Claims Mgmt. In-Depth Series (Part 2):The Issues at Hand
By CYRIL TUOHY, managing editor of Risk & Insurance®
For risk managers with approval from their board to hire a third-party administrator (TPA), there's no shortage of options, and choosing the right TPA may at times seem a more difficult task than getting approval to hire a TPA in the first place.
Risk managers, for example, could make a beeline for TPAs connected to a carrier.
ESIS Inc., a subsidiary of Philadelphia-based ACE Group of Cos. comes to mind. Or there is Specialty Risk Services (SRS), the well-known Hartford, Conn.-based TPA and subsidiary of the property/casualty giant The Hartford Financial Services Group. Or risk managers might prefer to tack toward Helmsman Management Services LLC, the TPA subsidiary of Boston-based insurance giant Liberty Mutual.
Then there are the TPAs allied with the big brokers. Itasca, Ill.-based Gallagher Bassett Services Inc., for example, is a multiline property/casualty TPA and subsidiary of insurance broker Arthur J. Gallagher & Co. Another popular option, Aon eSolutions, acts as a technology solutions arm of Chicago-based brokerage powerhouse Aon.
Or perhaps risk managers are drawn to the services provided by a phalanx of smaller, more specialized, often nimbler independents like Cranbury-N.J.-based REM Ltd., or Memphis, Tenn.-based Sedgwick CMS, or Atlanta-based Crawford & Co.
Chosing the right TPA is an important decision for any risk manager, and one on which millions of contract dollars usually ride. This is one contract risk managers can't afford to take lightly. When risk managers get it right it usually means saving the company bundles of money. On the other hand, risk managers are going to hear about it if the TPAs they recommend turn out to be a bust.
"There was certainly doubt, and it was certainly a risk," recalled David Jewell, director of risk management for PetSmart Inc., the nationwide retailer of animal products and services on his TPA selection process. "The biggest risk was the hand-off and when we actually pulled the trigger."
PetSmart, with more than 15,000 claims a year in 2007, has begun its second year with the TPA Sedgwick CMS. So far, all has gone well for PetSmart, said Jewell.
For risk managers new to the TPA marketplace, the distinction between a carrier-owned, a broker-owned, or an independent TPA may not amount to much except for the proximity of where they are located on the RIMS show floor--ESIS close to ACE, SRS across the aisle from The Hartford, Gallagher Basset within earshot of Arthur J. Gallagher & Co.
Not so for a top TPA executives. It's always reassuring for risk managers to know that a TPA subsidiary has the backing of a solvent and financially secure carrier with years of claims data on file, and who can invest in its TPA unit.
Since the majority of buyers purchase TPA services on a "cradle-to-grave basis," said David Patterson, president of ESIS Inc., "clients want to be sure a TPA will be there in 10 or 15 years to handle the claims they pay for today," particularly with workers' compensation claims.
"Certainly, the TPA's staying power is important and not just that they need to be financially strong but that the TPA is going to invest in staff, technology, and other processes and resources to help them achieve the lowest possible claim costs," said Patterson.
Few would argue with that. Yet to a claims administration veteran like Kathy Kukor, senior consultant for Risk International Services Inc., the distinction between a carrier-owned, broker-owned and independent TPA shop is important. The carrier-owned TPAs may tout the financial strength and expertise of the parent company but at the end of the day, who is the TPA really loyal to?
TPAs owned by a parent--whether a carrier or a broker--are "well-trained" to protect the parent company, as those TPAs know who ultimately set the rules, according to Kukor. "The old adage of 'Ye who hold the gold, rules' is very applicable in this environment," she said.
In the end, it's the managers touching the claim who matter the most, whether the TPA shop they work for is connected to a carrier, a broker or remains independent.
"Ultimately it's all about the team of people touching the claim," added Kukor, who also serves as the senior manager for workers' compensation for Goodrich Corp. "Any given TPA has good offices and not-so-good offices around the country. The bigger the TPA the harder it is to maintain consistency of service."
Disputes between the TPA and the insured are infrequent "but when I've heard about it, it seems to arise out of bad faith actions where everybody comes under the microscope or where there is a relationship issue arising over one or more claims that just completely breaks down," said Kukor.
Take claims denial, for example. Claims denial is potentially volatile and can easily degenerate into a nasty and expensive dispute between the TPA and the insured, and involve sticky customer service procedures and union rules to boot. "That's part of the reason it's so important that the claims adjuster understand the culture and the personality and the style of clients they are working with," she said.
Not surprisingly, the deeper the research on the part of the risk manager, the greater the likelihood of finding the tightest fit, according to TPA executives. The more unique an insurance program for which a risk manager is responsible, the more research is required to find the right TPA.
"It takes more of the buyer's time to hunt for and be comfortable with the proper outsourcer," said David North, CEO of Sedgwick CMS, which provides third-party claims administration services to some of the largest companies in the country. "The buyer needs some face time with the TPA or the outsourcer to make sure both parties know what is possible and required."
"The last thing you want is a TPA that can't manage your program in the fashion that gets the best results," said Joe Boures, president of SRS. "It happens more than you think."
In the past a risk manager dissatisfied with claims services provided by the carrier might only find one or two, or perhaps three alternative carriers--and changing carriers was a major headache. The TPA model, however, has offered risk managers far more choice.
Thus, when it came time for Ron McGee, senior vice president for insurance services at the nationwide professional employer organization Administaff Inc., to drop his TPA relationship with Gallagher Basset a decade ago, he had no trouble finding a new TPA vendor.
"The other point is that you can negotiate the cost," he said. "You can separate that out of the carrier's insurance program. You can shop for a TPA so that the best TPA isn't always the cheapest TPA."
CONFLICTS OF INTEREST
Swapping out one TPA for another happens every year, as the needs of insureds change or as the business models of TPAs evolve. Risk managers looking into the TPA marketplace should also think about the business model used by the TPA, said Boures, to make sure the risk manager understands the potential conflicts of interest that arise out of the insured-TPA-vendor relationship.
"Is the TPA really positioned to represent your interest 100 percent of the time? Are there conflicts with the relationship the TPA has with its vendors?" added Boures.
There are relationships, according to Boures, where the TPA will engage vendors to service a claim, so the vendor bills the TPA a wholesale price and the TPA turns around and charges the client the retail price on the claim file. The practice isn't illegal by any stretch; in fact, it is fairly common. The question is whether it's the best way to represent a client. "It's difficult to honestly represent a client's best interest if the TPA is making money with most vendor relationships," said Boures. SRS doesn't engage in the practice, Boures also noted.
These conflict-of-interest issues are important because the TPAs are here to stay, according to TPA executives and former risk managers. Processing claims has become so complex that no large or even midsize company can afford not to be able to process claims in accordance with government regulations, which means companies need help from their insurer or through a TPA outsourcing arrangement.
For Fortune 500 companies, using a TPA has always made sense, though more middle market companies are looking at TPAs to help them with their insurance needs, said Kukor. That's particularly true in the workers' comp arena, which is taking a bigger bite out of shrinking budgets.
There's no question that right now the TPA model represents the future of the industry, according to Sedgwick's North, and that will require risk managers to recognize that there's more to outsourcing than simply complying with an insurance policy and state laws.
"The selection of a third-party administration provider is really more similar to selecting a lawyer or an accountant," said North. "You have to evaluate the TPA on the expectations you have and not just on the specifications you have."
March 1, 2010
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