Is off.

The latest intel from several folks in the know is consistent: APAX will not be buying Aetna’s Coventry workers’ comp business.

While it's possible Aetna will look for another buyer, that is doubtful; the issues that reportedly led to the collapse of the APAX deal are real, material and not going to resolve themselves. In fact, the key asset – the PPO network – continues to deteriorate. Aetna has a declining-value asset on its hands, one that, as time goes on, becomes ever less valuable.

According to reports, the biggest sticking point was APAX’s concern that the Coventry network will take at least two years to rebuild; when that onerous task is completed it will be nowhere near as valuable as it is today.

That’s far from surprising; I’ve discussed the network contracting issue ad nauseum. Fact is, without the real, committed and ongoing support of a major group health/Medicaid/Medicare payer, providers aren’t going to give much of a discount to a work comp network.

Workers' comp accounts for just over 1% of total U.S. medical spend. Even if Coventry’s successor could claim 100% market share, their influence on a provider – outside of a relative handful – is never going to be appreciable.

But it wasn’t just the network. Sources indicated there were concerns in other business lines as well. Chalk this up to chronic under-investment in the business by Coventry pre-Aetna and the lack of focus on workers' comp by Aetna since they bought Coventry’s parent company.

With earlier reports indicating Aetna wanted $1.5 billion for a business throwing off more than $200 million in free cash flow annually, a 7x multiple seemed reasonable. However, with no guarantee that the cash would keep flowing, I’d imagine APAX dropped the amount of their bid to account for the lowered expectations.

I’m sure there is much more to the story, but the net is APAX wasn’t willing to pay the price Aetna wanted, and Aetna wouldn’t accept APAX’s lowered bid.

What’s next?

Work comp represents just over 1% of Aetna’s revenue. The company has a few other priorities on its hands at the moment – and as a $50 billion company, well it should.

Guessing here…but if I were at Aetna, I’d think about:

• Working to keep the PPO network as functional as possible as long as possible without screwing up any of my other – much more important – business lines.
• Selling off pharmacy benefit manager First Script, an asset that should generate a very nice offer.
• Replacing the bill review platform (BR 4.0) with one of the third-party applications currently available. This would allow Coventry WCS to continue its very profitable bill review/PPO outsource business.
• Leaving current management in place. Art Lynch is running the show, and he’s the perfect person to do so. He has strong relationships with current customers, is universally well-liked and is just the kind of low-key, steady exec WCS needs now.

What does this mean for you?

Don’t delete Plan B -- you’re still going to need it.

Joe Paduda is owner of Health Strategy Associates and co-owner of CompPharma, a consortium of workers' compensation pharmacy benefit managers. This column was reprinted with his permission from his Managed Care Matters blog.