Sep
19

Paradigm Outcomes acquired

Paradigm will be acquired by investment firm Omers, a Toronto, Canada headquartered company. Sources indicate the price was approximately 14 times earnings; by my calculation, the total valuation was above a billion dollars.

Till now, Omers had not been visible in the work comp services investment space. And, Paradigm was not “shopped” in the usual way; an investment bank is hired, books go out, bids are accepted, etc. The price is even more remarkable as there wasn’t an auction; the valuation continues what’s become the new normal pricing for work comp assets.

If it seems like you were just reading about a Paradigm acquisition…you were. The company just completed a deal to buy pain management network company AdvaNet.

Omers does own Premise Health, a worksite clinic firm, as well as two outpatient rehab and physical therapy companies – however sources indicate there are no plans for any collaboration or combination of assets.

What does this mean for you?

If you own a work comp services business – sell now!


Sep
13

The biggest deal in work comp to date

Yesterday’s announcement that Carlyle is acquiring Sedgwick is a clear indication that the work comp services industry remains a favorite of private equity investors.

The transaction, which valued the giant TPA at $6.7 billion, far exceeds the previous record set by the ill-fated One Call deal. It also produced very healthy returns for previous owner KKR; it bought the company for $2.4 billion just four years ago.

A 180% increase in value over a brief four years speaks to Sedgwick’s successes over that period, a clear and compelling growth strategy, and strong belief in management, which remains an investor in the company. (To be clear, a big chunk of this value growth was also driven by two major acquisitions, discussed below)

Here’s my brief take on why Sedgwick sold for so much.

Management

I’ve crossed swords with CEO Dave North in the past, but no one can argue with the success he and his team has delivered. I’ve also come to know several senior management folks, and they are, to a person, impressive.

Strategy

Work comp is shrinking, and TPAs are perhaps the only segment of the industry that will benefit from that shrinkage.  As claim counts decline, more insurers are choosing to have TPAs handle more of their claims.

Sedgwick also increased its internal work comp services expertise and capabilities. One example – the pharmacy management program overseen by Paul Peak PharmD is delivering impressive results.

North et al embarked on a clear diversification strategy several years ago, a strategy evidently designed to continue the company’s growth by dramatically increasing its footprint internationally and in property adjusting. Sedgwick’s acquisition of Cunningham Lindsey and Vericlaim positioned the company to profit from climate-change driven events such as hurricanes, fires, tornadoes and the like.

Wise indeed.

Scarcity

I’d be remiss if I didn’t reprise my comments from a few weeks ago –  there just aren’t that many work comp services assets to buy these days. To be clear, Sedgwick is neither a Pinto or a Gremlin; far from it.

The services industry has bifurcated into really big companies – Mitchell, Genex, Sedgwick, One Call, and relatively small ones – MTI America, HomeCare Connect and the like. While there are several firms occupying the middle ground, overall the number of potential acquisition targets has shrunk dramatically.

Because the big companies are really, really big, relatively few PE firms have the financial wherewithal to buy them.

As a result, when assets do come to market, investors seem willing to bid up prices.

What does this mean for you?

There are ways to succeed and profit in a consolidating, highly mature industry.

 


Sep
12

Florence and work comp

Hurricane Florence will devastate much of North and South Carolina and parts of Virginia as well.

Florence will have some impact on workers’ comp – and in some ways already has.

  • Industry capacity – The work comp insurance market remains soft, and until and unless capital dries up, it is likely to remain soft. Insurance stocks took a hit as investors anticipated major losses, and the catastrophe bond market sunk as well. Total projections for insured losses range from $12 to $20 billion, a range that is well within the financial capacity of the industry.
    If current rainfall and storm surge forecasts prove accurate, projected losses can be absorbed without undue stress. I don’t expect Florence to affect work comp premium rates.
  • Preparing for service delays – In conversations with work comp home health care, PBMs and other work comp patient service providers, I learned that these companies are doing a lot to prepare, including:
    • sending patients additional medications, soft goods and consumables in case mail services are disrupted
    • re-locating patients to facilities in case home health care providers can’t reach patients’ homes, or their homes lose utility services for extended periods
    • testing their backup and business interruption processes to ensure they can stay functional
    • re-scheduling office visits, therapy sessions, IMEs and other services
  • Post-storm cleanup and rebuilding – There will be two employment effects – Storm recovery companies will hire thousands of contract workers to help clean up debris and damage from the storm surge, wind damage, and flooding. Most of this will take place in the next couple of weeks. Rebuilding will – of course – take much longer, and will increase hours and wages in construction, logistics, and other industries.  Hiring and payroll increases won’t be enough to move the national needle, but it will be material in the affected states.
    As many of the clean-up workers will be temps, there will be a localized and very short-term uptick in claims.

The bigger story here is future storms will be larger, more damaging, and perhaps more frequent.

Harvey’s rains were almost 40% more intense due to global warming. Changes to the jet stream associated with changing weather patterns have affected Florence’s path.

What does this mean for you?

The climate is changing; weather will too.  Those who deny this do so at their peril.

 


Sep
6

The latest deal in workers’ comp services

Paradigm announced it is purchasing Adva-Net, a Florida-based company with a network of pain management providers. While terms weren’t disclosed, word is the price was north of $105 million, a very healthy multiple of earnings.

I interviewed Paradigm CEO John Watts a few weeks back, but decided to hold off on publishing it until this deal was done. Watts, who has an impressive resume including multiple leadership roles in the “real world” (outside of work comp) is impressive; he has a clear strategic vision for the company, knows what he doesn’t know, and appears to understand the critical importance of branding. Quotes are from Watts

We talked about his strategy for Paradigm and the acquisitions the company made over the past year plus – specifically Foresight Medical and two case management firms – Alaris and Encore. In addition, Paradigm just acquired several ‘advisory solutions’ focused on pain management, catastrophic claims, and back care from Best Doctors.

Frankly I’ve long been somewhat puzzled by these acquisitions; NCM is old school, Foresight is anything but (and was wicked expensive).

Before those additions to the company, Paradigm had “a nice longstanding business doing pretty much one thing” – managing a carefully selected inventory of catastrophic claims, and doing so quite well.  Management realized that a sole focus on cat claims wasn’t enough and the company needed to diversify.  Acquiring case management assets, a business that Watt noted is “way more traditional than the cat claim business”, gave that cat claim “operation access to about 500 +/- employed nurse case managers.” Not only did this expand Paradigm’s ability to handle cat cases, it increased it’s customer footprint, provided a training ground for cat nurses, and added some “synergies” – management speak for reducing overhead expenses like management, finance, and HR.

Going forward, Paradigm “wants to stitch together assets with the ability to take risk in complex acute situations to manage clinical outcomes…[the company will likely handle] more types of catastrophic conditions while also moving into lower severity claims.” Alaris and Encore (Paradigm’s NCM firms) help them do that.

Foresight was another acquisition; I asked how these services align with Foresight.

Foresight stands on it’s own. According to Watts, it has a “Strong focus on implants, cost and quality…Foresight is also building a high performance orthopedic network using data analytics.”

In the near future, expect Paradigm to be a “big player in the musculoskeletal space.” The company (again this was several weeks ago) was “in an acquisitive place now.”  Going forward, the plan is to focus on becoming known as expert in managing ortho surgery care…first, couple [Foresight’s ortho network] services with NCM, then add catastrophic services.”

At the end state, expect Paradigm to handle a defined bundle from point of injury to back to work.

Future expansion will likely include a “front end solution on musculoskeletal condition to help clients avoid unnecessary surgeries” and the tools to do that.

So, Paradigm is focused on adding depth and breadth to the solutions it provides work comp payers – adding services to help with less acute claims, and broadening its capabilities to handle more of the claim medical service spectrum.

In this context, Adva-net will add a pain management provider network. After a rather prolonged development period, the company’s earnings recently ramped up significantly. The business model is primarily a traditional percentage of savings arrangement – the more services delivered, the more dollars earned.

The acquisition brings another specialty-focused business, some additional customers, and a provider network to the Paradigm portfolio.

The acquisition was expensive, but as the company has shown with Foresight, it isn’t afraid to pony up the bucks when it sets its sights on a deal.

My take.

Paradigm is intelligently diversifying and has a coherent and promising strategy. That said, I still don’t understand the prices paid.


Aug
28

Asbestos is back!!?

The Trump Administration has loosened rules that will allow broader use of asbestos in manufacturing.  

Here’s how Fast Company put it:

A lengthy report of EPA’s new “framework” for evaluating risk, placed into effect this month, detailed how it would no longer consider the effect or presence of substances in the air, ground, or water in its risk assessments—effectively turning a blind eye to improper disposal, contamination, emissions, and other long-term environmental and health risks associated with chemical products, including those derived from asbestos.

No one knew how dangerous asbestos was until people started dying from exposure to it. How many thousands of dads, brothers, friends, moms and sisters would have been saved if researchers had studied exposure risks and informed the public?  How many tens of billions of dollars would have been saved, not spent on medical care, remediation, lawyers fees?

I don’t think we’ll see any big increase in the use of asbestos – the litigation risk is just astronomical and no insurance company would allow it – so no business will use it (wait, there are unscrupulous business owners that will do anything for profit, so there is some risk…)

But that’s not the point.

The point is that the health risks of any number of substances, compounds, fibers, chemicals will NOT be evaluated before we are exposed to them.

I’m thinking liability insurers are going to be quite concerned by this.

With the EPA abdicating its responsibility to protect the environment and us, the risk of lawsuits and huge awards increases dramatically.

While no insurance company will accept the liability for increased use of asbestos, they may well start re-writing coverage to ensure they aren’t on the hook for tomorrow’s asbestos suits.

What does this mean for you?

Increased health risks over the long term, and increased insurance costs over the near term.


Aug
24

King v CompPartners – good news, but another shoe to drop?

Yesterday California’s Supreme Court fully supported the State’s workers’ comp UR/IMR process.

That is excellent news.

First, here’s the key takeaway – the Court ruled that workers’ comp remains the “exclusive remedy” for resolving disputes related to treatment approvals/UR/IMR.

Second, the California Legislature may well take up the issue and require payers to take into consideration the potential medical effects of a treatment decision, perhaps including weaning off medications that are no longer approved.

The Ruling

UR/IMR is an inherent part of the workers’ comp process, and therefore falls under the exclusive remedy provision of work comp. So, the plaintiff could not sue the IMR reviewer for an allegedly adverse treatment decision.

(Any treatment arising from the plaintiff’s medical care – which in this case was allegedly due to the suddenly stopping a medication – is part of the work comp claim.)

Here’s how CWCI General Counsel Ellen Sims Langille put it:

We have long contended that exclusive remedy was the beginning and end of the discussion in this case, inasmuch as the URO was acting in the capacity of the employer, and as a statutorily required part of the claims process, and now the Supreme Court has agreed.  The URO was acting as the “alter ego” of the employer, and the utilization review itself is a statutorily required part of the claims process.  That is the very definition of exclusive remedy.

The Court of Appeal had made an obvious error in finding that the seizures suffered by Mr. King were compensable outside of the workers’ compensation system because there were no allegations that he was working at the time he suffered the seizures.  That is a fundamental misunderstanding of how compensable consequences work.  As our Amicus brief argued, the injuries alleged by Mr. King were derivative of a compensable workplace injury, and the new compensable consequences injuries fall within the scope of the workers’ compensation bargain — and within exclusive remedy.

But there’s more, which may lead to additional legislative action to address the underlying event behind King…again from Langille:

Concurring Opinions were filed by two justices, and may prove to be the enduring legacy of the decision.  Justice Liu frankly invites the Legislature to examine whether existing safeguards provide sufficient incentive for competent and careful utilization review, pointedly noting his skepticism that “a care plan… appropriate for the medical needs of the employee” was established before the Klonopin was discontinued.  Even the Majority Opinion referenced the same language from §4610(i)(4)(C).  Unfortunately, it does not appear that any of the justices understood that this subsection applies only to cases of concurrent review, which is defined under Reg.  §9792.6(d) as “utilization review conducted during an inpatient stay” and thus inapplicable to the facts of this case.  Be that as it may, it is likely that the next legislative session will include some effort to expand the safeguards for the injured worker under utilization review.

What does this mean for you?

Consider the impact of medical treatment decisions on the patient’s future condition. 


Aug
21

This makes zero sense.

A totally unqualified person has been appointed to California’s Workers’ Compensation Appeals Board. The person in question is not a work comp person, legal scholar, labor advocate, or claims expert, but an 80 year old retired music teacher whose sole regulatory experience is a brief stint on the Alcoholic Beverage Control Appeals Board.

Mr Gaffney, undated photo from facebook

Mr Gaffney has no apparent experience, education, or training that in any way qualifies him for any role in the workers’ comp system, much less a role as significant as an Appeals Court Judge. He is a high school classmate of retiring Gov Jerry Brown, who reportedly ran into Mr Gaffney at an event, and after a discussion decided to help him out by appointing him to a very lucrative position.

The California Applicant Attorneys Association seems to think this is a good idea, citing Mr Gaffney’s “heart”:

Getting beyond legalisms and into the heart and humanity of the workers we represent could be music to our ears.

I don’t see the logic behind the CAAA’s statement that Mr Gaffney’s decades of involvement in choral music mean he is a “person who has dedicated himself to the hearts of ordinary people – working class immigrants.” Sounds like he has dedicated himself to their ears, not their hearts…

If intrinsic goodness, love, dedication to the downtrodden, and pureness of heart are key criteria, the sainted Mother Teresa would be a perfect candidate.

Further, this is an Appeals Board – one where Mr Gaffney will be involved in decisions that will set precedent. Where he will have to adjudicate complicated issues around causation, apportionment (!), penalties for unreasonableness, assignment of liability, exclusive remedy and the like.

This is really complicated stuff that attorneys with decades of experience struggle with.

No matter how wonderful one’s heart is, it is no substitute for knowledge and experience.

If you are hurt on the job and have a disagreement with your employer about your claim, you very much want the arbiter of that disagreement to:

  1. Know a lot about workers’ compensation
  2. Have a lot of experience dealing with cases like your’s
  3. Understand the laws so they can give a final ruling that won’t keep you in limbo

If the arbiter isn’t all of the above, you may well be treated unfairly, have your case appealed to an even higher court, and not get things resolved for years.

What does this mean for you?

The appointment will be reviewed by the California State Senate Rules Committee.  Encourage this body to reject the appointment. 

 


Aug
13

Work comp claim counts are dropping – what this means for you

Claims counts are continuing to decline. That’s good news for employers and taxpayers, but not-so-good news for the businesses that service claims.

Ok, counts aren’t falling as fast as that sheep, but you get the point.

Here’s what this means for you and others…

For TPAs – Good news indeed – as counts decline, more insurers are choosing to have TPAs handle more of their claims. That new business is great, but…

That “but” is this – the claims business is going to become ever more competitive.  TPAs are going to have to get a lot more creative than figuring out new ways to charge for bill review and network access. Predictive modeling, narrow network development and operation, outcomes assessment are all paths to take. But become especially adept at taking over claims, because…

Smaller claims staffs = more flexibility for insurers and lower admin expenses.  It is much easier for carriers to adapt to changing markets when they don’t employ their own claims staff.  It also keeps their unallocated loss adjustment expenses lower, allowing them to be more competitive.

Those carriers also don’t have to worry (as much) about investing in new systems, processes, applications or technology when the claims are handled by a third party. This addresses one of the biggest problems in work comp – insufficient (to be kind) IT budgets.

Service companies – investigations, case management, peer review, IME, you name it – are all fighting over a shrinking pie. In this very-mature market, there just isn’t enough business for everyone, so competition is brutal.  Margin pressure, the buying power and IT security resources of very large competitors, the increasing demands made by large buyers are making it tough for smaller suppliers to grow and expand.

Technology firms – bill review, UR, claims and others – are kind of in the middle. If their tech can reduce expense and be implemented with a high chance of success and relatively low expense, they may do well.  But these companies recognize that IT budgets are tighter than ever, and they MUST be creative around pricing, be clear about deliverables and assume as much of the implementation and maintenance as possible.

Brokers and consultants – you’ve got a choice to make. Either skate along, get carriers/TPAs/vendors to cut prices to the bone, and show your employer clients what a great job you’ve done…or keep pushing for value – fewer injuries, faster return to functionality, lower total claims costs, lower medical expense.

What does this mean for you?

Success favors the prepared.


Jul
30

Where is the work comp insurance industry heading?

Work comp is doing very well – so well that one may want to be a bit nervous.

A couple things you should consider:

Today’s WorkCompCentral arrived with the news that the Hartford’s profits improved markedly last quarter driven in part by “favorable development” in its workers’ compensation business.

Essentially the Hartford determined that it had set aside more funds than necessary to pay for old claims, so a chunk of those funds were removed from “reserves” and became profits.

A bit further down in the Hartford’s filing came a bit more detail, detail that may be illuminating.  For example, “margin deterioration in workers’ compensation and a higher expense ratio” in the company’s middle market sector put a slight dent in that sector’s financial results..

Yet, while work comp renewal premiums for the small commercial sector were down, 4 percent growth in middle market revenue was “principally driven by workers’ compensation” new business.

So, we have better results than expected from old claims, tighter margins, higher expense ratios, and premium growth in a key sector. This may seem inconsistent – but it isn’t.

  • With lower premium rates come higher expense ratios – that’s just math.
  • Lower historical claims costs help reduce current premium levels; insurers may see this as lowering the cost of risk and therefore cut premium rates and/or offer discounts.
  • In turn these lower rates may generate more business especially from employers who want to buy insurance from top-rated carriers.

Quick aside…At Liberty Mutual, work comp accounts for 6 percent of net written premium. As a former Liberty employee, this is a pretty amazing statistic coming from the company that dominated US WC for decades.

From Liberty’s Q1 2018 earnings presentation

In the not-too-distant past, Liberty was at or very near the top of the largest writers of workers’ compensation insurance.  Not anymore.

This from Chubb’s Q2 2018 earnings call (thanks to Seeking Alpha):

Well, the macro picture, you have record low unemployment, which actually can play – cut both ways on workers’ comp. You have less experienced workers on the job, so you have to be careful. We’ve been seeing frequency up until now, frequency of loss has been down. Severity has been reasonably tame. And so overall loss cost trends have been good in comp. I think you have to – in my own mind, the market is reacting to that, the insurers, and comp has become more competitive. And I think you have to be careful that you’re not too aggressive, you overshoot the market.

Work comp premiums for the big carrier were down just under 6 percent this quarter over last, while YTD premiums were slightly higher.

I won’t attempt to link these data points to strategic moves; you can ponder those yourself.

Rather, my sense of what’s happening is some carriers are really trimming back their work comp books, others are growing it carefully, and all are waiting for an indicator that this historically-long-lived soft market is about to turn.

What does this mean for you?

We do know that very few – if any of us – will time that market turn correctly.

That’s the perspective of my alter ego…Captain Obvious!


Jul
27

Friday catch-up

I thought summer was supposed to be slow…

Sorry for lack of posts last two weeks – just slammed with client work.

here’s what I should have been posting on.

Economy drives employment drives workers comp

The economy boomed in the last quarter, with growth around 4 percent, a number we haven’t seen for four years.

Chart from Statista.

That’s the headline; the real story is less positive. Growth was partially driven by:

Here’s hoping things continue without overheating; forecasts aren’t so positive.

Implications – Lots of jobs open means higher wages and incentives for employers to keep workers on the job and get them back to work ASAP.

For those who just can’t get enough of the tariff issue – here’s the Harvard Business Review’s historical perspective.  Yes, I am a nerd.

Heat = more work-related illnesses/injuries

Deadly fires in Yosemite and California and Greece and Siberia and Sweden. A heat emergency in Japan. Temps in LA at record levels – even overnight. Scorching temperatures here in upstate New York.

Yes, climate change is happening. Yes, humans are the cause. And yes, it’s going to impact workers.

If the wet-bulb temperature (equivalent to that recorded by a thermometer wrapped in a moist towel) exceeds 35°C [95 degrees Fahrenheit], even a fit, healthy youngster lounging naked in the shade next to a fan could die in six hours.

Shifts in weather patterns are far more significant than overall global warming as they lead to very hot and dry conditions some places, hot and wet others, and exacerbate storm intensity among other effects.

Kudos to NCCI – they’ve been producing some highly relevant, much needed, and very useful research of late. Detailed, thorough, and diverse, and well worth your careful review.

One different angle is their ongoing work to highlight the good done by the  workers comp industry every day. Today’s installment is another example of this; there’s a lot more recognition that work comp is about the patients and employers.

Well done.

Opioids in the Federal workforce

Thanks to the great folks who handle my social media, website, and all that technical stuff I don’t understand at all, we’ve got video of testimony before the House Committee on Education and the Workforce.