Self-insuring workers' compensation risks can be a good move if companies manage the risks well and estimate their liability accurately. Self-insurers can pay less to cover their exposures, and have a powerful incentive to prevent injuries from happening in the first place. But, experts warn, companies must also be aware of the risks inherent in outsourcing the administration of self-insured plans. CFOs typically rely on risk managers to oversee such arrangements, and those managers often turn to third-party administrators (TPAs) to handle the management of claims and medical costs. But without a clear understanding of TPAs' relationships with medical- and claims-services providers, some say, these arrangements can lead to waste and perhaps even fraud.
According to one senior sales executive for a managed-care organization specializing in workers compensation, delegating the lion's share of management to TPAs is tantamount to "the complete outsourcing of the risk manager's fiduciary responsibility to the organization and its shareholders, by allowing these service providers to control what should be viewed as a line of credit." Since legal liability remains with the company, he adds, a self-insured corporation's lax management of workers' comp outlays could represent "a huge hole in internal controls."
In one recent case, internal auditors found that administrators of the Broward County School District did a "woefully inadequate" job of managing the Florida county district's TPA, Gallagher Bassett Services Inc., costing taxpayers perhaps millions of dollars, according to The South Florida Sun-Sentinel. The auditors charged that the district's "casual interest" in the operation of the self-insured workers' comp program led to poor choices of health-care providers and medical overbilling. The horror stories included the payment of $2,800 to a case worker for accompanying an asthma patient on a visit to the doctor. (Gallagher Bassett declined comment to the newspaper. For more on this case, see cfo.com.)
To be sure, it's no easy task for a risk manager to track payments to and from the various managed-care companies, bill-review outfits, nurse case-management firms, and the host of other vendors that TPAs contract with on behalf of self-insured clients. But critics say that such lack of oversight can result in substantially higher costs. In particular, arrangements made between managed-care firms and TPAs may include payments from the managed-care firm to the TPA. These payments may motivate the TPA to approve managed-care services they might otherwise not, warns Joseph Paduda, principal at Health Strategy Associates, a Madison, Connecticut-based workers' comp and managed-care consultancy.
Although no TPA or services vendor has yet been accused of wrongdoing, state regulators have homed in on this complex web of relationships. New York Attorney General Eliot Spitzer has subpoenaed two workers' comp TPAs and one service provider — Gallagher Basset, Crawford & Co., and Concentra Integrated Services Inc. (CISI). While regulators haven't yet spelled out just what they are investigating, Concentra said in a press release that in its case, the matter regards "CISI's relationships with third-party administrators and health-care providers in connection with [Spitzer's] review of contractual relationships in the workers' compensation industry." Richard Parr, CISI's general counsel, did not provide further comment on the case, but did say that the "kind of transparency and disclosure" that the investigation might spawn would be "a good thing for the industry." Meanwhile, the state of Florida's CFO, Tom Gallagher, has set up a task force to look into broker practices in the insurance industry (including workers' compensation), also with transparency as its goal. The task force has already issued subpoenas.
While the issues remain murky, some industry players suggest that the way in which some TPAs are compensated in discounted health-care arrangements creates a conflict of interest that may encourage an overabundance of doctors' visits and other types of services (see diagram below).
By accepting those and other payments from vendors, Paduda says, TPAs put themselves in a position similar to that of Marsh Inc., Aon, and Willis, the three big insurance brokers that accepted contingency commissions from property/casualty insurers. Claiming to be acting solely on behalf of their clients, the brokers ended up apparently serving two masters, and later agreed to multimillion-dollar settlements of Spitzer probes.
Given adequate disclosure of vendor payments to TPAs, insurance buyers would be able to make their own best judgments about administrators' loyalties. Sources say, however, that service bills and plan documents rarely disclose much about such compensation. Paduda cites one contract between a large, self-insured company and a TPA as an example. The document's only disclosure of such an arrangement is a phrase in which the employer "acknowledges that the TPA has the right to reimbursement from the managed-care firm for fees to cover its expenses in working for the managed-care firm."
Lacking specific information about such reimbursements, the risk manager can't easily discern the incentives that drive the use of health care. Take the case of managed-care networks, such as preferred-provider organizations, that are paid based on the percentage of savings they can extract from doctors and other health-care professionals. If the TPA can pocket a piece of that percentage, it has an incentive to use a network that can deliver whopping discounts, Paduda notes.
That isn't necessarily a bad thing: TPAs that deliver big discounts via the networks they hire would seem to be doing exactly what their employer-clients ordered. However, there is a "perverse incentive" in that scenario, according to Paduda, because the percentage-of-savings method nudges the network and TPA to show more savings by producing more bills. And that can add substantial overall cost, even though each bill may be less than it would have been otherwise. Paduda recalls the response of one workers' comp insurer when the incentive was explained: "What you're saying is, I'm saving myself to death." (Florida, in fact, prohibits the percentage-of-savings method for TPA compensation. State CFO Gallagher told CFO in an E-mail that it is "an unallowable variation" on the state's ban on payments based on "claims experience.")
What's more, such overbilling can be hard for a risk manager to detect because bills are seen claim by claim rather than cumulatively. For example, in a high-deductible insurance plan in which the employer essentially self-insures at least the first $500,000 of each workers' comp claim, the charges can mount without showing up on a risk manager's radar screen, according to the managed-care executive who requested anonymity. Such claims can remain open-ended for years, making their aggregate effect tough to discern. "If the risk manager isn't watching how those dollars are being spent," he observes, "you can get into material amounts."
Verify but Trust?
So how can finance executives keep workers' comp incentives tilting in their companies' favor? To begin, apply market pressure. Every two or four years, Henry Schein Inc., a Melville, New York-based distributor of health-care products and services, puts out a request for competitive TPA bids "to see if the administrator is giving us a fair deal," says CFO Steven Paladino.
And there are specific steps to take to unearth potential conflicts of interest (see "Spotting Conflicts," below). But there is no way to hold down TPA-related charges without having internal managers continually on the case, according to Carl Koch, risk manager of United Natural Foods Inc., in Dayville, Connecticut. At United Natural, which is insured under a high-deductible plan, any claim that exceeds $5,000 is reviewed on a quarterly basis by the TPA, as well as the corporation's claims manager, its risk manager, and a human-resources representative of the state in question. A representative of the company's insurance broker, RC Knox & Co., also takes a look.
Still, Koch says, an employer has to have "a comfort level" in its relationship with its TPA; "there has to be trust." Given rising concern over potential abuse, however, trust may be hard to come by.
David M. Katz is deputy editor of CFO.com.
To ferret out conflicts of interest at third-party administrators of workers' compensation programs, experts say risk managers should demand that TPAs make a full disclosure of how they are compensated by managed-care companies. "If there's hesitation about disclosing that information, I think that's a red flag," says Denice Goto, senior director of tax and risk management for Hawaiian Airlines.
Part of that disclosure should include specifying the benchmarks that are the basis of plans that pay managed-care firms based on discounts they produce for employees, according to Mark Noonan, the leader of Marsh Inc.'s workers' comp practice. There would be no point in compensating TPAs or vendors for bringing down a doctor's rates to those of a state's fee schedule, since those are compulsory anyway.
To keep administrators' feet to the fire, employers should install cost and performance metrics and monitor the TPAs' compliance with them continually, according to Joseph Paduda, principal at Health Strategy Associates, a Madison, Connecticut-based consulting firm. Self-insured companies should demand that TPAs cap the total administrative expense per claim and break out charges for medical-bill reviews and access fees to medical networks, he adds. Paduda also contends that risk managers should keep tabs on the use of nurse case-management services by TPAs; an employer can end up paying both the administrator and the nurse case manager for handling a claim, with the TPA picking up added fees in the bargain. — D.M.K.