Has competition vanished? Coventry makes big gains in the workers' comp marketplace, but there's still plenty of room for alternative models.

Summary

* Bethesda, Md.-based Coventry Health Care has assembled a big position in the delivery of preferred provider organization (PPO) networks to the workers' compensation marketplace.

* Computers are delivering more discretion to insurers and third-party administrators, those who engage preferred provider organizations such as Coventry.

* Recent changes in California and Texas law give employers the power to choose which doctors to treat injured workers.

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Consolidations, computers and emerging competitors are raising Cain in the business of workers' compensation medical provider networks. In particular, attention is turning to Coventry Health Care, the Bethesda, Md.-based health care services organization which entered the workers' compensation field earlier in this decade.

Coventry, a health care services firm with 4,700 hospitals and 580,000 doctors and nurses in the entirety of its networks, has used acquisitions and partnerships to assemble, some say, a monopolistic market position in the delivery of preferred provider networks to the workers' compensation marketplace.

The PPO is getting huge discounts from medical providers--hospitals and physicians groups--to the tune of more than 30 percent off a state fee schedule or prevailing market rates, according to one experienced clinic chain operator.

A PPO with a strong market position, like Coventry, whose principal business is regional health plans, can gain in two ways: by extracting deeper discounts from providers and by nudging up its share of the savings from its customers.

In the world of PPOs size, gained either through organic growth or acquisition, matters. Back in January 2005, Coventry acquired First Health, a large workers' comp PPO, which it soon folded into other workers' comp PPOs.

Coventry was big and getting bigger so that by the end of 2006, the company was reporting revenues from all sources of $7.73 billion and $5.6 billion in assets.

Early last year, in 2007, it had just three serious competitors in bidding for large multistate contracts: the PPO arm of the managed care firm of Corvel; the PPO arm, named Focus, of managed care firm Concentra, and the health insurer Aetna, which had launched its own workers' comp network in 2005.

Aetna, one of the country's largest health insurers, provides workers' comp coverage in 18 states including Florida, New York and Texas. It came on the workers' comp scene in the spring of 2005, when it launched its own PPO network called Aetna Workers' Comp Access (AWCA).

Using The Hartford as its first client, it leveraged its health insurance volume to get very competitive discounts.

Tom Shivers, head of sales at Aetna Workers' Comp Access, says Aetna not only used its volume to negotiate discounts with payers. AWCA brought something else to the workers' comp party: Axcel, AWCA's regional networks of specialists selected for good clinical outcomes and economy in treatment. There are now 27 such networks and more on the way.

So, where does that leave Coventry? With the purchase of the Focus network, bill review, pharmacy management and case management operations from Concentra a year ago, Coventry deftly removed a national competitor, and then just months later turned around and struck a deal with Aetna to sell and market the AWCA networks to insurers and TPAs.

With the bill review, pharmacy management and case management assets it obtained in the Concentra deal, Coventry can offer the big package of cross-marketable services.

As a result--surprise !--Coventry's quarterly revenues from its workers' comp business jumped in 2007 from about $50 million to about $150 million. Wall Street expects Coventry's annual revenues in 2008 to meet or exceed $700 million just in workers' comp.

PPO ECONOMICS

There are roughly 600 claims-paying organizations in the United States each with annual premium or equivalent premium of $50 million or more, which makes them large enough to dedicate staff to provider relations, including selecting PPOs.

The largest claims payers, those with equivalent premium of more than $250 million in size have the most influence. This group, which includes about 50 insurers and a handful of third-party administrators and self-administered employers, pays about two thirds of all claims dollars. At the lower end of the scale are some 200 self-administered employers.

PPOs use several channels into the claims payer market. They may pitch directly to the claims payer. Or they may go through a medical bill review firm or managed care firm that a claims payer has assigned to recommend and contract with PPOs.

Claims payers pick networks to match their scale of operations, laws of states in which they do business, and their level of sophistication.

For example, an employer may want close relations with doctors it considers experts in treating its employees.

In California, for example, big companies like Chevron, Costco and Twentieth Century Fox have picked relatively small sets of doctors. These companies have taken advantage of recent state laws encouraging the use of customized networks.

Insurers with business in many states, servicing thousands of insured employers who may have no interest in relating to doctors, tend to favor very large networks of medical providers chosen entirely on their willingness to accept fee discounts, regardless of expertise.

Most claims payers, says Lockton claims consultant Kim Brown, adopt the following model of provider relations, regardless of state law: an off-the-shelf discount PPO contract, with as one with as large an enrollment as possible with the deepest discounts, balanced off with ad hoc, case by case informal steering of injured workers to specific doctors.

For the PPO vendors like Coventry, scale drives profits. The larger the network the more medical treatment runs through it and the more discounting transactions there are.

Richard Eskow, a Los Angeles-based consultant, says a large PPO may have in its network and in its subcontracted networks enough providers to capture 60 percent of the medical payments of its customers. Its fee discounts might average 20 percent. It may keep one fifth of that, which it may split with business partners.

If its network is "mature," needing only moderate maintenance spending, its profit margin could be at least 20 percent.

So, do the recent Coventry acquisitions give it undue influence ,in the workers' comp PPO business? How you answer that depends on what you make of the Aetna deal, the availability of other workers' comp provider networks, and the buying discretion of claims payers.

Aetna's Shivers says that in the 18 states in which he has workers' comp networks, a deal with Coventry requires that Aetna's AWCA must be the primary network and for doctors enrolled in Coventry's own networks and AWCA, bills will be adjusted to match AWCA's rates.

AWCA is free to continue to service its pre-existing customers independently of Coventry, Shivers says.

Betsy Robinson, vice president of products and marketing for the managed care firm Intracorp, says that one can find competitive or customized networks in most states without depending on Coventry. She says that Intracorp has been putting together multistate "mosaics" of provider networks since the mid-'90s.

"Over that time the landscape of PPO providers has changed a lot," she says. "We have seen in states like Texas or Florida providers opting out of a particular PPO, and other parties coming in with strong networks. There is no state where we have only one offering."

Jody Thompson directs marketing at Stratacare, a technology and workflow company specializing in workers' compensation which has positioned itself to manage medical bills from inception at the doctor's office through final resolution. He says, "We don't own a PPO network. We have relationships with 29 PPO networks, including national, regional, and ancillary ones. We bring them to our customers through our technology." Thompson doesn't express concern about lack of choice.

Both Stratacare and Ingenix, which licenses its bill review software, say their technology is capable of coordinating many PPOs for a client, including PPOs that overlap in provider enrollments. As a result, this allows for many combinations of networks besides Coventry.

In addition, players big and small aren't afraid of taking Coventry on.

Wellpoint's Blue Cross operations in California, Colorado, Nevada, Missouri and parts of Illinois, for example, are direct workers' comp competitors to Coventry. There is also talk of resurrecting a past effort by independent Blue Cross plans to jointly promote their services.

Specialized workers' comp networks have emerged to "carve out" work from all-purpose vendors such as Coventry. Medrisk, Network Synergy and Universal Smartcomp, for example, are three physical medicine networks which have made inroads. In contrast to PPOs that only address fee discounts, these specialist networks address the main concern of insurers about physical therapy: the issue of over treatment.

Specialist networks aren't the only family of vendors in the game. A company called Fairpay Solutions, for example, has been offering a non-PPO means to hospital bill repricing by applying analytical tools to find the lowest legally defensible reimbursement to hospital charges. It does not rely on network fee agreements to set rates at all.

TEXAS MUTUAL'S MOVE

Texas provides an example of how a claims payer and regional leader can craft a proprietary PPO strategy.

The Texas Legislature in 2005 passed a law enabling healthcare networks (HCN) over what networks should look like. Texas Mutual Insurance Co., the state fund, controls close to half of the workers' compensation insurance market. Its HCN was the first to have been approved.

But what's good for Texas isn't necessarily good for the rest of the country and the jury's still out on HCNs, at least the Texas model.

Other claims payers are reluctant to form HCNs, for example, largely because of what many consider to be too much regulation.

Only one of Ingenix's customers has taken the HCN route, says Karrie Clark, executive director of business alliances for Ingenix. Aetna's Shivers calls HCN programs "way overengineered, unbelievably burdensome."

But Texas Mutual appears undaunted. It's CEO, Russell Oliver, says that his staff worked with Concentra's medical clinics and several hospital chains to pick doctors for Texas Star, Texas Mutual's proprietary network.

"I can tell you that Texas Mutual does not pay a fee based on discount savings sharing; there is a structure in place that is similar to access fees per transaction," says Oliver.

Texas Mutual expects in 2008 to start linking with medical providers electronically as Texas is the first state to require statewide connectivity between payers and providers. Minnesota will be next. If this technology matures into a two-way highway, a claims payer can more easily push aside PPOs and directly deal with the doctors.

And what happens when claims payers begin to seriously look at how individual doctors affect claims costs? It will strengthen their bargaining position with PPOs.

ESIS, the third-party administrator, and Liberty Mutual, the large workers' comp carrier, have built databases with the needed medical and claims data to track a provider's performance. Liberty Mutual's Medical Loss Data Mart has been operational since early 2005.

Mark Sidney, who directs claims operations for Liberty's national markets, says that the variation in spending and outcomes among doctors is "very significant."

"If we can pick the doctors, a five percent savings in losses may be possible," he says.

Judith Kunisch, a healthcare executive who helped build a partnership between The Hartford and Aetna's AWCA, says that as a rule, workers' comp insurers invest too little in doctor picking analysis. To her, claims payers have to match what group health collaboratives such as the Leapfrog Group have been doing for years.

PETER ROUSMANIERE is a Vermont-based columnist and writer for Risk & Insurance[R]. He can be reached at [e-mail].