Following up on yesterday’s predictions, here’s the second five – in no particular order… cf

6.  Claims counts will bump up
In hurricane-ravaged Puerto Rico, Florida and Texas. Alas a lot of injuries and illnesses will go unreported as unscrupulous companies hire day laborers and don’t insure them, or, in Texas, where work comp isn’t required.

7. But frequency will continue to decline, and total claims will too.
because a) frequency almost always declines, and b) we are at or very close to full employment, so a growth in employment won’t counterbalance structural decreases in frequency.

8. Work comp medical costs will increase slightly
On a per-claim basis, expect costs were slightly higher in 2017 than the previous year. Per-claim figures are the best measure, although total medical spend is helpful as well. Kathy Antonello will tell us at NCCI’s Annual Issues Symposium in May…

9. Innovative new approaches to financing work comp risk will emerge
Variations of peer-to-peer such as Lemonade, some enabled by blockchain technology, will gain a toehold in a few states. Don’t expect there to be a major move just yet as the regulatory, capital requirements, and distribution channels are going to adapt slowly. That said, there’s just too much opportunity to reduce costs inherent in the inefficient administrative processes in today’s workers’ comp system.

10. Payroll fraud incidents and other even more creative efforts to screw workers will increase
I’ll be looking at this in detail, but one quick take is the number of “contingent workers” in many industries has grown dramatically.  The biggest increases? farming, fishing forestry; logistics; personal care; protective service, education and training. The implications for comp are deep and broad; lower premiums, claiming incentives, fraud.

I know, there are implications aplenty for claims, occupational injury rates and the like.

Good to be back at work – and ready to opine on what 2018 holds for work comp.  Here, in no particular order are my educated guesses, considered opinions, and wild-assed speculations.

1. M&A  – specifically big deals – will increase.
   I expect we’ll see more very large transactions this year, mostly driven by strategic purchases of other companies. Work comp is a very mature industry, scale and size matter a lot, and that means getting bigger is key.  Expect to see several billion-dollar plus deals in the service sector.
2. The market will stay soft.
   Claims frequency continues to decline, medical costs are pretty much under control, margins are healthy, and there’s still a lot of allocatable capital in the industry. Unless there’s some major  – as in huge – crisis I don’t expect a hardening of the work comp insurance market.
3. Cost containment’s focus will shift to facilities and hospitals.
   Hospitals are increasingly vulnerable due to consolidation among payers, reductions in governmental program funding (thank you Trump Tax Bill), changes to Medicare reimbursement, and the systemic shift of care to lower-cost settings.  Facilities have already – and will continue to – look for revenues from payers less able to reduce reimbursement. That’s us, kids. Expect to see payers more closely analyzing facility costs, looking for solutions, and implementing programs focused on the issue.
   
4. TPA growth will accelerate.
   Driven primarily by work comp insurers’ outsourcing. With a soft market, there’s little incentive for employers to self-insure, but the long-term decline in claims frequency is driving down insurer claim counts. Some insurers are making the strategic decision to shift claims to reduce fixed costs and capital investment requirements. Expect the big four TPAs to add significant new business from insurance companies and similar entities.
   ok…maybe not this much…
5. Tele-everything will take off
   Tele-triage, -medicine, -rehab, etc is going to grow quickly. Expect lots of activity from companies big and small; Concentra, MedRisk (HSA client), CHC Telehealth, Coventry, Work Comp Trust of CT and others are pushing this care delivery model hard – as they should. Expect thousands of “visits” will logged by the end of 2018.

   

Tomorrow, I’ll finish up with the other five…

In 2020, there will be 10 percent fewer claims than there are today.

In 2023, there will be 20 percent fewer. That’s about 1.2 million fewer claims.

excerpted from NCCI AIS 2017

The workers’ comp industry is shrinking, and while there may be bumps in frequency from time to time, the overall decline is inexorable.

There are immense implications, implications that I’m not sure enough of us are thinking through.  For example, fewer claims means the industry needs fewer adjusters, case managers, bill reviewers, UR staff, investigators.

It also means capital investments in technology have to account for the world that will exist when that new tech is up and running. Millions of dollars are at stake here; insurers (primarily) that chronically underinvest in IT have to evaluate whether there will be enough claims and premium to support their required internal rate of return.

HR staff are focused on trying to get young people into the business…how many new workers will a) want to work in a disappearing industry and b) really are needed?

A couple other things to consider:

• regulators – if the business is shrinking, will regulatory staff and their work product decline?
• provider interest in workers’ comp will likely drop, especially because Medicare and Medicaid are likely to grow in importance

I’d be remiss if I didn’t note that automation and artificial intelligence may actually accelerate the drop in frequency as large chunks of the blue-, pink-, and white-collar job market disappear when functions are handled by machines.

This isn’t a bad thing. Fewer injuries and illnesses means fewer hurt people.

But it also means an industry that relies on addressing injuries is being forced to adapt.

What does this mean for you?

This is going to be painful indeed, especially for those people and companies that don’t think this through carefully and intelligently.

The investment community’s interest in workers’ comp remains high. Not as high as it was a few years back when deals came almost every month, but high nonetheless. What’s different is the size of the investments we’re seeing – which isn’t a surprise.

As the industry consolidates, the companies in the sector get fewer and bigger – so the buyers these days tend to be either big “strategics” (companies in related businesses or in sectors that can create additional value via acquisition) or the relatively few very large private equity firms – many of which are already invested in the space.

We are also seeing wiser buyers.

Not smarter – almost all the people I’ve dealt with in private equity and investment banking are really intelligent – but many don’t have the wisdom that comes from experience in this space.

This wisdom comes from experience; some transactions haven’t quite worked out the way the investors thought, for reasons both predictable and not (OneCall, York, Bunchcare, MSC’s pharmacy business).  A few have worked out really well, but not because the core business idea and execution thereof was brilliant but rather because the owner found some other investment firm to buy the asset (OneCall Imaging, initial York transaction).

This is a good thing.

A few years ago pretty much any company in the work comp space was a hot commodity, which is why we ended up with some deals that weren’t “deals” at all. Today, buyers are a whole lot wiser, ask way better questions, dig way deeper into stuff that matters, and perhaps most significantly, spend a lot of time getting to know management. 

So, where are the opportunities these days?

• Telemedicine. This is going to be a major disrupter, impacting case management, rehab, physician visits, and more things we haven’t thought of yet. Collateral impacts will include:
  • systems connectivity (sending, sorting, and indexing video),
  • regulatory catch-up (some states are a long way from being ready, others are the wild west, and most are trying to predict the future)
  • stakeholder roles – changing who provides what services when to which claimants
• Outsourced claims. TPAs are going to do well.
• Agile, service focused companies – Companies, many run by folks who sold their businesses a few years back, are focusing on traditional niche business sectors. These will be smaller transactions, but valuations will be solid.

What’s going to hold things up?

Owner expectations. Many of the owners I talk with have unrealistic expectations – they think their businesses are worth more than buyers will pay. That’s understandable; it’s also why we may see a hiatus as those expectations aren’t met, and sellers slowly acclimate to the idea that a 14x trailing earnings valuation isn’t going to happen for their company (which has decent but not great growth).

What does this mean for you?

Build your business around customer service, differentiate your brand, and you’ll do well.

Focus, customer service, and execution are the three reasons MedRisk has thrived over the last several years.

That’s what Carlyle bought into when they invested in the company in a transaction that will be announced today. This comes less than two years after TA Associates bought a minority stake in the company, one of the quickest “flips” in the workers’ comp services industry.

Disclosure – MedRisk is an HSA consulting client.

I could not be happier for Founder and Chair Shelley Boyce, CEO Mike Ryan, EVP Marketing Rommy Blum, COO Michelle Buckman, CFO Tom Weir, and CIO Vic Pytleski – the rest of the professionals at MedRisk – and the customers MedRisk serves. Great people built this company by focusing relentlessly on execution, sticking to the business they now dominate, and doing business the right way.

And they will continue doing exactly that.

MedRisk continues to innovate, building the industry’s first telerehab program (which is up and running under Mary O’Donoghue’s leadership). A home-built IT platform specific to the industry is making adjuster’s days easier, communications smoother, and patient scheduling a matter of a few hours.

Management is staying. An oft-heard mantra in private equity is “you’re investing in the management team”, and nowhere is this more true than in this transaction. You will see the same people doing the same great work for years to come.

There is one major change; now that MedRisk is in the Carlyle portfolio, the company’s access to capital is greatly expanded. How and where that capital might be deployed is to be seen.

What is crystal clear is this: MedRisk will be a buyer, not a seller.