Insight, analysis & opinion from Joe Paduda


Shift from employer-sponsored health insurance to state-sponsored coverage

While the number of people with employer-sponsored health insurance has declined in California, the overall rate of uninsurance has not dropped, due to a rise in enrollment in the government’s Medi-Cal program. Moreover, in 2003 almost 800,000 Californians had access to insurance at their employer but could not afford the premiums. Average contributions increased from $114 to over $200 from 2001 to 2003.
These contributions went to health insurance costs that ranged from $3700 for an individual to over $10,000 per family in 2004.
In total, 54.5% of employed individuals had employer sponsored health insurance, a drop of two points from 2001 to 2003.
Lots of statistics, but what do they mean. Here’s my take.
1. Employees are paying roughly 25% of the cost of their insurance, when it is available.
2. The burden of providing health insurance is shifting towards state-sponsored programs from employer-sponsored programs.
3. This shift is likely to continue, and in fact to accelerate due to rising premiums.
I find it fascinating that we continue to debate the merits of a state-based system of health insurance v. employer based v. individual portable programs. Meanwhile, market forces are driving the nation in the direction of a state-sponsored system. So, while we engage in intellectual debates, outside factors drive reality.
Alain Enthoven of Stanford contends that we need to eliminate the employers’ role in health insurance. I disagree. Dr, Enthoven may well win the debate, assisted by these underlying external forces.
What does this mean for you?
If you are a health plan, you know quite well the challenges of adding lives and revenues in what is a mature market. That’s why health plans are moving so aggressively into government-sponsored programs. Continue that work, but don’t forget the employers – they still pay most of your premiums.


2004 Property Casualty industry results

2004 was another banner year for property and casualty insurers as industry profits (investment income, underwriting, and all others) surged to $42 billion, a 28% increase over 2003 results. Industry capital and surplus increased by $55 billion, or over 11% from the previous year. And, underwriting profits were up $9 billion from 2003’s $2.9 billion loss as a result of the industry’s combined ratio (losses/claims plus administrative expenses) dropping to 98.9.
Certainly excellent results of which the industry can be justifiably proud. It is indeed a rare event for the industry as a whole to enjoy such stellar returns. That’s the good news. The bad news is these results have been a result of increased pricing over the last few years, and there are growing signs that prices are either level or declining for most lines of coverage.
As capital enters this market, and pressure grows on both stock and mutual companies to produce even better results, returns will decline as insurers compete for market share.
What does this mean for you?
If you are a risk, good days are back. If you are an insurer, maintain pricing discipline and keep your “cost of goods sold” under control by managing risk through loss prevention and medical management. Now is NOT the time to scrimp on the basics of insurance – risk selection, loss prevention, and claims management.


Less “Managed care” for Washington surgeons

Surgeons who are top performers in Washington’s Department of Labor and Industries (L&I, i.e. workers comp) program will no longer be subjected to utilization review hassles. 111 physicians have been identified as providing all necessary documentation to the state’s UR program, and all of the surgeries they recommended were approved. The result – they won’t have to ask permission anymore.
The UR program is run by Qualis Health, and focused on carpal tunnel, shoulder, and knee surgeries performed over a two year period. According to the report in Insurance Journal, the 111 surgeons’ results will be monitored over the next year.
“If it is determined that the number of unnecessary surgeries doesn’t rise as a result of less oversight, L&I likely will expand the program to train and include additional physicians.
L&I-funded studies, conducted by the University of Washington, show that injured workers who get prompt and appropriate medical treatment tend to recover and get back to work more quickly. That results in lower workers’ compensation claim costs and less missed work. One obstacle to receiving timely treatment is unnecessary delays in authorizing procedures.”
No kidding.
While it is gratifying to see that physicians who perform well get treated differently by managed care overseers, it is indeed frustrating to recognize that this is one of the few programs of its type, and managed care in the form of precert has been around for more than two decades.
Here’s hoping this is just the first of many intelligent decisions to identify the good docs and leave them alone.
What does this mean for you?
If you are a physician, perhaps a little hope. For managed care firms and folk who contract with them, get with the program. Stop monitoring everyone and start using that huge amount of data resident on your systems to identify the good docs.


Bush mentions health care

Pres. Bush noted in a speech earlier this week that health care is a drag on the economy and family budgets. Ben Bernanke, Chair of the Council of Economic Advisers, said ” These are issues that we are going to have to address because they are significant.”
According to California HealthLine, Bush’s proposals “include tax-free health savings accounts, tax credits to help low-income individuals purchase health insurance, association health plans, support for new technology to reduce medical errors and limits on medical malpractice lawsuits.”
These are at best tweaks around the margins. Take limits on med mal lawsuits. Total costs for all expenses associated with medical malpractice, including defense, insurance, etc., amount to 0.46% of total medical costs. Medical malpractice is NOT driving health care cost inflation.
New technology will do little, if anything to address the underlying drivers of health care costs which are technology and price per service.
It is troubling that the President has done so little to address an issue which is at the heart of the nation’s economy as well as the wellbeing of its citizens.


Spitzer’s Marsh probe yields another guilty plea

NY Attorney General Eliot Spitzer’s ongoing investigation has produced another guilty plea, this time from an underwriter at Liberty International, a subsidiary of Liberty Mutual. The charge stems from bid-rigging; the underwriter, Kevin Bott, would submit unattractive bids at the direction of broker Marsh McLennan so Marsh would be able to show their client that another insurer’s proposal was more attractive.
By steering their customers to specific insurers, Marsh gained additional commissions.
Bott pled guilty to a misdemeanor charge, agreed to testify, and is subject to a maximum of one year in jail.
This is the investigation that won’t go away – the death by a thousand cuts, the Chinese water torture. And it shouldn’t go away, as these are clearly unethical and immoral activities that are also illegal. What is most troubling is the lack of attention from some in the industry who appear to be waiting for this to end so they can go on about their business.
Those folks are sorely mistaken. The world has changed, and business as usual will not be tolerated in the future.


More problems with workers comp in Florida

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…


Spitzer’s prosecution of insurance execs

NY Attorney General Eliot Spitzer’s ongoing investigation into the insurance industry has produced guilty pleas from 14 insurance execs so far. And more prosecutions and pleas are likely in the near future. Leading the list of the guilty are Marsh with six, followed by AIG with four and Zurich with three.
Most recently, four executives pled guilty to fraud and restraint of trade charges.
Insurance Journal notes that: “according to complaints filed by Spitzer this week, all four executives (three from Marsh and one from Zurich) were part of a scheme to control the excess casualty insurance market. More guilty pleas could be forthcoming, a spokesman for Spitzer said, but he declined to comment further, citing the ongoing investigation.”
What does this mean for you?
Probably more paperwork
, as compliance staffs seek to prevent any future collusion or appearance of same from tainting their business transactions.


Ohio Workers Comp to cut hospital reimbursement

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.


Concentra to acquire Beech Street

Concentra will acquire Beech Street for $165 million. The announcement indicates that the deal will be finalized this year, and a definitive agreement has been signed by both parties.
Beech’s senior management, led by Bill Hale, will be continuing in their roles, according to the companies’ joint press release. Concentra CEO Dan Thomas noted that Beech’s strong group health PPO will add strength to Concentra’s group business. While Concentra has been active in smaller niches in the group business, it has long been a relatively minor market for the company.
There will be the usual Federal approval processes, which should not be much of an issue. Concentra and Beech have been contractually linked for some time with Beech providing network access to its provider network under Concentra’s Focus PPO.
My take – a smart move by Concentra to gain share and presence in the group market, diversifying its revenue sources and adding depth in provider networks, at a very reasonable price.
What does this mean for you?
More consolidation means more bargaining power for the networks with providers and payers alike.


CorVel earnings report

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.

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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