Chain Reaction

Chances are, however, that if you look closely at your current claims process, youre already incorporating supply chain management in it. Companies will tell us they dont do supply chain management, says Andrew MacDonald, vice president at The Innovation Group (www.tigplc.com), a UK-based claims management vendor with U.S. headquarters in Danbury, Conn. So we ask them what they do when they repair a car. They realize theyve worked out discounts, and theyre doing [management] manually.

Automating this manual process can have a significant competitive advantage, and the stakes are high. Seventy-five to 80 cents out of every dollar goes into the claims settlement processes, Dalgleish says. Reducing claims costsfrom the hard-dollar costs of parts and services to the soft costs associated with faster settlement and reduced friction in the processhas been a mantra of claims departments, particularly in these troubled financial times.

Before a technological solution is even considered, however, insurers need to come to grips with the fact they have only limited control over directing claimants to preferred service and goods providers (see Problems and Promises, at right). As a result, supply chain solutions in insurance claims have focused heavily on automobile physical damage, where there is arguably less claimant loyalty to specific providers and where claim scenarios are relatively homogeneous. Consider the number of third-party providers that have established a niche in the automobile physical damage valuation and claims management realm: Mitchell International, CCC Information Services, and ADP Claims Services Group, to name three.

Sixty percent of the auto claim volume we have comes from physical damage, explains Mary Beth Riester, claim alliance director at The Hartford. Thats one reason why the insurer built a custom EDI link to CCC several years ago.

When all lines of insurance are considered, managing the service chain that insurers themselves use directly is perhaps a surer fit for a directed technological solution. Visibillity, for example, has carved a market niche out of litigation management. And The Hartford receives workers compensation medical bills, reports, and attachments electronically from providers to the insurers front-end claims system through a medical bill presentation clearinghouse, P2P Link of Farmington, Conn.

You have to look at ways to take cost out of the system rather than take care away from the patient, says Anthony Abate, corporate procurement vice president at The Hartford. Insurers have a great deal of ability to help providers take cost out of the system due to our size and scale. If we can reduce a good percentage of the per-bill processing costs for The Hartford and for the provider by eliminating paper, thats a huge net savings. The insurer reports the P2P Link system has significantly reduced the handling, processing and payment times, and associated costs for complicated medical bills, although no specific metrics were available because of the variability among various bills and attachments.

Three Steps to Better Results

There are three steps to service chain management in claims: identification of providers with which to establish preferred relationships, negotiation of those relationships, and collaboration with the providers when claims occur. At insurance carriers, technology has established a place in the first and third steps.

At The Hartford, the procurement department is responsible for all supplier negotiations and management. The department uses a composite systems approach to the process, mining its legacy claims data to get both raw information and management reports for benchmarking and capturing claims cycle time from the claims administration system. They are rolling out a PeopleSoft solution to process accounts payable in the claims department. The company has also internally built a number of contract management systems to help it evaluate and monitor providers.

We build only when theres no opportunity to buy, because the investment to build and upgrade systems is huge, Abate says. However, we have many business practices that make us unique to customers and claimants, and if we were to have a vendor issue a new product release based on our business practice needs, we could lose an advantage. So no one tool has been a perfect fit.

Insurers turning to technology to identify suppliers to target have several options, from supplier relationship vendorssuch as PeopleSoft or SAPor from claims management vendors that provide a level of business intelligence within their platform.

A key piece is optimizing supplier performance, so at any time the supplier can know where they stand with insurers, says Frank Siderio, director of field operations for financial services at PeopleSoft. Embedded analytics show insurers how vendors are performing, and vendors want that type of information; they want to know how theyre being measured.

Casteks claim management tool captures response and cycle times on per claim and global bases. It will advise the adjuster if times have been missed, so if, for example, a car rental company promises a response within a half hour and doesnt deliver, that relationship can be managed and re-negotiated, says Colin Smith, vice president of e-claims at Castek.

This kind of business intelligence is critical for effective negotiation. Ive seen a lot of insurance companies jump to the negotiation stage because dot-com companies have said, We can negotiate for you and get you the lowest price, whether that be car rentals or hotels, says Paul Young, senior supply chain analyst at SAP. However, you might get a really great price, but you have no concept of what you needed to buy. The negotiation shouldnt come [before the analysis].

With your negotiated agreements in place (sorry, we cant help you there), its time to enable collaboration with your providers and suppliers. The HB Group began using Casteks InsuroCity, a Web-based claims collaboration portal, in late 2001.

When we completed the pilot, we were communicating with about 200 individual supplier locations, says Dalgleish. With the HB Group system, an adjuster takes all the claims information and enters it in into HBs claims administration system, a homegrown AS/400 system. The adjuster then toggles to the InsuroCity dashboard on the desktop to locate a preferred provider, and integration between the two systems pre-populates claims data fields. The provider either receives a notification immediately or by logging on to InsuroCity, depending upon the connectivity of the shop.

The HB Group determined that this workflow best met its current needs. We looked at integration, but we didnt want to spend [that much] on the pilot, Dalgleish says. We wanted to do it simply yet minimize the rekeying process. Once a week, HB Group does a claim extract from its policy and claims system and sends an ASCII file to InsuroCity via encrypted FTP.

Instead of it costing me tens of thousands of dollars [to integrate], it cost us $2,500 to have a contractor write the file transmission routine, Dalgleish says. The worst-case scenario is that someone would have added a coverage yesterday and has a claim today. Wed have to check on that, but on the plus side, it would throw up a flag to the adjuster because the claim was reported right after the coverage was added.

On the other end of the spectrum would be a complete integration of supply chain management into an insurers claims management system. The Hartfords Riester believes relying on claims adjusters to go to a separate system, making it part of the manual workflow, wont work. If [supply chain management] becomes just another process, another step, then the benefits wont be achieved, she says. Everything were doing is contemplating a link to our front- and back-end system for that very reason. The Web is fine from a purely functional standpoint [to achieve some collaboration with suppliers], but as much as we can have that speaks directly to our front-end system, the better value we have.

Similarly, the HB Group plans an eventual integration between InsuroCity and its own claims front end if the pilot continues to meet expectations. The Hartford is also planning to migrate its current auto damage EDI to an open, XML-based architecture.

Today, we can only contract with auto body shops that use CCC for them to be in our body shop network. CCC also owns the data, and we have to pay for the data, explains Abate. With an [Internet-based] enabler system, wed buy one system and have eyes into any of the estimating systems. It would be platform-agnostic.

One other benefit to a Web-enabled supply chain solution, regardless of the integration on the insurers end, is the ease of access by providers and suppliers that represent varying degrees of technological sophistication. Additionally, since claims are not always first reported directly to the insurer, providing repair shops and retailers with access to a supply system can speed the claims process.

ROI

Insurers that effectively manage their supply chain in claims can expect an ROI of up to the 20 percent range, according to Ramaswamy Raj Rajagopal, a managing director at KPMG Consulting, Inc. But, as always, its up to the insurer to determine where on the payback spectrum it falls.

Generally speaking, we saved a day to a day-and-a-half rental if a claim went to a preferred body shop, says the HB Groups Dalgleish. There were savings based on the agreement with preferred rental companies, and having a customer at your preferred repair shop speeds up the appraisal because its imaged right there and we dont have to send an adjuster out. But we did not see a noticeable indemnity savings.

However, with only part of true claims management costs associated with real dollars, the actual impact can run much deeper. Weve seen that somewhere between 40 percent to 45 percent of a handlers time is spent on activities that dont impact the value of the claim; rekeying information, faxing, and so on. We do think that by effectively getting at some of that time, we can go after the 10 percent to 15 percent reduction in claims costs thats possible, says Michael Costonis, senior manager in Accentures claims solutions group.

Accentures charges vary depending upon the installation. If were hosting [the system], theres a per assignment charge, when the adjuster sends an assignment to a supplier. If insureds opt to install the system themselves, the charge varies depending upon the supply type and the services, from $2 to $3 for a car damage claim to a $15 to $17 fee for bodily injury assignments.

Based on the results of the pilot, we increased our average number of files per adjuster by five percent, says Dalgleish.

From the perspective of a repair facility connected to the direct repair network, the process efficiency ranges anywhere from a percentage point on the low end to a 10 percent improvement, claims Githesh Ramamurthy, chairman and CEO of CCC Information Services. The typical repair takes about 27 days, and weve seen the number dropping to 13 days. CCCs Pathways collision damage platform is sold on a subscription basis, per seat fee, with costs anywhere from $4,000 per seat per year to $7,000 per seat per year, based on the components purchased.

Perhaps the biggest potential benefit for both the insurer and the repair facility is the increase in policyholder satisfaction. It comes down to the friction costs, says Ramamurthy. As a claimant, Im no longer in between my insurance company and the repair facility. Im not taking a quote from the repair facility to the insurer and back to the facility.

Having a customer show up at a repair shop, having the contractor show up at their house, and having all the information gives the insured the impression there is a relationship, and the supplier really is connected to the insurance company, says Smith.

We look to technology support that will collapse the time it takes to handle claims, and we try to accomplish that same goal regardless of who the vendor would be, says Riester. Our objective is not only to reduce costs and streamline the process, but to achieve a beneficial result for all parties in the claims process.

Problems and Promises

Insurers looking to manage their claims supply chain need to first realize what their weaknesses and strengths are in the process. Insurance companies are different. They are the payers to the sellers, but theyre not perceived as buyers. Typically in the supply chain, you have a buyer and seller, says Ramaswamy Raj Rajagopal, a managing director at KPMG Consulting, Inc. In the claims process, you have a buyerthe customer who takes in the car, has damage to the house, or files the claimand the seller is the body shop, or a retailer. The insurance companies havent had control in the marketplace, even though theyve tried to address it.

But perhaps an even more fundamental problem lies within insurers reluctance to take control of the process. One of the major problems with collaboration is the competitive edge. Larger companies dont want to participate, because it means sharing their edge, but smaller companies want to. Also, the old issue of antitrust comes in again, Rajagopal says.

Even with preferred relationships established and management technology in place, insurers still face obstacles from claimants themselves. The personal nature of medical claims makes them a difficult push to aggressively manage in liability losses. But even complications in the property process have an impact.

Weve established relationships with general contractors and salvage facilities and hope to have our first contents replacement vendor on soon, says Keith Dalgleish, vice president of e-commerce at the HB Group. But its a funny thing in insurance. You get the electronic store to give you a replacement value, and thats how you base your claim. But the insured isnt ready to buy yet, so you settle on an actual cash value basis until he or she is ready. People also tend to rethink what they had and what they wanted. If theres been a fire or damage to furniture, theyll redecorate. So were much less successful in directing people to those vendors than wed like as an industry.

Technological Underpinnings

Any supply chain solution will require information from an insurers claims administration and management systems to be effective, and thats where one problem arises. Legacy systems are supposed to be large-scale processing systems to allow them to interact, explains Andrew MacDonald, vice president of The Innovation Group. However, often the claims handler is required to be the integrator between the admin system and a supply chain management system. They need to go to a separate system and rekey the information, or IT shops have to build custom, point-to-point interfaces.

If rearchitecting your legacy system isnt your idea of weekend fun, youre not alone, and thats why point supply solutions with asynchronous integration have gained some traction in claims departments. However, some level of integration is needed eventually to make these systems truly useful at an insurer. You need to share parts of the transaction with the vendor so the vendor can actually do work, says Michael Costonis, senior manager of Accentures claims solutions group. The idea of sending an e-mail for collaboration is not as powerful as sending data into the supply system. If you exploit Web services to push data out of the legacy system without rekeying, youll be able to develop these interfaces without custom point-to-point and swap out with other vendors. Theres a lot of heavy lifting involved.

The bottom line is the more discrete data elements your claims system captures and is able to send to the supply chain system, the greater level of granularity youll be able to apply to the management process. Consider automated replacement of personal property. In order to do that, you need to be able to capture [such detail as] make and model of a TV set. Having that data available at a detailed level is critical, Costonis says.

And of course, vendors need a certain amount of technological sophistication to be part of the automated chain. We asked if suppliers are technologically ready, says Colin Smith, vice president of e-claims at Castek. Do they have access to the Net, and are they savvy? And weve found the answer is yes. Just as an example, when we moved onto the property side with [an insurer client] and we surveyed their suppliers, 99 percent of their suppliers had access to the Internet and were estimating electronically or via e-mail with other companies.

Michael P. Voelker is principal of Equinox Communications, Inc. He can be reached at mvoelker@goequinox.com.