Sources indicate the “rebates” that broker Arthur Gallagher & Co. has recently paid to several employers in Florida may be related to contingent commissions and/or fees paid by managed care firms to the broker. At least three municipalities have received checks, including $1.3 million to the City of Gainesville, over $1 million to Lakeland, and over $100,000 for Alachua County.
The State Attorney General’s office is heading up the investigation, and there are apparently internal inquiries under way at several other public entities. Preliminary indications are that at least one city risk manager has been “asked to resign”, and other moves are likely in the next two weeks.
According to the Attorney General’s release,
“There are indications that insurance brokers have improperly steered business to insurers who pay the brokers the highest fees rather than seeking the best deals for their customers. There are also indications that the companies may have engaged in bid-rigging. The alleged practices could be in violation of Florida’s antitrust laws, Chapter 542, Florida Statutes. Penalties allow fines of $1 million for corporate violations, $100,000 for individuals and for three times the amount lost due to illegal activities.”
Gallagher has responded to the inquiry, claiming that this is due to the actions of a single producer who no longer is associated with the firm. The statement follows:
“During an internal process review, Arthur J. Gallagher discovered an over billing discrepancy that did not follow the terms of the contracts for the City of Gainesville, the City of Lakeland and Alachua County…These discrepancies were isolated incidents handled by one AJG producer who has since been terminated…As soon as these discrepancies came to our attention, the situation was immediately rectified with the over billed amount returned and the appropriate Florida authorities notified.
While it is entirely possible that Gallagher had nothing to do with this matter other than receiving the inappropriate payments, it is indeed troubling that
a. it took Gallagher ten years to uncover this problem
b. no explanation other than a brief “we billed you in error” was provided
c. risk managers appear to be at risk over this
What does this mean for you?
Hopefully, nothing…

The Ohio Bureau of Workers’ Compensation announced that it will be significantly reducing reimbursement to hospitals . Cuts will be 21% for inpatient and 17% for outpatient services, and are slated to go into effect October 1, 2005.
Estimates of savings to BWC are about $3.3 million per month, or $40 million a year.
The cuts were the direct result of an analysis performed by a major union in the state which indicated hospitals’ most profitable line of business was workers comp. Previously, reimbursement was 70% of a hospital’s stated charges for inpatient admissions; the new rate will be 55% of charges. Outpatient rates would drop from 60% of charges to 55%.
While one has to applaud the quick action by BWC, an entity that has never been known for fast action, cutting reimbursement that is based on a percentage of charges is a highly suspect way to reduce expenses – what, if anything, prevents hospitals from increasing their charges?
Moreover, this is an across the board cut, and does not reflect any measure of outcomes, efficiency, or results. Thus the hospitals that have excellent results and performance suffer the same cuts as poorly performing hospitals.
Once again, a blunt instrument employed in the name of cost control.

Managed care firm CorVel recently announced its results for the most recent quarter; revenues are down 7% and EPS dropped 12.5%. The company attributed its poor returns to soft claims volume in the workers comp sector (the source of most of CorVel’s revenues), higher costs for regulatory compliance, and soft case management volume.
Perhaps even more telling is the trend: profits for the quarter were .28 per share last quarter, .32 in the same quarter in 2004, .40 in 2003, and .36 in 2002. The profit margin is also slim at $2.8 million on revenues of $70 million. While the cost of revenues declined, SG&A expenses actually increased by 1%. One wonders how this is possible, despite the “increased costs of regulatory compliance.” Moreover, the stock carries a hefty P/E of 29, a valuation more in keeping with a growth stock than one with a three-year trend of flat or declining revenues and profits.
What is really hurting CorVel, which is most accurately characterized as a work comp managed care firm, is their business model and reliance on revenues and profits from nurse case management.
CorVel is highly decentralized, with operations management varying greatly from one office to the next. Some of their offices, notably northern Virginia, appear to be well run, while others, including south Florida, have significant problems as evidenced by the Broward County School Board audit. In addition, sources indicate CorVel’s IT infrastructure hampers their ability to serve national customers, as it has very limited ability to integrate across offices. I’m no IT expert, but the company’s dearth of national accounts seems to support that claim.
Nurse case management is a low-margin, high fixed-cost business that is mature, highly price competitive, and fraught with opportunities for “creative” billing. CorVel has hundreds of highly-compensated nurses that must be working billable hours at all times if it is to generate any reasonable returns. This is a tough, tough business that is likely dragging down results.
The company has made several acquisitons over the last couple of years which may have helped generate positive results; mention of these were notably absent in the earnings release.
In their earnings release, CorVel noted that it’s Network Solutions (PPO) revenues increased as a percentage of total revenues. This seems to imply that it was flat or negative quarter-over-quarter. Industry sources indicate that CorVel did not make it past the first round in a recent PPO network RFP process at a large national carrier due to an inability to share critical pricing data.