Sedgwick gets bigger.

Monday’s news that giant TPA Sedgwick is acquiring York from Onex shouldn’t have surprised anyone. Sedgwick has been – and will continue to be – an acquirer. Posting revenues of $2.7 billion last year, the TPA’s recent growth – revenues increased by more than 50% in 2018 – has been driven largely by acquisition.

Bought by private equity firm Carlyle just last year for $6.7 billion (from KKR), Sedgwick’s value has likely tripled over the last few years. Of course, that growth required major expenditures, so it’s not like the owners didn’t invest a lot more than the original purchase price of the business.

Growth is critical to any private equity-owned company and in a highly mature industry the fastest, least expensive, and best way to grow is by buying competitors. VeriClaim and Cunningham Lindsey were two of the larger acquisitions during the last few years, and both were smart buys.  They were strategic, adding different skill sets, customer types and service capabilities in addition to hundreds of millions to the top line.

The York acquisition follows the same game plan; it adds several key assets/capabilities;

  • a highly profitable managed care unit built by former leader Doug Markham (York has it’s own proprietary bill review software…);
  • a wealth of experience in program business management; and
  • strong municipality and governmental entity offerings.

With international capabilities and claim handling expertise in all P&C lines, Sedgwick is positioned to grow by handling claims from extreme weather events driven by climate change. It is also gaining efficiency – which will lead to more growth – in shrinking lines such as workers’ comp.

While I’ve locked horns with CEO Dave North in the past, one has to respect the strategic vision, marketing prowess, and execution skill that has pushed Sedgwick to the top of the TPA industry. Senior management is capable indeed; there’s some solid talent at York that will make it even better.

Last point – and it is a critical one. Over the last decade there have been dozens of PE deals in workers’ comp and P&C services. Most private equity investments performed quite well despite – or more accurately partially because – they used debt intelligently.

One would do well to keep that in mind these days; in and of itself debt is not bad or harmful. What is “bad” is a faulty investment thesis and crappy execution.

What does this mean for you?

Strong leadership, management that can execute, and an industry-leading brand make for success. 

How do you stack up?


Key takeaways from what happened last week

Here’s what else was happening last week while we were tracking One Call’s financial troubles…

Who’s for Medicare For All? Who wants to “abolish private health insurance in favor of a public run plan?”

That was the question asked of the 20 (!) Democratic candidates for President at last week’s debate with the request that those in favor raise their hands.

While it was great to see politicians put on the spot, forced to give a “yes or no” answer, the reality is it’s not that simple: There are multiple and quite different versions of “MFA”, ranging from Sanders’ version which is the “no cost to consumers, covers everyone, administered by the Feds, paid for with a big tax increase” to others’ “you can buy into Medicare if you want or keep your employer-based coverage.”

When someone tells you Candidate X wants to do away with your health insurance, make sure that someone knows what they are talking about. Ask them to define exactly what Candidate X’s platform is, then fact check with Google.

Here’s a great side-by-side analysis of all the health reform bills now under consideration. Lots of nuance here…

Provider consolidation – costs and benefits

The California Health Care Foundation published a solid analysis of the implications costs and possible benefits of provider consolidation.

The net – costs go up, quality of care doesn’t.

Key takeaways include:

  • A study of US hospitals by Stanford University researchers found that “hospital ownership of physician practices leads to higher prices and higher levels of hospital spending.”
  • vertical integration increases hospitals’ bargaining power with insurers.
  • Physician groups owned by large hospital systems were more than 50% more expensive than those owned exclusively by physicians, and
  •  “Physician-hospital integration did not improve the quality of care for the overwhelming majority of [quality] measures,”

Drug pricing

Thanks to WCRI for sharing their Flash Report on Drug Trends. The researchers looked at very recent data from 27 states; key takeaways include:

  • compound utilization has fallen off a cliff
  • opioid spend dropped in every one of the 27 states
  • Louisiana’s opioid spend topped all study states at $100 per claim per quarter
  • total drug spend also decreased in 25 of the 27 states.

A brief video intro is available here.  And, the findings parallel what I’m hearing from respondents to our latest PBM in WC Survey.

Next up, another excellent piece from Adam Fein on spread pricing and rebates.

Dr Fein opines that spread pricing – the PBM makes its money on the difference between what it pays the pharmacy and what it charges the payer – isn’t necessarily a bad thing. He also discusses how some manufacturers use rebate payments as a way to force buyers to use their drugs.

head’s up – I’m about halfway thru the 16th (or is it 17th?) “Annual survey of pharmacy benefit management in workers’ comp”; pricing is a hot topic, but the respondents’ views are not what I expected. More on this next week…

Worker mis-classification

Excellent piece in WorkCompCentral about the ongoing effort to combat the real fraud in comp – sleazy employers, employee leasing companies, and labor brokers that lie to avoid paying workers’ comp premiums.

The piece reviews research by Harvard University’s Law School; the research was triggered by:

the USDOL [Department of Labor]…rolling back worker protections in a variety of ways, initially withdrawing a WHD Administrative Interpretation on misclassification, and piloting an amnesty program for wage and hour violators, called the PAID program. As a result of this retreat at the federal level, state enforcement has become more critical than ever.

The entire report is here; the takeaway [emphasis added] is:

“Misclassification and payroll fraud harm workers, depriving them of rights and protections to which they are legally entitled. Law abiding businesses also suffer, as they struggle to compete with companies that unlawfully lower their costs”

Have a great holiday week, enjoy friends and family, and get out and away from work.

I am!


OneCall’s doing great!

I think it’s only fair to allow One Call to tell their side of the story. So, here it is.

Yesterday One Call execs had an off-site meeting and subsequently released a letter to customers extolling the successes the firm is having; landing new customers, rolling out Polaris, improving patient experience, and really improving customer satisfaction.

Oh, and OCCM is fully compliant with its debt covenants and is meeting its financial obligations.

Allow me to make a few observations.

First, current financials will not be reported until some time after June 30 – two days from now – so Mr Baldwin is technically correct when he states that OCCM is “fully compliant.”  Until those financial results are reported (likely mid July, or in two weeks), the debt holders don’t know if OCCM is or is not in compliance; Q1 financials indicated OCCM was compliant – if barely so.

Second, congratulations to OCCM on landing “13 new customer relationships.” Not to be too picky, but I don’t know if that is expansions of existing relationships – say by adding transportation to an existing customer relationship, are entirely new customers, expanding from a one-state contract to multiple states, or what exactly.

Third, Mr Baldwin didn’t mention that Broadspire, Nationwide, and several of the Great American companies have terminated or are terminating or drastically reducing their business with One Call.

I do not envy Baldwin and the folks at One Call; they are in a very difficult position which Baldwin stepped into long after the die was cast. OCCM is loaded down with a huge and growing debt burden, has spent millions on an IT system that – in my estimation – will not improve customer satisfaction, and is trying to compete with other suppliers that are nimble, deliver excellent customer service, and aren’t trying to be all things to all people.

With the exception of Eileen Auen, Peter Madeja, or Mike Ryan I don’t know any leader who could salvage the situation. And even those august personages would face the greatest test of their prodigious talents.

But here’s the really awful thing – even after recent layoffs, OneCall still has thousands of employees who will be affected by this. They had nothing to do with the sale of various predecessor companies, the ridiculous debt, the frankly stupid decision by Apax to put the company together in the first place, the investment of millions into an IT system that could well be too little, too late.

Yet the folks who do the work every day are going to be the ones most hurt.

That sucks.

What does this mean for you?

Fortune favors the prepared. (borrowed from Louis Pasteur)




OneCall’s financial situation is…

Some of the investors that own OneCall Care Management’s debt holders are getting organized to prepare for a “potential liquidity event and expected covenant violation…”

That’s the lede from a piece [subscription required] authored by Associate Editor Paunie Samreth citing two sources (not me) writing on Debtwire, an Acuris company. Samreth:

The process is in early stages, with DDJ Capital among the firms spearheading efforts given its [DDJ’s] sizable position in the first lien debt, they said.

If you’ll bear with me for a minute, here’s the non-English version of what’s happening. The issue at hand is a “7x first lien leverage covenant” which kicks into action when the company draws down its revolver debt by 20%.  According to Samreth’s article, OCCM had a “razor-thin” margin at 6.9x as of March 31.

I do NOT know what those specific covenants are, however in my experience debt holders put covenants into contracts so the debt holders can take control – partial or total – of a company that is at risk of defaulting on its debt.

Samreth also indicated OCCM had drawn down $50 million of the $56.6 million revolver.

Allow me to translate into language we non-financial wizards understand.

Among other debt instruments – bonds etc – OCCM has “revolving” debt, which is kind of like a line of credit. The company can borrow from it and pay it back as cash flows dictate.

The “7x” is calculated by dividing the total long-term debt – which was reported to be $1.375 billion on March 31 – by cash flow (adjusted EBITDA) – which was $200 million over the 12 months preceding March 31.

So, as of March 31 OCCM had drawn down its revolver by way more than 20%, but had kept its revenue-to-debt ratio just below 7, which prevented the covenants from kicking in.

That was almost three months ago. Since then…citing Samreth:

[OneCall’s] earnings have been pressured in recent quarters as a result of customer losses and pricing pressures in the face of competition from peers including MedRisk, said two of the sources. [Medrisk is an HSA consulting client]

Compounding problems, cash flow has been limited by high capex [capital expenses for the Polaris IT system] needs as a result of its effort to migrate users under a single system, according to one of the sources.

It appears the debtholders are concerned that OneCall’s second quarter financials will indicate it is in violation of the covenants as the ratio will be over 7x and the revolver withdrawal over 20%.

The concern could well be that cash flow will not be enough to pay the interest and cover operating and other expenses. Decreases in revenue (customer losses), increases in expenses, and increases in the amount of debt could all play a role.

The latter – an increase in debt – may be happening as OCCM’s recent refi allows it to not pay interest on some of the new debt, instead adding that debt to the existing principal. I wrote about this a couple days ago.

It appears that the new debt from the refinancing may increase the company’s total first lien debt (that’s part of the covenant equation).  Add that to recent customer losses and the only way out is expense reduction. Rumor is the folks who were working on expanding OCCM into the group health market have been let go, and investments in Polaris have been cut back as well.

Am I full of crap?

Well, I’ve spoken with several current OCCM customers who tell me OCCM staff have assured them all is fine, there are no financial issues, and there’s nothing to worry about.

It could be that Samreth, Debtwire, and I have it all wrong. It could be that OCCM isn’t losing customers, hasn’t laid off staff, hasn’t cut back on investments in Polaris, isn’t in a cash flow crunch.

And I could be the next point guard for the Golden State Warriors.


Quick update on OneCall

Summer isn’t off to a sunny start for OneCall.

Two good-sized customers are moving their business to other suppliers. Sources indicate concerns over OCCM’s financial situation led to the switch to other vendors for transportation, PT, imaging, DME and home health.

Sources indicate MTI America, VGM HomeLink, MedRisk, HomeCare Connect, and Paradigm are among the winners. (MTI and MedRisk are HSA consulting clients)

Other customers have been in discussions with OneCall about ensuring payments for treating providers are made on a timely basis.

OneCall was carrying just under $2 billion in debt at the end of the first quarter; that has increased due to the refinancing of a big chunk of debt earlier this year. Despite the refi, debt service is eating up most of OneCall’s cash flow, dollars that would otherwise go to internal needs such as Polaris – the company’s name for their new IT platform..

The refi terms allow OneCall to not pay a portion of the interest on the new debt. Instead, the deferred interest becomes part of the debt owed. So, sort of like credit card debt, if you don’t pay the interest owed, you end up owing interest on the unpaid interest.

That saves cash over the near term, but increases the company’s total debt load and the cost of paying off that debt just gets bigger every month.

I’m hearing the customer-facing part of Polaris is gaining fans, but development of connections to and replacement of legacy internal systems isn’t keeping pace. This may be part of any cash-flow problem; Polaris was supposed to reduce headcount by replacing people with systems. If customer-facing staff hasn’t been reduced and customer service levels haven’t gotten better, OneCall has a couple challenges, namely:

  • continuing to pay for Polaris development, while
  • keeping more people on payroll, in an effort to
  • keep customer satisfaction at some reasonable level and
  • generate enough cash flow to pay the bills.

I’ve asked OneCall for their comments, but the company has been quite unresponsive of late so don’t expect anything substantive.



Marketing is NOT sales support

Marketing is not sales support.  If proposal writing and RFP responses are in “marketing”, you aren’t doing “marketing”.

Selling is one-to-one. Selling is finding out what that individual’s views, perspectives, challenges, biases, needs, opinions, fears and desires are. It is NOT “selling”, rather it is finding out what problem that person has and what she wants to buy, then packaging your offering so it addresses that individual’s needs and situation.

Marketing is one-to-many. It is doing the research to identify market segments, and those segments’ needs, wants, fears, and buying processes. It is developing and modifying products and services so they specifically address general and specific needs. It is promoting those products and services so potential buyers are aware of them and see the applicability to their situation.

Marketing can be squishy; it can be hard to assess the ROI on a marketing campaign or investment.

Work comp services execs often think marketing is easy, simple, and they are good at it. Hey, they can write an article, press release or “white paper” or give a speech or design a booth.

While a few execs understand Marketing, most do not.

And that is precisely why work comp services is a highly commoditized industry where price is critical. 

What does this mean for you?

Marketing’s budget should be 2 percent of your revenues, and led by someone who really knows the subject.


The Arrogance of Ignorance

Your systems, savings, capabilities, and results are better than the competition.

You know that because, well, it’s true. You’ve seen reports that show it’s true, been told that by your bosses, or some independent third party said so.

I cannot count the number of times I’ve heard “we save X to Y points more than the competition.” – or something just like that. One problem – your competitors believe the same thing. All of them. They’re wrong…right?

I heard it again at the National Council of Self Insurers’ meeting in Orlando yesterday – several times. When I demurred, my demurrals were rejected out of hand.

Allow me to burst your bubble.

Utilization review should be used to ensure the medical care delivered to patients is the right care, for that specific patient, by the right provider. In most cases, it is nothing of the sort. Rather, it is done to comply with regulations, generate revenue and is almost never integrated into billing.

Bill review is merely applying relevant regulations and fee schedule edits, sending bills to network vendors, and adding in some high-cost bill audits and perhaps retro UR and clinical audit.

Network selection doesn’t account for lower cost providers – it is based on discounts not net costs.

This is really basic stuff – and compared to what happens in group health it barely scratches the surface. Fact is medical providers are way more sophisticated than payers when it comes to coding, billing, and revenue management. There’s an entire industry devoted to revenue maximization for workers’ comp.

Data point – work comp represents about 1 percent of a health system’s revenue, but more than 10% of profits.

If you’re doing such a great job managing medical, why are providers making so much money off your patients?

With the exception of the Workers’ Comp Trust of Connecticut – I’ve NEVER seen a workers’ comp medical management program worthy of an A grade. In fact, the metrics most to evaluate program results are prima facie evidence the programs can’t be succeeding. Metrics like:

  • savings below billed charges
  • savings below fee schedule
  • turn around time
  • UR denials
  • network penetration

are all process – not outcome – measures. And they measure the wrong things.

The right metrics include:

  • medical cost by claim – case mix adjusted
  • drug cost per claim
  • time from date of injury to correct diagnosis
  • disability duration – case mix adjusted – by provider and employer location

How am I so confident you’re not as good as you think?

I’ve audited dozens of programs and seen crappy data, inaccurate reporting, useless metrics, and poor analytical methodologies in almost all.

A fundamental problem in work comp medical management is complacency and an unwillingness to ask and demand answers to tough questions, borne out of today’s low medical expenses and continually dropping premiums. The result is many have grown fat and happy.

What does this mean for you?

You can do better.  A lot better.



A reminder – work comp is a tiny part of medical care

Work comp medical expenses total around $30 billion.  Total US medical expenses amount to $3.6 TRILLION.

Clearly work comp is a minuscule part of the healthcare world; less than one percent.

This matters because health care providers – doctors, therapists, facilities, clinics – see very few work comp patients.  While some providers tend to see more work comp patients than others, it’s rare indeed for a provider’s work comp patient population to amount to more than 10 percent overall.

Think about this in terms of regulations, network relationships, systems integration, clinical guidelines and UR requirements.

One patient out of a hundred – that’s how many work comp patients the average physical therapist, prescribing physician, pharmacy or clinic sees. When regulators require prescribers comply with a new formulary or UR prior authorization requirements, they are asking the provider, and the office and clinical staff that work with that provider to:

  • learn something new; and
  • develop, implement, maintain, and potentially modify new workflows and communications protocols and standards.

How would this work out in your world?

In your work, how much of a hassle would it be if one out of every hundred customers – or even one out of 25 – required unique and special handling, different processes, and a failure to comply with those requirements could lead to some type of legal sanction or unhappy customer?

I would suggest that many regulators don’t factor in the obvious challenge inherent in getting clinicians to change their practices for one out of every hundred patients.

Yes, regulators need to ensure regulations meet legislative intent, but often regulators can influence that intent, educate legislators, and if nothing else work diligently to hopefully reduce the potential friction inherent in changed regulations.

Unfortunately, this often isn’t the case. As a result, conflicts arise, conflicts caused by misunderstanding or misinterpretation, or just plain ignorance.  These conflicts may well lead to increased litigation, angry patients, and/or delays in patient care.

It can also lead to providers dropping out of the workers’ comp system, as the hassle just isn’t worth it.

What does this mean for you?

A bit of perspective is always helpful.  It is also essential.

As my late father used to remind me quite often, better to do it right from the start than have to fix it later.



The next recession – Not if, but when, and how bad will it be?

This month marks the second longest economic expansion in US history; it’s been a decade since things turned around back in June 2009.

Like all expansions, this one is going to end – and there’s mounting evidence it will happen soon.

The latest Fed forecast shows GDP growth slumping to 1.3% this quarter, driven in large part by a drop-off in commercial and industrial construction.

Without Congressional action, we will see another government shutdown this fall; the Treasury will run out of money by early November. There’s hope the Republican-controlled Senate and Democratic-controlled House will reach some sort of deal. Whether an increasingly-volatile President – who has been public about his lack of concern about the possibility of the US defaulting on its debt – will approve it is anyone’s guess.

Absent a deal, $125 billion in Federal spending will be cut immediately, thanks to the 2011 sequestration bill.

Manufacturing growth is slowing. New data shows the U.S. Manufacturing Purchasing Managers’ Index is at its lowest point since the last recession. From Bloomberg:

customers were postponing orders due to growing uncertainty about the outlook. Similarly, new business from abroad contracted by the quickest pace since April 2016 to the first decline since July 2018.

One industry that’s hurting is autos. The president’s latest moves to slap tariffs on Mexico will increase US consumer and business costs alike; the auto industry is particularly vulnerable as Mexico supplies a lot of car parts – and 2.6 million cars – to the US. Analysts project the tariffs would add about $1,300 to the price of an average car. If Trump keeps his promise to continue to raise tariffs, that will jump to $10,000 on Mexican-made autos and trucks by October.

This has caused so much consternation amongst Congressional Republicans that they are actually considering going against Trump…

There’s a lot more data out there on this – the inverted yield curve is perhaps the one most worrying to economists.

So, we can fix this, right. Well, it’s going to be a lot harder to dig out of the next recession than it was to crawl out of the Great Recession. It’s increasingly likely the Fed will slash interest rates this year in an effort to keep the economy growing. Of course, rates are already near historic lows and the Fed has few resources left to buy back debt in “quantitative easing” without risking rising inflation…the tools available to the Fed to reverse a downturn are few and may be overmatched.

What does this mean for you?

It’s going to happen. When it does, worker’s comp payers will see a downtick in claims frequency but likely a rise in claims duration.

From here, my take is the next recession is going to be long and deep; we just don’t have the tools to claw our way out of it.


Research Roundup

In which I drop a “Nerd Bomb” into your email folder…

Here’s this week’s research-that-impacts-you I found compelling…

From WCRI, a report analyzing the relationship between prices for medical services and patient outcomes. More specifically, authors Olesya Fomenko and Bogdan Savych and ask the question “What happens to worker outcomes when prices increase or decrease?”

The authors used a comparison of workers’ comp medical prices for common office visits to group health, with the latter used as a proxy for adequate or benchmark compensation (my words, not the authors’.)

Key takeaways:

  • Medical prices are “not strongly related to measures of recovery of physical health and functioning, speed and likelihood of return to work, or duration of temporary disability.”
  • But…as all healthcare is local, there are some unexpected (at least to me) findings.
    • in areas where WC pays less than group health, raising WC prices results in more care delivered to WC patients, increased temporary disability (TD), but no significant change in access to care – and no impact on outcomes
    • where WC pays MORE than group, increasing WC prices results in more care delivered to WC patient, less concern about access – but NO meaningful impact on outcomes

Changing bad health behaviors

If you’re using financial incentives to change people’s health behaviors, you may be disappointed. Research published in NEJM indicates support from loved ones and clinical support are  more effective.

Pharmacy costs

Lost in the mostly-incoherent squabbling about drug prices is this: Net prices – that is, what insurers/healthplans/employers/payers paid AFTER rebates – for “traditional” drugs DROPPED last year (specialty med prices increased marginally).

Dr Adam Fein’s analysis of PBM trend rates showed the overall increase across all PBMs was in the low single digits; individual PBM results varied somewhat.

I’d encourage all to read Dr Fein’s post – and to subscribe to Drug Channels.

Speaking of drugs, the American Pain Society – the fine folks partially funded by opioid manufacturers looks to be filing for bankruptcy. 

Finally, how important is clinical care to a person’s overall health?

The answer – not much.

Your family income, environment, whether you take care of yourself – all these are WAAAAAY more important than the quality of care you get.

Which ties in pretty well to the research above about health behaviors.

What does this mean for you?

Get out and take a walk, and lift some weights too!

Note – this is me getting some exercise while on the boy’s annual mountain bike trip in Moab, Utah. Fortunately the “healthy behavior” of riding my bike a lot wasn’t outweighed by my inability to avoid crashing a few times…