Insight, analysis & opinion from Joe Paduda


GHI-HIP merger in NY

The mergers among health plans continued yesterday, with New York’s GHI and HIP announcing their intention to join forces to create the state’s largest single health plan. With four million members and $7 billion in revenues, the not-for-profits would dominate the New York metropolitan area, with especially strong market share in the municipal, blue- and pink-collar demographics.
HIP, the smaller of the two plans with 1.4 million members, also owns Vytra Health and Connecticare. The Connecticare acquisition was one of the more intriguing deals in recent years, as it combined two different models with distinct membership demographics, while adding broader geographic coverage to HIP. The company recently announced plans to acquire a high-deductible health insurance provider, PerfectHealth Insurance Co.
GHI covers 2.6 million members in the NYC, upstate, and northern New Jersey area, covering over 2/3 of City employees. GHI has extensive experience in administering governmental programs including state contract work on mental health, coordination of benefits, and Medicare + Choice.
We have been following this trend for quite a while, and with the two largest not for profit health plans in the nation’s most concentrated market merging, it is even more clear that consolidation will continue and likely accelerate. The merger sets up an interesting battle between the merged entity, the Oxford-United combination, and Wellpoint – Wellchoice for share in this key market.
What does this mean for you?
If you run a health plan or TPA in the NYC area, batten down the hatches; there will be a lot of collateral damage to smaller insurance and health coverage providers as these three giants go at each other.


Wellpoint’s acquisition of Empire Blue Cross

Wellpoint is continuing to consolidate its hold on the nation’s Blues plans with its recent announcement regarding the pending deal to acquire Wellchoice, the holding company that owns New York’s Empire Blue Cross and Blue Shield.
The transaction is valued at $6.5 billion in cash and stock, is scheduled to close in the first quarter of 2006, subject to regulatory approvals.
This continues the trend towards consolidation in the industry, following such notable deals as Coventry-First Health, United-Oxford, United-Pacificare, Anthem-Wellpoint and Aetna-HMS.
According to California HealthLine;
“The (Wall Street) Journal reports that slowed membership increases, large premium increases becoming less common and the fact that size helps insurers negotiate rates with providers has contributed to the trend of consolidation in the insurance industry (Martinez, Wall Street Journal, 9/28). Gary Claxton, a Kaiser Family Foundation vice president and director of the Health Care Marketplace Project, said, “If you want to grow, you have to look at new markets or consolidation.” He said that insurers have been unable to grow by adding new employers or members, so consolidation is their only option.”
Claxton’s comments echo earlier statements here. With Wall Street’s insatiable thirst for growth and continuously improving quarters, health plan execs are desparately seeking new business. There are now 13 remaining publicly traded health plans, and speculation is rampant that the smaller will continue to be acquired by the larger as health care Pac-Man continues. Coventry may be next on the list.
What does this mean for you?
Opportunities for speculation in stocks. Fewer choices in health plans. Confusion regarding who owns which health plan.


Spitzer subpeonas St Paul/Travelers

Eliot Spitzer, New York Attorney General and terror of the insurance industry, has just subpeona’d insurer St Paul Travelers for documents and information related to workers compensation. No further details were immediately available either from the AG or St Paul Travelers.
The company is one of the largest WC insurers and administrators in the nation, ranked #4 or 5, depending on criteria used.


Senate moves to allow negotiation for pharma prices

Sen Wyden (D-OR) claims he has enough votes in the Senate to pass legislation authorizing the Secretary of Health and Human Services to negotiate for Medicare drug prices with pharmaceutical companies. Critics were quick to decry the move, with the pharma industry claiming such a move would not reduce prices, would be counter-productive, and unfair.
Which begs the question, if it would not reduce prices, why are they so concerned?
In any event, despite the present budget crunch and moves by the HHS Secretary to reject providing access to Medicaid for victims of Katrina and Rita due to the increased expense, pundits claim the measure is not likely to pass because “it faces strong opposition from the Bush administration, Republican leaders and the pharmaceutical industry” (Las Vegas Sun)
In a related development, a study was released that compared pricing under the Veteran’s Administration’s negotiated pharma arrangement to the new Medicare Part D card. The net –
– prices for 49 out of the 50 most common drugs were higher under the Medicare program than the VA; and
– the average annual cost of drugs would be $220 higher under Medicare than the VA.
The VA is the only Federal governmental unit that is permitted to negotiate directly wtih pharma firms. The study was conducted by Families USA.
What does this mean for you?
Higher taxes to pay higher prices for drugs, but perhaps that is better than the cost-shifting that would occur if the Feds got tough with pharma and squeexed them for lower prices.


Concentra’s investor briefing

Concentra Inc.’s presentation at the Bank of America Investor Conference earlier this month focused on their continued growth, focus on workers comp, and impact of the acquisitions of Beech Street and Occupational Health and Rehab.
Here are some of the highligts from the presentation and comments on same.
Revenues for 2005 are projected to be $1.1 billion, with EBITDA of $156 million and operating cash flow of $101 million. Revenues are growing organically about 5% per year, while operating cash flow is down from $114 million in 2003 to $98 in 2004 to $101 in 2005.
Workers comp is by far their largest market, driving 70% of revenues. The Beech deal will certainly help diversify Concentra’s revenue base, as Beech is a strong mid-tier group health PPO. Beech’s provider contracts will also be compared to the Concentra contracts to identify the ones with the best rates. This, coupled with the greater buying power brought by Beech, may help Concentra drive better deals with some providers.
Of Concentra’s three distinct business units, by far the highest margin business is network services, with a margin of 31%, followed by the clinic business’ 14% margin. The care management sector, which is primarily field and telephonic case management, was hurt by declining revenues and price compression and returned 6%.
Of note, the clinics saw same store revenues up 6.6% on a 5% increase in visits. This at a time when the WC injury rate has been declining by about 4%.
Thomas made the point several times that after the completion of the OH+R deal, Concentra’s clinics will see one of of every ten workers’ comp injuries for initial care. While that sounds impressive, and is impressive, it is important to note that the clinics only see the routine injuries, and most of the dollars that are spent on WC medical go to the more complex cases that are treated by specialists.
The Beech Street and OH+R acquisitions were expensive at $210 million +. The Beech deal adds significantly to Concentra’s group health product offering. while OH+R will add 26 clinics after 8 existing clinics are closed.
Both Thomas and Kiraly repeated their assertion that Concentra is the industry leader in the WC managed care business, and is a full service integrated services provider. From a sheer numbers perspective, they are correct. However, other entities are leaders in segments of the WC business. For example, Coventry’s First Health is by far the leader in the WC PPO sector. MedRisk is the industry leader in management of physical medicine; and PMSI in pharmacy management.
Thomas noted that because Concentra manages all aspects of the claim, it therefore impacts more claims dollars than other competitors. Not exactly. Intracorp has case management, networks, bill review, peer review, and access to specialty managed care. So do Genex and CorVel. Concentra’s out of network bill negotiation entity (Concentra Payment Services) may well be the industry leader in non-network bill processing, but a host of competitors are now in this space.
While Concentra is not a public company, rumors have been rampant for years of their desire to become one. That, coupled with the large amount of debt outstanding, is evidently the reason for their continued participation in these road shows.


California’s kids and health insurance

As the number of employers offering health insurance declines and Medicaid enrollment increases, the people left without health insurance coverage tend to be members of families where the parent(s) have jobs without coverage.
A new study released by the University of California – Berkeley indicates that less than half of the state’s children will be covered by employer-sponsored plans within five years if premium costs continue to escalate at double digit rates. Of the rest, 14% would have no coverage at all, and the rest would be insured by tax-payer funded governmental programs.
What does this mean for you?
Higher taxes, larger deficits, and increased cost-shifting from providers to insured patients will accelerate the death spiral of the US health care system.


Marsh hammered again

The investigations into broker/insurer malfeasance continued to make their presence felt last week, as Conn. Attorney General Richard Blumenthal announced the expansion of the state’s charges against Marsh. Blumenthal, never one to avoid the limelight, said
“We have uncovered powerful evidence of a systematic scheme to raise insurance prices,” Blumenthal said. “We also have strong evidence of bid rigging, victimizing specific Connecticut consumers and companies. In essence, Marsh established a toll both between insurers and consumers, and the toll exacted was heavy. Creating the illusion of free and open competition, insurers agreed to provide Marsh with rigged or fictitious quotes in exchange for the prospect of submitting winning bids on future placements. Marsh threatened retaliation against non-players.”
According to Insurance Journal;
One insurer wrote about a Marsh “broking plan“: “This is another protection job… Our rating has risk at $890,000 and I advised (Marsh) that we could get to $850,000 if needed. (A Marsh broker) gave me song & dance that game plan is for AIG at $850,000 and not to commit our ability in writing!”
The amended complaint identifies several major Connecticut businesses that were harmed by Marsh’s bid-rigging and price-fixing plan, including Hubbell Inc., Kaman Corp., Hexcel Corp., and Bridgeport Hospital.
Marsh has about 2,800 policyholder clients in Connecticut – 300 of them large businesses or government entities. Its corporate clients in the state also include Bic Corporation, United Technologies Corporation, Carvel Corporation, Ethan Allen Furniture, Timex Corporation, Xerox Corporation and General Electric Company.
The company’s state and municipal clients include the Connecticut Department of Administrative Services (DAS), and the cities and towns of Hartford, New Haven, Stamford, Manchester, West Hartford, and West Haven. Marsh was also the insurance broker for several large, publicly supported state construction projects, including Adriaen’s Landing. Marsh’s nonprofit clients include Yale University, Mystic Seaport and the Save the Children Federation.
The announcement of the expanded charges against Marsh came the same day Blumenthal announced that insurer ACE Financial Solutions Inc. had agreed to pay $40,000 to the state to settle allegations for a scheme in which ACE paid Marsh a secret $50,000 commission to steer an $80 million state contract to the company.”
The scandal that will not go away lives on.
What does this mean for you?
Yet more evidence that crime doesn’t pay, and practices that were once accepted with a wink and a nod can get you in serious trouble.


The myth of consumerism in health care

I have been engaged in an email debate with a libertarian about the value of “freedom of choice”, impact of payment sources on health care expenditures and inflation thereof, and potential impact of consumerism on health care costs.
He is of the opinion that health care costs are best addressed by patients paying their own way – at least that’s what I think he is saying. Leaving aside the question of how someone of modest means pays for a knee replacement much less a heart transplant, the debate spurred me to further investigate who pays what, and who incurs what kind of charges.
My theory is that consumer-directed health plans will have little to no impact on total health care costs, that they are really cost-shifting from employers to employees. I’m not making a value statement about cost-shifting, just stating a fact. By the way, most employers also don’t believe CDHPs will have any material impact on health care expenses.
The thinking behind my theory is the belief that most costs are incurred by people who spend way more than their health spending account would hold, and therefore their behavior is not influenced to any significant degree by the funds leaving their spending account.
Here’s the support for my theory. (thanks to George Halvorson of the Kaiser Family Foundation for some of the statistics)
Healthy people – 70% of people spend less than $1000 per year on health care costs. These folks are not contributing to the nation’s, or their employer’s, health care costs in any meaningful way. So, while they may make a “better decision” about health care because they are spending their own dollars, the impact is on the margin.
Catastrophic patients – about 5% of the population, those with really expensive acute or chronic conditions, such as serious heart disease, advanced arthritis, cancer, or significant multiple morbidities, are also not affected – they’ll blow through their MSA account balance in a month or two, after which the insurance company or Medicare or Medicaid pays the rest. So, no funds out of their pockets, and realistically, no way for them to pay the huge costs of their health care. By the way, the top one percent of the population that falls into this category spends 40% of all health care dollars, the top five percent that falls into this category spends over 50% of all health care dollars.
OK, that leaves the medium users. The remaining part of the population consumes more than $1000 in health care (a typical MSA plan deductible), and therefore might be more influenced by finances than the other two groups. But there’s a problem here. Studies indicate that a significant percentage of people with high deductible plans tend to not fill prescriptions, not seek care, and otherwise “under-utilize” health care due to financial reasons.
Well, their costs are constrained, at least for today. But what if they are not taking their hypertension medications and suffer a stroke? What if they don’t get a mammogram and their breast cancer is not diagnosed until it is marginally “curable”? They’ll become part of the top 5%, where costs are really uncontrollable.
Some libertarians will claim that their decisions are their responsibility. Not so in health care. There is ample evidence that the costs of the uninsured are borne by private payers; in fact about a thousand dollars of the average family’s insurance premium goes to pay for uncompensated care. So, free marketers, who base their policy theories on the merits of the invisible hand, miss the fundamental problem – there is not, and never will be, a free market in health care. One can intellectually debate the merits and benefits of the free market, but that discourse is irrelevant in the real world.
In the real world, people seek care, all of us end up paying for it, and in the US we pay 40% more for health care than in any other industrialized country. And none of the so-called free-market initiatives will in any meaningful way change that.
True change will come from applying more science to the art of health care. Data mining, outcomes analysis, intelligent reimbursement based on that analysis, and financial incentives for insureds that factor in lifestyle choices are all necessary. But consumerism alone will do nothing to hold down health care inflation.
What does this mean for you?
Avoid ideologically-based solutions, and stick to the facts. If the facts don’t support your position, find another position.


First Health search for work comp executive

Sources indicate Coventry is still seeking a leader for the workers compensation business at First Health, although they have assigned the task to an outside search firm after their internal recruiters came up empty.
Spencer Stuart’s Chicago office is handling the search. Spencer is an interesting choice as the firm is not known as a major player in staffing for the managed care, health insurance, or HMO sectors. They are using their own internal resources, bolstered by a list from Coventry of individuals that have been vetted and found wanting. While this may help reduce the number of false negatives Spencer encounters, the firm may also encounter difficulty filling the slot if Coventry allows First Health’s present customers to weigh in on the decision.
Several sources have indicated that Coventry has asked present customers their opinions of previous candidates, and these opinions have had an impact on the company’s selection process.
In any event, given the significant profit contribution of the work comp business (11% of Coventry’s net comes from work comp) this is a key hire. And the fact that they have been looking since February with no apparent success demonstrates the difficulty inherent in finding a candidate who understands the HMO industry, knows workers comp, has a solid reputation among First Health customers, and can lead a customer-service-challenged company forward.
What does this mean for you?
Either very little or quite a lot.


Medical cost inflation in workers comp

The cost of workplace injuries in the US topped $50 billion in 2003, despite a 6.3% drop in the injury rate. These results continue a long-running trend of declining frequency that is more than offset by medical inflation.
The often-asked question is how can this be? If the number of injuries is dropping, how can total costs be increasing? While it appears that the severity of injuries may be increasing, that is actually a proxy for medical costs (the workers’ comp research firms equate severity with higher medical expense). The culprit is medical inflation, and more specifically increased utilization of medical services.
There are fee schedules in about half the states (most of the larger ones) that do a pretty good job of constraining price increases. With rates pegged to Medicare’s fee schedule, prices for most physician and outpatient services are under control. Unfortunately, that’s only part of the problem – the other two drivers are the percentage of claims that have a particular type of medical expense, and the volume of services per claim.
As an example, physical therapy occurs in about 26% of cases with lost time. However, given there are few treatment guidelines that are helpful in managing PT, and the propensity for therapists to overutilize, PT costs appear to be growing significantly. Without objective clinical guidelines to ensure the volume and specific treatment modalities are appropriate, work comp payers are essentially unable to constrain the delivery of PT.
The result – a recent analysis conducted by my firm, Health Strategy Associates, showed that over 55% of lost time cases treated at a national occupational medicine company had PT services. Sure, the price per service was low, and the average number of visits was quite low, but there is no doubt many of the patients receiving PT did not need it.
The work comp market is recognizing the extent and cost of the problem; MedRisk, a firm that specializes in managing physical medicine in workers comp has seen explosive growth, and now manages PT on a national basis for carriers and TPAs including Liberty Mutual, Zurich, ACE, Sedgwick, Gallagher-Bassett, and Amerisafe. (MedRisk is a consulting client.)
And physical therapy is but one example of a medical service that is a key driver of medical inflation. With work comp medical expenses trending up at double-digit rates, payers are finally beginning to adopt intelligent strategies that are specific to the key drivers of inflation.
What does this mean for you?
If you are a work comp payer and have yet to adopt a “specialty managed care strategy”, your medical inflation rates are likely higher than your competitors’. If you don’t get costs under control, you will not be a payer much longer.

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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