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. In one contract between a large, self-insured company and a TPA that Paduda cites, for instance, the 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 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 (PPOs) 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.
So far, so good: TPAs who deliver big discounts via the networks they hire would seem to be doing exactly what their employer-clients ordered. However, there's a "perverse incentive" in that scenario, according to Paduda: the percentage-of-savings method nudges the network and TPA to show more savings by producing more bills. And that can add substantial overall costs — even though the charge on each bill is cheaper than it might have been. Paduda recalls the response of one workers' compensation insurer when the incentive was explained: "What you're saying to me is that I'm saving myself to death."
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 up beneath 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 detect. "If the risk manager isn't watching how those dollars are being spent," he observes, "you can get into material amounts."
Also problematic are the lucrative "bill-repricing" services provided by some bill-review vendors. Such vendors, who are also paid according to the savings they produce, provide computer systems that discount medical bills to rates that jibe with those of managed care companies or state-mandated fee schedules. Such purely administrative costs tend to be billed separately from medical expenses, according to a number of sources, making it hard for employers to track compensation arrangements.
In at least one state, the "percentage of savings" method, when it comes to compensating a TPA, is flat-out illegal. Florida's statutes contain a strict ban on paying an administrator "for any policies in which the administrator allows or settles claims contingent on claims experience," Gallagher, the state finance chief, wrote in response to a CFO.com query. "We view the 'percentage of savings method' an unallowable variation of a payment based on claims experience."
Another possibly perverse incentive cited earlier this year by Paduda in his blog, "Managed Care Matters," is what he calls "the long-established tradition of gifts from managed care vendors to claims adjustors, managers, and other staff, with either an overt or subtle link between the gifts and future business."
A Fair Deal
So how can finance executives keep workers' comp incentives tilting in their companies' favor? To begin, apply market pressure. Every two to four years, executives at Henry Schein Inc., a Melville, New York-based distributor of health-care products and services, put out a request for competitive TPA bids "to see if the administrator is giving us a fair deal," says chief financial officer Steven Paladino.
To unearth potential conflicts of interest, say experts, risk managers should demand that TPAs make a full disclosure of how they're compensated by providers. "If there's hesitation on disclosing that information — or even having a frank discussion — I think that would be a red flag," says Denice Goto, senior director of tax and risk management for Hawaiian Airlines.
Part of that disclosure should include specifying the "markers" that are the basis of percentage-of-savings plans, 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. "Savings should be off the state-mandated rate," adds Noonan.
To keep administrators' feet to the fire, employers should install cost and performance metrics and monitor the TPAs' compliance with them continually, according to Paduda. 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 feels 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.
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