You have just concluded a rigorous request for proposal (RFP) process and selected a third party administrator (TPA) at a very good price, or so you thought. At the end of the three-year agreement, your average cost per claim is still increasing at a steady rate. But you have just negotiated a hefty reduction in the fee per claim you are paying. The medical network, utilization review and pharmacy vendors are all showing much-improved savings. At the end of the day, your experience modification (e-mod) has not improved and still remains at an unacceptable level. Average costs per claim are actually increasing. Does this sound familiar?
The industry, using the RFP and spreadsheets, has done a good job of holding unallocated expenses steady over the past 15 years. As a result, the claims fee now covers approximately 60% of a TPA’s expenses, such as investments in technology, and the overall rise in expenses (e.g. benefits) facing businesses today. Therefore, it might make financial sense for your entity to self-insure and hire a TPA. The first step towards getting a good deal is developing an understanding of allocated vs. unallocated expenses. Unallocated expenses (according to IRMI) are defined as all external, internal, and administrative claims handling expenses, including determination of coverage, that are not included in allocated loss adjustment expenses (ALAE). In a typical TPA contract, the most common unallocated expenses are claim fees, though administration and system fees are common as well.
Example: In a typical TPA contract, ULAE =
- TPA 1 WC Claim Fee
- Indemnity = $995
- Medical Only = $130
- TPA 2 WC Claim Fee
- Indemnity = $1200
- Medical Only = $150
As you can see, there is a big difference between the fee charged for an indemnity claim versus a medical only claim. Therefore, to make sure that you are paying the proper fee, entities need to ensure that the TPA follows the industry definition of indemnity and medical only claims. Many TPAs will use a liberal definition to classify a higher portion of claims as indemnity, resulting in a higher overall fee. For example, the statutory definition of an indemnity claim is a claim that has incurred or paid (on closed claims) indemnity or legal costs; the file will be charged as a lost time claim. All other claims should be charged as medical only. However, some TPAs will classify a medical claim as an indemnity claim if, indemnity is paid or incurred, or if a claim incurs only medical charges but remains open for more than 90 days, or if medical charges exceed a certain dollar amount (e.g. $2500).
When reviewing RFP responses, looking at two TPAs, one that follows the statutory definition (TPA 1) and another that follows the more liberal definition (TPA 2), how might this impact the bottom line?
TPA 1 Rate TPA 2 Rate
Claim Counts 1,000 1,000
• Indemnity 250 $995 440 $1,200
• Medical Only 750 $130 560 $150
• Indemnity $248,750 $528,000
• Medical Only $97,500 $84,000
Total $346,250 $612,000
As you can see, the results can be dramatic. The savvy consultant you hired to lead the RFP selection process has done a good job of pointing out the potential pitfalls. Your spreadsheet will clearly indicate that TPA 1 is your best choice. We will peel back the onion by looking at allocated expenses in my next blog post.