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By managing editor CYRIL TUOHY, who talked by phone with G. Bryan Thomas, chairman and CEO of the Danville, Ill.-based third-party administrator CCMSI about trends in the industry. This interview has been edited for length.

Q: How does the presence of the older workforce affect the third-party administrator industry and are you having trouble recruiting qualified talent as the baby boomers retire?

It's true that finding capable talent, particularly in the adjuster ranks, has become more difficult. We have changed our criteria for some aspects of our business to acquire some capabilities. We've traditionally hired more aggressive adjusters for general liability cases and auto liability cases, and we've recently been hiring a lot of law school grads and educated them about claims. We've had quite a bit of success at it.

As an industry we're going to have to change the criteria of the people we're looking for. For the first time in a number of years, it's a buyer's market for the employers. The weak economy and industry acquisitions impacted that as well. We are seeing talented employees looking for new opportunities due to acquisitions.

Q: What changes in technology do you see affecting the third-party administrator industry the most over the next three to five years?

A: I believe security is the No. 1 criteria; therefore, we do look at different technologies and applications. Our industry is responsible for a tremendous amount of confidential data.Any technology enhancement that takes place will be directed by the security perspective first, as opposed to merely the application.

Smartphones and personal digital assistants will soon be used more frequently in our business for clients to review the information. Our ability to share real-time data with our clients allows them to have a better view of their business exposures and, in turn, allows them to make better decisions.

There are also internal changes we are making to be more efficient. When it comes to workflows and operational efficiencies, our organization went completely paperless two years ago. In discussion with a couple of tenured, experienced adjusters, they commented that they couldn't survive without paper files on their desk. Now they can't imagine working any other way. These are adjusters with 25 years in the claims business. As long as technology makes sense at the user level, is efficient enough and doesn't cause any delays, we will continue to adopt new technologies.

Q: Market pricing is soft, as you know. What implication does that have for third-party administrators? Will we see more mergers and acquisitions because of it, as we did earlier this year with Sedgwick and SRS?

A: Prices have remained soft, which is interesting in and of itself. Ultimately, it's good for the buyer, but like any free-market enterprise, with less companies competing you have less competition, therefore we are seeing hardening of the pricing. Some say that the merged companies are not as good as they were and not as nimble; people might blame their size. The mere fact of getting bigger doesn't mean you are becoming more capable.Good service is good service, irrespective of the size of organization and that determines a company's success.

We'll see if pricing is predicated on size in the marketplace. I believe that if you deliver solid service and work toward reducing your client's total costs at an effective price, then pricing becomes less material to the buyer. The truth is the fees we are paid is the smallest portion of our client's cost.

Q: There's a lot of talk about the importance of analytics in the industry, as you know, and the demand for it has increased. What kind of analytics are we talking about?

A: The 10,000-foot view from the buyer's perspective is: Where is my money being spent, and on what? Can I mitigate my exposures and if so, what do I have to do to implement that? Basically, you do all of this analysis and analytics for the client and when you finally bring the results to the table, many of the actions that the customer should implement are not possible to do from their perspective. But, when that is all said and done, they still want to know how you are going to help reduce their costs by 10 percent to 15 percent.

We have seen people in the industry using predictive modeling as a rationale to increase caseloads to already overwhelmed adjusters. For example, let's say an adjuster is paid a salary of $40,000 and the employer asks them to manage 170 files, each with a $1 million deductible per claim. That adjuster is now responsible for $170 million of exposure. If you described this scenario to any CFO, where a $170 million of exposure was being managed by $40,000 of resources, they would say they wouldn't allow it. Well, guess what? That's what's been going on for the past 10 years. It's creating issues with outcomes you don't care for.

Q: Costs are rising. What kind of costs? To whom? In what areas? Are you passing along those costs to your clients?

A: Right now, the greatest new expense is the regulatory reporting requirement through electronic data interchange and the like. From the claims perspective, it's about reporting back to the jurisdiction, and it's a significant hard cost. There are technology programming costs and human resources cost. Right now, in every state that requires electronic data interchange, the level and type of information they are requesting tends to change on a weekly basis. It's very cumbersome.

Q: Fifteen years ago, practically no one had ever heard of a third-party administrator. Now, it's a billion-dollar industry. Is the third-party administrator here to stay? Or might we not see any in 15 or 20 years?

A: I do believe third-party administrators are going to be around for a long time. If we look at what drove the beginning of the third-party administrator business, those demands still exist. The industry will do well as long as we deliver what we have delivered for the past 15 years. That will insure its viability. Some third-party administrator are getting larger due to mergers and acquisitions. Third-party administrators that are not merging are also growing as a direct result of the increased opportunities due to the mergers and acquisitions. Any third-party administrator who is not a specialist will not survive in the long run. You need to be a specialist in your clients' industry to understand their needs. A generalist, who does a marginal job in multiple arenas, will have a difficult time surviving.

Q: Speaking to others in the industry on background about you, people seem to think you are an unconventional chap. What have you done differently to earn this kind of notice?

A: We here at CCMSI try and handle business in a very straightforward way. Most things in claims and in life, start out fairly simple. But simplicity is not very sexy, so people tend to want to make things more complicated. We try to stick with and prefer the former: simplicity. We find that performing the simplest functions keeps our clients happy. We believe in communicating religiously with our customers, and I believe in hiring people who follow that philosophy.

The top two reasons that create client dissatisfaction are No. 1, adjuster turnover, and No. 2, not following client service instructions.

Q: Is there anything you'd like to add.

A: We have an issue as an industry that has been long overlooked, which I consider a flagrant foul. With softer pricing and reduced margins, there's an ever-increasing segment of the marketplace in which vendors are "revenue-sharing" with the third-party administrator, vendors like nurse case management firms, telephonic case managers, and prescription drug card companies, for example.

My beef with the situation is the lack of disclosure and the lack of transparency to the client.

What the client is not aware of is that some of the agreements between the third-party administrator and the vendor include the third-party administrator directly receiving money back from the vendor on every hour billed. When these agreements are in place, it allows the adjustor to give some of their work to the vendor and, in turn, take on additional new files.

These revenue-sharing dollars are profit to the third-party administrator that is very high margin revenue. Based on my conversation with a number of national vendors, in some cases this revenue sharing is as much as 25 percent to 40 percent of the actual third-party administrators' fees.

From my perspective, it's the client's money that's being spent and, if I am the client, I deserve to know how it's being spent.

October 1, 2011

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