Insight, analysis & opinion from Joe Paduda


Medicaid, Round Five

While state legislatures and governors are moving to make significant changes in Medicaid programs, a coalition including AARP, pharmaceutical manufacturers, labor unions, pediatricians and lobbying groups are preparing to do battle for their constituents. The impetus behind this nation-wide movement is the agreement between the Bush Administration and Congress on a $10 billion cut in Federal contributions to Medicaid programs (state governments pay somewhat less than half of the costs of Medicaid, with the Federal government picking up the rest). With that historical decision now law, states have to figure out how best to implement the cuts.
Perhaps most telling, there appears to be consensus from politicians of all stripes that something has to be done. And, given the influence that states have over Medicaid decisions, we will likely see a broad array of possible solutions advanced by legislators. Options include:
— requirements for beneficiaries to share in costs through co-pays and deductibles
— cuts in reimbursement for certain providers, notably nursing homes
— “stripped-down” benefit packages, with different benefits for children, the disabled, elderly poor, and working poor
— negotiations with pharmaceutical manufacturers to reduce drug costs
— change Federal funding for long-term care to a “block grant”, whereby states receive a set amount of money and can make their own decisions as to how to allocate those funds.
This is a good thing. There is no question the US needs to address the exploding costs of Medicaid, and states are excellent “labs” to test various approaches. There is also no question this will be painful for some, with recipients, pharmas, nursing homes, and hospitals among the likely victims. But, we have no choice. Medicaid has grown significantly in recent years, primarily driven by increases in enrollment. Many of the new enrollees are the working poor; individuals who work for employers that do not offer health insurance or cannot afford the employee contribution towards the premium.
What does this mean for you?
This is getting as tiresome for me as it is for you, but prepare for cost-shifting as pharmas and providers seek to recoup lost income by increasing charges and utilization for commercial payers. Especially vulnerable are liability and auto insurers, as their “managed care” programs are in the dark ages.


Merck detailing – crossing the line?

Back to the detailers v. doctors, if only just for a moment. Dr. Gary Schwitzer of the U. of Minnesota has posted an interesting piece on Rep Henry Waxman’s indictment (figurative, not literal) of Merck’s behavior related to misleading MDs about Vioxx.
Another blog has a highly entertaining review of some highly embarassing marketing training literature ostensibly used by Merck. Suffice it to say that they are using anatomy as well as physiology in their efforts to “reach” docs…
What does this mean to you?
The dollars pharmas have to spend on convincing MDs to order their drugs are much larger than the dollars managed care firms have to “counter-detail”. If managed care firms, insurers, and employers want to stand any chance in this battle, they need to figure out how to do a much better job of educating docs than they have to date.


Coventry call

More from the “group health” side of the Coventry call…
In general, a very strong quarter for one of the mid-tier players in managed care. Loss ratios were down, medical trend slightly decreased, and efforts are underway to address some of the key components of medical inflation, notably imaging.
There was some talk about increasing copays and deductibles, a “cost containment” mechanism from the early days of health insurance. These are now called “benefit buydowns”…
Details –
In line with other managed care players, medical cost pmpm trends were at 8.1% for the first quarter, which was mirrored by their Medicaid and medicare business. This was driven by better utilization (volume of services delivered), with inpatient utilization and pharmacy trending well. For pharmacy trend, Coventry also saw “more favorable unit cost and utilization.”
Medical Loss Ratios improved significantly; my sense is this was likely driven by the improvements in utilization coupled with premium rate increases.
Coventry execs talked about the components of medical expense in some detail, paying especial attention to diagnostic imaging. Evidently they are working hard on this area as costs are increasing. Specifically, Coventry is looking to cut unit prices. They are also trying a somewhat unique approach which will bear watching, purchasing imaging on a capitated basis from a vendor for imaging. In addition, they are using precert on all significant imaging in most markets.
On the benefit design side, Coventry is selling more higher deductibles and copay programs, referred to as “benefit buydowns.” For those of us old enough to remember, these appear to be nothing more than cost shifting of initial expenses to the plan member. This has been extended to specific service lines, including “benefit buydowns” in pharmacy.
Consumer Directed Health Planss – they have one, it is in the market place, although they have not seen huge demand due to their smaller size market – have 10k members in some form of that, expect it will grow but “unlikely to be exponential”.
Want to write a few large accounts and keep the “small group engine” going.
What does this mean for you?
Medical inflation is not tamed, but more under control than in prior quarters – this is consistent with other managed care firm results, so if you are not seeing a leveling off of the “rate of increase”, you’re doing something wrong.
Attention to the drivers of trend, notably imaging, is growing, and reflects a deeper understanding of the nuances of health care. Simply put, you cannot manage imaging like you manage hospital expenses. If you haven’t figured this out yet, get with the program.



Interesting notes from their analyst’s call, focusing on their First Health acquisition…
They are “achieving synergies” by reducing headcount and consolidating purchasing. On the pink-slip front, the combined First Health-Coventry operations will shrink by about 450 positions by year end. In total, they expect to exceed $25 million in synergies.
They are also successfully renegotiating vendor contracts; examples include telecom where expenses were $21 million between FH and Coventry. They have renegotiated deals to achieve savings of over $5 million, with no operational change.
In April, they completed conversion to FH for OON emergencies from an outside vendor who supplied that OON service.
During the call, Coventry’s CEO, Dale Wolf, was quick to note the value of FH, and specifically their workers’ comp products which are generating slightly more than $210 million in revenue per year (about 3% of Coventry’s total), but a surprising 11% of their margin. A profitable product line indeed. In total FH revenue was under $142 million in Q1 which was less than expected but not materially so.
Wolf stated that Coventry wants growth in their 3 areas at FH (WC, network rental, and the Federal Employee Health Benefit Program (FEHPB)), and noted that the equity markets appear to have confirmed their belief in FH.
Wins for FH for the unit include an expanded relationship with AIG, a new customer in Fireman’s Fund (which had been in the works for some time), (both in workers comp) and selling (non WC) services to a Fortune 100 employer. Wolf also cited new business wins in rental network. Coventry expects FH will continue to grow modestly in 2005 but more in 2006
On the network side, it sounded like Coventry is working to renegotiate facility deals to drive better discounts, although this was somewhat unclear.
Looks like FEHBP is a potential problem with declining enrollment, but high premium increases appear to have moderated somewhat and Coventry sounds hopeful.
The company has added one more position at senior level, one more to go. Wolf says they have assimilated FH and are in execution mode. Sources indicate the slot that is still open is for the leader of the Workers Comp unit; they continue to look outside the combined company (search has been going on for about two months to date).
While I have every confidence in Coventry’s ability to maximize the return from the FEHBP and network rental business (this is fairly similar to their core group health business), my sense is the optimism about FH’s WC business may be somewhat misplaced. Here’s why:
1. FH’s largest customer is Liberty Mutual, which accounts for about a fifth of their business in WC. Liberty has their network contract out to bid, and I would be quite surprised if First Health retains all of their present business. Expect them to lose several states to competitors.
2. The Hartford’s recently announced deal with Aetna to access their WC network in PA noted that they plan to expand their relationship into other states. Sources indicate this is not a hollow promise, so I would expect the Hartford to move other FH states to Aetna over the next 9-12 months.
3. FH’s WC network continues to suffer from “hollowing out”, as payers hire specialty managed care vendors such as OneCallMedical and MedRisk to provide imaging and physical medicine networks respectively. (note MedRisk is an HSA client). WIth imaging at slightly less than 10% and PM at about 20%, the loss of network access revenue for FH will grow as more payers adopt this strategy.
4. EDS manages FH’s medical repricing technology, and their ongoing struggles with the FH medical bill repricing system are well known, and are not helping the company solidify relationships with existing customers. This has always been a “loss leader”, strategically identified by the ex-FH leadership as a way to “lock in” customers for the FH network. It remains to be seen if the new bosses continue to support that strategy.
What does this mean to you?
Coventry management is quite strong, and has made signficant progress in fixing some of FH’s problems
. If you are working with FH, patience may be the watchword, but additional progress, in the form of a defined IT strategy, an increased willingness to partner with specialty networks, and a demonstrated understanding of the huge asset that is their medical bill database will be a requirement for success.


Center for Medicare/Medicaid Services’ impact on private payers

There has been lots of news about Medicare lately; a good round-up is available at California HealthLine. News includes:
Physician reimbursement – the current fee schedule expires in 2006, after which reimbursement is scheduled to decline by 5% annually from 2006 to 2012. While some are predicting, with apparent confidence, that the cuts will be eliminated, it appears that others on Capitol Hill, searching for ways to deliver on Bush’s commitment to cut the Federal deficit, are turning their attention to Medicare.
 Medicare will be covering more services performed at Ambulatory Service Centers. Most of these are minimally invasive surgeries, and many have been performed at ASCs for years. It looks like CMS is just catching up with normal practice. However, some procedures, such as laparoscopic cholecystectomies, which are routinely done in ASCs, will not be covered in this setting by CMS.
 CMS will increase payment for stays in long term care hospitals by 3.4% on July 1 of this year and make it easier for LTC facilities to receive payment for “outlier” cases (those patients that consume significantly more resources).
 Drugs – under pressure from the retail pharmacy industry, CMS will require health plans to cover 90 days of drugs whether they are obtained at a retail or mail order pharmacy.
What does this mean for you?
As goes CMS, so follows commercial insurance. Here are the potential effects.
1. Physician fee cuts – physicians will seek to recover lost income from other payers, and those other payers tend to be their group health, auto, and workers’ comp patients. Watch for cost-shifting


workers comp and uninsurance

Workers’ Comp Insider is published by LynchRyan Associates, a company with a long-standing, and well-deserved, reputation for excellence in injury prevention and return to work. Disclaimer – the folks at LynchRyan are also friends, and we follow each others’ blogs religiously.
At the risk of appearing incredibly incestuous, there is an excellent posting on their blog of a real life example of the impact of the lack of health insurance on an employee, employer, and the financial situation of both. I tend to be somewhat abstract in my posts about the impact of uninsurance on other lines of coverage; their posting makes this problem real.


Cheating docs

One of the more distasteful practices in the medical profession is the subject of an article in today’s Wall Street Journal. The practice is so-called self-referral of patients by a physician to an imaging facility where they stand to gain financially. Yes, there are laws against this. Yes, physicians and business folks make lots of money thinking up creative ways to circumvent these practices.
This is one of the more creative I have heard of. To quote the Journal;
Imaging centers “structure referral deals as leases, under which physicians, each time they send over a patient, are renting the scan center’s facilities and employees.” The physician then bills the insurance company whatever rate they deem appropriate, and receives payment directly.
Imagine what they could accomplish if they worked to create value and better health, instead of thinking up ethically-challenged ways to generate even more physician income.
What does this mean for you?
If you are contracting with physicians, be very careful about the language re self-referrals; although many tend to turn up their noses at the mention of contract law, this is a great example of why the details are critical.
If you are evaluating an upsurge in diagnostic imaging, tie the referrals back to referring physicians, and look for any sudden increases. Then, have a talk with the doc.


Cover the Uninsured Week

This is Cover the Uninsured Week, a national program to bring awareness of and discussion of solutions to the US’ 45 million non-elderly without health insurance. While this elicits a big yawn from many with health insurance, that is a very naive response.
As a good friend put it, these are not the uninsured, they are the self-insured. Unfortunately, their self-insurance policy limits tend to be in the hundreds of dollars, therefore any claims in excess of that “retention” are not covered by the “claimant”. Instead, the funds required are paid via overt (federal and tax dollars go to health systems to cover uncompensated care) and covert (cost-shifting due to providers seeking to recoup lost income, claiming injuries are suffered at work, and therefore subject to workers’ compensation) taxation.
There is no question we are paying for the uninsured’s health care through subsidies and lost productivity (those without health insurance tend to miss work more, operate at a lower functional level, and suffer from more serious chronic conditions). What is also apparent is there is little political will to challenge this status quo.
However, rising premiums are forcing employers to drop health insurance and employees to stop purchasing it due to the high premium contributions. This will undoubtedly lead to more uninsureds. Large employers such as GM are suffering due to their high health care costs, as is the federal government. Sooner rather than later a Fortune 500 employer will declare bankruptcy, dragged down by the cost of retiree health care costs and union plans. And it will attract more attention than the demise of the coal miners’ union plans that went bust in the nineties
Perhaps when GM or a sister company goes under our politicians will get the backbone injection needed to tackle this issue. But since their health care coverage, paid for by the taxpayers, is one of the richest plans in the country, they’ll have little personal appreciation for the reality faced by the uninsureds.
The insurance industry has mostly ignored the problems of the uninsured, instead choosing to pass increased costs on to customers, negotiate better deals with providers, and hold forth at the occasional conference. Given the lack of any significant organic growth potential at any of the largest health plans, this is surprising. After all, their universe of potential policyholders is shrinking while the industry has rapidly consolidated, leaving little opportunity for the significant growth needed to please the equity markets.
The Week is sponsored by the Robert Wood Johnson Foundation.
What does this mean for you?
Health insurers are missing out on a big opportunity here. There are 45 million potential customers, many of whom have jobs and are earning decent money, money that could be used to buy some form of health insurance. Whether by lobbying, thru industry consortia, or innovative product development insurers would be well-advised to pursue this market.


AIG’s problems continue

AIG is still in trouble. The latest announcement indicates the firm is still unable to unravel the complex financial transactions that are causing distress in Mr. Spitzer’s offices, and thus will be unable to report their audited results (as previously promised) on Monday.
Instead, AIG will report unaudited results and indicate where they have found potential problems. So far, those problems “only” amount to $2.7 billion in overstated reserves, a figure that is a mere fraction of the company’s total assets. I do wonder why they would run the risk of publishing unaudited results, as they may well be wrong, and perhaps significantly so. If the unaudited results are in fact significantly different from the final, audited results, this premature disclosure will cast further doubt on management’s grasp on the fundamentals. A pretty scary thought.
On another, seemingly-unrelated topic, the burgeoning issue of AIG’s apparent willful decision to mis-report WC premium as liability premium in several states has led to possible investigations in NY and California. Simply put, AIG knew they were mis-representing some portion of their WC premiums as liability as far back as 1992, yet by 1997 they had not completely resolved the issue.
This is not just a meaningless accounting error. In many states, WC insurers pay a percentage of their earned premium into a guarantee fund that sets aside reserves to cover potential losses from insurers that go bankrupt. Thus, mis-representing WC premiums as liability saved AIG a lot of money.
I find it hard to believe that a company like AIG that is so numbers-oriented, that constantly measures and monitors its’ financial results, and that is so creative and innovative in all things financial, could take five years to resolve what is really nothing more than an accounting problem. Yes, it is possible, it just strains credibility.
As noted before, AIG is a very well run company with a lot of innovative, hard-working, extremely intelligent people. There is nothing more damaging to their productivity than constantly waiting for the next bad news.


Property and Casualty 2004 results

The property and casualty industry had a banner year in 2004, making money on an underwriting basis for the first time since 1978. The combined ratio of 97.9, combined with investment profits produced a return on equity of 10.4%, a significant improvement over historical results.
Explanation for non-insurance folks. The combined ratio is the sum of claims and administrative expenses, and represents all of the claims, underwriting, sales, and other expenses. Typically the P&C industry loses money on an underwriting basis (producing combined ratios of over 100%) and makes money on investing the premiums customers have paid. As many P&C insurance lines have long “tails”, claims may not come in for several years, and may not be paid in full for decades, allowing the insurer to reap the investment returns.
While all looks rosy, the underlying picture is somewhat troubling. The returns were driven by both increased prices for insurance and decreases in claims expenses. However, the growth in premiums is rapidly tailing off, with AM Best predicting growth in 2005 to be well below 2004’s 4.7%.
To quote Best,
“As a sign of things to come, net premium growth was only a little better than half the percentage increase for 2003. A.M. Best data show that increases in net premiums written have been reduced for the second straight year, from a peak increase of 14.7% in 2002 to 9.5% in 2003 and 4.7% in 2004. With the deceleration of rate increases giving way to price decrements in the latter half of 2004 in most major commercial and reinsurance lines, and with the expectation that this will be the norm in 2005, A.M. Best expects written premium growth will slow to 1.2% in 2005.”
This is happening because more insurers are seeking to cash in on the profitability boom, equity markets are poor alternatives for capital investment, the bond market returns are marginal at best, and real estate appears to be in or headed for a bubble. Why does this matter? For the simple reason that large investors are always looking for places to invest their money, and with other alternatives appearing strikingly unattractive, many are considering “parking” their funds in what is today a profitable vehicle, insurance capital.
The more that happens, the more price competition occurs. Thus the cycle begins anew, with price pressure leading to price cuts, leading to declining margins.
What does this mean for you?
P&C rates are likely to decline in the near future, especially for short-tail lines such as property and fire. Workers’ comp will not be far behind, with liability following soon after.

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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