Follow or Lead ?

january 2, 2021 – Michael Marsh

Those responsible for the results of a workers' compensation program must first make a decision to follow the industry...or lead. When considering to whom the claim handling responsibilities are awarded to and setting guidelines, incentives and rewards, it is time to reconsider following the industry 'pack'.

I have long talked and spoken about the negative consequences that flow from a flat rate claims administration program. What is that? For programs that externalize the handling of their workers' compensation claims, there are many choices of companies that are professional administrators for wc claims. There are hundreds of such organizations for whom to send Request For Proposals ("RFPs"). Each state is as different for TPAs as they are for the basic workers' compensation laws.

For years, the industry had benefit of a number of national firms as well as regional firms to choose from when selecting a TPA. Twenty years ago, there were also a large number of single state speciality TPAs. Decision makers with exposures in multiple states had the option to select one national TPA for all states, select a couple of regional TPAs or, as I did when I managed a multi-state program from CA, carve out and select a single state specialty TPA in each individual state. I believed then as I have shown through results that single state specialty TPAs that know their state, the statutes, the laws, the legal environment the ancillary service providers achieve better results than multi-state entities. In this context, 'better' means lower overall combined costs AND more positive employer and recovering worker relationships.

There has been a great deal of consolidation through acquisition in the past decade. A great deal of investor capital has entered the claims administration industry. Now there are national and international TPAs that advertise 10,000 and 15,000 claims employees...and literally billions of dollars in acquisition debt. This debt must be serviced and investors satisfied.

Coincidently in time, there has been a move away from a long-standing pricing model of Time and Expense towards a Flat Rate model. I have nothing to document the causation between the massive debt that must be serviced by some of the international players and the move to flat rate. Experience however whispers to me that it is not a coincidence.

The point of this writing is not to hash out the T & E versus Flat Rate issue, I'll do that another day. The point today is a message of caution. Decision makers need to pay closer attention to what they are getting for their money...and know what is being charged by the same or related entity in addition to the flat rate paid.

I have been a follower of Joe Paduda for some time. I was also fortunate to work for a short time as co-experts on a California wc dispute between a large self-insured employer and a CA TPA. It was a short time as the claims were settled shortly after Joe's involvement. His views on the industry tend to be a bit more statistical than mine generally. But recently his blog and my position align in perfect harmony.

Check out The Snow Job (December 17 2020) on If you make decisions about which company you will hire to serve as your TPA and what services are included, what is charged for those additional services and how those service charges are monitored and audited, read Paduda. 

Joe writes about his experience looking at a TPA that was paid from the claims additional service fees for medical management, bill review, bill negotiation, etc. Quoting two lines which stick out in perfect alignment with my openly expressed thoughts for 20 years:

"...pretty much any way the vendor could tack on a service charge, they did." 

This writing is one with a cautionary tone. I recall the old bromide "you get what you pay for". That is no more true than in the contracting for wc claims administration services. The myth is that by evaluating the TPA cost in a silo, and a competitive bidding process is held, savings can be achieved. In fact, I'm familiar with an RFP process a number of years ago where the acquisition of the TPA was done by the national company's product purchasing group. They were rewarded by saving money in their spreadsheet analysis on a TPA cost per claim basis. There was NO relationship developed or consequence delineated between the purchasing groups' decision and the 2 - 5 year overall claim cost results, efficiency and effectiveness of the awarded TPA. While those responsible for claims results where consulted for opinions, they did not have the 'final' vote. The claims folks were then held responsible for the results produced by the lowest cost TPA.

Conspicuously, ancillary services and other income was NOT included in the RFP, which REQUIRED a life of contract commitment for a flat rate per claim. One has to ask, how do the TPA's costs of doing business change when they agree to a flat rate agreement. Simple answer is that they don't. In fact, with the aging of experienced claims professionals, it is becoming more difficult to hire qualified staff. The law of supply and demand exacerbates the normal increasing cost of living issues tending to increase the salary and benefits needed to hire quality staff. When 60% or more of a TPA's operational costs are salary and benefits, increased costs must be covered somewhere.

As pointed out by Mr. Paduda, some TPA organizations garner additional income in ways other than claims administration services. I've seen a number of 'inventive' methods to bring income to the mother shop to augment the flat rate income. Some are disclosed, others are not. But in nearly every case, there is no direct audit path for the client organization because the income comes through methods other than contracted for  in the claims administration agreement.

Can this lead to abuse? Any process that is 'non-auditable' involving money gives an opportunity for malfeasance. If you are responsible for your overall wc claims results, which INCLUDES all program costs including bill review, PPO, IME/AME network, legal, nurse/medical management and vocational rehabilitation, you should look at the overall costs of your program by year and the silos that make up your cost structure. Better yet, include some level of audit trail for ancillary services that are charged to your claims IN THE CLAIMS SERVICE AGREEMENT.

Not every TPA will take advantage. Some TPAs in fact do not derive income from ancillary service program administration. Sadly however there are many stories of systemic abuses of the alternative income method used by some TPAs.

As a payer responsible for your workers' compensation program results, will you choose to follow or lead? There HAS TO BE a level of openness and transparency however between the TPA and the payer. The payer should be the leader in the process to ensure that the claims administration agreement includes consideration of these other than claims handling fees charged to the program and a definitive path enabling review, audit and dispute resolution.

Takeaway: For decision makers responsible for a workers' compensation program, the OVERALL cost of the program should ALWAYS be the decision point. Be informed. Be a LEADER.

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