Tory Wolff, Author at Recon Strategy

ESRX-MHS Part 2: mail facility speculations (…or: Indulging my Inner SWAGer)

Tory Wolff August 1, 2011

Summary ESRX was running at close to maximum capacity at its mail facilities while MHS has room to spare. ESRX is facing a scenario of significantly increased demand as greater mail penetration is achieved in the Wellpoint book and lacked the capacity to meet this demand. Similarly, ESRX would not be able to meet increased demand from reform coverage expansion. By combining, ESRX avoided having to build a new facility and the combined entity appears to have enough capacity to close at least one older mail facility. Given that a

ESRX-MHS Part 1: Last stand of the PBM pure play: observations on the Medco-Express combination

Tory Wolff July 29, 2011

UNH’s decision to take the commercial PBM business in-house did not force MHS into ESRX’s arms: I would argue that it removed the major roadblock to what the companies wanted to do anyway. MHS and ESRX had been talking about a merger off and on for few years (per WSJ reporting) and the logic (laid out below) is compelling but FTC concerns must have kept getting in the way. UNH’s decision doubled the size of its PBM subsidiary in terms of lives (somewhat less in terms of scripts because the

Consumerism bulk-up: Quick thoughts on Aetna’s acquisition of PayFlex

Tory Wolff July 20, 2011

Payflex is an administrator of account-based benefits including HSAs, HRAs, FSAs and COBRA benefits. The company has $58M in revenues, 1M individual consumer accounts and 3,300 employer customers. On Monday, Aetna accounced plans to acquire the company for $202M. The acquisition pricing looks rich relative to the other benchmark out there: Wageworks is a competitor about 2x the size of Payflex and which recently filed an IPO to sell 23% of the company for $75M (in the works at least since April and described in detail in the registration statement

Highmark and West Penn: it’s about mitigating consolidation, not transforming the system

Tory Wolff June 30, 2011

Highmark will invest up to $475M in the West Penn Allegheny Health System, a move characterized as a prelude to purchase. This is no bold move to drive closer integration of information flows and care decisions or align incentives in a transformative vertically integrated model. My take: this is about desperately propping up the last competing provider standing in a highly concentrated hospital market. Highmark’s hand was forced by West Penn’s financial bleed out. But, in response, UPMC has thrown down the gauntlet in a move that will reshape the

Did Wellpoint overpay for Caremore? No….not yet anyway

Tory Wolff June 28, 2011

Summary Wellpoint probably paid full value for Caremore (if that company’s performance is as powerful as limited data suggests) but did not overpay. In addition, Caremore offers several powerful upsides if Wellpoint can continue to grow the model. However, Wellpoint will need to tread carefully to avoid damaging its purchase, given an uncertain record with vertical models (NextRx) and the inherent challenges in integrating fast-growing, PE-fueled innovators into large, mature businesses. Some indicator of Wellpoint’s strategy for Caremore will be given by its approach to Arizona — a key market

Blue Shield of California’s unilateral profit cap: competitive gambit or PR move?

Tory Wolff June 9, 2011

Summary: Blue Shield of California (BSC) has committed to keeping profits at 2% of revenues or less (and returning any excess). The commitment is economically meaningful: $180M of 2010 revenues will be returned; just a few years ago, BSC made 4.9% net income and, under its promise, would have had to return 2.9% of revenues. However, given BSC’s very large reserves, it has plenty of capital to fund investments or, if necessary, absorb losses. While the PR aspects of the move are interesting, it seems unlikely that this is an

Employer opt-out as a result of reform: survey vs. model

Tory Wolff June 7, 2011

Yesterday, McKinsey released a report suggesting that 30% of employers will definitely or probably stop sponsoring health insurance after the Federal reform “big bang” in 2014. Although disputed by the White House per press reports and the methodology details are limited in the published article, there are four good reasons to think the McKinsey survey could be correct: Contradictory studies (Urban Institute in January 2011 and RAND in April 2011) use simulation methodologies while McKinsey did a survey. With a change as transformative as Federal health care reform, simulation parameters

Rapid shift to “bare bones” coverage among Massachusetts small employers: preview of Federal reform impact?

Tory Wolff June 2, 2011

Summary Massachusetts small group went from an average actuarial value (share of expected medical costs covered by the benefit) of 85% in Q1-07 to 73% in Q4-09. In the same timeframe, actuarial benefit levels in another state for which we could find data (Wisconsin) held steady. Given that this trend was well underway in 2007/08, only a portion of the change can be attributed to the economy. The rest may well be a result of 2006 Massachusetts healthcare reform. If true, back-of-the-envelope analysis suggests 50-70% of the decline in actuarial

Rise of self-insurance in smaller groups: opportunity and threat

Tory Wolff May 26, 2011

Summary Self-insurance is growing among smaller groups (including those sized 50-250) From a competitive point of view, it will be hard for insurers holding attractive groups in risk products to respond given the enormous profit cannibalization of converting from risk to an ASO offering But they will need to find some solution: risk products today are expensive for many groups given continuing low levels of utilization; “peanut-butter” share nationals at the forefront of these products (Cigna and now Aetna) won’t have cannibalization worries to stop them from pushing the model

Major health plan Q1 earnings: Profit surprise in commercial risk; multiple reasons why business prospects look good

Tory Wolff May 21, 2011

Public health insurers startled the market with earnings ~25% above consensus expectations. A key driver was lower-than-expected utilization (particularly in the under 65 commercial lives) which kept medical costs down. Management teams offered two theories in the analyst calls: bad weather and the beginning-of-the-year reset of consumer directed (CD) deductibles; neither is compelling: A lot of discretionary care has already been squeezed out of the system by the bad economy; it is hard to imagine that bad weather would drive out a lot more. Also the utilization decline was concentrated

ACO profitability: Reasons for optimism

Tory Wolff March 29, 2011

Summary A new article in the NEJM suggests ACO economics will be unattractive because of the costly upfront investment and low probability of shared savings payments. However, the results of the Medicare Physician Group Demonstration project show good earnings potential for providers (average >$5K per physician). Further: best-practice sharing, emerging narrow networks and scalability of ACO capabilities are likely to significantly enhance ACO economics for providers. It is likely that the most adept providers will be the ones forming ACOs; given delivery system capacity constraints, however, providers opting out of

Primary care capacity and the looming Medicaid surge: Medicaid-focused providers must be part of the answer

Tory Wolff March 21, 2011

Summary A new study from Center for Studying Health System Change suggests that new Medicaid eligibles under reform will have trouble getting access because most primary care are not accepting new Medicaid patients. Our view: The study does not take into account the role of focus in Medicaid which makes a big difference: Providers earning more than 25% of revenues from Medicaid are much more willing to take on all or most new patients. In fact, among the providers most likely to care for Medicaid eligibles, the willingness to accept

Revolution in Roanoke? Perspectives on the Aetna-Carilion deal

Tory Wolff March 19, 2011

Summary The line between health plan and provider continues to evolve: the Aetna-Carilion deal exemplifies providers backward integrating into insurance (and contrasts with other providers exiting commercial insurance business e.g. art part of last year’s Coventry deals) The Aetna-Carilion alliance appears to have compelling, multi-layered business logic and there will surely be more of these sorts of couplings in markets where there is a strong provider brand and a health plan with low share but deep capabilities and ambition. Using the provider brand to sell insurance creates challenges for health

How can a health plan weather the MLR hit to profitability? Some clues from Coventry

Tory Wolff February 28, 2011

Summary Health plan profits will be down dramatically in 2011 due to MLR rules Providing care management services to providers building out ACOs and medical homes can open new revenue streams outside the MLR constraints System profitability (health plan + provider) can be enhanced if the health plan allows providers to keep more of the savings from ACOs while requiring larger fees for its care management services * * * Could this be part of the plan behind Coventry’s touted close provider relationships and plans to acquire more health plan

Author: Tory Wolff

Recon takes an analytical look behind select developments in healthcare