Hiring the right third-party administrator(TPA) to handle an organization's claims, and then working with thevendor in a productive partnership, are two of the most criticalresponsibilities many risk managers face.

The first step in any successful TPA relationship is for riskmanagers to do some serious due diligence in order to ensurethey're contracting with a reliable partner. That begins with athorough self-assessment of the organization's own needs.

When Dale Lindstrom, risk manager at energy-company Vestas WindTechnologies, was scouting a few years ago for a new claimsadministrator (with help from his broker, Marsh), Lindstrom's TPAchecklist included the vendor's experience level, its approach toclaims management, and its having a deep knowledge of the specificsof managing employee health care and Workers' Compensationissues.

Additionally, because Vestas employs 1,250 U.S. employees in 28states, Lindstrom needed a partner with a national reach andfamiliarity with dozens of local health-care providers. Itultimately decided on Gallagher Bassett Services.

Then, in 2010, Vestas joined Columbus Captive Insurance, aheterogeneous group-captive insurance program consisting of 70-plusmembers. Coincidentally, Columbus also uses Gallagher Bassett.

And this use of a known TPA vendor was important to Lindstrom—ashe knows how easy it is for serious issues to arise via problemscaused by a TPA's execution. 

During one claim three years ago, before Vestas partnered withGallagher Bassett, “a breakdown in communication between our TPAand the plaintiff delayed getting the final settlement [to theplaintiff],” he recalls. “The claimant's attorney was planning totake it back to the legal realm and impose fees on us, instead ofthe TPA responsible, for not responding to the finalarrangement.”

Once the problem was identified, the TPA stepped up andindemnified all fees and penalties. But the lesson was learned:When a third party is handling your claims, they'd better be on theball—and for risk managers, it's best to stay in regular contactwith their TPA, regardless of reputation or perceivedeffectiveness. 

It's a sentiment shared by Sarah Perry, risk manager for theCity of Columbia, Mo., who says she feels a lot more comfortablehaving some serious oversight of the process: “Personally, I want aTPA that has the ability and willingness to give us [in-depth]access to claims information.” 

That desire for involvement comes from experience: Perry sawfirsthand two very different examples of how TPAs can handle theirwork. 

On the poor-performance side, Perry relates a story in which thecity's third-party administrator at the time was handling the caseof a city employee who had a Workers' Comp claim. 

The individual was approved for medical treatment that was laterdeemed by the TPA to be too costly. The treatment was halted andreplaced with a cheap alternative. The story got out, and theresulting public-relations fallout fostered negative perception ofhow city-employee claims were being handled.

“It looked bad for the TPA and the city, and the lack of trustrippled through the department and posed a challenge for us for awhile,” she says. 

Conversely, Perry tells of how 10 years ago a contractor waskilled on city property, and a claims adjuster and inspector fromthe city's TPA (the same one it uses now) were on site within 24hours even though their presence was not explicitly requested. TheTPA, Corporate Claims Management Inc. of Chesterfield, Mo.,investigated the circumstances surrounding the event and expeditedthe settlement of the resulting claim.

Be Specific on Service, PricingExpectations

Being as specific as possible with the services required of theTPA—and what the organization is prepared to pay for them—helpsgreatly in weeding out some prospective partners.

For example, the City of Waco, Texas' most-recent request forproposal for a Workers' Compensation Claims and Cost Containmentpartner (released in September 2010) was a voluminous 40-pagedocument that called for detailed submissions highlighting avendor's experiences and references, qualifications, pricing, andoverall responsiveness.  

Gary Urban is director of general services for the City of Waco,which employs 1,600 municipal employees staffing water-treatmentplants, the fire department, utility services and other citybusinesses.

Five years ago, Urban notes, the city was paying $1.2 million inannual claims for Workers' Comp. After switching to a new TPA,Tristar Risk Management of Long Beach, Calif., his yearly payout isnow down to less than $700,000. 

Urban says those cost savings are due to increasedaccountability between his office and Tristar's staff regardingground rules for claims administration, including interdepartmentalcooperation in injury management; early claims reporting; timelyreturn to work; and thorough claims evaluations that include policereports, photos and witness statements. 

Urban recalls a time prior to his job with the City of Waco whenhe was in a risk-management position at another public entity inthe state—and made a surprising discovery about the claimsadministrator it was using.

“During an audit I discovered that our TPA was overbilling usfor review of claims and medical costs—they were paying twodifferent companies to do the same job! This may either have beenmismanagement of business between offices, or it could have beencollusion. However, I wasn't interested in the reason—I wanted toget our money back!” 

Urban stresses it's important to stay connected with the TPAduring the claims process, in part because at the end of the day,the organization knows its own operations and culturebest. 

For example, the City of Waco's risk-management approachincludes an on-site health clinic staffed by medical professionalswho can work immediately with patients to treat on-the-job injuriesand oversee the back-to-work process.

“We have the responsibility to actively oversee our claims sincewe may know facts about a claim that are not apparent to the TPA,”he adds. “In our case, we have a health clinic, and lots ofrelevant information is known by our [own] doctors andnurses.” 

Michael J. Tilley, vice president of Workers' Compensation forKelly Services Inc., a global provider of workforce solutions,agrees that taking regular and deep dives on aclaims-administrator's services and processes is always a goodidea.   

Kelly Services Inc. has been using its current TPA, ESIS, since2005. Besides Workers' Compensation claims processing, ESIS handlesKelly's General Liability, Auto, U.S. Life and Health claims aswell as a few rare foreign-liability claims. 

One of the ways in which Tilley gauges the quality of hiscompany's TPA is to visit the vendor's office and talk to alllevels of staff, from claims adjusters to the vice president,conducting the trip as an interview. 

Come renewal time, one of his queries is the TPA's capacity totake on new cases, given a forecasted new claim volume—and makingsure there are no surprises when it comes to the price of certainservices. 

“Many times [the TPA's] claim-service fees will be subsidized bypricing in other areas in order to 'remain competitive,'” he says.“But if you measure firms in total, the shell-games that might beplayed disappear. For example, how are you being chargedfor medical-bill review? Is [service charged] on apercent-of-savings basis, or on a per-claim basis? Theanswers can be revealing when comparing competitors.”

Another point of interest for Tilley is the TPA's rate of claimsdenial. “Accepting virtually all reported claims signals a surelack of aggressiveness on [the administrator's] part, and moneywill be leaking out of your organization from day one,” he notes.“On the other hand, arbitrarily denying a fixed percentage of allclaims is foolish and simply invites fines, penalties and applicantattorneys.”