The ongoing investigations into broker and insurer malfeasance continue to send shockwaves throughout the insurance industry. And, these investigations are causing those doing business outside the “broker-insurer-underwriter” world to revisit what have been long-established “ways of doing business.”
While Mr. Spitzer and colleagues have started their investigations at the sales end of things, they may well find themselves uncovering many other instances of inappropriate or unethical payments.
For example, managed care vendors often pay TPAs an “administrative fee” that is a percentage of the revenues they receive from the TPA’s clients. Typically these fees amount to 10-15% of total revenues, but fees in the 25% range are not unheard of. There is speculation in the WC industry that one large managed care firm pays one large TPA upwards of $10 million in “fees” annually.
These fees are rarely fully disclosed to the TPA’s clients, and when there is disclosure, it is obscured by legalese, buried in the depths of a lengthy contract, and often mistaken for innocuous boilerplate.
One very large WC TPA claims it has provided full disclosure by including language similar to the following.
“The TPA does not receive any payment from the managed care vendor, except it reserves the right to charge the vendor for administrative expenses related to implementing managed care programs.”
Clearly it is incumbent upon risk managers, TPAs, underwriters, and brokers to fully and completely disclose these arrangements. It is just as clear that until and unless the light of day is shone on a few of these deals, they will continue unabated.
Coventry’s acquisition of First Health represents a critical point for the WC managed care business.
As the market leader with some $190 million in annual revenues in WC bill review and network services, FH has long been a strong, and somewhat self-possessed, “vendor”. Carriers and TPAs have found FH to be inflexible, and in some cases dictatorial, regarding terms, conditions, pricing, and services. Some are hoping that the new management will adopt a more “customer-friendly” approach. Early reports from FH customers are that their FH contacts and account managers are saying the right things, but have no in-depth information about Coventry’s future plans for Workers Comp.
Coventry’s latest presentation may shed a little light on this issue. In it, Coventry notes the growth opportunities inherent in WC, the strong “bench strength” of FH WC management, strong growth opportunity in WC (mid teens to low twenty percent range), and potential for reform-driven growth.
I am highly skeptical. FH has, if not poisoned the waters with the market, at least rendered them highly distasteful. Their product offerings are primarily a large, deep discount network and a bill review system that they do not own nor effectively manage. Many payers, facing rising medical costs despite their long relationship with FH, are looking elsewhere for the next generation of managed care.
In the final analysis, Coventry’s future in WC will depend as much on the analysts’ opinions, and therefore the stock price, as anything. If analysts see no synergies, Coventry may decide to “pursue other options” with the WC assets.
The analysts continue to question the acquisition of First Health by Coventry Healthcare.
Wachovia analysts are among those who appear to be reserving judgement in their latest pronouncements (as noted in Maryland’s “Business Gazette”):
“The deal “marks a turning point in Coventry’s evolution,” the Wachovia report said. Coventry has historically been a regional managed care company operating locally concentrated health plans in several markets, and its customers have largely been small employers with some municipalities and local divisions of larger employers.
“With the acquisition of First Health, Coventry will change the profile of the company dramatically,” the report said. “For investors, the combined company will look like another multimarket managed care company trying to compete.”
First Health has a national preferred provider organization and a workers’ compensation business and does some pharmacy benefit manager services, areas that require different management skills than Coventry is accustomed to, according to Wachovia. In addition, First Health has had difficulty competing with the largest managed care companies such as UnitedHealth, Aetna and BlueCross BlueShield plans. ”
The challenge of integration will be met by one of the stronger management teams in the industry. The Gazette’s article goes on to note:
“We have always been impressed by Coventry’s management and are confident that the company’s internal candidates will be strong,” according to the Wachovia report. The analysts cited McDonough’s previous stint as CEO of a division of UnitedHealth, which has similar products to First Health.
Thomas A. Carroll, an analyst with Legg Mason in Baltimore, called Coventry’s leadership “one of the best management teams in the business.”
So what are the issues facing Coventry?
— Coventry is a regional HMO firm, with particular strength in small group fully insured business; FH is a national firm with a very large customer (MailHandler’s program as well as other large self-insured customers, and is also a major player ($194 million in 2003) in a business (Workers Compensation) that is foriegn to Coventry.
–Further, FH deals primarily with large-self insured group health customers, a market segment that Coventry has not pursued aggressively.
–Weak management at FH. Statements in the analyst’s reports as well as by Coventry management during the investor telecon on the day the acquisition was announced lead me to believe Coventry does not view FH management as up to the task. This, coupled with the large payday for 16 FH executives (splitting over $20 million between them) leads me to speculate the senior level at FH will not be around much longer.
–There were also rumblings in the market that FH was looking for an acquirer for some time; the Gazette goes on to quote Wachovia’s report; “Even without the acquisition, we have doubts about First Health’s ability to grow or even maintain recent results,” the analysts wrote. While Coventry “has bought ‘fixer-upper’ plans in the past, the repair of [First Health] will require a different set of tools.”
Coventry’s management takes a markedly different view from these reports, a view that is best summarized as “the acquisition of First Health by Coventry = the whole is greater than the sum of the parts.” After the hit the stock has taken, Coventry responded with a detailed explanation/defense of the deal at an analysts’ meeting in early November. Again, the main point appears to be that the new markets and national scope will enhance Coventry’s future earnings potential.
The Workers’ Compensation Research Institute is one of the leading research organizations focused on WC. Their annual conference in Cambridge MA just concluded, and once again WCRI produced some interesting and thought-provoking studies.
This year’s conference used a slightly different format, focusing on individual states rather than comparing several, or many, states in a single presentation. Stakeholders from TX, TN, and CA presented after summary data presentations by WCRI staff.
Here’s the highlights as I saw them.
1. Drs. Peter Barth and David Neumark discussed the impact of Provider Choice on Costs and Outcomes. Interesting findings included:
— Costs were lower, and outcomes better, when the employer chose the provider, than when the injured worker chose a provider they had not previously seen.
–When an injured worker chose to use a provider they had previously seen, costs and outcomes were equivalent to those delivered by the employer-selected provider.
–The “new provider”‘s outcomes and costs were significantly worse.
2. The CompScope 4th edition was previewed; this is a summary of medical costs, disability duration, benefit amounts and other outcomes for lost time claims (and others, but we’ll only discuss LT claims) in 12 states. Items of note include:
–Of late, medical costs have been growing rapidly; with costs in all but 3 of the 12 states increasing by more than 10% from 01/02 to 02/03. California saw the highest increase at about 17%. Considering that CA is the largest WC state, that is a truly frightening number.
–There appears to be a strong correlation between medical costs and medical cost containment expenses, with most states favored by low medical costs also enjoying low cost containment expense, and high cost states also burdened by high cost containment expenses. My take is this may be heavily influenced by the percentage of savings model used in PPO deals; the higher the medical costs, the greater the “discounts”; the greater the discounts, the larger the PPO fees; and thus the greater the “cost containment expense”.
So, the higher the medical expense, the more money the deep-discount, percentage-of-savings PPOs make. Interesting incentives…
3. Disability duration factors – Worker age, education level, part-time and/or seasonal workers, and employee-supervisor trust factor were all key factors influencing disability duration. Workers over 60 had much worse return-to-work results than younger workers. There was also wide variation among states, with Texas hampered by RTW rates substantially lower than the median. Regarding education, workers with high school diplomas returned to work much sooner than drop-outs.
The full CompScope 4th edition will be available from WCRI in 2005; while somewhat weighty, it is a “must-read” for managers and executives involved in WC.
Underwriters should also pay close attention to the report; there are a wealth of “indicators” that the insightful underwriter can use to better select, and de-select, risks.
Why do doctors contract with large networks to provide care at a deep discount? Do they expect to get more business from those relationships? If so, does that additional business ever arrive at their examining room? How many other physicians in their area are also contracted with that network? If there are many, are they merely joining to maintain their patient base?
Have they actually done the math to determine the impact of the discount on their finances?
Here’s an admittedly simplistic analysis of the financial impact of a discounted patient visit.
- The “non-discounted” price would be $100
- The discount is 20%
- The net profit on the average patient visit (non-discounted) is 30% (an unreasonably high number, but easier to work with for our purposes)
The doctor makes a profit of $10 per discounted patient visit, and therefore must see three times as many patients to justify that 20% discount. And that’s before one factors in the additional fixed costs associated with the larger patient load – more parking, more staff, a larger waiting room, more examining rooms, and more of his/her professional time.
Perhaps more physicians are “doing the math”, and that is why managed care firms are having a much tougher time getting discounts.
The network deep discount model has other fundamental flaws, flaws that are only now beginning to be fully appreciated.
The investigations begun by Eliot Spitzer of broker-insurer business practices have not only spread from property and casualty insurance to other lines, but to other states, and now it appears there may be international repercussions as well.
The investigations and subpeonae appear to be increasing on a daily basis, with each morning beginning with an annoucement of additional targets. Employee benefits insurers and brokers are now coming under scrutiny, while the number of P&C carriers facing subpoenae has increased again today with St. Paul/Travelers the latest subject. Chubb is also under investigation, while also facing allegations concerning their relationship with their auditors, Ernst and Young.
Expect this to continue, as Attorneys General throughout the country seek to ensure their consituents are protected, simultaneously demonstrating their diligence. This last comment may be viewed as cynical, but undoubtedly any regulator worthy of the post will want to be sure they are viewed as aggressively pursuing this hot issue.
Undoubtedly the ramifications will continue to be felt – latest rumors have the Mercer Consulting entity splitting off from parent Marsh…
Notably, the highly publicized nature of the charges has drawn the attention of federal regulators, with the recent release of a GAO report on federal regulation of financial services. Included in the report is a discussion of the potential for changes in the role of the feds in insurance regulation.
This issue will not go away anytime soon.
It looks like the Anthem-Wellpoint merger is going to go through after all. John Garamendi, the Insurance Commissioner of California, was holding up the merger, claiming it would cost California’s members in both dollars and health care quality.
Garamendi successfully negotiated with the merger parties, getting them to provide over $100 million in payments to fund rural health, child health, nurse training, and other initiatives. In addition, Anthem-Wellpoint promised to not raise CA premiums to pay for the merger; the actual language mentioned that the entity will not pass along merger costs to Blue Cross (Anthem) customers in CA.
This is exactly what we had predicted would occur; the only surprise is it took longer to get the deal done than I thought.
What does that mean? Maybe something, perhaps not much. There are any number of reasons for premium increases, and lots of ways to change premiums that could be used to “hide” merger-associated costs. These could include:
–plan design changes
–different provider panels
–amortization of capital expenses
–different risk pooling
–increased distribution expenses
— and on and on.
The net is this – Garamendi got some additional concessions, the “rate increase” deal is probably unenforceable, and he, and Anthem-Wellpoint, can move on to other priorities. For Garamendi, it may likely be contingent commissions, sham-bidding, and other broker-consultant games. Your author’s opinion is this elected official can’t stand to be upstaged by another regulator, and Mr. Spitzer’s press is likely driving Mr. Garamendi nuts.
While Anthem and Wellpoint are free to move on, brokers, agents, et al are likely to feel the “wrath of a regulator scorned.”
The Piper Report, a well-respected weblog focused on all issues healthcare, published a great piece about techniques for encouraging enrollment in high-quality health plans.
Briefly, the piece documents the success some states see when they use “performance based auto-assignment”. This is engineer-ese for enrolling people in health plans based on the performance of the plan. States practicing “PBAA” (my acronym, not their’s) assign Medicaid recipients to health plans based on a comprehensive analysis of plans’ performance – quality, cost, access, patient satisfaction may be used in this analysis. This assignment only occurs if the recipient has not picked their own plan within the required time frame.
“PBAA” is being extended to Medicare prescription drug beneficiaris, in January of 2006. The first of that year, over 7 million Medicare recipients will find themselves participating in prescription drug “auto-assignment”.
There will be clear winners and losers, but among the winners will be taxpayers and beneficiaries. No topic has generated more heat and less light than the issue of “pay for performance” – here is the best example to date of why performance matters.
Perhaps employers should consider employing the same method in selecting health plans for those workers who can’t seem to enroll on time…
Hospital costs are among the key drivers of medical inflation. In turn, one of the largest components of hospital costs is labor.
What may not be “new news” to many is the nationwide nursing shortage. This shortage is leading to closure of wings or departments, hospitals raiding each other for staff, importation of nurses from the Phillipines and other countries, and chronic overtime for the majority of nurses.
Nowhere is this shortage more acute than California, where the “rock” of the RN shortage has run into the “hard place” of the law. A 2003 California law requires all hospitals to maintain a staffing ratio of one nurse to each eight patients. It further limits the number of vocational nurses, and prohibits all but RNs from caring for critical trauma patients. That’s today.
California’s nursing shortage
In less than two months, hospitals will have to staff at a 1-to-5 standard. However, regulators are asking for, and will likely receive, a delay till 2008 for implementation of that standard. This looks like a foregone conclusion, which is certainly appropriate as many hospitals can’t meet the standard today. In fact, according to a piece on the California nursing shortage in California Healthline,
“A California Healthcare Association survey found that 85% of hospitals do not comply with the regulations, and a California Nurses’ Association survey found that 42% not do comply. ”
Here’s the link. Penalties for non-compliance are significant, and will likely be enforced with more alacrity in coming months. With state laws mandating more nurses, and few nurses to be found, the price elasticity rules of economics will come into play. Big demand for few nurses mean all nurses will make more money – probably a lot more.
The result – higher hospital costs in California, and, short of importing nurses, little any managed care firm, insurer, or employer can do about it.
The latest information on the Coventry acquisition of First Health may provide a sense for the future of the merged entity.
Profits at First Health are down, ostensibly due to “merger related charges” and steep declines in revenues from FH’s MailHandler’s employee benefit program.
The MailHandler’s program is a federal employee health benefit plan, formerly administered by CNA Insurance. Several years ago FH won the contract, taking it from CNA (who happened to be a FH customer at the time). It accounts for a significant portion of FH’s topline (revenue).
Coventry EVP Tom McDonough has been named to oversee the integration of FH and Coventry. McDonough joined Coventry from UnitedHealthGroup, where he was responsible for their large, multi-state employer groups. Clearly, this experience is highly relevant to FH’s present market mix.
Several years ago, UnitedHealthCare divested itself of its’ Workers’ Comp entities, specifically Focus Healthcare and MetraComp, after the MetraHealth acquisition. McDonough was at United at the time, as were other current Coventry executives (e.g. Harve DeMovick, now CIO).
Coventry and FH stock prices have not fared well since the acquisition announcement. The Motley Fool, long a critical observer of FH management, had this to say just after the announcement:
“No sooner had the buyout news gone out than 11% of Coventry’s market capitalization vanished, and McGraw-Hill’s (NYSE: MHP) Standard & Poor’s placed Coventry on its watchlist for a possible debt-rating downgrade. The reason: Coventry may be overpaying for this underperforming business. Coventry plans to pay for its purchase roughly half in stock (at a 0.1791:1 exchange rate) and half in cash ($9.375 per share of First Health). At Coventry’s Wednesday closing price, that would value First Health at $18.75 per share, imputing a valuation of $1.7 billion to First Health. Factoring in Coventry’s own share price decline in response to the deal’s announcement, however, brings the agreed value of First Health shares down closer to yesterday’s close — about $17.70.”
Currently, Coventry’s stock price remains significantly below the pre-acquisition level (from $53.50 to $44.01 today). I doubt either Coventry or FH management are terribly pleased with this…
One of the criticisms advanced by analysts is the potential for Coventry management (which is highly respected) to become distracted by the merger and the non-core FH business – PPO, Workers’ Comp, etc.
Net is this – if the Coventry stock price continues to languish, expect to see a “return to the core” – perhaps spinoff of some of the non-core assets.