A number of consumers view TPA services as a commodity with virtually no
difference from vendor to vendor. Not surprisingly, these buyers give price
a great deal of weight when selecting their provider. While there are number
of buyers who go strictly for the lowest price, most recognize that
well-handled claims will cost less than those that are mismanaged. Further,
the "savings" of opting for a low cost TPA could easily be erased by the
mishandling of just one claim.
Despite the recognition of the importance of evaluating the quality of a
TPA, price remains a major if not the
preeminent factor even for these more enlightened buyers. This article will
explore whether price should be a consideration in TPA selection and, if so,
the extent to which it should be a factor.
Price as a Major Selection Factor
A good place to start this examination is with the identification of the
reasons that price is a major selection factor. Price is often given a great
deal of weight, not because of its importance, but because it is easily
quantified and compared. The TPA fee is a black-and-white cost that can
easily be compared from provider to provider. It is a much harder task to
quantify the savings that one could expect from a high quality TPA. For
instance, it is impossible to conclusively assert that a TPA's effort will
lead to a timely return to work rather than costly workers compensation
Similarly, there is no way to quantify the savings resulting from an
excellent investigation and negotiation executed by a skilled general
liability adjuster as compared with the ultimate value of the claim if it
was handled by a less qualified adjuster. Every claim is different, so
comparisons of the results from adjuster to adjuster can be affected by
factors beyond the adjusters' control. Also, there is no way to have two
different adjusters handle the same claim and then compare their results.
Given the difficulty in quantifying the savings associated with quality
claim handling, it is no wonder that price is often used for comparison.
Another reason price is given a great deal of weight is due to the nature
of most bidding projects. Particularly in the public sector, there is a
preference shown to the low bidder. As long as there are no disqualifying
flaws, the lowest cost proposal is typically selected.
The private sector is not immune from falling into the price trap. There
are many private and public employers who do not have experienced risk
management or claims management professionals on staff. The insurance and
TPA procurement decisions are often made by financial or human resources
specialists who are not equipped to analyze the quality of a TPA.
The Value of Quality
While there are many reasons that TPAs are chosen based on cost, there
aren't many good ones. In many cases the TPA costs are a small fraction of
the claim dollars that can be affected by the TPA. Consider an employer that
averages 10 lost-time claims per year where the TPA fee is $1,000 per claim.
The annual TPA fee would be $10,000.
If the TPA fails to properly challenge one lumbar laminectomy procedure
that is not causally related to work, the employer could be stuck with
medical payments of $50,000 or more that weren't really its responsibility.
If a TPA that charges $1,500 per case would have handled the claim properly,
then the employer would have paid additional TPA fees of $5,000 to save more
than $50,000 in medical costs.
Another way to look at the value of quality is to take the example of an
employer that has 150 lost-time claims per year that generate loss payments
of approximately $2.5 million. The TPA fees would be $150,000 if the per
indemnity case charge is $1,000. If we conservatively estimate that a higher
quality TPA that charges $1,500 per case would save at least 10 percent per
year in loss costs, the savings would be $250,000 as compared with the
additional fee of $75,000. Unfortunately, 10 percent is not and can't be a
scientifically derived percentage. However, extensive experience in the
claims business indicates that this percentage is a safe estimate to use
when comparing an average or low quality TPA to a high quality TPA.
The savings from a high quality TPA can come from many areas. Quality
adjusters save money through their success in getting employees to return to
work and avoiding litigation. These adjusters are also adept at recognizing
when a return to work cannot be achieved and immediately employing alternate
strategies such as litigation and/or settlement to achieve resolution. If
settlement is appropriate, quality adjusters will strike at the appropriate
time and will have worked to develop negotiating leverage to keep the
settlement as low as possible.
Passivity and short-term focus are two characteristics of a low-quality
TPA and are huge money wasters. Quality TPAs closely and aggressively follow
each claim and are always focused on the end resolution instead of merely
the next 30days. TPAs that focus their action plans on early claim
resolution, ideally through a return to work, will most certainly save a
minimum of 10 percent over TPAs that lack this focus.
Assessing Quality in TPAs
It is one thing to understand that a high-quality TPA can save an
employer money, but it is another matter to divine which TPA is the best fit
for an organization. While we have already indicated the difficulty in
pinning down a percentage of savings that one could expect from a high
quality TPA, it is also difficult to rank TPAs in order of their quality.
The highest priced TPA may or may not be the best fit and the best value.
Simply selecting the highest priced TPA won't guarantee quality.
In theory, a comparison of the results from two TPAs' handling of a
significant sample of claims should reveal reduced costs achieved by the
high-quality provider. Even here, the comparison problem exists because no
two pools of claims are identical. Therefore, a straight comparison of two
TPAs' results is nearly impossible. Beyond claim-to-claim differences, the
book of business from TPA to TPA varies widely. A TPA that handles employers
with office exposures will have very different average claim values than a
TPA who handles construction risks.
There are also numerous factors that affect claim costs that are outside
a TPA's control. For instance, the TPA can't control the severity of the
injury or the profile (age, average weekly wage, etc.) of the injured party
in the pool of claims that they handle. The closest one can come to a fair
comparison would be the experience of a single employer with one TPA and
contrast those results with the results of a new TPA when a switch is made.
While this sort of comparison might be revealing, it does nothing to assist
with an evaluation of quality during the selection process because it
requires the selection to occur before the data can be compared.
While it is difficult to quantify TPA quality, there are many factors
that can be examined to provide an indication of which TPA would do the best
job for a certain employer. The following comparative criteria, when taken
as a whole, will give a good indication of a TPA's capabilities and whether
they would be a good fit.
- Experience with similar companies or organizations
- Experience/strength of the assigned claims person and team
- Adjuster caseloads
- Claim office location
- References selected by the employer from a full client list and not
references hand-selected by the TPA (quality of service, responsiveness,
expertise, and results)
- Average closing value of indemnity claims in the employer's industry
- Average duration of indemnity claim from report to closure in the
- Litigation rate of claims in the employer's industry
- Expense ratio (ratio of expense costs to loss costs)
- Risk management information systems (RMIS) capabilities
(diary/follow up reminder capabilities, standard reports, ad hoc
reports, online access)
- Approach to managed care: in-house or outsourced (and if outsourced,
- Defense counsel relationships
Price should not be ignored, but the wise consumer will analyze the
quality indicators first and then compare price. It is very possible that
two TPAs will rate similarly on quality, and it would then only be right to
select the less expensive option. However, when the choice is presented
between a low-cost versus a high-quality TPA, the choice should be obvious.
Management Consultants claims management team (Glenn Brown, Lisa Hartman,
William Quinn, Jr., and David A. Tweedy) contributes articles on claims topics.
You can reach Glenn Brown at