Does workers’ comp have a future?

Not much, at least according to workers’ comp legend Frank Neuhauser. In an article published in last month’s Perspectives, the IAIABC journal, [sub req] Neuhauser argues that workers’ compensation is no longer needed for 90% of America’s employees, as the workplace has become safer than the non-occ environment.

Noting that the occupational injury rate has dropped precipitously over the last 25 years, he draws a contrast between today’s occupational risks and those extant 100 years ago when workers’ comp was just a few years old. This contrast is so compelling that Neuhauser makes the case that workers’ comp insurance is superfluous, unnecessary as the risks are so low in our largely service economy.  Further, he makes the case that this safe workplace is one of the primary reasons to do away with work comp. Moreover, the medical care that would be needed for those few injuries that do occur can be delivered via health insurance, while disability coverage can simply be added to workers’ existing short- and long-term disability.

I find Neuhauser’s case far from compelling.  In fact, it is so far-fetched at least one very knowledgeable colleague wondered if Neuhauser had penned the piece just to provoke discussion.

If that was his mission, it was accomplished. At today’s Maine Workers’ Comp Summit, all panelists at the Think Tank disagreed with the central premises of Neuhauser’s case, raising multiple objections to his data and logic.  Here are a few.

  • About a third of workers have disability coverage.  What about the other two-thirds?
  • About 15% of workers do not have health insurance.
  • Employers have worked diligently to reduce injuries and risks thereof in large part because they pay higher premiums with higher injury rates.  Removing that financial incentives would almost certainly result in higher injury rates.
  • Eliminating workers’ comp would also eliminate the tort protection enjoyed by employers in today’s no-fault system.
  • In some cases, there is no tort system as a recourse. As Think Tanker Alison Denham pointed out, some injuries, such as those suffered by fire professionals, have no “cause of tort.”  Who would an injured fire professional sue?

Pennsylvania Judge David Torrey succinctly addresses many of Neuhauser’s arguments, bringing a much-needed legal perspective.

The net?  Sorry, Frank.  Work comp is here to stay.

 

Companies need strategies, Execs need success

And those two often don’t match up very well.

Example.  Work comp insurance companies benefit when medical and indemnity costs are lower than expected.  So, lower medical costs = better “outcome” for the company.

Many – if not most – managed care executives are evaluated in part based on “network penetration” and “discount below fee schedule”.  Thus, the more dollars that flow thru their network, and the deeper the discount those providers give the network, the “better” the executive’s performance is.

Superficially, this makes sense – more care thru lower cost providers equals lower medical cost, which benefits the insurance company.

“Superficially” being the key word.  Here’s the problem with this model.

Insurers contract with PPOs, which in turn contract with providers to deliver services at a discount. Most PPOs get paid a percentage of the savings that is delivered by that discount, typically 15 to 22 percent of the savings. So, the more the PPO ‘saves’ the more it makes. On the surface, this sounds good: the system rewards the PPO for saving money and does not pay it when it delivers no savings.

Under a percentage-of-savings arrangement, reducing total medical cost is ignored in favor of saving money on unit costs. The PPO gets paid for savings on individual bills. Therefore, the more services that are delivered and the more bills generated, the greater the ‘savings’ and the more money the PPO makes.

The system encourages over utilization because it is in the PPO’s best interest financially to have numerous providers generate lots of bills for lots of services. Also, the providers, squeezed by a per-unit fee schedule that is lower than fee schedule/Usual and Customary Rates (UCR), have a perverse incentive to make up for that discount by performing more services.

The fact is few carriers, TPAs, or employers have realized that per-bill ‘savings’ is the wrong way to assess a managed care program – or the executive running medical management. And unless senior management changes their evaluation methodology, their managed care departments will have no incentive to change their program to one that actually does reduce total costs.

This is by no means the only example out there; I’m quite sure you can come up with more than a couple off the top of your head.

What does this mean for you?

Take the time to understand  – really understand – what success is, and what drives success.  You may be unpleasantly surprised to learn your execs’ motivations are diabolically opposed to your company’s success.

Federalizing workers’ comp

Insurance folks decry the difficulty inherent in operating in multiple states, each with their own rules, requirements, standards, and demands.  It would be all so much easier if there was one national standard, and some would argue this would make for a “fairer” system.

However.

States have the Constitutional authority to oversee and regulate most insurance functions. While federal legislation and resulting regulations can – and do – supercede State laws (think voting rights, interstate speed limits, education standards, firearm background checks), to date states have been left pretty much alone when it comes to workers’ comp.

Is that going to change?

I think not, but reasonable people can make a good case for some national standardization – which would almost certainly require Congressional action. Of course, given Congress can’t even bother to authorize spending to deal with the opioid disaster or take action on Zika, something as tiny and non-problematic as workers’ comp is not likely to get any Congressperson’s attention.  

Here’s where it gets ideologically sticky.

Folks who normally favor small, limited Federal government find themselves advocating for national standards to streamline work comp for insurers and employers. The hodgepodge of state regs creates a whole host of inappropriate incentives;

  • injured employees get higher wage replacement payments depending on the state “where they were injured”
  • while employers get lower rates in states with low wage replacement levels and
  • doctors get paid more to treat workers’ comp patients in Connecticut than in Massachusetts – a LOT more

Those just scratch the surface; talking with Bob Wilson yesterday about this, he noted many payers are most frustrated by EDI rules and regs.  Set up in an effort to normalize state requirements around a set of national standards, Bob noted many states seem to have a need to tweak things just a bit here and there. Once that begins, there’s no such thing as “standard”.

What does this mean for you?

Ideology sometimes conflicts with reality.

Tuesday update

Not to rub it into my friends and colleagues who are “working” in Orlando this week, but here in Montana it is 73, dry, sunny, and the mountain views are spectacular. Of course, flying into Bozeman isn’t nearly as…challenging as the obstacle course of strollers, elderly folks (my mom is 95, so don’t flame me), clueless travelers, little-kids-running-in-circles and mouse-hat-wearing families that is MCO.

While the attendees at the Montana Governor’s Conference on Workers’ Compensation won’t be partying to ThirdEyeBlind, these westerners have just as much fun at their annual confab as anyone.  Some have even more.  Film at 11.

I’m sure Bob Wilson will report back after his keynote talk here tomorrow; in what might well be a preview of the Clinton:Trump debate the esteemed WorkCompKing and I will be on the stage discussing matters of great import.  As we are the last session before the cocktail hour, don’t expect us to run long.

On to more serious matters.  And not much is more serious than the goings-on in California these days.

In California, we’ve learned that a big chunk of the liens filed are the work of individuals convicted or criminally indicted.  A total of $600 million in liens fall into this category, with a total of $2.5 billion – yes, that’s with a “B” – filed by “68 businesses comprising the top one percent of lien filers [who] filed more than 273,000 liens totaling $2.5 billion in accounts receivable on adjudicated cases between 2013 and 2015.” 

The Department of Industrial Relations’ summary goes on to note:

The assignment of liens by service providers to those who file and collect on liens are, in essence, the buying and selling of injured workers’ treatments and fertile ground for presenting fraudulent claims.  DIR’s review of filing dates indicates that lien claimants tend to wait until after the primary case is settled rather than seeking early resolution of medical necessity.

My interpretation – these scam artists are waiting to file until AFTER the claim is settled because they know full well the fiduciary just wants the damn thing to go away, doesn’t have the resources to fight each and every lien, and is better off paying off these crooks than fighting them.

These people add no value, deliver no service, help no one, and want to get paid for it.  

Here’s hoping California’s legislature jumps on this issue, prohibits lien filing by criminals and for denied claims.  Time is short…

Staying west for a minute, the fine folk at CWCI (Stacy Jones in specific) just published their evaluation of medical fees post-reform.  A main takeaway:

The amount of the reductions [below pre-reform utilization levels] varied by the type of care, ranging from 11.4% for radiology services to 49.5% for medicine services (comprised primarily of ancillary services such as cardiovascular, nerve and muscle testing, and psychiatric testing and psychotherapy), with an overall reduction of 17.7% in all medical services. At the same time, changes in total amounts paid under the schedule ranged from a 44.9% reduction in medicine services to a 12.7% increase in physical medicine services, for a net reduction of 14.3% in payments for all services. [emphasis added]

The implication is this – adoption of Medicare’s fee schedule has increased the volume of and reimbursement for cognitive services – talking with patients, rehabbing patients – and a reduction in payments for doing stuff TO patients; MRIs, nerve tests and the like.

This is good.

Thanks to CWCI’s Bob Young for the info and background.

Housekeeping

The systems folks who do all the IT work on ManagedCareMatters updated our WordPress to the latest version last week, which led to a deluge of bounced emails from former subscribers with dead email accounts.  I’ve been ever-so-slowly cleaning up the subscriber list: this is a highly manual process, requires individually deleting a lot of addresses, and I’m absolutely sure I’ve screwed up and deleted addresses I shouldn’t have.

So, sorry about that.

This is going to take a little while, and in the interim I’m not going to be able to post as often as I’d like.  Hope to get this cleared up by the weekend, or I’m stuck sitting in front of a computer while my lovely bride and friends cavort on the lake.

Grrr.

HealthWonkReview’s review of ACA is up

And that’s just part of Jason Shafrin’s August edition; from premium increases to Christian health plans; from not enough regulation to dumb rules; from formulary exclusions to OSHA penalties, click here for your guide to all that’s worth Reviewing.

What’s happened to all the private equity interest in workers’ comp?

For the last five plus years, the investment community has been all over workers’ comp services. Lately, not so much.

What’s going on?

From PMSI’s purchase by HIG to APAX’ acquisition of Align and One Call to form One Call Care Management, from Onex’ buyout of York Risk Services to United Healthcare’s purchase of Helios, there have been more than a score of meaningful transactions.  And that’s not counting the “tuck-in” deals such as MSC’s purchase of TMS, or One Call’s acquisition of MedFocus or EXAM’s dozens of deals to acquire small IME firms.

Of late, the transaction flow has slowed to a trickle, and the reasons for that change are well worth considering.

Before we jump into that, let’s review why work comp was so intriguing to investors.  I’ll summarize:

  • highly manual industry crying out for automation and process improvement
  • low regulatory risk compared to national health care deals
  • lots of smaller companies competing in different markets
  • relatively low prices, at least at the outset
  • horizontally- and vertically-fragmented service market (single region or state and/or single service e.g. DME)

Here’s what’s changed.

  • Far fewer companies to buy.  The PBM market alone has consolidated from 12+ down to 6 with meaningful market share.  EXAM has bought up many of the mom and pop IME firms.  Genex has bought case management and related businesses.
  • Buyers are scarcer.  After increasing interest in the private equity “industry” early on which I attribute to firms jumping on the bandwagon, PE firms have moved on to focus on other niches.
  • Some of the deals have yet to meet expectations.  This should NOT be surprising, as investments always carry an element of risk. However, the sometimes-high-profile “misses” have made potential buyers a bit more cautious.
  • Prices are high.  Multiples (buyers typically base their purchase price on a multiple of Earnings before Interest, Taxes, Depreciation and Amortization) were as high as 14x, well above historical levels that tended to be in the high single digits.
  • Buyers are smarter. After learning all about workers’ comp while looking at different opportunities, buyers no longer accept at face value marketing pitches based on growth, consolidation, and “white space”.
    Also, the state-specific nature of workers’ comp adds a level of complexity that PE firms often find problematic.
  • Structural factors. Workers’ comp is a declining industry, with claim frequency dropping by 2-4 points per year. That trend is structural, is not going to change, and, at the risk of stating the blindingly obvious, is not emblematic of a growth industry. Therefore, buyers can’t just base part of their investment thesis on underlying structural growth, a fundamental “given” in almost every other sector – telecom, mobile communications, pharma, medical devices, energy.

That doesn’t – by any means – imply that there isn’t still significant interest in the workers’ comp services space.  I am aware of four separate transactions that are in various stages, two of which have significant implications.

In addition, the debt markets, especially those firms that buy existing debt, remain pretty heavily engaged. I’d expect this to continue.

Rather it implies that investors’ interest has “matured”, they have become more selective and more discriminating.

This is good.

What does this mean for you?

Smarter buyers will lead to better service providers.

Trump will be GREAT for workers’ comp!

No, seriously, he will be.

It’s The Wall.

For a moment, ignore the fact that the Donald is not a builder, but a developer.  And that his string of developments-gone-bankrupt show he’s not very good at the financial stuff either.

And please, don’t get distracted by folks claiming you could just tunnel under it or climb over it.  Those “dummies” would never think of that!

But the Wall…the Wall will be the single largest construction project the Feds have done, in, well, ever.

It’s bigger than the Hoover Dam. More than three times bigger. At 1,964 miles, it will rival China’s Great Wall.  40 feet tall, 7 feet underground, made of pre-cast sections supported by steel pillars and concrete footers, the Trump Wall will require 9.4 million cubic yards of cement and concrete.  2.5 million tons of steel. 

Wage costs to build the wall alone will be around $8 billion (40,000 workers at mean annual salary of $41,000.)

Then there’s annual maintenance.  In order to keep the wall beautiful, it will have to be maintained.  And, of course, upgraded.  You don’t want our “big beautiful Wall” to start to look like this…

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Or, *gasp*, like this…

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Don’t know if the Donald is going to have murals painted on the wall, gild parts of it, or have TRUMP in giant letters spaced at random intervals; all would add expense and maintenance. Fortunately, there are LOTS of extra Trump signs available, just have to ship them from Atlantic City and Nevada and New York…These are ready to go!

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Sorry, got distracted there…

Ok, forgot about the road construction, truck drivers, excavation workers, and concrete and cement plant workers.  Figure about $1 billion for their wages.

Now, some parts will be really remote, and others run right thru big cities, so land costs will be pretty variable.  But they will be real; landowners will have to be paid fairly as the Fedrul Gubmint is going to be taking their land.

But those costs aren’t labor, so never mind…

Here’s the calculation.  To keep it simple, we’ll use the $8 billion in construction labor plus $1 billion in additional labor, plus $500 million in annual maintenance labor multiplied by average work comp rates for industrial work – which is about 3.1 percent of wages.

That gives us $356.5 million in work comp premiums over the first five years of the wall, or about $71 million per year – a really nice addition to premium in the border states.

Of course, that’s assuming the Donald pays the premiums, something he’s had a bit of trouble with in the past.

True, he’d be using Mexico’s money.

REAL innovation in healthcare

What do these have in common?

Duexisis.

Valent.

Martin Shkreli

Mylan.

Answer – they are all on the leading edge of healthcare innovation.

More precisely, these examples show there’s no need to create really new products, develop new medicines, figure out how to keep people healthier longer, when you can just raise prices on your current product.  A lot.

Duexisis is just ibuprofen combined with an acid reducer, creating a brand medication that sells for about 50 times what it should.  Yep, you can just buy Advil and Pepcid instead of breaking your bank enriching Horizon Pharmaceuticals.

Valeant has made a business out of buying generic manufacturers and other pharma companies and jacking up the price of their medications, a practice that has earned the company the attention of the Department of Justice, presidential candidate Hillary Clinton, and the US House of Representatives.  Oh, its stock price has gotten hammered of late due to some of these issues.

Shkreli is the brilliant and totally tone-deaf former hedge fund exec who discovered it’s a lot easier to make billions by buying little-used drugs made by one company than raising the price by, oh, say 6000 percent.

Mylan makes Epi-pens, the life-saving devices used to prevent deadly allergic reactions. Altho late to the “let’s just increase the price by a gazillion dollars for our poorly designed device cuz people who need it HAVE to buy it” game, they’re making up time quickly. Mylan raised the price by 6 to 9 times recently, causing problems for paramedics, families with kids with deadly allergies while jacking up their profits.

There are many, many more examples, but you get the point.

For anyone looking to assign blame for our ludicrously high cost of health insurance and pathetically poor outcomes, there are plenty of convenient culprits; HMO executive salaries, mandated benefits under ACA, specialty physician income, device manufacturers, hospital inefficiency, stupid and counterproductive HHS regulations, legislators who bow before the PHARMA lobby, physicians who refuse to wash their hands.

But it all gets back to this – the US health care “system” is based on a capitalist ethos, one where the shareholder and profits are God.

These companies and people do this stuff for a very simple reason – because they can, and they are rewarded for doing so.  There’s no reason to spend millions innovating when you can make billions just by raising prices for your product or service.

What does this mean for you?

Reality sucks.

Big things that affect work comp

Perhaps the biggest factor driving workers’ comp is the economy, and more specifically employment trends.

In a down economy, payroll declines, claims cost increase, and it’s harder for recovering workers to find new jobs, resulting in longer disability duration. The result – lower total premium dollars and a challenging claims environment.

In an up economy, there are lots of jobs looking for workers, payrolls are up as employers have to pay more to get and keep workers, and it’s therefore easier to place recovering workers.  Plus premiums are up as payroll is higher.

We are now enjoying the classic “up” economy. While there are spots where the economy is not booming, overall things are pretty good in most places. And, the latest data is even more encouraging.

We are near a 16-year high for job vacancies at 5.6 million.

540,000 jobs were added in June and July, and unemployment is at 4.9 percent.

Wage growth is finally showing some movement, with BLS reporting private industry workers compensation over a rolling-twelve-months up by 2.6 percent last week.

This isn’t a post about who created what jobs, or who gets credit or blame, its about workers’ comp and what drives the business.  And right now, with comp carriers enjoying a string of financial success that’s all but unheard of in our industry, it’s good to know the macro factors out there are generally pretty positive.

What does this mean for you?

Good news until the pricing wars hit.

Help me understand…

How an investment firm can own a physician dispensing company and a work comp program administrator.

ABRY has acquired a controlling interest in NSM, an insurance program administrator focused on, among other things, selling work comp to smaller employers.

Yawn, right?

Not if you are one of NSM’s insurance companies or insureds.

ABRY – which now controls NSM, also owns Automated Healthcare Solutions, the physician dispensing “technology” company that makes big dollars by sucking dollars out of work comp carriers, employers, and taxpayers.

So, if you’re ABRY, what’s going thru your corporate mind? You know – better than perhaps anyone in the country – how lucrative the doc dispensing business is (that may be a key reason ABRY has held on to AHCS for 6 years, way longer than most investors hold on to companies).

And you know the dollars are coming (mostly) from workers’ comp – which means insurers, employers, taxpayers.  And you know that all credible research indicates physician dispensing increases medical and indemnity costs – plus the higher cost per pill inherent in the doc dispensing model.

Now you own a controlling interest in a company that – and this is importantadministers worker’s comp programs but does not insure those programs.

So help me understand why this is not inherently a conflict of interest. As an owner, ABRY makes money when AHCS makes money from workers’ comp payors, but does not lose money when a company it owns pays AHCS’ bills.

I reached out to ABRY’s Brent Stone and NSM CEO Geof Mckernan early this morning in an effort to get their perspectives.  Here’s what I asked Mr Mckernan:

Given that NSM’s insureds and carriers expect NSM to effectively manage their workers’ compensation programs, how does that square with the business model of AHCS, which is based on generating the highest possible fees for physician dispensed drugs?

There is a conflict of interest inherent in owning a company that manages workers’ comp claims and one that profits by generating the highest possible revenues from workers’ comp claims.  How will this be addressed by NSM?

Specifically:

  1. How will NSM work to mitigate the additional costs including extended disability duration and medical expenses inherent in physician dispensing?
  2. Will ABRY keep AHCS and NSM entirely separate from an investment management perspective?
  3. When conflicts arise between AHCS seeking reimbursement and NSM’s claims function (both internal and via YorkRSG), how will those conflicts be addressed?
  4. Given the well-documented problems inherent in physician dispensing, how will NSM assure it’s carriers and insureds it is taking all possible steps to mitigate those risks?

I’ll keep you posted if I hear anything…

and thanks to WorkCompCentral for the tip!