By CYRIL TUOHY, managing editor of Risk & Insurance®
Editor's note: Managing Editor Cyril Tuohy talked with David North, CEO of Sedgwick Claims
Management Services Inc., in doing his research for our latest in-depth series on claims management. The following is a transcript of North's responses.
In the past decade, there have been two trends that are reshaping the organizational structure of the third-party administrator business. One is consolidation and the other is segmentation.
We've seen some consolidation in the third-party administrator marketplace. It's not a significant amount, but it's an evolution through which providers who have traditionally concentrated on the business as their primary focus have grown and gained share, and those that have dabbled in the marketplace either as a broker or as an insurer are doing it less and less. With the exception of Arthur J. Gallagher and its third-party administrator Gallagher Basset, all the major brokers have exited the third-party administrator marketplace.
Marsh had one of the original third-party administrators, which they called CMS, about 35 years ago, but they sold that. All the major brokers at one time had a third-party administrator but now they don't, so there's been a consolidation that's occurred. (A few carriers have third-party administrators: ACE has ESIS and The Hartford has SRS, for example.)
The other organizational trend we've seen over the past decade is a segmentation trend that's occurred among the third-party administrators. Some have focused in one specific area, and have redefined themselves as a property-loss adjustment company, for example.
These are companies that are quite content being a $30 million to $40 million a year company, and they would rather do that very well than become a broader player in the hopes of becoming a $100 million or $200 million a year company.
The size of the overall third-party administrator market is fairly small as a piece of the entire insurance industry universe. There are relatively few large third-party administrators that are public or, like Sedgwick CMS, are private but have as their core business just third-party administration. The vast majority are much smaller mom-and-pop type adjusting companies. The consensus is that that third-party administrator industry is $10 billion industry in terms of revenues.
SMALL PIECE, BIG IMPACT
It's an interesting dichotomy in that claims administrators and claims professionals are, relatively speaking, the smallest component of the insurance industry in terms of overall costs.
But in terms of impact, they are the most significant. Don't forget that claims doesn't deal with risk transfer. Instead, claims deals with 80 percent of the insurance dollar, which is loss costs. So in terms of impact, it's very significant.
The American Association of Independent Claims Professionals, which counts as principals both Sedgwick CMS and Gallagher Basset, should be able to give you more market share figures.
There are also a number of trends currently affecting the professional focus of the third-party administrator marketplace. The first one is a short-term trend created by this economy. If you had asked me three years ago what's the most immediate short-term issue facing our industry, it would have been shortage of qualified claims professionals.
But there's been a shift. Now the most important trend in workers' comp is how to return workers to a health status that they can return to work in some capacity. But at the same time, returning people to jobs has become much more difficult because of the economy because in many cases there's no job for them to return to.
The second trend is the re-emergence of the fraudulent and exaggerated claim. The economy is putting a lot of pressure on people to commit fraud to allege an event to have occurred because they need money. More often than not, it's the exaggerated claim; someone has been legitimately injured in a slip and fall and they have bills to pay, the cost of child care, for example, so people get home and somebody advises him to sue or to file a claim, and they are tempted to exaggerate the severity of their slip and fall.
Another trend in professional services that we're spending some time on is what we would describe as a shift from managed care to healthcare. In the workers' comp arena, the industry started by adopting managed-care techniques from the group-health arena: I'm talking about such things as utilization review, bill review, second opinions. All of that came from the group-health arena, but we've let the pendulum swing too far. Today the managed care component in the occupational injury world has become a significant concern because we have not delivered proper medial care at the right time at the point of injury.
We adopted discounting concepts from the world of managed care, and as that part of our business grew, we started to see discounting driving certain trends, and we had to build managed care into the workers' comp system to respond to that.
So today workers' comp utilizes nurses and review protocols to review the treatment being recommended for an injured worker because the system did not deliver the most appropriate medical care at the point of injury in a cost-effective way. We are advocating going back to emphasizing the best healthcare for a particular injury to begin with, at the appropriate price.
WASHINGTON'S HEALTHCARE REFORMS
With the healthcare changes now under debate in Washington, D.C., the level of attention on healthcare delivery is so significant that whether major healthcare legislation is adopted or not, our system of access, healthcare distribution and medical provider compensation in workers' comp will be impacted.
Some of the changes are two, three and even four years out even though the marketplace will respond now and changes will start occurring in how healthcare is delivered. We have a significant opportunity to change how healthcare is delivered in the workers' comp space. This whole idea of moving from a compliance-oriented managed-care world to a primary emphasis on the proper care at the right price is going to be big in the near future.
The current buzz in the industry is about analytics, and how we use this tool and that tool. Analytics in and of itself does nothing. Analytics just reports a fact. It's what you do with that data that matters and how to alter behavior of your claim. Analytics is a means to an end.
April 1, 2010
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