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An article in the September edition of Risk & Insurance®about the attitudes of leaders in the workers' compensation industry toward outsourcing and offshoring revealed a mix of interest, opportunity, fear and skepticism. A follow-up survey of industry leaders, with more than 375 responses, shows that the marketplace may not be quite as skeptical.

In the September article, leaders of the major third party administrators and workers' compensation insurers reported that the industry was beginning to adopt or test significant outsourcing and offshoring opportunities in claims processing.

Our initial interviews with the leadership of several major TPAs and insurers suggested that although payers were beginning to test the outsourcing waters with back room processes such as system development or scanning/paper conversion, most held firmly to the belief that core claims processes could not be outsourced and most definitely could not be offshored. However, the results of the survey suggest that there is significant interest and enthusiasm for outsourcing in the industry, across a wide spectrum of the claims processes.

OUTSOURCING ENTHUSIASM

While it was not surprising to find that paper conversion and software development led the list of items respondents thought could be outsourced, it was surprising that a majority of respondents also believed that key account-level processes such as underwriting, policy administration, loss control, billing/invoicing and reporting/analysis could be successfully outsourced by payers. It was also unexpected to see a majority of survey respondents also thought that every claim-specific component of the process that we asked about, from first notice of loss to claim triage to processing complex medical-only claims and return-to-work management, could be successfully outsourced.

Of all the elements in claims processes that we asked about, underwriting was the one with the least support for outsourcing, yet even so, 54 percent of all respondents thought that underwriting could indeed be outsourced.

In addition to the somewhat abstract idea of outsourcing processes, we also asked survey respondents whether they thought specific positions within the claim organization could be outsourced. More than 70 percent of respondents thought that call center representatives, claim assistants, billing clerks and medical bill reviewers could be outsourced. Not surprisingly, positions that required the most knowledge or expertise, such as senior claims adjustor and claim supervisor received the least support for outsourcing, yet nearly half of all respondents thought even these positions could be outsourced.

OFFSHORING INTEREST

Perhaps the most intriguing and surprising outcome of the survey was to see how many of those outsourced services and positions survey respondents thought could actually be sent offshore. If a respondent thought that a specific process could be outsourced, we then asked a follow-up question as to whether they believed that process could also be successfully offshored.

As expected, the "usual suspects" in the offshore lineup--paper conversion, document management and software development--scored the highest, with more than 50 percent of those who thought they could be outsourced also saying they could be successfully offshored.

However, several other key claim components such as policy processing/administration, billing/invoicing, reporting/analysis and coverage verification also had a majority of respondents who believed they could be sent offshore. There was less interest in sending claim-level processes offshore, although more than 40 percent of those who thought first notice of loss, processing simple medical-only claims and medical bill review could be outsourced also thought they could be done offshore. Processes which required significant interaction with an injured worker such as processing complex medical-only claims, medical case management and return-to-work management received the least support for offshoring, with less than 21 percent of the vote.

From an occupational standpoint, the positions which received the most votes for outsourcing also received the most votes for offshoring. A majority (54 percent) of those who thought claims assistants could be outsourced thought they could be staffed overseas, but only 43 percent thought positions such as mailroom clerk, call center representative, billing clerk and medical bill reviewer could be outsourced offshore. Once more, the jobs which require significant interaction with the injured worker such as senior claims adjustor and nurse case manager received the least support for offshoring, with only 20 percent of the vote.

SPEAKING FROM EXPERIENCE

Moving from the abstract to the more concrete, we also asked respondents about their actual experience with outsourcing and offshoring in the claim process. Nearly two-thirds of respondents indicated they either had not had any experience with outsourced claims processes (48 percent) or they were not sure if their payer was using any outsourcing (17 percent). Of those who did have experience with outsourcing in the claims process, the vast majority (79 percent) said their experience was with domestic outsourcing only, while 19 percent had experience with both domestic and offshore outsourcing, and 2 percent had used offshore only. A majority (57 percent) of the domestic outsourcing programs had been in place for at least three years, with nearly a third having been in place for five or more years. Not surprisingly, the offshore outsourcing programs appeared newer, with only 43 percent in place for more than three years.

When asked how satisfied they were with the results of their outsourcing program, 64 percent of those using domestic programs said the quality of the outsourced program was as good as or better than the original internalized program. Those using offshore outsourcing were slightly less satisfied, with only 41 percent indicating the quality was as good as or better than the original program.

BENEFITS/OBSTACLES

While the survey strongly suggests the market is supportive of outsourcing components of the claim process, it was also clear that as an industry the workers' compensation market is not yet sold on the concept of offshoring. When asked point blank whether the claims industry could benefit from the use of offshoring, 50 percent of respondents said "No" while only 26 percent said "Yes" and 24 percent were not sure. The top perceived benefit of offshoring was extremely clear, with 74 percent of respondents identifying reduced operational costs as the greatest incentive to offshore. The closest other benefits were "increase operational capacity" with only 26 percent selecting it as a primary benefit and "improve productivity" and "support client's international operations" both being selected by 23 percent of respondents.

The greatest perceived barriers to offshoring were "customer service issues" (selected by 62 percent of respondents) and "loss of control" (47 percent of respondents). Other key barriers were knowledge loss, hidden costs, vendor performance/expertise and market perception issues.

This last item in particular appeared to be a polarizing issue with segments of the survey respondents, as we received several write-in responses along the lines of, "Americans should not send ANY jobs offshore." What made this type of response particularly interesting was the fact that half of those who had an opinion said that their claim organization had been hurt by a shortage of experienced claim staff within the last 18 months.

Rather than looking to outsource or offshore components of the claim process to help address this adjustor staffing shortage, it appears as if payers prefer to increase adjustor caseloads (28 percent of respondents), hire temporary adjusting staff (27 percent) or recruit adjusting staff from competitors (18 percent).

Overall, while respondents did appear to generally agree that many tasks in the claim process could be outsourced and that there was strong satisfaction with existing outsourcing efforts, there still appears to be significant industry reluctance to take the next step and move more functions overseas.

Some companies do appear to be experimenting with offshoring pieces of the claim process and those that are appeared satisfied with the quality of work a majority of the time. However, the strong reactions that we received in the comments sections of the survey clearly indicate that emotions run high when talking about outsourcing and significant barriers still remain to its widespread adoption in our industry. Nevertheless, the fact that more payers are experiencing adjustor staffing shortages, coupled with the fact that most of those surveyed do believe that many of the claim processes could successfully be offshored, would seem to indicate that eventually more payers will adopt some level of offshoring.

More detailed results will be shared during our session entitled, "Extreme Makeover: Claim Edition," at the 15th Annual National Workers' Compensation and Disability Conference in Las Vegas, November 13-16. The session is scheduled for 8:45 a.m. Wednesday, Nov. 15. We will have interactive voting technology available at the session, so come make known your opinions about outsourcing and offshoring.

MADDY BOWLING, president of Chicago-based Maddy Bowling & Associates Consulting, has been in the industry for 27 years and is a frequent speaker and contributor.

DAVID HUTH is a senior associate at Maddy Bowling & Associates Consulting specializing in insurance analytics, systems and strategy.

November 1, 2006

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