- April 24, 2010 9:46 am
- Rick McCord
- No Comments
Selecting the Right TPA
Outsourcing the handling and administration of claims may not be the right strategy for every organization, but can be a sound business decision in many cases. There are a number of key issues that any insurer, reinsurer, Program Manager, MGA, self-insured, or other principal should consider when selecting a claim TPA, and these naturally vary considerably depending on the individual circumstances. While price is probably the first and foremost factor generally taken into account, there are other variables that can be critical and should not be overlooked.
Size:
TPA’s come in all shapes and sizes. Some large national companies have multiple locations and hundreds of employees. There are small family owned TPA’s with a staff of only a couple people. This can be a very significant factor in the decision making process when selecting a TPA. Yes, size does matter.
A small TPA with two or three adjusters might be the perfect fit for a Program Manager writing a small book of physical damage business which generates only a handful of claims each month. Each claim will probably get close attention, and more than likely there will be consistency, with each claim being handled by the same several people. That same TPA would probably not be a good fit at all for an insurer writing a large multistate personal auto program, for example, which generates a huge volume of relatively low severity claims. The small TPA simply may not have the resources required to do a good job.
Some insurance or self-insured organizations have acknowledged that it can be preferable to work with a smaller TPA for the simple reason that they may have better access to its top management, who will probably tend to be more open to addressing any concerns or changes.
On the other hand, a large TPA might be ideal in some situations. Some of the older, well established TPA firms are particularly geared toward handling high volume claim programs, and this is especially true for Workers Compensation claims.
There can be problems when the TPA’s adjusters are handling claims for a variety of different programs. Will they be as consistent in following the specific guidelines for each? Will a particular program, specifically a smaller one, tend to get “lost in the shuffle” with a large TPA?
Ownership:
Another factor to consider is the ownership of the TPA. Some insurers, brokers, general agents, and others, both large and small, have developed what amount to in-house TPA’s to handle claims, including those generated by their own parent company’s programs as well as those from “outside” clients. This might be a good fit for some, but not necessarily a great idea for others. A company may have legitimate concerns about contracting with a claims firm owned by a competitor, for example.
It can be very important to determine whether a TPA being considered is owned by or affiliated with another insurer or reinsurer, etc. The level of corporate support for the TPA operation can ebb and flow with overall company profitability; there have been instances in the past when the parent company has pressured its claims operation to increase revenue and decrease expenses, which can have a detrimental effect on the level of service.
Some large independent adjusting firms have also formed or acquired TPA divisions. While this may be a logical extension of the company’s claim business, in certain cases the primary goal might be to generate claims for their various local “adjusting” offices to handle, without regard to whether those offices always have the appropriate expertise needed for a particular type of claim. When considering a prospective TPA it can be important to identify whether the TPA operation is designed, in whole or in part, to be a “feeder program” to provide claims assignments for the adjusting company’s local offices, and a source of business and revenue for its core business operations.
Background:
The background and origins of the TPA can also be important factors to consider. Workers’ Compensation and medical disability claims for many years constituted the bulk of outsourced claims, and a number of large and very successful firms have been built to handle those claims. Some of these firms, in looking to expand their opportunities, have also taken on other types of claims, with sometimes mixed results. A claim administration firm designed and built to handle a large volume of a particular type of claim may not always make the transition to other types of claims smoothly.
The background of the TPA’s claims staff can also be a factor which is often overlooked. A TPA whose staff consists exclusively or primarily of people with a background in independent adjusting may take a somewhat different approach to claims than one whose staff came from an insurance company. As a very general rule, the “company people” tend to have worked with and be more familiar with policy elements and coverage issues, while the independent adjusting people more frequently have an outside claim investigation background.
Specialization:
The types of claims in which a particular TPA specializes can obviously be an important factor. It is critical to examine whether the TPA has the staff and experience for the type, complexity, and volume of claims under consideration, and to match the program with the appropriate expertise.
A firm whose background lies exclusively in handling personal auto claims may not be a great match when it comes to handling a program of commercial general liability claims. By the same token, a TPA which does an excellent job handling transportation claims may not be quite as successful taking over a program of construction defect or medical malpractice claims. Some TPA’s have specific areas of specialization, such as Workers Compensation claims, Commercial Property claims, Personal Auto claims, or Transportation claims. Be wary of someone who claims to be an expert in everything.
A TPA specializing in a particular type of claim will generally have developed a certain expertise. In addition to the specific knowledge and abilities in that particular area, there may also be other related advantages. For example, a TPA with a strong background in handling W.C. claims will likely have strengths and available resources in areas such medical bill review processes or individual medical case management. A TPA which focuses on handling truck or heavy equipment physical damage claims will likely have a network of local appraisers and experts to call upon in the handing of those claims, while a TPA new to that line of business will probably face a learning curve to some extent.
There are examples in the industry of a claims organization with a focus on handling personal auto losses trying to make the leap to long haul trucking risks, and approaching liability and physical damage claims involving large over the road tractor-trailers as if they were nothing more than “big cars”. This has sometimes revealed a poor understanding of some of the unique issues involved, and poor results.
The same factors can apply to litigation management. A Workers Compensation or Health Benefits TPA will probably have identified and established relationships with attorneys who specialize in dealing with those types of claims. But that same TPA could very well run into issues when it has to find an attorney to deal with a Motor Truck Cargo claim, or a coverage issue involving a completely different type of exposure.
Infrastructure:
It is important to look at how a TPA operates. Does in make appropriate investments in areas such as ongoing education and training of its staff? Has it spent the necessary time and expenses for licensing of its claim handling staff in various states? These costs can be considerable, and potentially an area where a TPA can cut corners.
Another important issue involves staffing. Has the TPA experienced a high rate of claim staff turnover? How will it “staff up” for a large new program? Are the experience levels of the claim handlers appropriate? Is there clear evidence of good hands-on supervision?
One important element to consider is the adjusters’ caseloads. Many industry experts suggest that an adjuster can reasonably handle a caseload of 100 to 150 claims. This statistic can obviously be affected by the type of claims involved, the extent of the adjuster’s involvement, and how they are counted. Nevertheless, an adjuster handling 200 claims or more will often not have the time to devote the attention needed, and may be spread too thin. Fewer claims on an adjuster’s plate mean more time and attention paid to each one, and this can typically result in more hands-on handling, more timely settlements, and quicker turnaround of claims.
Another key element in some situations can be the “back room” resources of a particular TPA. Does it have the data systems and support, accounting, claim fund management, and other services required? Can it provide the specific claim data elements and report formats needed by the client? Is the management, front line supervision, and staffing stable? Are the adjusters properly licensed? Is there appropriate emphasis on recovery of salvage and subrogation?
A fairly recent trend has been for some TPA’s to abandon their “brick and mortar” offices, and have employees work from their homes. While there may be cost benefits, this approach can have its own set of potential issues, depending on the type of claims involved, the structure and supervision in place, etc.
Price:
Pricing models for providing claim administration can vary widely, from a “flat fee” per claim, to an hourly time and expense rate, to a “cost plus” basis, to a percentage of premium, and others. Regardless of how the price is determined, in too many cases a company considering outsourcing of claims may select a TPA largely, or wholly, on the basis of price. A large TPA organization may have considerably greater overhead, with correspondingly higher prices, but may also potentially have more resources to bring to the table.
One common pitfall involves a quoted hourly fee for claim services. One firm may charge less per hour, but simply inflate the number of hours billed for a particular task. The quoted hourly rate may not include some common overhead items such as telephone costs, copies, postage, etc., and these “hidden” costs can inflate the actual rate.
In addition to comparing fees alone, it can be important to consider whether the TPA can save additional money through claim handling efficiencies, through such key processes as litigation management and recovery of salvage or subrogation.
Intangibles:
A couple other issues to be considered include such intangibles as reputation and references. What programs has the TPA handled previously, and what type of claims were involved? Did they do a good job, and were the clients happy with the level of service? Did the TPA live up to its agreements? Were regular claim audits conducted, and what were the findings? It can be important to look closely at prior clients and outcomes.
Can the TPA provide the level of customization and flexibility a client is looking for? And more importantly, is it willing to do so? It might be willing to change its standard procedures for a large program, but may not for a smaller less profitable one.
Although the term is grossly overused, it can be very important for an insurance organization to form a true partnership with a TPA it selects to handle its claims.
Conclusions:
The claim TPA concept has been described, only half jokingly, as “Rent-A-Claim Department”, and there is some truth to that. An insurer, Program Manager, MGA, reinsurer, or self-insured company clearly takes some risk when selecting an outside firm to take on the task of handling its claims. This can include managing its loss reserves, issuing claim payments, and interacting directly with its customers. A poor decision can have significant and long term effects.
My own background has provided a somewhat unique opportunity to see these issues from the perspective of both the insurer and the TPA. I spent a number of years managing a Claim Department for an insurer which eventually started writing some Program business in addition to its traditional lines of business. This put me in a position to evaluate and select TPA’s for the handling of a particular program in several instances. I found, not surprisingly, that some TPA’s can be long on promises, and sometimes woefully short on delivery. I learned fairly quickly that it is important to monitor a TPA’s work by reviewing and auditing individual claim files on an ongoing basis.