When shopping for a third-party administrator (TPA), where should you rank the importance of price as compared to the quality of service?
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 litigation.
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
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 employer's industry
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, to whom)
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.
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