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Using a TPA to control losses.

by Robert F Warner and William G. Whitehead

Robert F Warner is director of engineering operations and William G. Whitehead is director of marketing operations for Axia Services Inc., a Glastonbury, CT-based subsidiary of Aetna Life & Casualty.

What does management think when it hears the word "claims"? Money down the drain? Less capital to reinvest or retain as profit? Unpredictability, uncertainty, loss of control?

Many companies believe claims are inevitable. In a way, they are both right and wrong. While some claims are inevitable, many claims are avoidable. However, in both cases losses on inevitable claims can be reduced by efficient cost containment.

A loss control program can reduce costs by eliminating potential claims or reducing their frequency and severity. Yet, surprisingly, many companies forgo loss control to concentrate on paying claims. Some companies handle claims using in-house talent, others contract with a third party administrator. Not many, however, think of using a TPA for loss control.

Companies often pay repeatedly for the same type of claim. If a person buys an item on credit and is billed twice for it, he or she is likely to react immediately, find out how the mistake occurred and take steps to prevent a reoccurrence. That person may also refuse to pay the bill until the discrepancy is resolved. A company that experiences and pays for repetitive types of claims should do the same thing. Although a company cannot refuse to pay claims simply because they are repetitive, it should acknowledge that a problem exists, investigate the source and take preventive steps.

A company can do much on its own to implement a loss control program. However, a TPA which provides loss control in addition to claims handling and cost containment support can be invaluable, because without first focusing on loss control, practicing cost containment will be no more effective than pouring water into a sieve.

Many indicators determine whether a risk manager needs a TPA's loss control expertise, including company size, number of locations throughout the country, type of operations, hazards and related exposures. In making a decision, determine if losses are increasing and costs are skyrocketing. Do you need assistance developing a loss control program? Do you have a geographic spread of locations that stretches the capabilities of an in-house staff? Also, determine the potential benefit of a formal loss control audit, and whether you require expertise beyond your own capabilities such as industrial hygiene and occupational health services, laboratory analytical services, ergonomics, environmental engineering or electro/mechanical engineering.

What to Expect

If you decide a TPA is needed for loss control, what can and should the company expect? The following hypothetical scenario illustrates a TPA's capabilities. A company with more than 20 locations was experiencing an increasing number of costly losses, and as a result, its insurance premiums were increasing. Management could not pinpoint the reason for the escalating losses and did not know how to handle the situation. A TPA brought in to assess the situation made several observations. There was no published safety policy or loss control program. No one was directing any type of safety effort for the multiple locations. No one was accountable for the losses the company was experiencing. And while employees were accountable for maintaining excellent sales volume, profits were being drained by losses.

After such an assessment, a TPA can conduct a physical survey, which involves determining company assets such as human and financial resources and property. This analysis focuses on negative factors such as employee injury, liability claims, fire, automobile accidents and vandalism.

The TPA then can look at the company's claims history to determine its actual claims cost, thus providing a base against which improvements realized from a loss control program could be measured. This also helps a company monitor the cost benefit of hiring a TPA. While direct costs, which include handling claims and the TPA's charges, are obvious, indirect costs, such as loss of production, replacing personnel, training new employees and replacing damaged or destroyed equipment, can cost the firm as much as four times direct loss costs.

Measures for correcting or alleviating losses are easy to suggest, but to make them work, management must first write and publish a safety policy. It could be as simple and direct as: "XYZ organization is committed to providing a safe, healthy environment for its employees by implementing loss control measures to eliminate losses where possible and reduce the frequency and severity of others."

Next, objectives for fulfilling the policy statement must be clearly defined. This includes assigning responsibility for specific objectives and, most important, giving full authority to everyone with the responsibility of achieving these objectives. Without this responsibility and authority, the program will not work or, at best, will be only mildly effective.

Early in the process, the organization should establish monitoring procedures with its TPA. An organization may spend hundreds of thousands of dollars for a TPA's services over time only to discover that losses are still proliferating and profits are being drained.

Usually, a quick check of how thoroughly management implemented the objectives and monitored them reveals the problem. At the outset of a loss control program, when commitment and enthusiasm are strongest, monitoring may be consistent. However, as time passes, the organization often pays less attention to monitoring, and implementation of the objectives subsequently suffers.

To ensure that all steps from the initial audit to program implementation are completed, a company should make sure its TPA possesses the ability and resources, including access to industrial hygienists and laboratories, ergonomists and fire protection personnel. The ability of a TPA to provide these services saves time and provides better coordination. For example, if an organization is experiencing related fire protection and workers' compensation problems, having one TPA handle both matters permits better coordination. The TPA must also be able to conduct training sessions such as general loss control and occupational health nurse seminars, as well as develop company-specific training seminars.

Containing Claims Costs

Even with state-of-the-art loss control efforts, losses still occur. However, careful cost containment can often make the difference between a financially catastrophic claim and one that is fiscally manageable. That means having a TPA that does more than just handle claims or "cut checks."

Medical, indemnity and litigation costs must be contained. Medical cost control is critical in this era of rising medical costs. Before paying a medical bill, a TPA should verify that a listed treatment is consistent with the employee's work-related injury and ensure that charges do not exceed reasonable and customary charges or the state's fee schedule.

Indemnity cost control should emphasize a timely return to work. It involves coordination among the medical provider, TPA and injured party's employer. The goal is to return the individual to his or her former position as soon as medically possible. If the injured employee is unable to return to his or her previous position, it is important to clarify what tasks he or she is capable of performing.

In an increasingly litigious society, not only can a workers' compensation settlement be expensive, but the process leading up to the outcome can severely drain resources. At some point, a company is likely to be confronted with litigation in the form of a hearing before an administrative board or panel. A TPA skilled in litigation management can expedite the process by making informed recommendations to achieve the most cost-effective results.

Can companies run loss control and claim cost containment programs simultaneously? The answer is yes. An organization can use the money it has been spending on losses in a more productive manner and improve employee productivity and morale. On their own, loss control and claim cost containment programs save money, but when used together the savings are even greater.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:third party administrator
Author:Warner, Robert F.; Whitehead, William G.
Publication:Risk Management
Date:Jul 1, 1991
Previous Article:A risk manager's guide to workers' comp providers.
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