By JACK ROBERTS is editor-in-chief of Risk & Insurance®.
Almost 16 months ago, Atlanta-based Crawford & Co., the largest independent provider of claims management services, closed on its acquisition of Broadspire, one of the largest third-party administrators.
The deal, estimated to be worth about $150 million, came on the heels of the sale of Broadspire's disability business to Aetna Inc. for a cool $160 million. That netted its owner, the private equity fund Platinum Equity, a total of $310 million.
Clearly, Platinum Equity, which acquired the former Kemper Services operations in 2003 and then quickly renamed its business "Broadspire," knows how to turn a profit. Industry sources characterized the deals as exceptionally good for Platinum, which is one of a number of private equity firms that has been investing in the claims management field recently.
In 2003, Dennis Replogle, then president of Specialty Risk Services, another third-party claims administrator, was named president and CEO of Broadspire. Replogle had grown revenues at SRS, owned by The Hartford Financial Services Group, more than five-fold.
Last year Crawford's total revenues, including Broadspire, topped more than $1 billion. Broadspire's main focus is workers' compensation claims management. Broadspire, in an increasingly competitive and difficult market for the workers' comp claims management industry, posted revenues of $318 million in 2008, down about seven percent from 2007. Profits for the Plantation, Fla.-based Broadspire increased 12 percent in 2008, despite a loss in the fourth quarter of 2008.
Replogle acknowledged in an interview with Risk & Insurance® that the only real options available to third-party administrators in this market are to take business away from other competitors or to keep costs under control and improve margins.
"As tough as the market is right now, you must have the right story for your customer base that differentiates yourself in the marketplace," he says. "Customers tend to look at all TPAs as the same and to stand out you have to show hard-hitting results."
Replogle, during the time when Platinum owned Broadspire, clearly positioned the company for its sale. It was only eight months after Broadspire announced the sale of the disability claims management services to Aetna in February 2006, that the deal for Crawford to buy Broadspire was announced.
When the company was bought by Platinum, Replogle says "the idea was to establish Broadspire as either the leader or a leading contender in the TPA claims marketplace." One of the key differentiators for Broadspire in the market was its array of products and its "integrated model of services, services that Broadspire itself owns."
The acquisition by Crawford, for years considered to be the top claims management firm with a great reputation for claims adjusting and claims management for property casualty companies, made lots of sense, Replogle says.
"Their book of business and our book of business were fairly similar. Crawford had about the same geographic footprint as we did. They had an array of medical management products that complemented ours."
The TPA operations of both companies were combined under the Broadspire brand name. Initially, the head of Crawford's TPA operations was named CEO of the combined firm. However, that didn't last long and Replogle, who was president, added back his old title of CEO. "My goal was to seamlessly integrate the two organizations and make sure that none of our customers felt any pain in this transition," he says.
"I think we did that pretty well." His next task was to assemble, as he described it, a management team that could take the company forward for the next 10 years.
ONE DEGREE OF SEPARATION
In the TPA business, the top managements of the major players often share employment histories. In 2007, Replogle brought on Kenneth Martino, then senior vice president at SRS where Replogle had been president. Indeed both Replogle and Martino cut their teeth at the Travelers Insurance Co. before signing on with SRS. Martino was named president and would transition to become the CEO within the next year, when Replogle planned to cut back and become chairman. That happened last June, when a series of additional top management changes were also announced: Replogle and Martino had their new team in place.
"We really have developed an impressive senior management team," Martino says. "These are all top people who have been in the business for a long time. We have enhanced our leadership in sales, marketing, claims and medical management."
But both Replogle and Martino acknowledge that in the current economic environment, the business is increasingly tough. Revenue and profits at TPAs are typically tied to the number of claims filed, which usually declines when overall employment levels drop. That puts tremendous pressure on costs especially because TPAs typically run on thin margins.
Still, Martino insists that growth is at hand. "We have aggressive plans to grow the business, with our new sales team in place," he says. But that will be a challenge, at least in the short term. Broadspire posted an $1.8 million operating loss in the fourth quarter which was "primarily due to lower workers' compensation claim referrals as a result of weakening U.S. employment levels."
Most top workers' comp claims executives say that in the current market clients are reluctant to make a change in their TPA unless there is a really significant problem in the operations. Indeed, with the recent plant closings, corporate bankruptcies and the general economic decline, it will be a challenge just to maintain the business, no less expand it. Cost control is probably now the top priority at both TPAs and their clients.
Martino and Replogle argue that this gives Broadspire an advantage in the marketplace.
"We're a fully integrated operation," Replogle notes. Unlike many other TPAs, Broadspire owns and operates most of the services that it offers, like bill review, its core claims operations and, most importantly, its managed care and medical services. Martino and Replogle believe it's the managed care operations that give Broadspire a competitive advantage. Medical costs, for example, continue to rise dramatically even as claims frequency drops.
Crawford's most profitable business segment is its international operations, which Broadspire hopes to leverage with increasing global sales. "Even in countries with national healthcare, we are finding that many employers are now on the health and productivity bandwagon," Martino says. "And, although there are national health services, the medical community is not oriented towards such issues as return-to-work."
He thinks that kind of positioning can give Broadspire an edge. This global direction also offers opportunity in the United States. "What happens if a foreign national employee is injured on the job here?" Martino asks. "They might want to return home, but if it's a serious medical condition, the question becomes whether they can receive proper care there." Crawford's medical services in those countries can provide the kind of help needed in these situations.
Both Replogle and Martino explain that medical issues are often the overriding problem. "Half of all catastrophic claims begin with a medical problem that isn't initially seen as a big problem. We have a decision-support software tool that helps us sort through the interview process to identify the particular cases that have the potential to develop into a catastrophic medical situation. It's a combination of both qualitative and quantitative analysis," Martino says.
Although gaining new customers is challenging ? basically that means you must take customers away from a competitor ? Broadspire is also looking at acquisition opportunities, another growth option. "The market has been consolidating for years," Martino says. "It's going to be difficult for the smaller players to become big players. Says Replogle, "Some of the smaller players have real cost advantages in the marketplace. But if they have a client base that is not too far afield from us, that could be a good opportunity for us to come in and overlay our model on theirs."
The combination with Crawford, now more than a year old, looks to be working out. "Crawford is the big player in the business and that's an advantage," Replogle adds. "The company posted more than $1 billion in revenue last year. We're excited about the opportunities that we will have."
April 1, 2009
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