Wise on Work Comp - More Bills, the Better

Wednesday, April 29, 2009 | 0

"It's all a fee-based business, so actually [in] the workers' comp business, the more bills there are, the more claims there are, the better that we do."
                                    -Allen Wise, CEO, Coventry Healthcare, Q1 2009 earnings call


By Joe Paduda


That was the chairman's response to an analyst's question about workers' comp claim frequency declines - and he's right.

Coventry's networks, bill review, case management, and other services deliver more revenue and profit when there are more injuries generating more bills.

As plain as the nose on your face, a crystal clear explanation of how Coventry profits when workers' comp medical costs go up. By the company's chair, no less.

(To quote my wonderful bride, Coventry's incentives are "diabolically opposite" those of its clients.)

In his opening comments, Wise noted: "I do feel confident that we'll be able to improve our operating margins in the short term and when the employment market returns that we will be able to demonstrate revenue growth. In summary, it's a good business and were absolutely committed to it."

The chairman went on to talk about the business bouncing back with the economy. Wise expects a 300 basis point "margin opportunity" in comp over the next 24 months.

He didn't say where that increased margin was coming from, but the company's recent layoffs and price increases give a pretty good indication of what we can expect.

Wise also expressed confidence in the new management team, led by David Young. It is quite clear that the work comp unit will operate almost autonomously, with great flexibility and control over their own destiny.

No one from corporate is going to be watching over their shoulders.

According to Wise, "We have given the management group the resources of a large company in terms of IT and some of our favorable network locations but made them more autonomous, and their earnings and their bonus depends on EBITDA (earnings before interest, taxes, depreciation and amortization) targets, and so, I think now that they have better control of their expenses or rather more accountable for their expenses, they're making better business judgments..."

Can it be sold?

At RIMS I had several conversations with individuals opining that Coventry would sell off the work comp division. I think not.

While it would be easy to just quote Wise's statement of commitment, we all know how corporate-speak works - it could very well be a smokescreen to cover a transaction in the works.

But I doubt it, for a simple reason - What's to sell?

Bill review - Well, Coventry's application is OK (see upcoming results of bill review survey for more details) but the market is limited, competitors including Medata and Mitchell are doing quite well, Coventry's BR has always been a low-margin business, they recently laid off key support staff and EDS will not support the application after this September.

Case management - Seriously? Who would buy a CM business these days? Perhaps for 3x ebitda, but perhaps not. This business, on the downslope for years, is cratering.

Medicare Set-Asides - What's left to sell? What was a $30 million business is now projected to do $5 million in 2009. That, and the overhanging liability of First Health's ill-conceived "guarantee" program is causing major problems with several customers, as the customers have started to ask for payment on the basis of those "guarantees." Much as they'd like to stick that in a box at the bottom of a very long mine shaft, it's not going away.

Networks - Ah, the crown jewel. Except hospital discounts are fading, the Aetna (which provides the actual network in 16 or so states) is seeking to renegotiate their contract, and Wise himself has alluded to his concern about using group health to get workers' comp discounts (which has been causing problems since 2003). Even if they could leverage the group business' buying power, how could they then turn around and sell the "workers comp network" to another entity? Answer - They couldn't.

FirstScript PBM - The network is accessed through a group PBM (Caremark), pricing is low, and there isn't much in the way of value-add. Still, the sales force under Matt Padden is pretty good, and Padden is well respected throughout the industry. On balance, one of Coventry's stronger work comp offerings.

This is not to say Wise is not actually enthusiastic about comp - even if it is only 6% of Coventry's total revenues. But he has way bigger fish to fry, and he's leaving this to run on its own.

Let's recap.

We have the dominant player in the work comp managed care business being told to increase profitability. We have an express acknowledgment by the CEO that the more bills their workers' comp clients have, the better for Coventry. We have several months' experience with the 'kinder, gentler' Coventry.

What does this mean for you?

Price increases, service decreases, higher medical costs.



Post Script - Once again, I reached out to Coventry to seek their views. And once again - no response.



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Joseph Paduda's blog, managedcarematters.com, focuses on managed care for group health, workers compensation, auto insurance, cost containment, health policy, health research, and medical news for insurers, employers, and health care providers. Paduda is the principal of Health Strategy Associates.
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