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Audits of TPAs reveal common mistakes.

Olan A. Hembree jr. is a vice president and the manager of the claims consulting division of Walston & Associates, an insurance consulting firm in Atlanta.

Companies that self-insure C their workers' compensation policies often hire outside firms to handle claims services. Referred to as service agents or third party administrators, these firms impact vast amounts of money for their clients. Yet when clients look into the services actually provided, it is only to verify that funds are being handled and disbursed properly. To accurately measure the effectiveness of a TPA's services, one must perform a complete audit of all its activities.

Only in the past three years have companies begun to lose confidence in TPAS.

Whereas TPA account executives once could not persuade prospective clients to even consider changing service agents, today the picture is quite different. Now that clients have suffered the consequences of poor performance by their service companies, many are convinced that all TPAs are inept. In fact, self-insurers have become so skeptical of TPA guarantees that some TPAs now offer partial refunds just to retain the business.

Most risk and benefits managers would agree that service agents could win favor if they simply returned phone calls, paid compensation and medical bills promptly and submitted an accurate record of losses. TPAs have also been known to overlook such important responsibilities as reporting claims to state regulatory agencies or reinsurers, responding to agency inquiries, preparing required state forms and applying for second injury fund recoveries.

Such oversights can be costly. Some states impose fines when reports are not filed. Neglecting to formally close a claim also involves high stakes; in some states failure to file a closing report can extend the statute of limitations for filing or reopening a claim and even prevent a final settlement. Yet the client company rarely knows of a TPA's non-compliance with the state. That's because when a discrepancy is noted by a state agency, only the service agent is usually advised.

What an Audit Shows

Recent audits of approximately 17 clients with self-insured workers' compensation programs involving numerous TPAs and insurance companies reveal some interesting results. Specifically, 90 percent of the cases eligible for second injury fund recoveries were not identified by the service agent. As a result of one TPA audit, a client received more than $200,000 in recoveries. Two cases that had been accepted by a state second injury fund were closed because application for reimbursements of more than $20,000 had not been made. In several cases the deadline had passed for applying for fund assistance. At least two of these cases may involve permanent total disability with lifetime benefit potential.

The audits also revealed numerous incidents in which claim reports were not submitted to state agencies in a proper and/or timely manner. Some inquiries on open cases from state agencies had gone unanswered for more than two years. And closing notices were not filed by service agents in 40 percent to 100 percent of the cases; on average, the service agent failed to properly close 75 percent of the cases audited.

In several audits, files were closed prematurely. A review of 110 closed files for one client revealed 33 cases in which required forms were not filed. In many of these cases state inquiries went unanswered. Wrapping up a case in such a premature or sloppy manner jeopardizes the finality of any settlement, the start time of the statute of limitations and the legal status of the case as being officially closed.

In 90 percent of the cases examined the TPA did not report claims, as required, to the workers' compensation reinsurer. When the reinsurer is not properly notified and the cost of the non-reported case exceeds the self-insurer's retention, a penalty may be levied. Penalties can include a percentage reduction or a reservation of rights notice, which could lead to a denial of coverage.

In some audits the broker, TPA and self-insurer overlooked the existence of aggregate reinsurance coverage. Savings to these self-insurers through recoveries and reduced reserves from the reinsurance coverages were conservatively estimated in the hundreds of thousands of dollars. To ensure proper contact with the reinsurer, the service agent must thoroughly understand the types of reinsurance coverages purchased by the self-insurer, the identity of the carriers for reinsurance, retentions for specific coverages, loss funds for aggregate coverages and reporting requirements.

Overpayment of benefits occurred in approximately 5 percent of the audited cases. In most of these instances overpayment was the result of an error or oversight by the service agent. In one case the TPA adjuster requested a permanent disability rating in early 1988. By law this would allow the company to stop weekly benefits for lost time then attempt to settle the case. The rating was granted in the spring of 1988, but by that time the adjuster had been transferred. His successor overlooked the rating for months, and benefits continued for more than a year before a supervisor filed for stop payment. The supervisor did not settle the case, assign rehabilitation or monitor medical status. The claimant's condition deteriorated, and the company now faces a potential lifetime case. In addition, the case was not reported to the reinsurer and a penalty is applicable in the likely event the retention is exceeded

Perhaps the most glaring example of claims mismanagement is evidenced in a case in which the claimant received benefits for weeks after the TPA was notified that the state had approved a settlement. Certainly, high TPA employee turnover, lack of training and heavy case loads are often at the root of such errors. Many service agents have reduced their staffs, assigning as many as 400 cases to adjusters who are, in effect, claims processors. They are usually responsible for filing and copying their own paperwork, preparing forms and paying bills. Outside adjusters are a rarity, midlevel supervisors are pushed to their limits and true examiners are non-existent.

These staffing difficulties mean that important TPA functions are overlooked. For example, in states where medical fee schedules limit physician charges, adjusters occasionally fail to check a bill against the schedule to assure proper payment. Frequently, employees receive benefits for months on end while the service agent makes little effort to obtain either an independent medical examination or a second medical opinion. Furthermore, attorney fees and rehabilitation costs are often incurred with no positive results.

The audits also revealed that cases requiring sizable reserves were often underfunded. Other reserve funds were larger than warranted. Some reserves were increased for cases that should have been closed. These problems are costly; they affect loss experience, an important consideration for self-insurers because of the need to purchase reinsurance. Inaccurate reserves can also lead to poor planning by the insured or self-insured company. The audits found that some lifetime cases had reserves of only a few thousand dollars. Settling these cases could financially shock a medium-size company with a high self-insured retention.

Who Performs the Audit?

Regularly auditing the TPA serves as a preventive measure and helps allay many problems and concerns. Most companies would prefer to have their workers' compensation cases handled properly in the first place to avoid the turmoil and expense of switching to another service agent. However, experience has shown that quality of service by a TPA increases when an audit is implemented. Companies have also reported significant improvement in the performance of their legal counsel as a result of auditing.

Companies that audit the performance of their TPAs are few and far between. Too often such audits are conducted by actuaries or accounting firms with little or no claims adjusting experience. Insurance brokers frequently recommend TPAs and often receive a commission for this service. A competing service agent may have the resources to perform a TPA audit but might have difficulty drawing the line between a review and a sales pitch to secure the account.

Some companies consider requesting that their TPA conduct a self-audit. Here, too, the thoroughness and objectivity of that type of audit may be questionable. Certainly, an independent risk management consulting firm is a good place to start searching for a TPA auditor. However, if the consulting firm does not provide this service, it should at least be able to make an objective recommendation, since it is not permitted to accept commissions.
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Title Annotation:third party administrators to handle workers' compensation claims
Author:Hembree, Olan A., Jr.
Publication:Risk Management
Date:Nov 1, 1990
Previous Article:Effective risk management through loss control.
Next Article:A risk manager's guide to managing adjusting fees.

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