Managing Editor Cyril Tuohy interviewed David Patterson, president of third-party administrator ESIS, earlier this spring. The following is a part of the transcript of what Patterson had to say about how risk managers can best choose a TPA, and what red flags to watch out for in a TPA that might not be the best choice for them.
When it comes right down to it, there are three considerations for the large Fortune 1,000 buyer when it's seeking a third-party administrator (TPA). The first is if they want to consider the bundled option. The second consideration: Is the carrier willing to unbundle, and have they selected a third-party administrator? The third is: Is the buyer considering working on a self-administered basis, where the client hires his or her own claims adjusters to manage claims? Only a select few, very specialized companies can do this, and most clients are moving away from this model as it's not the company's core competency.
There are five or six big third-party claims administrators, and they've been fairly stable at a national level for the past decade. Their ownership structures appear to be different. Some are owned by the carriers and others by private-equity firms. You really want to look at all these kinds of things when you are evaluating the financial strength of a third-party administrator.
There are certain table-stakes items that have to be in place for a risk manager, and one of the things we talk to clients about when they're considering working with us, is the financial strength and staying power of a third-party administrator.
The reason I say that is that clients are interested in buying claims services. Though buyers purchase them in different ways from a structure standpoint, the vast majority of buyers purchase third-party administrator services on a cradle-to-grave basis. Particularly when working with workers' compensation lines with long tails, clients want to be sure a third-party administrator will be there in five or 10 years to handle the claims they pay for today.
A buyer should also seek a third-party administrator whose business model allows them to manage claims aggressively. Certainly, the third-party administrators' staying power is important, and not just that they need to be financially strong, but that the third-party administrator is going to invest in staff, technology, and other processes and resources to help them achieve the lowest possible claims costs.
Price is, of course, a critical component. We understand why price is key to a client. But, if a client buys just on price, with no ability for longevity in the marketplace, this could be dangerous for a buyer.
Part of that can be attributed to an accounting issue: How does a third-party administrator account for revenues when they are paying for cradle- to-grave services, and, when the customer pays up front, how is that recognized and how do they accrue for future expense of the claim?
GETTING THE GLOBAL FOOTPRINT
The ability to match the third-party administrator's geographic and services offerings to the unique needs of clients can't be underestimated. If it's a large national account, with exposures across the United States, unless the client wants to deal with multiple third-party administrators, the client needs a third-party administrator with a national footprint.
The question a risk manager has to ask himself of herself is: Does the third-party administrator have the capability to do offer a national and even global footprint, and does it offer other kinds of services that they may need or benefit from?
The ability of a third-party administrator to serve various geographic regions as well as provide diverse products is key. There are safety and risk-control issues to consider. Also, do the offerings of a third-party administrator complement and respond to the breadth of a potential client's needs?
Working with more than one third-party administrator is not the norm. Most clients have one third-party administrator to service their domestic programs. This is not only for the sake of simplicity from a management standpoint, but the vast majority of our clients have work with one current U.S. partner, unless, of course, they have underlying policies that are contracted with a bundled player that doesn't accept third-party administrators.
Some large companies with global claims exposures and issues may work with multiple third-party administrators instead of one, since they have to deal with multiple jurisdictions and different regulatory structures.
COMPLIANCE RED FLAG
We have invested heavily in both compliance and regulatory functions, and have teams dedicated to these efforts. We go to great lengths to make sure people are educated about issues related to compliance.
Clients can potentially be exposed to regulatory infractions, and if the third-party administrator is not in compliance, then that becomes an important issue. One issue that has been at the forefront this year is Medicare reporting. All of our clients are exposed to it, and it's critical that we respond accordingly. The penalties for failure to comply are significant. It's important to consider how a third-party administrator manages an issue such as Medicare reporting on behalf of its client.
TECHNOLOGY AND RMIS
In many cases, the risk management departments are not growing, but instead shrinking in size. This has resulted in smaller budgets. The risk management function within a company has to be more efficient with the limited resources that they have. One of the ways we help them maximize their risk management resources, is by working smart through the use of technology.
So, if a risk manager is on the RIMS tradeshow floor, he or she should examine the technology that's available, including looking at the ease of use of the technology used by the third-party administrator. A question to ask is: Can you use one risk management information system (RMIS) to view all types of claims and give you all the information you want?
In the case of ESIS, we have a paperless claims environment, whereby all the information is available to the client electronically. When we do a claims file review, clients don't have to travel to the claims office to review the claims, thus cutting down travel costs and supporting better time management. They can review claims right at their desktop.
So it's important for a risk manager to ask: What RMIS is the third-party administrator is using? Is it easy to use? Does it collect all the information needed to manage lost costs? And beyond that, does it cover the global needs of the company if they're combining domestic and foreign programs? Is the program Web based?
June 1, 2010
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