Insight, analysis & opinion from Joe Paduda


CorVel results

CorVel Corp just announced its results for the quarter and nine months ending December 2004 , and the picture isn’t pretty. Both revenues (down about 7%) and profits (dropped about 30%) declined significantly from the same period in 2003, while G&A expenses actually increased by about 4%.
According to CorVel, the soft labor market and a purported decline in the rate of inflation in Workers’ Comp medical costs were responsible. While the former may have had something to do with the poor results, the latter appears to be a rationalization at best. Medical trend rates are running in the double digits, so it is hard to understand how that would increase would contribute to a decline in revenues and profits for a company primarily focused on WC.
CorVel has grown recently through acquisitions, and is still assertively pursuing this strategy. Meanwhile, their difficulty in handling large national WC accounts (due to distributed IT systems), spotty management (some regions are very well run, others less so), and poor discounts delivered by their PPO may be the more significant contributors to the bad news than the environmental factors cited in their press release.
As a maturing market, the Workers’ Comp managed care industry is seeing consolidation among the top players and significant growth among smaller, specialty entities. Expect this trend to continue, as the real innovation is occurring among specialty managed care firms such as Choice Medical Management (regional player in FL), MedRisk (physical medicine and claims workflow automation), OneCall (diagnostic imaging), and in selected firms in the PBM area.
(Note to reader – MedRisk and Choice are consulting clients of HSA)


Medicaid experiments in Sec. Leavitt’s state

Secretary-designate Mike Leavitt, ex Governor of Utah (R), was confirmed by the Senate today. We have alluded to his background in health policy matters, specifically Medicaid experiments, when as Utah Gov. he received approval from CMS to reduce benefits in return for expanding coverage.
As his approval nears, deeper consideration of the Utah experiment is required. While no one knows what will happen with Medicaid, it certainly appears that his efforts as Gov. did not hinder his chances for high office in the present administration.
The program reduced benefits for substance abuse and mental health, increased physician and prescription fees to some beneficiaries, and terminated a program for chronically ill low-income patients.
In return, (According to California Healthline) “The program covers physician visits, basic dental care and up to four prescriptions monthly.
In addition, hospitals in the state agreed to provide $10 million a year in no-cost care for PCN patients, and some specialist physicians also offered their services for no cost. The state anticipated that the new program would allow 25,000 people to obtain coverage for preventive medical care, the Journal reports.
Results have been mixed. “with critics calling the new levels of coverage “so basic as to be inadequate,” and supporters pointing to early data that suggest a drop in the number of people requiring hospital stays and emergency department visits…”
Expect to see many more states adopt variations of the “standard” Medicaid programs as they struggle with rising Medicaid costs and reduced federal reimbursement.


Drug price increases and price negotiations

Two interesting articles on drug pricing appeared in today’s California Healthline; one reporting drug manufacturers’ recent price increases, and the other noting the introduction of legislation authorizing Medicare to negotiate prices with drug companies.
Leaving aside the irony of juxtaposition (those CA Healthline editors know how to lay out a newsletter!), the rationales behind these related announcements is intriguing.
Price increases
According to one industry analyst, prices are going up because drug companies need to increase revenues to offset declines from other drugs going off patent and thus losing their high margins. Also, some feel that there will be downward pressure on drug prices after the Medicare prescription drug program goes into effect 1/1/2006.
Proposed legislation
As noted below, the Medicare Drug bill’s prohibition against CMS negotiation with drug companies for pricing has been contentious, to say the least. Outgoing Sec. Thompson has been rather blunt in his condemnation of the limitation. After all, every country in the EU and most of the rest of the world does negotiate with the manufacturers. However, there is some doubt whether the legalization of CMS’ negotiations with drug companies will have any material effect.
Nevertheless, expect this bill to get a lot of attention in the months to come, if for no other reason than the Democrats will use it to highlight perceived problems with the present Medicare program.


HHS’ new leader’s views on drugs

In testimony before Congress last week, Mike Leavitt, Secretary of HHS nominee, stated he did not believe the Secretary should have the ability or power to negotiate for drugs on behalf of Medicare recipients.
Here’s how the NYTimes reported it:
“Mr. Leavitt said he did not believe that the secretary should have the power to negotiate with drug manufacturers to secure lower prices for Medicare beneficiaries.
The current secretary of health and human services, Tommy G. Thompson, said last month that he wished Congress had given him that power. But Mr. Leavitt said that a healthy, competitive market was a better way to hold down drug prices.”
Huh? No fiduciary responsibility to his employers, the taxpayers? No mention of using the power of the position to encourage stronger competition? And this at a time when Medicare and Medicaid costs are accelerating at rates more than twice that of general inflation.
Kudos to for highlighting this…


Drug prices and the Feds

A very interesting, if politically skewed, column claiming that the Veteran’s Administration’s ability to negotiate drug prices amounts to “drug price-fixing” appears in the January 21 issue of the LATimes.
The column is authored by an economist working for an institute which receives funding from the pharmaceutical research and manufacturers ass’n (PHRMA) and is somewhat breathtaking in its claims. For example, the author, Benjamin Zycher, senior fellow in economics at the Pacific Research Institute, states that the drug companies are forced to participate in the “price fixing” scheme required by the VA, for if they do not, they would be excluded from “a market accounting for roughly 10% to 15% of their sales.”
News flash to Mr. Zycher – for-profit companies do this all the time – if a potential customer can’t afford a Mercedes, Mercedes does not have to sell to them. Many companies would be delighted to have their products priced such that they are affordable for 85% of the total potential market.
Next, Mr. Zycher states
“Despite many casual assertions about “huge profits,” the truth is that pharmaceutical companies face enormous research-and-development costs


Cox-2s – the cure is worse than the disease

To no one’s surprise, a recent study indicates the vast majority of patients for whom Vioxx, Celebrex et al were prescribed would have been fine with older NSAIDS – (non-steriodal anti-inflammatory drugs). In fact;
only 2% of participants were at “high risk” for gastrointestinal side effects and should have taken COX-2 inhibitors rather than older nonsteroidal anti-inflammatory drugs (Dai et al., Archives of Internal Medicine, 1/24).”
Recall that the main benefit of COX-2s was their alleged benefits for those patients at risk for gastrointestinal side effects. Price was no benefit, as the COX-2s are much more expensive than a common substitute, ibuprofen (Advil).
California HealthLine summarizes the findings succinctly:
“Randall Stafford, a Stanford University internist and an author of the study, said that marketing efforts by Merck, which in 2000 spent $161 million to promote Vioxx, contributed to the increased number of COX-2 inhibitor prescriptions. Stafford said, “There’s an assumption that newly approved drugs somehow have proven themselves to be better than what’s already available” (USA Today, 1/24).
G. Caleb Alexander, a University of Chicago professor and an author of the study, said, “What we saw was widespread, rapid adoption of an interesting and promising but expensive and largely untested medication by millions of people with little or nothing to gain from long-term use” (Los Angeles Times, 1/22). ”
So, Merck paid $161 million in a single year to
–get people to take drugs which were not demonstrably better than much cheaper alternatives;
–get doctors to greatly over-prescribe to many people who would not benefit from their main selling point:
–thereby increasing health care costs by
—-forcing insurers and patients to pay more money for drugs they did not need;
—-selling a drug that causes cardiovascular problems (requiring treatment, not to mention killing patients) when used at high dosage over a long period of time; and
—likely leading to litigation against insurers, managed care firms, physicians, and employers brought by workers comp patients who received COX-2s for treatment of a WC injury.
An executive at a top-five WC TPA told me that their legal department is keeping a “very close eye” on COX-2s. Undoubtedly, so is the plaintiff bar.


Whither (or wither?) Medicaid?

Mathew Holt has his usual way with the present administration in his latest post on The Health Care Blog. He also has two rather interesting quotes from the outging Secretary of HHS, which may provide insights into the future of Medicaid.
“In response to a question after his resignation speech, Secretary of Health and Human Services Tommy G. Thompson said, “I would have liked to negotiate” or bargain with pharmaceutical companies over the price of prescription drugs.
Thompson also said this:
“Out here, in this department, you get an idea and you have to vet it with all the division heads and the 67,000 employees. … then it goes over to the supergod in our society, and the supergod is.


CA move to universal coverage?

A California legislator has announced plans to introduce legislation authorizing implementation of a universal health insurance system run by the State. California HealthLine reports that Sen Sheila Kuehl (D-LA) and an unnamed number of co-sponsors are working on plans to establish a state government run health system, funded by taxes, that would provide coverage to all residents.
Hopes are not high for eventual passage, as political stars do not appear aligned in favor of this sweeping change from today’s combined private and government-funded health care system.
According to California HealthLine, funds would come from a variety of sources;
“The system would not have participants contribute deductibles or copayments but rather would be funded through “a patchwork of taxes,” the Times reports. The taxes would include:
An employer payroll tax equal to 8.2% of salaries;
An employee payroll tax of 3.8% of salary;
A 3.5% tax on unearned income;
A 12% tax on the net business income of self-employed residents; and
An additional 1% tax on all income of more than $200,000 a year.”
The bill will likely be similar to one introduced by Keuhl in 2003. That bill did not get far; it may have been overshadowed by SB2, CA’s initiative to require employers to provide health insurance to all employees.
I wouldn’t make too much of this, nor would I dismiss it as a flakey CA thing.
Desparate times call for desparate (or is it disparate?) measures.


HMO enrollment drops in 2003

Managed Healthcare Executive magazine published their annual survey of HMO enrollment in December.
The numbers show that most states actually experienced a decline in HMO enrollment, and nationally there was a decline of some 3 million members. Part of this may well be definitional issues, as HMOs have morphed into “open-access” HMOs, “closed network” PPOs, and the like. Regardless, this is an interesting development; early (albeit anecdotal) indications are that enrollment in more tightly managed plans may actually be increasing, as employers battle significant trend rates.


Impact of CA WC reforms

The impact of California’s workers comp reforms is already being felt in insurance rates, as premiums are dropping by between 13.9% and 16.6%.
The reforms, which have included drastic reductions in reimbursement for prescription drugs, a tougher definition of disability, a requirement to utilize clinical guidelines, and the authorization of employer-directed care to certified networks, have been at least in part, responsible for the rate reductions.
Interestingly, perhaps the most significant component of reform, the Medical Provider Networks (MPNs) have only just come on the scene. The first batch was recently approved by the State, and rumor has it that the next batch is due out next week, with Liberty Mutual among those to receive notice.
Sources indicate that the State has over 300 applications pending, and is being quite the stickler on some of the applications, rejecting one because part of the documentation was on the wrong form.
If other states’ experience is any guide, once the State and the payers get comfortable with the process, things will flow more smoothly and quickly. For now, patience is the watchword if you’re waiting for your notice.

Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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