Colleague Jaan Sidorov is hosting today’s edition of Health Wonk Review. Jaan’s writing is terrific, as is the content – objective, too!
Sep
18
Insight, analysis & opinion from Joe Paduda
Sep
18
Bear Stearns, Lehman Brothers, and Merrill Lynch were here one day and gone the next. Their rapid, almost-overnight disappearance from the world wide financial landscape is as stunning as the collapse of the Twin Towers. Solid as concrete and steel, their permanency wasn’t even questioned until days before they were forever gone from the skyline.
The next to go may well include Morgan Stanley and Washington Mutual; if the stock prices of other financial institutions continue to drop, more companies may also be putting up ‘for sale’ signs.
While the Fed’s rescue of AIG may well have prevented a global mess of historic proportions, it also sent a very loud, and very clear message that the financial industry is in danger of worldwide collapse. As one South Korean put it, “”The U.S. government’s rescue of AIG helped the markets to avoid the worst case scenario, but the fact that only the government was willing to help indicated the gravity of U.S. credit problems.“[emphasis added]
Now we learn that rating agencies, all too aware of their failure to accurately assess credit risk in banks, investment houses, and property and casualty insurance, are re-thinking their approach to assessing the financial viability of health insurers. Fitch Ratings will be dumping the traditional debt to capital formula within a month. “Fitch believes operating EBITDA, funds flow from operations (FFO) and subsidiary dividend capacity are the appropriate measures in assessing financial leverage and debt utilization, to augment the debt-to-capital analysis traditionally used for insurance companies.”
Clearly the landscape is changing dramatically – mountains may be disappearing here, but they will likely be replaced by new mountains in other parts of the globe. From here, it looks like New York, long the center of the financial universe, may be losing that status to London, or perhaps eventually Dubai. Investors hate uncertainty, and there’s all too much of it here in what has become the Wild West of speculative ‘investing’.
Sep
17
Peter Rousmaniere’s column this month in Risk and Insurance addresses the dirty not-really-secret practice of TPAs getting kickbacks from their managed care ‘partners.
This unseemly practice has been going on for years; perhaps the most notable example is the Broward County Public Schools scandal, where TPA Gallagher Bassett was allegedly paid by CorVel for referrals to case management and other services. This isn’t small potatoes; the scope of this debacle earned it a prominent place in an article in CFO magazine.
Peter notes that SRS (the Hartford’s TPA) is one that specifically rejects doing business this way; pledging “Specialty Risk Services, as a fiduciary of our clients’ money, does not participate in any so-called wholesale-retail relationships with our vendors nor do we request or accept administrative fee arrangements from them.”
Broadspire also doesn’t take kickbacks/commissions/admin fees. But the Florida-based TPA also sells an integrated medical and claims management service so customers don’t require much in the way of outside medical management support. According to a highly-placed source; “we do not do a lot of unbundled arrangements for managed care services…most of the services for managed care [are] provided by our own staff, priced and charged separately from the claim service. On the rare occasion that we are requested to go outside by a customer, we will consider it on a case by case basis but, do not make any requirements from the managed care vendor that they provide us any “commission” or anything else of that nature for the pleasure of working with us.”
I’d note that the TPA business has gotten hammered lately – the soft market has driven down loss costs, and with it admin fees. The reductions in frequency have resulted in fewer claims to adjust, and therefore fewer fees to charge. Employers have been able to get TPAs to bid against each other, thereby lowering admin costs by forcing TPAs to cut pricing.
It’s not entirely fair to blame TPAs for this; their customers share the guilt. While employers are saving admin costs over the near term, this is a short-sighted tactic at best. TPAs, like any other business, have to make a margin, and if they can’t make it thru admin expense they’ll have to make it up in other ways.
What does this mean for you?
Demand full disclosure of pricing and cash flows from your TPA and managed care vendors. And expect to pay a fair price.
Sep
17
I heard about the Fed’s bailout of AIG last night while sitting in the stands at Yankee Stadium (watching the White Sox defeat the Yankees, the desired outcome). The seats in front of me were occupied by Wall Street types, all expressing a great deal of relief that the Fed had come to it’s senses and done the right thing. Now the markets would settle down and they could get back to making money.
My reaction was somewhat different.
AIG’s failure was a direct result of it’s exposure to billions of dollars of liabilities from insanely complex financial instruments it sold to banks and other financial firms. These instruments were neither fish nor fowl; neither bonds nor insurance policies they were not subject to any regulation or oversight. None.
When things were good, the lack of onerous regulatory oversight was great; it allowed the free market to price, assess risk, and trade without the friction and inefficiency inherent in the oversight process.
This morning the ‘cost’ of regulation looks like a pretty good deal compared to the $85 billion taxpayers are paying to save AIG. I’d also note that our (we taxpayers’) ultimate liability may be a lot more than $85 billion. We own AIG and if it needs more capital, we’re going to provide it.
It is going to be interesting to watch how the financial industry reacts to this disaster. And disaster it is; the largest Federal takeover of a private company on record. Will they welcome oversight and regulation, seeing it as a necessary cost of doing business or will they chafe under the ‘burden’ of that oversight?
The broader issue is the impact of the disaster on government policies and politics. In the health insurance market, the GOP has been advocating a dramatically reduced role for regulators, calling for an end to mandated benefits, Certificate of Need processes, and prohibitions against the interstate sale of policies. This would almost certainly result in insurance companies filing their policies in those states with the least amount of regulation and the lowest capital requirements.
Individuals buying those policies would have to hope any problems would be quickly and competently addressed by an insurance department in some other state, led by a commissioner unconcerned with the problems of citizens living outside his/her voting district.
The current climate does not favor de-regulators, a dynamic that may well influence how voters feel about the candidates’ health reform proposals.
Sep
16
In all the commentary and discussion about the source of AIG’s problems I’ve yet to read or hear what may be the most important contributor – the company’s culture.
There’s no question AIG was long considered one of the world’s best run insurance companies. AIG is legendary for its intramural hypercompetitiveness. The company would rather one of its subsidiaries lose an account or prospect to another internal subsidiary than to an outside firm. The rewards (up till now) for winning those competitions have been huge – the top execs at AIG become Starr Partners, a highly lucrative status.
AIG’s hundreds of subsidiary companies compete against each other for insurance business, talent, resources and recognition. The rules are few, but ironclad – chief among them return an underwriting profit (make sure the combined losses and admin expense is less than premiums). All investment income accrues to the parent organization, where various investment entities compete to deliver the best results.
By several accounts, one result of this business model has been a consistent under-investment in non-revenue driving IT, and a lack of emphasis on paying claims. AIG was one of the first insurers to embrace the web to sell to consumers and small businesses; it also infuriated regulators and medical providers when it screwed up the consolidation of workers comp medical processing by eliminating regional processing centers. Bills were lost, repeatedly processed incorrectly, and paid to the wrong provider.
The company’s auto business has grown substantially over the last decade, yet many insureds are none too happy with the company. An article several years ago highlighted complaints from some of AIG’s commercial clients; here’s an excerpt:
“AIG was losing more than $210 million on auto-warranty claims, provoking the ire of the company’s longtime chairman and chief executive, Maurice R. “Hank” Greenberg, according to court documents. As a result, in mid-1999, a newly installed team at AIG’s auto-warranty division began to reject thousands of claims — including half of the claims that its own contractor, a claims-handling company, recommended be paid, according to court papers.”
I had the pleasure of working for AIG a bunch of years ago. At that time, AIG’s CEO and Chairman, Hank Greenberg, used to have Presidents’ meetings every month where the presidents of AIG’s subsidiaries would present (very briefly) a summary of how their business was doing. My sub was not doing particularly well, which is probably why I was asked to attend the meeting representing my boss’s boss.
Greenberg started at one end of the large U shaped table, with the first of about 25 presidents. After the brief presentation (two minutes or so) he’d grill them – with the temperature on ‘sear’. Fortunately, I was second on the flame, and still in shock when he asked me who I was and what I was doing there. After about thirty seconds of my babbling, he dismissed me as too low in the hierarchy to be worth his time and moved on.
I proceeded to watch as a couple dozen middle aged execs went thru their inquisition sessions. Most seemed to be doing a pretty good job, delivering solid results and expanding revenues, and a couple were doing very well. Despite that evident success, all were scared, several terrified, and at least a couple so distressed that I found them in the men’s room throwing up.
Although Greenberg departed several years ago, according to several insiders this culture still exists – the hypercompetitiveness, coupled with huge rewards for success and caustic tongue lashing from your superiors for anything but success. The combination of the two may have contributed to the company’s recent problems. Execs who are scared of their bosses are not likely to be first in line to tell them that the great investment in mortgage-backed securities or rate swaps has blown up. The turmoil in the executive suite may have distracted top management from tracking these issues as closely as they should have. The constant hectoring from Greenberg (after he was kicked out as a result of Spitzer investigation) certainly soaked up C-suite bandwidth that would have been well-applied to assessment of investment strategy.
That’s not an excuse, but may be a lesson.
Sep
15
AIG may not be alive and well, but it is still functioning. That’s the good news.
The real news is the source of the financial lifeline thrown to the big insurer – the state of New York. Gov David Paterson has authorized AIG to access $20 billion in capital currently locked up in subsidiary companies to increase the company’s liquidity (free cash on hand). The Governor’s permission essentially gave AIG more capital from internal sources, capital that the company had been desperately seeking (with little luck) from outside backers.
The $20 billion is half of the company’s immediate cash needs; sources indicate the firm is also looking to sell assets to come up with the other $20 billion. Tops on that list may be the General American, the auto insurance business, and AIG’s aircraft leasing subsidiary, long one of the company’s most profitable ventures, which would generate between $7 and $14 billion in proceeds.
The problem with selling International Lease Finance Corp. (the aircraft finance arm) is it is very profitable, generates lots of cash, and is particularly advantageous for AIG due to tax matters. ILFC buys aircraft and leases them to airlines, taking deductions for depreciation and other expenses that it can use to offset earnings – deductions that are more valuable for AIG than they would be to another owner.
AIG would very much like to hold onto ILFC, and it is just possible it will be able to do so. The Fed hired Morgan Stanley to help figure out what to do about AIG, and at this point it looks like the recommendation, and possible short term solution, is for Morgan to put together a pool of capital from JPMorgan Chase and Goldman Sachs to help AIG survive the current liquidity crisis.
And just to make the situation even more difficult, reserves for claims from Ike will also be hitting AIG’s financial statements in the next few weeks. While it is too early to tell precisely what AIG’s exposure may be, the company is one of the ‘second tier’ carriers in terms of property market share in that area, a position that will likely result in substantial claims costs.
Sep
15
Founded primarily to do business in China by Cornelius Starr (by all accounts both a good person and terrific businessman), insurance giant AIG has long been among the largest property and casualty insurers in the world.
That history may have a final chapter, written this week. Some reports indicate AIG may not make it past Thursday. At this moment the stock is trading at $12 a share, down 30% today and 83% from its 52 week high. The share price is now trading well below the company’s (reported) book value of $29 a share. That book value appears to be highly suspect, as it includes $20 billion in subprime mortgage securities, carried on the books at a discount of 31%.
The fall of AIG has a human dimension that is rather close to home; I worked at AIG in the mid-eighties, and know a number of individuals who continue to get their paychecks from the company. Most have a good chunk of their savings in the company’s heretofore terrific employee stock plan – savings that have all but disappeared as AIG craters. AIG’s senior management is rough, brutally competitive, arrogant – and historically very successful. That success has been delivered by the company’s 116,000 employees, many of whom now find their previously rosy financial future has been destroyed.
To show how fast things move, AIG stock is now at $5.89, fifteen minutes after I started this post.
The trigger for a collapse would be the threat by ratings agencies to downgrade AIG’s credit rating – a move that would allow AIG’s counterparties to pull their capital and business out of the company. Many of AIG’s insureds require the company to maintain an “A” rating from AM Best or similar rating agency, and if the rating declines the policyholders have the right, and in some cases the legal obligation, to cancel their coverage and move it to an A rated firm.
2008 has been awful for AIG – the company lost over $18 billion so far, due in part to the drop in value of the company’s investments in mortgage-backed securities and other credit-related investment declines. The credit market collapse – which has affected several big banks, Merrill Lynch, and Lehman Brothers, is also hammering AIG.
I’ll be thinking about the potential implications of this mess more later today, especially for what it may mean for the soft market and what parts of the company may be sold off by an acquirer.
In the meantime, it may well be that a collapse of AIG would cause the insurance market to harden rather quickly, as current policyholders scramble to obtain coverage, brokers push their clients to buy only from insurers with very low credit risk exposure, and insurers raise rates to add capital to bolster their financials.
Sep
15
There’s yet another reason for work comp payers to pay a lot more attention to surgical implant pricing – CMS has reserved the right to use its own methodology if it finds the payer’s methodology lacking.
WorkCompCentral reported piece [sub req] on “>today “if the workers’ compensation medical set-aside proposal includes the cost of an implantable device but does not include enough of the CMS required cost information about the device – and it is determined an implantable device such as a spinal cord stimulator is needed – CMS will use its own methodology to determine the cost of the device.”
CMS’ methodology is discussed here. (scroll to bottom of page and click on “august” download)
The folks at WorkersCompInsider have an excellent piece on implants and motivations of (some of) the physicians that use them.
I doubt the ‘look at what these cost us in the past’ methodology is going to fly with the good folks at CMS. They will certainly want something more substantial, something based on actual cost and not conjecture and what was paid in the past.
btw, WorkCompCentral is one of the go-to sources for comp-related information and news.
Sep
12
Could be.
For a couple days there have been rumors swirling around Hartford (Aetna’s hometown) that the big insurer may be looking at Coventry’s books ahead of a possible acquisition.
With Coventry’s stock still relatively low, and at a P/E under 10, the company looks like a good deal. CVH’s stock bounced up a couple bucks early Wednesday, and has stayed in a fairly narrow range since then. There has also been significant volume in options markets, volume that appears to indicate some investors’ sense that CVH is in play.
Aetna and Coventry do have an existing, if really tiny, relationship – Coventry uses Aetna’s work comp network in many states. I don’t know the dollar value of that deal, but doubt it is much more than ten million annually, if that. That’s not terribly significant at ‘mother Aetna’ where annual revenues are over $30 billion.
If Coventry is on the block, I’m not so sure Aetna’s a serious option. CVH stumbled recently after missing their earnings forecast earlier this year, a miss that was painful both to investors and management who had cultivated a (to that point well-deserved) reputation for consistently hitting their numbers. Coventry is particularly strong in the smaller employer market, and their ability and expertise in that segment could be helpful to Aetna if it seeks to grow its small employer market share. Coventry does have a growing individual block, but Aetna has already expanded its individual business significantly and is now in 29 states.
Coventry is not a national account company, a market that has been Aetna’s sweet spot for years. Its new markets, which tend to be in secondary metro areas such as Oklahoma City, still represent relatively few lives.
Lastly, Coventry’s provider contracts are certainly not as good as Aetna’s.
Which leaves us with the question – why would Aetna buy Coventry? The only real reason I can see is a strategic one – to gain more strength in the small employer end of the market. There’s always the American League East (see Red Sox/Yankees bidding wars for free agents) strategy – if Aetna buys it Anthem can’t – but Aetna is not a company that would spend corporate assets just to keep a property away from another competitor.
If you look at Aetna’s acquisitions in the past, you’ll notice there have not been many. And the deals that have been done – PPOM and Schaller Anderson, have been highly selective and oriented towards acquiring new skills, new market expertise, and new/better technology – not health plan acquisitions.
Is an Aetna-Coventry deal possible? Sure. But highly unlikely.
Sep
12
After spending the last part of last week and the better part of this one preparing for two major presentations on ‘US health care 2009’ (both requiring predictions about health reform efforts and results thereof) I’ve been anxious to get back to the comparatively sedate world of workers comp.
Here, in no particular order, are a few of the ‘not enough for a full post’ items. There’s more going on which I’ll focus on next week.
The good news is rates continue to decline in most states, with the notable exception of California (where if rates had gotten much lower insurers would be paying employers). The so-far not terribly bad hurricane season has certainly helped; here’s hoping Ike and colleagues stay out at sea, away from the shipping lanes and fishing grounds.
As long as cat(astrophic) costs stay modest we can expect the market softening to gradually taper off and then start to harden – say this time next year.
The good news has been the result of a continued decline in frequency, payer success in managing ancillary medical costs (particularly drugs and physical medicine), and relatively low wage inflation. Oh, and that’s all been minor compared to the impact of the dramatic cost reductions in CA (which are due in part to tight limits on the number of physical medicine visits).
Florida has also been enjoying several consecutive years of rate reductions, brought on (at least in part) by the 2003 reforms. Word from the Sunshine State is that one of the key components of the reform law, limitations on plaintiff attorney fees, may be overturned. If that happens, it’s ‘Katie bar the door’, as the plaintiff bar in FL has long been champing at the bit to return to the halcyon days pre-reform, when they could bill hourly fees at will. Yikes.
While rate reductions and soft markets have been great for employers, TPAs, managed care firms, and carriers are having challenges. Several TPAs have closed shop, been acquired, or suffered dramatic losses in business, and most (particularly in Florida and other states with big premium drops over several years) are doing their best to hang on and hope things turn around soon. CorVel has added a couple TPA customers – one an existing managed care client and another new business. These deals have also required CorVel to do quite a bit of programming and IT development, work that was responsible for higher costs for the company in the most recent quarter.
I remain skeptical about CorVel’s business model and attempt to sell to, while competing with, TPAs.
On the managed care side, several network companies are vying to be industry leader Coventry’s chief competitor, with little success to show for all their effort – so far. This may change soon, as Coventry’s continued heavy-handed, my-way-or-highway approach to customer relations is wearing a bit thin. One of their larger self-insured employer customers was handed an eight point rate increase. Not percentage but points. Word is the folks delivering these new rates, contracts and addenda are not exactly comfortable doing so. Coventry has also been expanding its staff, adding long-time industry vet Pat Sullivan in an effort to improve its image in the market.
A new firm (NovaNet) announced it’s presence just this week; when I get more info will pass it on. I would note that their press release talks about some direct provider contracts and rental of other networks; there are several other PPOs with similar models already in the space. One observation – the company touts its huge network of docs – while this may be an asset in group health, the huge network model is losing followers in the comp space of late.
MedRisk has been awarded the contract to handle the Pennsylvania state fund’s entire managed care program, a major win for the company. (MedRisk is an HSA consulting client).
Internal sources at the ‘old’ Fair Isaac, now Mitchell Medical bill review firm report the new owners are investing, listening, and supporting their efforts to revamp the WC bill review products. That’s a good thing and bodes well for MM’s future in work comp.
