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Getting results from your third-party administrator.

FOR MOST COMPANIES, PAYING and monitoring claims has become an increasingly burdensome process. Although no official figure exists, insurance industry experts estimate that $60 billion will be paid out this year in workers' compensation claims alone in the United States. In addition, pessimists convincingly argue that we have just seen the tip of the iceberg as overall claims costs continue to escalate each year against the backdrop of an increasingly litigious society.

One proven method of controlling prohibitive claims expense, as far as self-insured are concerned, is the use of a battle-tested third-party administrator (TPA) who can manage, reserve and pay claims. This is particularly important due to the rise in individual and group workers' compensation self-insurance costs and claims. Since most self-insured allocate at least 80 percent of their program dollar for losses, how these payments are controlled is vital to the well-being of a company.

However, in order to establish a level playing field at the outset with your TPA, it is important for self-insureds to draw up a contract that addresses their concerns as well as their expectations. If the old axiom of "you get what you pay for" is true, then it is important to get what you want first in writing on the contract.

Indeed, several issues can be negotiated prior to contract inception. An important point for the risk manager to remember in developing the contract is what happens if the relationship deteriorates and a new TPA is needed? In more than one such case, the TPA held files hostage when the self-insured wanted to change service providers.

It is usually unwise for self-insureds to accept the TPA's standard contract because most do not address key ways to reduce losses. During negotiations, specific areas -- such as fidelity coverage -- should be incorporated that will allow for objective performance standards, reduced claims costs and areas of conflict between the TPA and the self-insured.

Elements to Consider

ONE IMPORTANT element of a TPA contract involves employee dishonesty insurance. Employee dishonesty insurance is designed to protect an employer against losses by its employees. Indeed, addressing potential fidelity exposures reduces the likelihood of an unfunded fidelity loss for the employer. Often, the TPA's employees (as an agent) will handle the employer's money through checks and wire transfers. Since workers' compensation costs range from 1 percent to 20 percent of payroll, a great deal of money is at stake. In one case of fidelity loss, a claims manager misappropriated $2 million through hidden ownership of vendors. If a contract is unendorsed, neither the employer's nor the TPA's fidelity coverage would respond adequately to a TPA employee misappropriating the self-insured's money. The fidelity policies provided by the TPA frequently provided by the TPA frequently provide coverage for loss of TPA assets only and should be reviewed carefully. TPAs will frequently provide only one policy to protect themselves and all self-insureds they service. Although the limits may sufficiently cover the losses of one client, they may not cover all clients. Appropriate coverage can be realized through broadening the self-insured's definition of employee to include employees of the TPA and naming the self-insured as the obligee on the TPA's fidelity bond.

Filing ownership is another important ingredient in a TPA claims contract. All claim files should be the property of the self-insured and should be available for review during normal business hours. The contract should also include a limit on the number of open lost-time files per adjuster, depending on line, age of files and adjuster experience. A maximum of up to 150 case files per adjuster for workers' compensation claims is appropriate, although it varies by state. Under no circumstances let your TPA overburden the adjusters with too many files. If this happens, a claims management program becomes a claims processing or payment program with little regard for investigation, subrogation, verification of lost wages or second injury fund pursuit. Ask your adjusting firm how many files are being handled by each adjuster and then establish a maximum number. In addition, require a written periodic reserve review by the supervisor or claims manager that addresses the quality of investigation, prognosis and treatment plan, and the need for an independent medical exam. Supervisor reserve reviews facilitate better or faster communication within the TPA office and may reduce claim reserve deterioration or underreserving. The amount of supervisor review affects the price of claims handling.

Claims management is not a commodity. You do not buy a car or a home based on price alone, so do not place excessive importance on the price of claims handling. A self-insurance program includes 10 percent to 20 percent overhead and 80 percent to 90 percent loss costs. Place the appropriate emphasis on reducing losses. If your TPA is losing money on your account, you are probably paying too much in loss costs, and your claims payout is likely to increase. The TPA will find a way to minimize its losses by reducing data entry processing, claims adjusters, supervisor reviews, and second injury fund and excess coverage recoveries.

Typical fees for claims handling, which include the cost of investigation by the TPA, are $85 for a medical file and $600 to $750 for a lost-time file. The self-insured should consider the basis for fee contained in any proposed contract. Using a fee basis such as a percentage of premium for workers' compensation may result in overpayment during a rising rate environment. Therefore, a more stable basis such as number of claims or payroll should be considered. Whether a TPA works on a flat fee per claim, or by another arrangement, the contract must spell out pricing and payment due dates. For example, is the TPA paid when a file is open or closed?

If your TPA uses independent adjusters for claim investigation, make sure the company has not charged this cost as an allocated loss adjustment expense. The TPA's payment for routine investigation and taking statements must be addressed in the contract and verfied by file review.

The TPA contract should also outline the circumstances for personal claimant visits, reporting to excess carriers, frequency of narrative reports on large claims, approval procedures for use of rehabilitation, and surveillance and maximum files per adjuster. In addition, the contract should require disclosure of conflicts of interest or potential conflicts of interest. For example, many TPAs own rehabilitation companies that they use to provide services to worker's compensation claimants. The self-insured should be apprised of transactions with entities owned directly or indirectly by the TPA or their employees.

Finally, the contract with the TPA should specify type and frequency of reports such as monthly loss reports, check register, reserve change and closing reports that the TPA will provide. Many TPAs make additional charges, which can be substantial, for reports not required by the contract.

Seek a provision allowing either party to terminate the contract with 90 days notice and avoid contractual language that differentiates between termination "with cause" and "without cause." It is simply too hard to determine what justifies "cause." A three-year contract often works best and will indicate to the TPA that you have no desire to shop for the services every year. A three-year contract with a 90-day termination clause may be no more binding than a 90-day contract. However, a TPA may be more willing to fully staff and train employees if a three-year contract is signed. The contract with the TPA should specifically address what happens to the open files if the contract is terminated because legal problems can occur defining "cause." Is the TPA responsible for adjusting these files? If so, what will be the cost to the self-insured?

Settlement authority can vary based on the expertise of the insured or the severity of claims. Should the TPA settle claims above a certain level without your approval? With new programs, limited authority might be given to the TPA; however, as trust and experience develop, authority can be increased. In any case, the insured should always approve large settlements.

The lack of minimum claims standards, which can easily be set between the self-insured and the TPA during contract negotiation, can make an objective judgment of the TPA virtually impossible. It is far better to include specific contractual standards up front.

[William L. Shores is a CPA with Shores & Co. in Orlando, FL. Richard G. Alford is a consultant for risk management services with Mac Lean, Oddy and Assoc. in Dallas, TX.]
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:managing workers' compensation claims
Author:Shores, William; Alford, Richard
Publication:Risk Management
Date:Jun 1, 1992
Previous Article:A broad brush approach to managed care.
Next Article:The essence of hazard control.

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