As if the declining frequency rate wasn’t bad enough, managed care companies are now looking at significantly lower claims volume in 2009, a decline that will spell trouble for work comp managed care.
When the number of injuries goes down (which it does during economic recessions), managed care vendors are directly affected. There are fewer bills (bad news for bill review), fewer treatments and visits to providers (bad news for PPO networks and UR vendors), fewer prescriptions (not as bad news for PBMs as you might think), and fewer cases to manage (bad news for case management firms).
This recession, currently in its twelfth month, may well be tougher on managed care vendors than prior ones. The jobs that are disappearing tend to be those in higher injury rate classes – retail, manufacturing, construction (24 consecutive months of declining employment), transportation/logistics. The auto industry is in freefall with sales down 37% last month, bringing suppliers along for the ride. The unemployment rate has rocketed to 6.8%, the worst result in over sixteen years, and may be headed to 8.5%.
Fewer workers, fewer injuries. Those fortunate enough to keep their jobs tend to be more experienced, better trained, and less likely to report an injury for fear they’ll lose their job. And, the pace of work is slower with much less overtime- all contributing to lower injury rates.
As if that wasn’t bad enough, payers are looking to move more managed care services in-house.
For some time, big (and medium) TPAs and insurers have been internalizing their managed care. Gallagher-Bassett, Liberty Mutual, AIG, Broadspire, and Sedgwick are but a few of the big boys that have long handled much of their own managed care (with the exception of networks – more on networks in a minute). Services such as bill review and telephonic case management are easily handled by the payer, and system vendors usually have modules ready for payers moving in this direction. Payers are able to capture more revenue and profit, while contending (with, in some cases, justification) that their results are better than vendors can deliver. Of late this trend has accelerated, primarily due to the soft market. First Cardinal is one TPA that recently brought case management in-house, others are internalizing bill review and UR as well. Expect this trend to accelerate.
As I noted a couple weeks ago, the network business is under increasing pressure from regulators. In addition to the legal issues in Oregon and Louisiana, is is highly likely the ‘networks of networks’ will find their business model under attack as states adopt legislation/regulations forcing greater disclosure of rental network agreements, requiring positive agreement from providers (providers have to sign off on a document before they can be added to a network). This will mean more work for provider relations, legal, and customer service departments at network vendors, driving up costs.
There is also increasing chatter in the industry about big payers moving towards much smaller, more specialized networks focused around key workers comp physicians. We are seeing significant movement in this direction in California, Florida, and Texas, three states that combined account for a big chunk of workers comp medical spend.
There is a bright spot. Specialty vendors in the DME, Home health, and pharmacy sectors will be least affected. As reported by NCCI, the big dollars in these sectors are spent by long-term claimants. The recession will not affect these companies much, if at all, as most of their business is coming from claimants that were injured years ago.
What does this mean for you?
If you are a vendor, batten down those hatches. Demonstrate your value, service your customers, and get your employees on board.

The comp conference ended (for me) last Thursday; the passage of time allows for the individual impressions to meld into an overall picture of the current, and near-term future, of the comp managed care industry.
Here’s what it looks like.
The decade-and-a-half decline in frequency that has slashed the injury rate in half is causing real pain among occ health clinics. Sources indicate industry leader Concentra is seeing a decline in work comp patients, a trend that will likely be exacerbated by the steep drop in employment (when the number of people with jobs drops, so does the number of workers comp claims – for more on the impact of recession on workers comp click here). It is likely that other occ health companies such as US Healthworks are also experiencing declines in patient counts.
Together, Concentra and USHW together have almost 450 occ health clinics, and both have been adding clinics in 2008. It is too early to tell if the additions have been worth the added cost in cash or debt, but the current economic situation makes it unlikely they will be looking to expand aggressively over the near term. Unless they find clinics that are finding it difficult to make it on their own, in which case this may well be a good time to expand on the cheap.
The big game-changer will be health care reform. If, as I’ve predicted, Medicare increases reimbursement for E&M codes (cognitive services), then the clinic business could well get a major boost. Almost all WC fee schedules are based on Medicare, so any change in Medicare directly and immediately impacts comp reimbursement. Watch Capitol Hill carefully; if Congress passes legislation signed by future President Obama affecting Medicare reimbursement, clinic companies may be big winners.
Meanwhile, work comp managed care industry leader Coventry is continuing to hurt (due to non-workers comp issues), with rating agencies downgrading their outlook on the company. If anything, the workers comp business at Coventry is a plus, as the fee revenue helps to offset some of their problems in the health insurance, Part D, and Medicare Advantage sectors. Several people I spoke with at the conference confirmed Coventry is continuing to get price increases on their network and bill review products, although pricing for PBM First Script and other services (e.g. MSAs and case management) is soft.
The network business is under increasing pressure from regulators. In addition to the legal issues in Oregon and Louisiana, is is highly likely the ‘networks of networks’ will find their business model under attack as states adopt legislation/regulations forcing greater disclosure of rental network agreements, requiring positive agreement from providers (providers have to sign off on a document before they can be added to a network).
The future of networks that are mostly amalgamations of other network contracts is not promising. They will have to convince payers that their liability is under control and their value (to the payer) is greater than networks with direct provider contracts.
Good luck.
The PBM sector continues to grow, with the biggest player – Express Scripts – looking to add to the distance between itself and its rivals. Despite claims to the contrary, ESI is not winning business by using its group health contracts; a well-informed source adamantly refuted that assertion, stating that all workers comp scripts are processed under their workers comp agreements. Expect this sector to get even more competitive as ESI fights for business with newly-purchased PMSI (second largest PBM by volume), Progressive (excellent reputation for customer service), Cypress Care (aggressive, innovative marketing and strong clinical offering), ScripNet (expanding into the eastern US), and Aetna (cross-marketing to their large group health employer customers). MyMatrixx (focus on pain management) and Modern Medical (highly disciplined and responsive) are also in the mix.
Expect pharmacy to remain highly competitive, with vendors adding value through clinical services, first fill capture, and upgraded reporting and communications capabilities as companies seek to survive and prosper in what has become one of, if not the most, competitive segments of the work comp managed care industry.
I’d also say we need to pay attention to DC. If Congress calls for the Feds to negotiate drug prices, this will affect comp in one of two ways. Either comp payers will be able to piggyback on the Feds’ negotiated rates, in which case per-pill prices will come down, or (more likely) comp payers find their per-pill prices increase due to cost shifting.
Case management firms are facing the same issues confronting occ health clinics, with several folks at the major CM firms bemoaning the decline in volume. With volumes declining, and more big insurers and TPAs taking CM inhouse, expect continued pressure on pricing as Genex, Intracorp, Corvel, and Coventry struggle to ‘feed the monster in the basement‘.
What does this all mean?
External factors are the primary driver of workers comp. Medicare, the economy, and politics are all way more important than internal happenings in comp.
Look up and out if you want to know and understand.

While I and a few thousand other industry folks have been conferring in Las Vegas, the world (most inconveniently I would add) has been marching forward without us. In Florida, it looks their progress is headed right for the edge of a metaphorical cliff.
Florida’s workers comp regulatory bosses yesterday approved a change in the way workers comp payers will reimburse outpatient facility bills. According to WorkCompCentral, Florida regulators will:
“begin drafting a rule to base outpatient fees paid to hospitals on the Medicare Outpatient Prospective Payment System. But the fees would be adjusted using Florida-specific multipliers based on the usual-and-customary charges now employed to establish outpatient fees…Under the new system, the Medicare-based fees would be adjusted by a new factor created by a hospital’s usual and customary charges, by 174% for outpatient surgeries and 395% for other outpatient services.”
Okay, here’s why this is a bad idea.
First, Medicare fees are for treatment of elderly folks. Not working age, employed people. As a corollary, providers treating Medicare patients are not concerned with functionality or return to work. CMS has repeatedly stated their reimbursement methodology is specific to their population, and discouraged use of that methodology by other payers.
Second, The reimbursement scheme pays hospitals 74% more than Medicare for surgeries and four times Medicare for other outpatient services. This is insane. Workers comp is already the most profitable line of business for Florida hospitals, and this methodology makes it even more lucrative. It is indeed unfortunate that the Sunshine State has the second highest percentage of working folks without health insurance, but why make workers comp payers cover their medical bills? No, there’s not a direct link, and no, this wasn’t expressly addressed (as far as I know as I wasn’t at the hearing) but from here it sure looks like workers comp payers are being asked to help facilities cover the underpayments from Medicaid and provide funds to help treat the uninsured.
Oh, and these costs will now be the highest in the country.
Third, basing reimbursement on charges is just nutty. Providers increase charges around 14% every year This methodology now locks in a 14% trend rate for outpatient hospital services in Florida. Take it to the bank (if yours is still in business) – the slope of the inflation line is about to steepen dramatically.
Fourth, according to sources present at the hearing, there are serious problems with the methodology and data used to support the three member panel’s decision. Florida State University health economics guru Gary Fortier submitted a brief that stated that the methodology being used by the Department was “fundamentally flawed,, and in my opinion the study and methodology used cannot be relied upon….to make policy.” Fortier also warned that once this payment system, which encourages greatly increased utilization of hospital services to treat WC patients, is put in place it will be hard to change even if payments become more tight-fisted in the future.
Mike Malloy, former managed care analytics expert at E&Y, gave details about how easy it will be for hospitals to game their charges and drive up employers’ costs under the proposed system.
And FairPay Solutions (HSA consulting client) presented industry statistics illustrating how paying hospitals 333% more to treat WC patients than they are paid by FL group health plans creates such significant financial incentives that it will inevitably lead to greatly increased treatment of work comp patients by hospitals and cost Florida employers several hundreds of million of dollars more.
As I’ve noted here and here and here this is going to end up costing the comp industry in Florida a lot more than many think.
What does this mean for you?
the end of the happy times in the Sunshine State.

My quest for an actual provider-centric network is not complete. But there are a couple of companies that look to be off to a good start.
By way of background, most networks tout their huge directories of lots of providers, their discounts, and not much else. They sell their network by electronically matching their provider database against the prospect’s 1099 data (historical payments to providers). The better the match, the better their chances of landing the deal. At one level this makes perfect sense.
I’d suggest that this methodology is fatally flawed; the payer is asking the wrong question. By identifying networks that have as many docs as possible that already treat the payer’s claimants, the payer is asking for nothing other than a cheaper per-unit price. Yes, they will get a lower price per service from the docs they like, but they will also keep in the network docs they do not like at all – the ones who don’t return adjusters’ calls, don’t understand workers comp, do lots of unnecessary PT in their offices, and dispense drugs at outrageous markups.
Harbor Health takes a different approach – they have developed a process and analytical capability that enables HH and their clients to analyze sort thru their gigabytes of data to identify the providers that meet their definition of ‘good’. The analysis includes claims data as well as patient satisfaction and claims satisfaction information and billing/admin data to identify physicians who meet (customizable) criteria. HH is also building networks. To date, most of their customers have been large self insured employers (SoCal Edison was one of the first, and Sears is their latest).
After spending a half hour discussing Harbor Health’s process, methodology, ranking system, and approach, I’m impressed.
FairPay Solutions (current HSA consulting client) has built a physician-only network in Florida that is currently being evaluated by several large payers and soon to be implemented in Florida by one. FairPay also has access to a wealth of data, and has mined that data using sophisticated criteria as well as local knowledge in their development effort. The folks FPS brought in to develop the network came out of the old Choice Medical Management, acknowledged as the premier network company in the Sunshine State.
FairPay is, quite intelligently, building a physician-only network. There are any number of companies that do an excellent job of managing physical medicine, drugs, DME/HHC, imaging, and hospital costs. What FPS is focused on is the physician who controls how these other services are utilized.

Las Vegas is a weird setting for a workers comp conference. The hyperactive, eternally lit, wildly exciting town that is ‘Vegas’ makes for a bizarre counterpoint to the world of risk management – a business that works very hard to be steady, buttoned-down, predictable, and is certainly not glamorous.
Then again, the boom-and-bust that plays out every minute on the felt of the craps tables and poker games is workers comp in miniature.
Right now the sense seems to be the comp industry is starting to recover from the years-long soft market. Vendors throughout the hall are seeing employers and insurers focusing more tightly on cost drivers, on risk management and loss prevention. Risk managers are looking for new answers, different ways to attack the problem of rising medical costs that has been the one constant in this highly cyclical industry. The vendors’ perspective is borne out in conversations with managed care execs, who are getting much more attention from large employers interested in ‘real managed care’, who want to delve into the details, the workflows, outcomes, and results. No longer satisfied with ‘yeah, we’ve got that managed care stuff’, employers are (finally) getting serious.
About time.
For too long employers have been satisfied with ‘me, too’, cookie-cutter approaches to managed care. Most every large payer uses the same network, the same case management and UR schemes, pretty generic bill review and some amalgamation of specialty managed care vendors. They’ve been talking about outcomes oriented networks for years, and far too complacent when vendors have consistently failed to deliver on their promises to actually build them.
Yet employers haven’t been completely complacent. While the market’s been soft, employers have beat the bejesus out of their TPAs and carriers, demanding more and more coverage and service at ever-lower costs.
Now it’s coming back to them. Medical costs are rising, the power is shifting to the other side of the table, and there are few new and promising answers.
The good news – there are a few answers. I’ll talk about them later today.