Insight, analysis & opinion from Joe Paduda


Insurer – Physician communication

One of the most important benefits of the internet is improved communication among and between folk who otherwise would likely not interact. And blogs add immeasurably to that improvement. For some time I have been reading and occasionally cross-posting to and commenting on several providers’ blogs, and more specifically two blogs written by thoughtful, highly intelligent, and obviously concerned physicians. The latest discussion is on DB’s Medical Rants and concerns pay for performance.
Another excellent physician blog is Health Care Renewal.
As one of the few “payer-side” bloggers, I have also received (or perhaps been subjected to) many comments from folk on the provider side. While the discussions can be contentious at times, they are direct, insightful, and helpful in advancing understanding.


More trouble for Ohio

An analysis of hospital expenses in Ohio indicates that the Bureau of Workers’ Compensation paid $1.6 billion for services that cost the hospitals less than $1.1 billion to provide. The mark-up, some $544 million, has been described by various stakeholders as “a positive profit margin”, “outrageous”, “ludicrous”, and “a cash cow for hospitals”.
The basic issue is hospitals are paid a set percentage of charges, a methodology that some suggest is open to misuse, as the hospitals set the charges. Ohio’s hospitals are paid 70% for inpatient and 60% for outpatient services. Scott Courtney, EVP of the Service Employees Union that conducted the study, claimed that “Hospitals arbitrarily set a price that’s not at all relevant to the cost of providing care.”
Both the BWC and the Ohio Hospital Association are disputing the SEIU’s conclusion that hospitals are generating a profit of some 65% on workers compensation, with the Association claiming the figure is in the 15 to 35 percent range.
My own experience examining hospital data, coupled with the experience of MedNet Connect (a consulting client), a firm that works with payers to evaluate bills to assess their


Workers Comp costs and premiums

While payments for workers compensation indemnity and medical expenses rose just 3.2% in 2003, employer costs were up three times as much. The data, from a report by the National Academy for Social Insurance, indicates claims costs totaled $55 billion while total expenses (claims plus premiums and equivalents) were up to over $80 billion.
This is not surprising. I have been talking for several months about the profitability of the workers compensation market, and NASI’s report clearly indicates that the industry’s recent strong profitability is due to increased pricing. The cognoscenti will also note that this “happy time” appears to be ending, as recent softness in pricing indicates there is more capital flooding into the market as outsiders (and insiders) decide they want some of that profit too. While it looks good now, remember that the industry’s present return on equity is well below that enjoyed by other sectors. Thus, on a relative scale WC is doing well, but on an absolute scale returns are mediocre.
The NASI report is perhaps the best summary of the state of the workers comp business in existence. While it is somewhat dated (due to the time delays in reporting in WC), it is well worth reading.
What does this mean for you?
If you are a seller, don’t cut prices. Period. If you are a buyer, think long and hard before chasing the latest cut-rate workers comp policy. Anyone who would sell that to you is less likely to invest in long-term initiatives that will benefit your program, and over the long term, your bottom line.


Health care costs – US v. other countries

US health care costs are much higher than any other nations’. Why? Do we have better access to care? Are our doctors paid more? Is it the fault of higher drug costs? Do the related issues of malpractice insurance and defensive medicine have much impact?
A new report sponsored by the Commonwealth Fund compares US and other industrialized countries’ health care and attempts to answer those questions. The report’s conclusions go a long way towards dispelling some of the “urban myths” surrounding health care.
Overall results
According to the report, “


Auto insurance and the uninsured

In 2003 Colorado changed its auto insurance law from one in “which all drivers were required to have coverage for treatment of any injuries resulting from auto accidents to a system in which just the driver at fault pays.” The result has been a decline in the percentage of auto injury victims with insurance, leading to reduced revenues for hospitals and an increase in uncompensated care.
Health care providers in Colorado are up in arms about the impact the change away from the no-fault coverage has had on their financial wellbeing, claiming an $80 million hit from the new law. Interestingly, according to Insurance Journal, insurance spokespeople seem to acknowledge the transference of expense from the insurance companies and their policyholders to the hospitals. Carole Walker, executive director of the Rocky Mountain Insurance Information Association, stated:
“We don’t believe people should be required to have medical coverage as part of their auto insurance just because some people don’t have health insurance


Employee health insurance costs

A new study indicates three quarters of US employers will increase employee contributions for health insurance in 2006 while a quarter will reduce pay increases as a result of higher health insurance premiums. The survey, a poll of 150 US employers by PriceWaterhouseCoopers, also noted that health insurance costs were up 12% this year, with respondents estimating costs next year would climb by 11%.
The study also indicates that health insurance, which accounted for 8% of payroll at large employers in 2000, now consumes between 12% and 15% of payroll. The fallout from these increases is significant, with 20% of employers likely hiring fewer new employees as a result of and 25% attributing reduced profits to increased health care expenses.


Why Medicare Part D will not succeed

The Medicare Part D marketing wagon train has hit the road, with CMS Director Mark McClellan leading the effort to convince skeptical seniors to enroll in the program. By all accounts, the effort has yet to hit its stride (free subscription required), as some seniors are confused about the coverage, while healthy seniors appear uninterested in the benefit, and the chronically ill are concerned that the benefits will not be rich enough.
I have been saying for some months now that Medicare Part D is a bad idea primarily because it does not take into account adverse selection. Simply put, the only people who will sign up are those who need the benefit. Others will not sign up until they get sick; while there is a financial penalty for delayed entry into the program, it is so small that it is unlikely to act as a deterrent. In fact, a study by Brandeis University of seniors using drug discount cards indicates the cards were purchased disproportionally by seniors who were already significant drug consumers.
It is therefore difficult to see how this program will be a financial success. Yes, the government will subsidize money losing plans (where those funds will come from is somewhat of a mystery), yes there will be some price concessions on individual drugs as pharmacy benefit managers negotiate better deals with manufacturers, yes some employers will save money by having the Feds pick up their retirees’ Rx costs. But the fundamental flaw is that seniors will only sign up if they get more out of it then they pay in premiums.
Unless and until someone figures out how to overturn human nature, Medicare Part D is a dead duck.


Insurer profitability

US property and casualty insurers have had their most profitable year in almost three decades, turning an underwriting net profit of $5 billion. The bad news is one of the key drivers, strong pricing, has already started to deteriorate.
The great result followed several years of declines that ended with a disastrous 2001, and marked the third consecutive year of improving profits. The improvement, driven by higher prices, a favorable regulatory environment, and more restrictive underwriting, has produced a net profit after taxes of $39 billion. While that sounds like a great pile of cash, the 9.4% return on net worth doesn’t look quite as attractive when compared to other industries or historical results. One of the key reasons – the low rates of return on investment income.
By comparison, the industry had a 17.3% rate of return in 1987 with a combined ratio of 104.6, whereas the 2004 rate was 98.1. For those of us old enough to remember, interest rates and stock market returns were significantly higher in those days, allowing insurers to lose money on an underwriting basis and more than make up for it with investment income. It looks like those wonderful days of double digit returns aren’t coming back any time soon.
So, despite strong underwriting , a mostly favorable regulatory environment, and few very large catastrophic events, the industry can’t even come close to delivering the kinds of returns enjoyed by other sectors. Couple that with the recent evidence of softening prices and continued inability to even focus on, much less begin to control health care expenses, and one cannot be sanguine about the industry’s future results.
The net – if prices continue to soften, those insurers without discipline and a focus on medical expense management (for the lines impacted by medical costs) are in for a rough ride.
What does this mean for you?
Success if you stick to the fundamentals and finally do something about medical.


AIG-Spitzer close to settlement

Reuters reports that Eliot Spitzer, NY Attorney General, is close to a settlement with AIG in the civil lawsuit filed by his office. This would be good news for both AIG and the insurance industry, which has been waiting for the proverbial “other shoe” to drop since the suit was filed earlier this year.
The most visible impact of the issue has been the departure of long-time CEO Hank Greenberg as well as the decline in stock price, with AIG’s stock down 17% (compared to the S&P’s 2 point drop) since the Valentine’s Day announcement. An equally significant, but perhaps less visible result is the loss of management attention on key business issues affecting the company. These include –
continued major problems with AIG’s new medical bill document management program, exemplified by long delays in payment, lost bills, frustrated health care providers, and regulatory actions
uncertain strategic direction at recent acquisition American General. AG’s target market definition seems to wander like the needle on a compass in an iron mine. This lack of focus is NOT typical to AIG.
That said, AIG is a very strong company with competent management. If their leaders can once again begin to focus on their business, and correct a decades-long underinvestment in information technology, then it will continue to succeed.
What does this mean for you?
Get crises resolved as fast as possible, and do NOT lose your focus on the franchise. Trite, but true.


Selling Vioxx

Jon Coppelman at Workers’ Comp Insider has a great post on the influence of lunches, meetings, and sales reps (detailers) on prescribing habits of physicians. The quick take – MDs who attended Vioxx lunches prescribed four times more than those who just met with detailers. Oh, they weren’t consuming vioxx at the lunches, just hearing about their wonders.
MDs were also paid $750 – $1000 to present at these educational gastronomic events. The presenters talked about related conditions, indications, etc. Jon notes:
“the participating doctors insisted that they are not flacks for the drug companies — they say that they answer questions at these sessions honestly and candidly. In the example of the migraine headaches above, the lead doctor mentioned the availability of generic medications, in addition to those made by the sponsoring company.”
These are pretty common events – almost a quarter million of these doctor presentations took place last year, compared to under 140,000 detailer sales calls. Figure 237,000 events x $750 honorarium per presenter, that’s $178 million.
While the investment was huge, “The return on investment for the presentations involving a doctor was twice that of the other sessions.”
What does this mean for you?
If you are seeking ways to “counter-detail”, you better have a big budget.

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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