Coventry takes charge: Plan becomes the biggest game in town

In the world of workers' compensation, no managed care company is as powerful as Coventry Health Care. Now physicians are waiting to see how Coventry flexes its newfound muscles.

By Emily Berry — Posted Nov. 26, 2007

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As fewer companies establish more dominance in the commercial health insurance market, the number of plans handling workers' compensation physician networks also is shrinking.

In particular, Coventry Health Care has emerged as the big fish in the workers' compensation pond. In the space of a few years, Bethesda, Md.-based Coventry has established a firm grasp on the workers business, and analysts estimate that the company now controls 65% or more of the market for national workers' compensation physician networks.

If they have not felt it already, doctors who care for injured workers could feel the weight of the company's market power.

"They have become a very dominant player in the workers' comp side, and they're the only viable national network in workers' comp at this point," said Peter Rousmaniere, a Woodstock, Vt.-based consultant in the workers' compensation field.

Doctors already wrestling with the high administrative costs of workers' compensation care can't afford a pay cut, said Dan Nagle, MD, a hand surgeon in Chicago. A recent UCLA study found a correlation between a decline in physician pay for workers' compensation and a decline in physician acceptance of those patients -- a trend exacerbated by practice expenses for workers' compensation cases ranging up to three times higher than Medicare, which is attributable to additional administrative and regulatory burdens.

Coventry hasn't spoken publicly or to analysts in specific detail about what it plans to do with physician reimbursement. But if Coventry sends pay down even more, Dr. Nagle said, "you'll see an exodus."

Coventry entered the workers' compensation market just three years ago with the $1.8 billion purchase of First Health Group Corp., based in Downers Grove, Ill. At the time, First Health was the largest provider of workers' compensation physician networks, said Joe Paduda, principal of Health Management Associates, a Madison, Conn.-based health consulting firm.

After a few years' experience in the market, Coventry bought out Addison, Texas-based Concentra, First Health's nearest competitor, earlier this year. Coventry paid $387.5 million for Concentra's workers' compensation managed care and PPO networks. Concentra continues to operate its occupational health medical clinics.

Within a few months, Coventry took greater control of the workers' compensation market by cutting a deal with Aetna, Paduda said.

In an agreement reached this fall, Coventry became the gatekeeper for Aetna's 17-state Workers' Compensation Access (AWCA) network, which had been Coventry's sole competition in some areas of the country.

Concentra, then Coventry, actually was both a customer and a competitor of Aetna, paying for access to the AWCA network and its discounted rates. As of this fall, the competition was eliminated.

"This was a case of two organizations looking honestly at each other, working toward a common goal, and coming to a mutually beneficial agreement for each organization as well as for the industry," said Aetna spokeswoman Tammy Arnold. She declined to say how much the deal was worth.

In cases in which physicians had contracts with both companies, the AWCA contract would take precedence -- a pay cut for many physicians.

"What's happened in the last six months is they have taken a very strong role from a leadership role to a dominant role by making deals with the other national competition," Rousmaniere said. "There weren't too many competitors to begin with, so it was pretty easy for them to do that."

Paduda said of the top 25 workers' compensation insurance carriers, led by American Home Assurance Co., a subsidiary of AIG; Zurich American Insurance Co.; and Commerce & Industry Insurance Co., nearly all use Coventry's networks.

Workers' compensation networks have been just one part of Coventry's rapid growth.

The company was founded in 1986 by health care entrepreneur Phil Bredesen, who is now Tennessee's governor. Coventry sells health insurance to small employers, operates PPO networks, and administers Medicaid and Medicare benefits. In addition to expanding its workers' compensation business, Coventry has been buying up smaller plans like Florida Health Plan Administrators, which owns Vista Health plans, and Mutual of Omaha.

Coventry, like many larger health plans, was a defendant in federal lawsuits alleging violations of the Racketeer Influenced and Corrupt Organizations Act. Unlike most of the larger plans, Coventry did not settle with the plaintiffs, and in June a U.S. Court of Appeals panel upheld the dismissal of the lawsuit against Coventry and against UnitedHealthcare, citing insufficient evidence.

Coventry spokeswoman Cathy Campbell said the company would "respectfully decline" to talk about its workers' compensation business. But executives have been clear to investors and analysts about their intent in the workers' compensation market.

At a Securities and Exchange Commission hearing in November 2004 over its first major workers' compensation acquisition, Coventry CEO Dale Wolf laid out the company's strategy: Network consolidation is "key to our success," he said.

Its second-quarter earnings release noted that with the April closing of the Concentra deal, Coventry is "now the market leader in providing managed care solutions for workers' compensation payers."

Coventry officials Oct. 26 announced third-quarter net earnings of $168.7 million, from total revenue of $2.5 billion, for per-share earnings of $1.08. The revenue total included $156.9 million from the "specialty" division that includes workers' compensation business, up from $ 51 million a year earlier.

But with all of its acquisition integrated next year, the company expects its workers' compensation business to bring in $700 million in 2008.

The state of workers' comp

Workers' compensation is a relatively small piece of the health insurance pie -- it represents about $25 billion of the $2 trillion health care industry, Paduda said.

But Coventry was attracted to the workers' compensation market because it was fee-based, rather than a risk-based insurance product and because the big players hadn't gotten in to the workers' compensation business in a big way, he said.

At the SEC hearing over its First Health acquisition in 2004, Wolf said the fee-based nature of workers' compensation would broaden Coventry's business and also would expand the company's reach geographically. And, he noted, "the wind is at our backs in terms of regulatory reform that promotes the use of network providers in that business."

By controlling more than half the market, Coventry will be positioned to push down physician and hospital reimbursement and drive up prices for employers buying workers' compensation insurance, Paduda said.

Workers' compensation is handled differently in each state. In every state but Texas, every business with more than a few workers is required to have workers' compensation insurance to pay for medical care and lost income for workers hurt on the job.

Companies either can self-insure or buy workers' compensation insurance from the state, or from a carrier such as AIG, Zurich or Liberty Mutual. The insurance carrier covers lost pay and medical expenses related to work-related injury and illness. In five states, the state offers the only workers' compensation insurance plan, and private companies like Coventry just sell access to their physician networks to self-insured companies.

In turn, carriers buy access to physician networks from Coventry or from smaller companies that have established local networks.

Many states have established fee schedules that lay out what workers' compensation insurers must reimburse physicians for each service. In some cases, reimbursement is a percentage of Medicare's reimbursement across the board. But managed care companies can negotiate discounts below the state's fee schedule.

Chicago-area hand surgeon Michael Vender, MD, president and managing partner of Hand Surgery Associates, SC, said his practice's cases are 60% to 70% workers' compensation. He said if Coventry pushes physicians to accept lower pay, it could drive some physicians out of the market.

"It puts the patient at risk, because what happens is certain companies will then put a priority over who is going to provide the cheapest health care rather than the best health care," he said. "Cheaper health care in the short term can lead to more expensive care in the long run."

Some physicians feel well prepared should Coventry try to push for deeper discounts. In Miami, Richard L. Dolsey, MD, is CEO and medical director for Physicians Health Centers, a multi-clinic group of occupational medicine specialists.

"We feel we have a strong presence in our community," he said. "We won't see a payer that has a monopoly as such come in and say, 'Well, we're going to reimburse you less,' because we feel our quality is good."

So far, he said, Coventry hasn't shown any indication of flexing its market power over his group.

"The real steep cuts under the fee schedule have been things of the past," Dr. Dolsey said. "All of the studies have said ... that if you cut the fee schedules too much to the caregivers, then the good guys are going to back off, and then the other side is you tend to get more utilization. It doesn't work well for anybody."

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How workers' compensation is covered

States have different requirements for how businesses purchase workers' compensation insurance. Many workers' compensation insurance carriers and self-insured companies are using networks controlled or owned by Coventry Health Care. It has quickly emerged as the dominant company providing physician networks for workers' compensation coverage.

"Monopolistic states" - workers' comp insurance provided only by state: North Dakota, Ohio, Washington, West Virginia,Wyoming

Both state-run workers' comp funds and private carriers: Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah

Private carriers only: Alabama, Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, South Carolina, South Dakota, Tennessee, Vermont, Virginia, Wisconsin

Note: Market will open to private carriers in July 2008 in Wyoming. Workers' comp insurance required only for governmental entities in Utah.

Source: U.S. Dept. of Labor, Joe Paduda

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Building a bigger network

2004 First Health Group Corp. -- $1.8 billion merger Gain: 50-state operation for workers' compensation, including physician networks, pharmacy benefit management and disease management Market share: Less than 40%

2007 Concentra (workers' comp business only) -- $387.5 million acquisition Gain: Workers' compensation PPO, bill review, pharmacy benefit management, independent medical exam services. Recent physician network acquisitions by Concentra meant big market share gains for Coventry in New York and Texas. Market share: More than 50%

2007 Aetna Workers' Comp Access (AWCA) -- Partnership (cost undisclosed) Gain: AWCA becomes Coventry's workers' compensation network in 16 states and the District of Columbia: Arizona, Colorado, Connecticut, Delaware, Florida, Georgia, Indiana, Michigan, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas and Virginia with another seven to be developed in 2008. Market share: 65% or higher

Source: Coventry Health Care filings with the Securities and Exchange Commission, Joe Paduda, Aetna

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Choice of physicians

State laws that govern who chooses the physician to treat an injured worker vary widely. In some states an employer can choose a treating physician or establish a managed care network like the ones Coventry operates. In other states, an injured worker has the right to see any doctor.

Employer choice: Alabama, Indiana, Iowa, Kansas, Missouri, New Jersey, Oklahoma, South Carolina

Choice from employer-maintained list: Florida, Georgia, Pennsylvania, Tennessee, Virginia

Choice from state agency-prepared list: New York, Texas

Employee choice: Alaska, Arizona, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oregon, Rhode Island, South Dakota, Washington, West Virginia, Wisconsin, Wyoming

Employer selection, may be changed by state agency: Arkansas, Colorado, Idaho, North Carolina

Employee choice after set period: California, Maine, Michigan, New Mexico, Utah, Vermont

Note: Choice may be restricted when an employer has established a managed care network arrangement.

Source: U.S. Dept. of Labor, Joe Paduda

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