In last week’s PRIMA Blog, we explored unallocated expenses. In this blog, we will discuss allocated expenses. According to IRMI, allocated expenses (ALAE) are defined as loss adjustment expenses that are assignable or allocable to specific claims. Fees paid to outside attorneys, experts, and investigators used to defend claims are examples of ALAE. Municipalities typically entrust their TPAs to select vendors as needed to administer the claims. One common example of an allocated expense is bill review, which is used to reprice medical bills to fee schedule. Many TPAs use bill review as an additional source of revenue.
Example: Bill Review (ALAE)
- 1000 claims: 250 LT; 750 MO
- 10 invoices per LT claim; 3 invoices per MO claim
- 45% savings
- Average fee per bill: LT = $600; MO = $300
TPA 1 TPA 2
Rates 20% savings $8.50/bill
•Invoices N/A 4,750
•Medical Paid $2,175,000 N/A
Bill Review Fee $195,750 $40,375
Total Fee $542,000 $652,375
Now comparing the two TPAs, TPA 1 still has an advantage (albeit much smaller); but that is not all. Many TPAs have also hired their own nurses to perform telephonic case management and utilization review. This has also become an important source of revenue for TPAs. While some TPAs do a very good job in the managed care sector, oftentimes the emphasis is on the revenue leading to an overutilization of managed care services.
Example: Telephonic Case Management (ALAE)
TPA 1 TPA2
Counts 1,000 1,000
• Lost Time 250 440
• Medical Only 750 560
Rates $ 85/hr $200/mo
• Utilization (LT) 50% 25%
• Utilization (MO) 5% 5%
–LT 8 hrs/mo (3 mos) 3 months
–MO 2 hrs/mo (1 mo) 1 month
• Total Telephonic Case Management $261,460 $71,600
Total Fees $803,460 $723,975
Once all costs have been identified and defined, TPA2 has become the best choice for the municipality. The entity must remain ever diligent in making sure that all business partners comply with established service and financial standards. Reporting mechanisms must be in place until a level of trust has been established. Even then, as President Reagan stated so succinctly, “trust, but verify”.
What Can You Do About It?
Demand full disclosure. Insist that all pricing – allocated and unallocated – remain fully transparent. Retain the opportunity to contract with vendors directly. Make sure allocated expenses as a percent of total paid fall below 10% (typically 5-8%). Pay your TPA a fair fee up front, preferably a flat, fixed fee. Audit all business partners frequently by a disinterested third party. And, most importantly, develop a relationship with your business partners. These are integral factors that will determine the success of your workers’ compensation program. All are entrusted with the care of a very valuable asset – your employees.
When a self-insured entity hires a TPA to manage their claims program, the entity, in essence, hands their checkbook (and a high degree of trust) over to the TPA. The TPA is also given the authority to hire other vendors necessary to administer the claim. Make sure they have your best interests at heart and do not forget to “trust but verify”.