Keeping an Eye on Third Parties

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.

Spotting Conflicts

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.

See "Self-insured Workers' Comp: How the Money Flows"

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