David Jewell, director of risk management at Phoenix-headquartered PetSmart Inc. spoke with Managing Editor Cyril Tuohy about the company's
former bundled insurance claims program and about its current
use of a third-party administrator (Memphis, Tenn.-based Sedgwick Claims Management Services Inc. in this case). Below is a transcript of part of their conversation.
DAVID JEWELL: In weighing the benefits of using a third-party, it became clear that the major issues have to do with the size and scope of program you're dealing with, as well as the complexity of program. We strongly believe that a third-party administrator provides significantly more control over claims management and ultimate cost of claims.
In our case, we spend approximately $35 million in loss payments annually on self-insured, or retained, losses. Of that amount, about 80 percent is workers' compensation, and the remaining 20 percent is general liability. Previously, we were in a bundled program, and the claims administration was part of the insurance program we had with the carrier. We had this type of arrangement for at least 10 years prior to making a change. In the late 1990s when we were a much smaller company, this arrangement made sense.
When I took the job three years ago, we were growing quickly (from just a few hundred stores to more than 1,000), and our claims counts were quickly rising. In addition, our claims were not being managed to our satisfaction, and we did not have much control over the plan to resolve the claims or the ultimate resolution of them. In 2007, with 15,000 claims a year from more than 1,000 stores and $35 million in loss costs, it became obvious that we needed to change our program.
We are unique as a retailer due to the amount of animal interaction taking place in our stores. Of the 80 percent of the loss costs due to workers' compensation claims, about half of this amount is spent due to injuries involving animal interaction. A high frequency of claims often come from animal bites and scratches, but there are also claims arising from injuries due to lifting animals onto grooming tables, moving animals in and out of kennels, and injuries resulting from dogs knocking associates down and even head butts that can cause serious injury.
Knowing that a small bite can develop into a several-hundred-thousand-dollar workers' compensation case, we were unique in terms of our need for a custom solution when selecting a third-party administrator.
We needed a focused claims management effort, and the only way we were going to get it was to partner with a third-party claims administrator that understood the business and was able to adapt to our needs. For us, it was not a cost issue. It wasn't the expense of claims-handling fees that was driving us.
We knew we needed control over the entire claims management process, allowing us to focus on the conditions internally that were driving the claim counts, both frequency and severity. We wanted a unique solution that met the needs of our business.
SEDGWICK STEPS IN
My department ultimately hired Sedgwick CMS as our third-party administrator. One of the key components and things that we wanted and needed was to be able to design an integrated reporting solution.
There are several unique things that Sedgwick did when they came in. They worked with us to design an integrated nurse triage process, using customized scripting in the intake process. That was a new product for Sedgwick, and they had not used that process with any client prior to us. They committed the resources to designing the program and to making it work for our business. Using customized scripting, they also implemented a "critical" incident reporting arrangement that allows for instantaneous notification to all necessary PetSmart stakeholders. Sedgwick also installed a dedicated claims unit here in our office in Phoenix.
We have just entered our second year with Sedgwick CMS as the third-party administrator. We have achieved huge cost-efficiency in terms of claims management fees, and we're seeing fewer claims coming in the door. Our store managers are not calling in as many nonwork related incidents as before and the reporting process is streamlined and easier for our stores to work with. Visibility of the entire program among our stakeholders is vastly improved.
Sedgwick's dedicated claims unit in our office handles all of the liability claims nationwide, approximately $4 million to $6 million annually. They schedule regular meetings with our legal department, our real estate department, our safety and loss prevention group, and our charities department. They are able to simply walk across campus to access the proper stakeholders in order to get things done. As you can imagine, having instant access to necessary information is immensely beneficial and allows decisions to be made much faster.
Our insurance arrangement is with ACE. We have a high deductible and a high retention: $1 million per claim on the workers' compensation claims and $500,000 per claim on liability claims. Sedgwick handles all of the claims, and their dedicated program manager, Michelle Chambers, who is here on-site, handles all the communications and claims protocols with ACE. We work directly with her on budgets and all other issues that arise.
Using a third-party administrator has been a huge win for us. Our stakeholders love it. And it made sense economically, given the amount of money that we traditionally spend on claims annually.
Were there doubts in your mind about hiring a third-party administrator? Did you feel it was a risk?
There was certainly doubt, and it was certainly a risk. The biggest risk was the hand-off and when we actually pulled the trigger. There are lots of unknowns and you plan for contingencies, but there are always things that evolve that you don't anticipate.
Our biggest issue was the change in process in how the stores reported incidents. We went out and communicated with the stores, but inevitably with 1,200 stores (none of which have dedicated HR people), store managers are busy and the message doesn't always get properly heard.
Through custom scripting we tried to walk them through the new process. Sedgwick made a commitment to us up front to dedicate whatever resources were needed to get the job done. So, while the initial process of the change in incident reporting was a bit rocky, we never had to worry about the claim once it was reported in to Sedgwick.
In over a year, I can't even think of one case we have received where a customer complained that no one has contacted them regarding their claim in a timely basis. This is a great improvement over what we had seen in the past.
The change has paid off big time for us. We had a bumpy road for a couple of months during the transition, but we never looked back. With Sedgwick's help, we continue to refine the process, and it is working smoothly today.
CULLING THE TPA CHOICES
For a large company, I would recommend that you cull the prospective third-party administrator field down to several that you really believe will fit your vision and culture. You won't get what you need by an RFP of many TPAs. You need to focus down to those that will fit the culture.
Initially, we met with many TPAs at their offices, and they came to us. We did an initial review of several of them that we believed from our experience might be the right choice, and we were open to people who really wanted the business. I believe that those that bring an innovative solution deserve a seat at the table.
Ultimately, we ended up choosing the final third-party administrators through intensive meetings and research on their capabilities. We solicited opinions from other companies using TPAs, and we checked references. We completed site visits with the third-party administrators and visited them on their turf. After much consideration, we narrowed our selection from three or four down to two.
The final two options were extremely close. It was a difficult decision. It came down to Sedgwick committing the resources that we needed and providing a fully integrated solution. It was one of the most difficult decisions that I've made as a risk manager.
We negotiated a multiyear deal on most aspects of the program. The dedicated claim unit operates on a "cost plus" basis and is flexible depending on our specific needs.
STILL HANDS ON
We've taken a hands-on approach. We have high retentions and any third-party administrator requires good management and oversight. The ones that don't do a good job are those that look at claims as commodities and are not creative in coming up with solutions.
In speaking with my peers and others about the use of third-party administrators and whether they plan to use one, it's about 50-50. There are a lot of companies that choose a bundled arrangement and don't want a third-party administrator. Possibly they don't have the resources to manage a TPA, or maybe they simply don't want to take on some added risk with a TPA. Some companies also just don't want to make a change that brings uncertainty to their cost of risk.
The greater the appetite for risk, the greater the likelihood that the company is going to have a third-party administrator because they are going to want more control over how claims are managed.
Our management here at PetSmart realized the impact we could have on our total cost of risk by implementing a custom solution, considering the amount of money we spend on claims. We have initiated a program that is easier for our stores to use for incident reporting, delivers better post-injury care and at the same time have achieved cost-efficiencies in both claims-handling fees and a beneficial impact on our total cost of risk.
February 1, 2010
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