Insight, analysis & opinion from Joe Paduda

Aug
7

A digression

I get approached a couple times a month by folks offering to give me great exposure to their gazillions of readers if I’ll agree to let them have unlimited access to anything I’ve written here. In a few cases (very few) it makes sense – WorkCompCentral is probably the best example of a site with significant overlap with MCM’s readership that selectively posts relevant stories from Managed Care Matters.
But most are just looking for free content, and the quid pro quo is heavy on the ‘quid’; they get my intellectual property and I get exposure to their (usually really small) readership.
Not much of a deal; in the almost three years I’ve been publishing MCM I’ve written over twelve hundred posts, commenters have added their own thoughts and contributions, and well over a thousand people a day visit the site. These aggregators want to take that work and use it to build their business, without any compensation. No surprise, I’m one of dozens of bloggers that get the same personalized request from really important folks blowing smoke up my skirt about how great my blog is and how wonderful it will be to work together.
The other business deal I get from time to time is requests from advertisers and agencies looking to place ads on MCM. I’ve resisted so far and see no reason to take ads any time soon. That’s not to say I disapprove of other bloggers’ decision to sell advertising; that’s their business and their decision entirely. For me, accepting ads might add a whiff of potential bias, a decline in objectivity, and that’s not a direction I’m interested in going. And I certainly don’t want to do have to check out potential advertisers who may be sketchy/unprofessional/have skeletons in their closet, skeletons that would then take up residence in my closet.
Which leads to my final point.
I get pilloried from time to time by (usually nasty) readers accusing me of bias towards my consulting clients (list is here). My response is always the same – I always identify a client if that client is referenced in a post, and because I know my clients, and the rest of their industry well, I’m very comfortable discussing issues that involve them. After a dozen years running my consulting practice and another ten in the managed care business, I’m fortunate enough to be able to work with clients I like and respect, and not work with anyone I don’t like or respect.
Am I biased? Sure, biased towards individuals, companies, ideas and strategies that make sense and deliver value honestly and ethically. Will some readers take issue with my opinions, think they have a better business model, get upset and ticked off? Sure. And if they are professional and have a good point, one backed up by solid research and data, I’m happy to listen and happy to share their criticism with you.


Aug
6

Comp networks and hospital costs

A few weeks ago I wrote about the big profits hospitals get from workers comp, and closed with the observation that comp payers are overpaying hospitals. The question is why?
Glad you asked.
Since OUCH (predecessor organization to First Health, now Coventry) first started the work comp network business in a major way (although AIG’s managed care sub had one in the DC area in the mid-eighties, OUCH’s entry really got things going in the late eighties) the business has exploded, with pretty much every work comp payer using a PPO nowadays. The idea is payers get to reduce their expenses and only pay the PPO for ‘savings’.
So, are networks actually saving medical dollars?
Lets run the numbers. National PPO penetration averages around 58-62%, with wide variations among the states (NJ and FL are up above 90% with NY down below 45%). Savings (below FS or U&C but not net of PPO fees) runs about 10-12%, and PPOs charge from 16-23% to their ‘retail’ customers.
Total work comp medical spend this year will be about $32 billion. PPOs are ‘saving’ about $2.4 billion and getting paid about $480 million for that service.
But medical costs in comp are still going up faster than group health medical inflation, and considerably faster than the medical CPI. The biggest contributor to that inflation is facility costs.
According to the latest stats from NCCI, comp medical trend was 6.0% in 2007, 8.6% in 2006, and 6.2% in 2004. By way of comparison, the CPI was 4.4% in ’07, 4% in ’06, and 4.4% in ’05. Anecdotal information from several payers indicates trend is heading up in 2008, with facility costs particularly problematic. And that anecdotal information is backed up by national figures, which indicate facility costs are the fastest growing component of the medical CPI at an annual rate of 4.8%.
In contrast, drugs and supplies were up 0.1 percent in June after dropping 0.7 percent in May. Professional services increased 0.3 percent in June after a 0.7 percent increase in May.
Facility costs in workers comp make up between 35% to 55% of total medical expense (depending on the state) – a pretty significant chunk. As they continue to rise faster than other sectors, that ‘share’ will also rise, making facility costs increasingly significant.
Why aren’t networks able to deliver better results for facilities? Market share. Workers comp makes up less than 2% of total medical costs in the US. When a workers comp network calls on a hospital, the red carpet isn’t exactly rolled out – the managed care contracting department is pretty uninterested in offering a deal to a network that might deliver one percent of their total revenue. While workers comp can be very profitable for hospitals, most facilities look at the revenue numbers and set priorities accordingly.
This isn’t going to change – work comp network deals (with a few minor exceptions) are specific to workers comp. A PPO owned by a group health company may try to leverage the group business when negotiating with a hospital, but get real – the group contract is way more important to the insurer/network than work comp, so when push comes to shove during the contract negotiation process, work comp discounts will be given up to get a better group health discount.
Although there is consolidation going on as one would expect in what is a mature market, there is little in the way of innovation among the larger generalist network vendors. Even though their results are declining, the big PPOs have nothing to gain from innovation, and a half-billion dollars to lose.
What does this mean for you?
Until payers decide they are sick of being pushed around by networks producing increasingly crappy results, this isn’t going to change.


Aug
5

The use of torture in statistics

The recent CONCORD report on cancer survival rates has been used by some on the right to support their contention that the US health care system is superior; according to Catron, the “much-maligned U.S. health care system is the best in the world.” Catron and his fellow travelers’ use of the researchers’ findings has been, to be kind, selective at best.
The study looked at populations around the world, including 16 US states and a half-dozen metropolitan areas that represented 42% of the US population. (Not all state data was available due to collection issues and standards). Four types of cancer, including breast (women), colon, rectum and prostate, which comprise a majority of all newly diagnosed cancers in adults were examined.
From this, Catron concluded:
“Nowhere is this [the superiority of the US health care system] more obvious than in the area of cancer treatment. John Goodman reports on another study published in Lancet Oncology showing that the U.S. has the best cancer survival rates:
[this is a quote from Goodman, not from the Lancet] “A new study of cancer survival on five continents lays to rest the theory that Americans fare poorly compared to other developed countries … in almost every category Americans survive cancer at higher rates than patients in other developed countries.”
Here’s a chart showing U.S. survival rates for breast and prostate cancer compared to the survival rates of four countries whose health care systems are often touted as superior to ours”
Here are a few of the problems with Catron’s argument.

  • Catron used two types of cancer, not the four that were studied. And the two he used were (surprise!) the ones that favored the US. Rectal and colon cancer survival rates were statistically similar in the U.S., Japan, Canada, France, the Netherlands, Sweden, and Australia
  • There’s no doubt the US survival rate for one of his examples – prostate cancer – is very high. There’s also no doubt that this cancer is way over-hyped in the US, with much more screening and testing, lots of which identifies cases that are unlikely to be fatal. Prostate cancer is quite common among older men. It usually grows very slowly, so slowly that most of us end up dying from something else. So we’re paying way more for screening that is marginally useful from a population perspective.
  • The incidence of diagnosed prostate cancer in the US is much higher than in other countries
  • Catron may have meant to say that the US health care system is much better for white folks. In the US, there’s a wide disparity in survival rates between blacks and whites. For breast cancer, survival for white women in the USA (84.7%) was 14% higher than for black women (70.9%). For colorectal cancer, white patients in the US had survival rates 10% higher than for black patients (60% compared with 50%). For prostate cancer, However, there was a 7% difference in survival between black and white men (92% compared with 85.8%).
  • The US stats covered less than half of the population; we don’t know if survival rates in the other 58% of the population are better/worse/the same

The leaps of logic in Catron’s argument would do credit to gymnasts with Olympian aspirations. First that the data is complete (it is not); second that survival rates for two types of cancer is a fair evaluative basis (what about other maladies?): and third that the US has a better health care system because of breast and prostate cancer survival rates.
The logical errors in Catron’s analysis, combined with his faulty arguments, would be laughable if they weren’t representative of how some actually ‘think’. Their approach to any issue is to try to scare the bejesus out of folks, ignoring data and evidence contrary to their opinions. This does them no credit, and over the long term likely undermines their attempt to influence the dialogue on health system reform.
Looking at data from the Commonwealth Fund, and employing Catron’s logic (better survival rates = better health care systems), we find that the 5 year survival rate for kidney transplant patients was 94% in Canada, 86% in the UK, and 83% in the US in 2001. Does this mean that the Canadian system is better than the US system? Of course not – and I’d bet that Catron and his ilk would be quick to point out the problems inherent in drawing such a conclusion.
What does this mean for you?
If you torture numbers long enough, they’ll say anything you want them to. Catron’s misuse of the CONCORD statistics is Exhibit One in the case against this horrifying practice.


Aug
4

Cheap fast or good – pick one

There are those on both sides of the political debate (and some who fancy themselves in the middle) who use anecdotes, scary stories, hyperbole and highly elastic versions of ‘true’ stories to support their solutions to our present health care insurance disaster.
While both sides are guilty, I’d have to say the free marketers look to be ‘guiltier’. Case in point – I’m on the distribution list (at least at the time of this writing) for a few PR firms that have been hired by conservative types to get bloggers to espouse the libertarian, it-ain’t-broke-that-bad-so-don’t-fix-it perspective on health care reform. And they tend to try to scare the crap out of everyone with horror stories of waiting lists in Canada, patients expiring in the UK on transplant lists, and folks with furrin accents invading American hospitals as they try to get kidneys or MRIs or gall bladder surgery without waiting till three years after they’re dead. And these are the reputable folks – there’s also a lot of misinformation circulating in the webosphere about bad Canadian health care.
Not to say this doesn’t happen – there’s no perfect health care delivery/reimbursement system anywhere on earth (although the VA looked closer than most before it was underfunded).
Are there waiting lists in Canada? Yep – but they’re not intolerably long. Are there waiting lists in the US? Yep. Which one is shorter? Depends. Do you have insurance? If you aren’t insured and live in the US, the wait is really really long. If you are a workers comp patient in Massachusetts and need a neurosurgeon, the wait is really really long (the fee schedule is so low very few docs will take WC patients).
And let us not forget that American health care system has a pretty poor reputation for delivering consistently good care…
Ignoring the politically-biased reports on waiting lists, it is likely that Americans don’t have to wait as long as Canadians for some specialty care, and some Canadians may actually not get certain services. For that rapid access, Americans pay almomst twice as much.
You can get it cheap, fast, or good – pick one. We Americans have picked fast, ignored good, and certainly ignored cheap. The Canadians picked cheap, are at least as good, and have accepted slow.
Before you vote, consider what you could do with $750 billion a year in the US – because that’s how much we’d save if our costs mirrored our friends to the north.


Jul
25

Coventry earnings call – the analysts blew it

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

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

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


Jul
25

MCM on vacation

Managed Care Matters will be spending the next week at a lake in New Hampshire, blissfully unaware and unconcerned about happenings in the real world.
See you in August


Jul
24

Williams’ Health Wonk Review

Colleague David Williams has a new take, fresh look and punchy style in his edition of Health Wonk Review.
His version is a fast read, too.


Jul
24

PMSI sale – the numbers

In today’s earnings announcement, AmerisourceBergen, parent company of work comp PBM/ancillary services firm PMSI, detailed the financial impact of the deal.
ABC carried PMSI on the books at about $260 million; by selling the property for $40 million (plus a $10 million contingency) ABC will be taking a $222 million hit as a result of the transaction. On an earnings per share basis the result is 1.37 per share, giving ABC a net loss of $108 million, or 67 cents per share.
Observers who are confused about the recent on-again, off-again status of the PMSI sale can be forgiven for that confusion; ABC has been somewhat schizophrenic about its dealings with PMSI. After putting PMSI on the market early this year, ABC announced last month that the company was not going to sell PMSI after the initial offers came in well under expectations. According to ABC’s CEO David Yost, “We look to PMSI to be on track in the September quarter and into fiscal ’09.”
Contrast this with Yost’s announcement today – “We were very disappointed with PMSI’s performance in this quarter, and after re-evaluating our alternatives, we decided to sell the PMSI workers’ compensation business in order to focus our full attention on our pharmaceutical distribution and related businesses and allow H.I.G. to focus on the opportunities at PMSI.”
ABC’s impatience with the turnaround may have played a role, but from here it looks like the hammering Yost took over ABC’s overall financial performance to date may have been more of a motivator.
HIG, the investment firm that bought PMSI does have some experience in this space with investments in Align Networks and Gould and Lamb. They have been quite successful in selling properties and generating rich returns for their investors, a history that bodes well for PMSI. And for the PMSI employees who add value, are flexible, focus on customers, and don’t buy into the “we do it that way because that’s the way we’ve always done it” nonsense.


Jul
24

PMSI sold, MSC/Express Deal closes

PMSI, the workers comp PBM and ancillary services provider, will announce today that it has been sold to investment firm HIG. Sources within PMSI indicate the stock deal is worth $50 million, of which $10 million is contingent on achieving certain performance measures. Current management will likely remain in place after the deal closes in about 60 days.
The timing of this transaction is coincident with Express Script’s announcement of the closing (sub req) of their acquisition of MSC’s Pharmacy Benefit Management business. Express Scripts is now poised to become one of, if not the largest workers comp PBMs.
These deals are the latest in a series of financial transactions and potential transactions involving work comp PBMs. Cypress Care was recapitalized by investor Brazos Private Equity in November, 2006; Fiserv sought to sell its third party biller/PBM business early last year; Coventry purchased First Script as part of the Concentra transaction, and MSC itself was purchased by Monitor Clipper early in 2005.
PMSI has been struggling of late, losing the Hartford’s business (while retaining SRS (Hartford’s TPA)) to ESI and CNA late last year to Coventry. While PMSI’s parent company, Amerisource Bergen, was somewhat of a distant parent and may not have provided the attention and resources necessary for PMSI to maintain its historical leadership position, there’s no question HIG’s focus and attention will be intense and constant. Private equity management can be quite helpful; it can also be overbearing and short-sighted. And sometimes all three – which may be exactly what PMSI needs to recover its leadership position.
At risk of being accused of burying the lead, here’s what has me puzzled. Sources indicate Express looked closely at PMSI – recently . Yet they plunked down $248 million for MSC’s pharmacy business, when they could have paid a fifth of that for all of PMSI (which includes a robust ancillary services division).
PMSI has been somewhat damaged goods lately due to customer losses, yet MSC was in a similar position less than two years ago after it lost its largest PBM customer, Liberty Mutual, to rival Progressive Medical (PM had half of Liberty and was awarded MSC’s portion).
From here, it looks like a pretty good deal – although PMSI’s financials have been pretty bad lately, $50 million is a very good deal for one of the top two companies in a growing market.


Joe Paduda is the principal of Health Strategy Associates

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