Have you ever wondered “How in the world did the TPA (third party administrator) come up with their pricing for our workers compensation claims?” If so, you are not alone. This article looks at some of the pricing mechanisms used by TPAs and the benefits and negatives of the varying approaches to pricing.
Value vs. Price – One thing to note is the consideration of low-cost prices upfront vs. solid, quality over the long run. Like in all things, quality costs more. There’s no way a company can get the best service at the lowest price. For 25 years, I’ve watched companies WANT the higher quality service, then select the low-ball price. They pay for this in the long run because when adjusters handle more claims in less time, quality suffers; they simply can’t spend as much time on your claims as they need to. “Select Value Vs. Price” and you’ll save money in the long-run. We’re preparing a more expansive article on how the wrong decision now will cost more in the long run. Watch for the upcoming article.
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“How Do I Get My Adjusters To Follow My Account Handling Instructions?”
TPAs use many approaches to price for the claim handling services. The most common ones are:
Time and expense
- Flat rate per file
- Flat rate per program
- Cost plus billing
Time & Expense
Three decades ago, almost all claims handled by TPAs were handled on what was referred to as Time & Expense billing. The workers comp adjuster entered the nature of the activity on a time sheet and the amount of time each activity took to complete. The amount of time billed to the client was usually shown in tenths of an hour. Hence if the adjuster worked 5 minutes on a file, one-tenth (.1) was entered on the time sheet or if the adjuster worked a half hour, five tenths (.5) was put on the time sheet. Expenses for long distance phone calls, postage, photocopies, faxes, etc. were entered on the time sheet in a separate column for expenses. (Most defense attorneys still use this system).
The benefits of the time and expense system to the self-insured or an insurer utilizing a TPA was the exact accounting of what was done on the file. The time and expense billing method has fallen out of favor due to inappropriate billing by some greedy TPAs. For example — while the preparation, taking and writing up the employee’s recorded statement was actually thirty-five minutes, instead of billing six-tenths (.6), TPAs would bill for 1.0 hours or some other number higher than the actual time. Also, if the TPA’s adjuster billed the actual time, but was not very efficient in his work, the insurer or self-insured was paying for the adjuster’s inefficiency. (WCxKit)
[Note: As a consultant who is often asked to bill my time, I know it’s not an easy task, and there is set up and admin time that has to be put somewhere, then all the phone calls back and forth that never connect. It’s easy for the party paying the bills to scrutinize the bills without taking those things into consideration, which is why I prefer “project pricing,” but back to the issue of TPA billing… ]
While all TPAs still offer the time and expense billing method, it is seldom utilized today. When it is utilized, there is a strong trust between the self-insured or insurer and the TPA.
Flat Rate per File
In the 1980’s self-insureds and insurers who had doubts about the accuracy of the time and expense billing method started looking for a different way to pay for their workers comp claims to be handled. A new method of billing per file was developed to replace the time and expense method of billing. The TPAs added up the total number of claims they had handled and the total fees they had earned using time and expense billing. Based on these numbers they were able to determine the average amount they would charge for a medical only claim and the average amount they would charge for a lost time claim.
Using the averages from time and expense billing, TPAs started offering to handle each claim for a flat rate per file. This allowed the self-insured or the insurer to know exactly what each claim was going to cost for claim handling. Flat rate per claim file billing worked great on the self-insured’s and insurer’s liability claims, but not so well on the workers comp claims. The TPAs learned there are a lot more “legacy files” (files that never close or go away) in workers comp than there are in liability.
As TPAs lost money on the legacy files, they looked for a better billing solution. One approach was to change the flat rate per file, to a flat rate for a specific time frame (frequently two years), with an additional flat rate being charged if the file remained open beyond the initial time frame. As the legacy files got even older, the TPAs started charging an additional flat rate after each time frame expired and a new time frame began.
When insurers and self-insureds saw the additional flat rates being charged on legacy files, where the workers comp adjusters had less work to do then they did during the initial time frame, they asked for the second and subsequent flat rate billing to be at a lesser amount, and some even wanted to go back to time and expense billing for the legacy claims.
Flat Rate per Program
As insurers and self-insureds were unhappy with time and expense billing, and as flat rate billing per file had its problems, the concept of billing one overall flat rate for a period of time came into being. Based on the self-insureds or insurers previous number of claims per year, the TPAs agreed to handle all claims generated by the insurance program in exchange for a set payment, usually paid in installments monthly or quarterly. For example, the self-insured would agree to pay the TPA a total of $500,000 for one year of claim service with the TPA expecting to receive 300 lost time claims and 1,000 medical only claims.
Like other billing methods, the flat rate per program billing method also had its problems. If the expected number of claims was exceeded, the TPA would lose money and not be happy. If the expected number of claims was not reached, the self-insured would be unhappy, feeling they had over paid for the claim handling.
Cost Plus Billing
In the never-ending search for a fair billing method, the latest approach being used by more and more TPAs with the approval of the self-insureds or insurers is the cost plus billing method. In this approach the TPA tries to quantify its actual annual cost for salaries (adjusters, clerical, supervisors, management involved in the program) plus overhead, taxes, business acquisition, and all other expenses of operating the business. Once the accountant has established what is believe to be the exact cost of providing adjuster X (or adjusters X, Y, Z, etc.), an additional amount is added on for profit.
For example: Based on the previous loss history, the TPA believes two adjusters should be able to handle all of the claims on a program. The salary for the two adjuster equals $100,000 combined. A prorated share of the salary for clerical, supervisors and management is calculated. A prorated share of the company’s overhead, taxes, business acquisition and other expenses is calculated. The cost of operating the business over and above the adjuster’s salary is estimated at another $100,000. The total cost of handling the claims will be $200,000. To this amount is added a profit margin – let’s say 15% or $30,000 ($100,000 + $100,000 X 15%). The cost plus billing method would equal a total billing by the TPA of $230,000 for a year of claim service.
Summary
Most TPAs will refer to their billing arrangement with your company as “client specific fee arrangement” meaning they may be charging you more or less for the same services than they are charging your competitors for workers comp claim handling based on factors that may be specific or customized for your situation. It is imperative you have a complete understanding of the billing method that will be utilized on your company’s claims. Regardless of the billing method your company and the TPA negotiates and agrees to, the contract to handle your company’s claims should be in writing.
If you don’t understand it, ASK! You need to know how it works so you feel comfortable with the arrangement. The TPA does not want you to feel like you are being gypped , they want you to feel you are getting good value for your money.
Author Rebecca Shafer, JD is President of Amaxx Risks Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker and website publisher. Her expertise is working with industry employers to reduce their workers compensation costs. Over the past 25 years, her clients have included airlines, healthcare, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. Contact: RShafer@ReduceYourWorkersComp.com or 860-553-6604.
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