board cut of 10% (below the current very low rates) in California.
There are already myriad examples of claimants unable to fill comp scripts in New York today, and that is at the current, slightly more generous FS. There have been fewer reports of this issue in CA, but the new rate reduction has pharmacy chains screaming.
As well they should. Here’s how Workers comp and Medicaid are different
1. Unlike Medicaid, there are no copays, restrictive formularies, or other cost- and utilization containment measures in WC. Thus all cost containment efforts in WC for drugs involves Drug Utilization Review processes that can involve pharmacists and clinicians reviewing scripts for appropriateness, medical necessity, potential conflicts and adverse outcomes, and relatedness to the WC medical condition.
2. PBMs pay pharmacies more for WC drugs than for Medicaid drugs; a typical brand discount is AWP-12%, generic is MAC or -25-35%. The Medicaid FS is substantially lower, at AWP-15+% for brand and FUL (>-40%)for generics.
3. Unlike Medicaid, to the extent they exist at all, rebates are much lower in WC. In NY, Medicaid rebates are a minimum of 11% of the Average Manufacturer’s Price per unit. The rebate revenue significantly reduces states’ costs for drugs. As these rebates are much lower or nonexistent in WC, PBMs do not have rebate dollars to offset their drug costs.
Sure, it is easy for lazy insurers, regulators, legislators, and employers to think they are doing something positive by cutting the price they pay for drugs.
It is also a big mistake.

Category: Medicare and Medicaid