The burst of M&A activity in the managed-care space shouldn't surprise you, but what could shock is how beneficial it could turn out to be for clients.
Normally at this time of year, as our industry prepares for the migration to the Annual National Workers' Compensation and Disability Conference? & Expo, the excitement is ... nonexistent.
Last year, my partner Maddy Bowling even wrote a column explicitly challenging our industry to move beyond the "same old, same old" and become more innovative.
Judging by the frenzy of merger-and-acquisition activity in the workers' comp managed-care industry since last year's conference; maybe we should be careful what we wish for.Over the past 24 months, the workers' compensation managed-care industry has seen an unprecedented level of M&A activity. Most of it has been in the bill-review space, including:
-- Mitchell's acquisition of Fair Isaac's bill review operations
-- ACS' acquisition of CompIQ (and Xerox's subsequent acquisition of ACS)
-- Stratacare's purchase of the CS STARS bill-review division
-- The just-announced Mitchell acquisition of Ingenix's bill-review business
Other managed-care services have not escaped the merger-mania. Cypress Care (a pharmacy benefits manager) and Procura Management (which does case management, utilization review and bill review) integrated under the Healthcare Solutions banner. OneCall Medical (diagnostic testing) purchased STOPS (a transportation and translation firm). ISG (the investors in Stratacare) purchased Bunch & Associates (another case management, utilization review and bill review firm).
In addition, several deals are still in the works that just might be announced before this year's conference, including a megamerger between two of the industry's largest case management vendors.
The wave of mergers and acquisitions should not come as a surprise to anyone because a huge rush of venture capital flowed into this space in the preceding 18 months. Investors saw our industry as attractive precisely because it was highly fragmented and inefficient with a relatively low level of automation. From the venture capitalists' perspective, the most efficient way to maximize the value of their initial investments was to drive top-line revenue growth and capture additional market share. The quickest and most efficient way to achieve those goals in an industry that changes relatively slowly is to acquire and roll up additional competitors.
WHAT IT MEANS FOR US
While the M&A activity may make perfect financial sense to the investors, the more important question for our industry is whether these rollups are actually good or bad for the clients of these companies. Generally speaking, prices tend to go up and service quality tends to go down when there is less competition. Anyone who has had to negotiate a deal for a national workers' comp PPO in the last couple years can surely attest to that chestnut.
Fortunately, in this situation it appears that fewer, bigger competitors might actually be a good thing for buyers. First off, remember that overall the workers' compensation market is gradually shrinking. According to the Bureau of Labor Statistics, workplace injury rates continue to decrease by just over 5 percent per year. It is safe to assume that the overall volume of comp-related medical bills requiring review every year is also decreasing slightly--or perhaps in a best-case scenario might be holding flat if you factor in increasing medical utilization.
Faced with a flat or shrinking bill-review market, filled with a wide variety of competitors and buyers only willing to pay commodity prices, most software companies would be hard pressed to justify additional investments in their technology or increased innovation. However, while two or three bill-review firms, each with $5 million to $10 million in annual bills, might not be able to independently justify multimillion dollar investments in their platforms, that level of investment is much easier to make at a single combined entity with $15 million to $30 million in annual bills.
So long as there are several viable companies in this space, they will need to continue to compete for business, and as the firms get larger, they should actually be in a better position to compete on both innovation and price (because there are economies of scale in the bill-review business).
BIGGER IS BETTER
Similarly, bigger may be better in the world of field case management. One of the greatest operational challenges in on-site case management is providing exceptional geographic coverage while maintaining reasonable productivity rates among the case managers.
In today's environment, a handful of firms attempt to provide national coverage with somewhere between 300 and 600 field case managers apiece. Most of those companies struggle to find enough referrals to keep their field network productive, particularly in the more remote areas. The added cost of either sending case managers long distances to cover remote areas or the carrying cost of keeping staff with low productivity in more remote areas for the occasional referral gets passed along to clients in the overall hourly rates charged by these firms.
If two of these firms combined forces (and more importantly, referral bases), and rather than trying to cover 51 jurisdictions with 500 FTEs each covered the same geographic area with the best 750 case managers from the combined company, it is very possible that the quality of case management provided could improve while the cost of maintaining the field network actually decreased.
Clients and prospects of these newly merged companies should use the upcoming Annual National Workers' Compensation and Disability Conference? & Expo to get to know the new owners and senior leadership teams. Have them outline their planned strategic roadmap for the combined entities.
Ultimately, the goal for those clients and prospects should be to encourage those new owners and leadership teams to share at least some of those planned efficiency gains or benefits from new innovations with clients, rather than simply using them to pump up their own bottom line.
DAVID HUTH is a senior partner in the Chicago-based Maddy Bowling Consulting Inc.
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