Tips When Considering a Performance Guarantee with your TPA

If your Third Party Administrator (TPA) is not living up to the promises made when you signed up with them to handle your workers’ compensation claims, or if the quality of service is less than you expected, you need to incorporate a performance guarantee into your service contract. A performance guarantee goes back to the old adage “What gets measured gets done.” By implementing a performance guarantee with your vendors, the vendors have a better understanding of how they will be evaluated and they have a bigger stake in the quality of service provided.

In a performance guarantee, the TPA guarantees they will meet pre-determined levels of performance in their claims handling and claims administration. If the TPA exceeds the guaranteed performance level, they receive a bonus payment over and above their contractual service fee amount. On the other hand, if the TPA fails to meet the guaranteed performance level, they will incur a penalty reduction in their contractual amount.

The performance level is stated as a percentage of a measurable activity and the bonus or penalty must be stated in the same format with an explanation of how it will be measured. For example “The TPA will meet or exceed the servicing standards 90% of the time.” “The TPA will be paid 1% of the contractual amount for each percentage point the TPA exceeds 90% and the contractual amount will be reduced by 1% for each percentage point the TPA falls short of the 90% goal.” “The performance will be measured by an annual claim file audit of the established goals.”

Performance guarantees with TPAs have been shown to improve service quality, reduce administrative and data errors, and reduce workers compensation claim cost through higher quality claims handling. When the difference between the TPA making a profit, a bigger profit, or suffering a loss is the quality of service provided, it is in the best interest of the TPA to strive to provide the best service/quality possible.

To properly construct a performance guarantee, you need to determine the criteria that will be used to measure performance of the vendor. With a TPA, a common criterion is compliance with the Best Practices in their claim handling service standards. The broad categories often used are:

1. Investigations

2. Reporting & compliance with the client instructions

3. Reserving

4. Medical Management

5. Litigation Management

Each of these categories will have sub-categories that should be listed in the performance guarantee.

The weakness in performance guarantees comes when they are understood differently by the self-insured and the TPA. For instance the performance guarantee would include timely three-point contact with the employer, employee, and medical provider as part of the criteria for Investigations. If the adjuster thinks three-point contact within 24 hours means sending out a form letter to the employer and employee the first day of an assignment, while the risk manager expects voice-to- voice contact with information exchanged between the adjuster and each party, the differences in interpretation will lead to disagreement between the TPA and the self-insured company.

For a performance guarantee to work, the criteria that will be measured has to be spelled out in detail. Instead of stating the TPA will complete three-point contact, the performance guaranteed should state, “The TPA will contact the employer, the employee and the medical provider by telephone, or in person on severe claims, and obtain all available information from each party within 24 hours of the claim being transmitted to the claims office.” Note the time measurement starts from the time the claim is assigned to the claims office, not from the time the claim lands on the adjuster’s desk. This prevents the adjuster from making the excuse “the claim was held up by the clerical staff.”

With a new TPA, Best Practices should be used as the standard by which the TPA will be measured. If the self-insured has been using a TPA for a period of time and is satisfied with the quality of the TPA’s performance in some areas but not satisfied in other areas, the performance guarantee can be customized to address those areas needing improvement. By benchmarking the areas of unsatisfactory performance, the TPA and the self-insured can work together to improve the areas of poor performance. A claims audit would be used to measure the results.

As the performance guarantee can have a substantial impact on the profitability of the TPA handling the claims, it is essential to have an unbiased and unrelated claims auditor to measure the quality of the claim files. Neither the TPA, nor the broker, nor the self-insured should be the claims auditor as they each have a built-in conflict of interest in the outcome of the audit. For the claims audit to be accurate, it should be contracted to an out-side claims auditor mutually agreed upon by both the TPA and the self-insured. (workersxzcompxzkit)

If you need assistance in designing a performance guarantee for your new TPA contract, or assistance in creating a performance guarantee to address specific problems with your current TPA, our experienced consultants will be glad to assist you. If you already have a performance guarantee in place, we will be glad to arrange for a highly experience claims consultant to perform the claims audit for you. Please feel contact us with all your performance guarantee questions.

Author R. Shafer, J.D. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, healthcare, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. She can be contacted at: RShafer@ ReduceYourWorkersComp.com or 860-553-6604.

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