TPAs Looking for Value

In the past several years we have seen a movement in the Canadian property and casualty insurance industry toward the U.S. model of adjusting claims and handling claims management through third-party administrators (TPAs). In line with this trend, the days of conducting all investigations in person seem to be fading fast with increased focus on time expended and expenses charged. Are insurers gaining value through this system?

as this groundswell grows, Canadian insurance companies with high self-insured retentions are asking some tough and valid questions: What are the major differences in the “traditional approach” versus “TPA approach” to claims management? What are the benefits of using a TPA? What cautions are there in the highly touted TPA “fee-based” approach (versus time and expense), or are there hidden costs to be considered?

The “centralized claims management model” — a.k.a. third-party administration system of today — was first developed in the U.S. in the late 1950s and evolved as a response to a particularly hard market. Regardless of size, insurers of the time began seeking an alternative to skyrocketing premiums. The answer was to self-insure, though there were substantial barriers including higher operating costs and added administrative responsibilities. The TPA emerged as the most cost-effective solution.

Created by independent entrepreneurs, TPAs offered to conduct claims investigations and professionally manage the entire claims process, while assisting the company in meeting the state regulatory requirements for self-insurance. Today, these basics haven’t changed, though TPA capabilities and sophistication of services have grown considerably.

The Canadian TPA

In Canada, the “perceived value” of the TPA has been slower to emerge. This may be due, in part, to the belief that TPAs are used primarily and/or even exclusively in an “examining” capacity. This perception seems to come from the ingrained belief that the preferred method of adjusting claims was/is to conduct the investigation in person. This is the prevalent Canadian way with the advantage of highly valued “face-to-face” contact. There’s much to be said for this approach, but perhaps even more to be said in today’s highly competitive, cost-conscious market for the speed, efficiencies, and cost effectiveness of TPA methodology.

In an effort to keep the per claim cost low to their customers, U.S. TPAs have utilized effective means of maximizing efficiency while maintaining quality. Most of the tasks typically considered field investigation, for example, are performed in the office using e-mail, fax, and telephone. Perhaps the most significant procedural difference is the use of telephonic recorded statements in the U.S. versus written statements in Canada. Arguments have been made about the pros and cons of both interviewing formats, however there can be no dispute as to the expedience and cost efficiencies of recorded statements.

This is certainly evolution — whether it is “progress” remains open to debate. It is also a matter of a “sense of comfort” of users with a new technology-based system which can only develop over time. If you were to ask 100 people 20 years ago how they compared using a bank teller to an ATM, chances are they would have preferred the bank teller. It was personal, comfortable, accepted, and understood. Faced with modern time pressures, the majority of people today would most likely opt for the convenience of the ATM, with the more savvy users demanding the option of online banking.

Other models

Extent of use of technology is certainly one major difference between the Canadian and U.S. models. Many TPAs have invested millions in Internet-based systems. While expensive to develop and maintain, use of advanced technology is distinctly seen as a core advantage of the TPA approach: information management through innovations such as real-time, online claims information systems and software. For savvy modern businesses, technology is also part of intelligent evolution in the field and a survival philosophy that says, “advance, or go the way of the dinosaurs”.

Other important model comparisons and distinctions include: expense and time billing versus the TPA flat-fee approach, the way claims are assigned and investigated, the use of “known versus unknown” adjusters, and the overall approach to claims management offered in both models. In terms of fee structures, the Canadian model primarily involves time and expense billing, versus the U.S./TPA fee-based method. Fee-based seems to be the “hot trend” and preferable since companies know precisely what charges will be upfront. While this is seen as an asset for TPAs, some TPAs have gained a reputation for “creative” pricing and some risk management professionals are having difficulty comparing “apples to apples” when reviewing competing fee-based quotes.

Sometimes, though not often, items such as supervision, litigation management, office expenses, quarterly review meetings, or courier charges are not included in the flat fee. In addition, some TPAs put reserve level or “nature of injury” as criteria for suddenly shifting to time and expense billing. These “hidden charges” can add as much as 15% to 30% to administrative fees and are difficult to monitor.

When comparing TPA pricing, the best bet for any risk management professional is to look for a company with an impeccable reputation and a straightforward, easily understood fee structure. It is also important to scrutinize the bids closely to make sure you’re comparing those apples to apples.

Assigning claims

The TPA model involves assigning a claim to a supervisor who looks at adjuster capacity and expertise when determining who will investigate a claim. Supervisors stay involved in the claims process monitoring efficiency each step of the way. Control of quality is important across the board, especially since TPAs typically only employ salaried adjusters with no volume-based bonus incentives. Adjusters in Canada are typically not salaried and often work on a bonus system. In the U.S. TPA model, the only method to evaluate an adjuster is to measure their effectiveness in delivering a timely, high quality claim investigation. Therefore the quality internal and external review process becomes critical.

Finally, there is increased standardization, one of the great benefits of the TPA. In this model, the systematized process of claims management remains the same claim-to-claim. This process becomes part of total claims management as the most cost-effective means of reducing risk, increasing productivity, and maximizing profits.

There is no doubt that the U.S. TPA model is increasing in popularity in Canada and will continue to do so. Though insurance buyers and carriers need to analyze both models to consider which is best suited to their claims management needs, evolution may favor TPAs as a solution for the fittest in today’s cost conscious marketplace.