Finding the right match. What you should look for when choosing an administrator

Claims administration: finding the right match. What you should look for when choosing an administrator

Kathleen O’Connor

Claims administration: Finding the right match

Claims administration has been in flux. According to an A. Foster Higgins survey, more than one-third of employers have changed claims administrators over the past three years. Moreover, only 40 percent of employers report being satisfied with their claims administrator in areas of overall quality, timeliness and reporting capabilities. Only 38 percent were satisfied with the timeliness of claims payment and only 25 percent were pleased with the financial reports and utilization data supplied by their claims administrator. (See chart on page 40 for data on companies self-administering.) Given this low level of satisfaction, it’s important to know what to look for in selecting a good TPA.

Seven checkpoints

A good claims administrator should rank high in most if not all the following areas:

* experience in dealing with managed care;

* access to quality stop-loss insurance;

* experience in flexible benefits and plan preparation;

* management stability and low staff turnover;

* reputation and references;

* performance-based reimbursement and information management; and

* a vision of the future.

Managed care experience

The third-party administrator should have experience handling complex programs with utilization review requirements and medical management. “I cannot stress enough the importance of utilization review and a utilization review audit,” says Gary Ward, principal, employee benefits consulting department of Peat Marwick and Company’s Los Angeles office. “Look at how TPA is handling pre-admission reviews for hospitals along with concurrent reviews. Are they doing it by phone? On site? Are nurses involved? Is ambulatory care included in that utilization review; or only hospital care?”

Ward emphasizes that not all managed care is the same. The level of utilization review may vary, he says. Consequently, employers need to ask if the medical management review is being done by health care professionals or by other trained staff. While some organizations may indicate that it does not matter, health care providers, he says, may be less willing to cooperate with reviewers who have not also been practitioners.

“While claims audits are important,” says Ward, “they only solve part of the problem because they come after the fact. The long-term potential for cost savings lies with utilization review. Claims audits that catch unbundling or upcoding may realize some savings by denying parts of the claim, but real savings will come with good case management and utilization review, which eliminate unnecessary procedures before they occur.”

Ward also argues for reviewing medical necessity as part of the selection process for a claims administrator. “When medical necessity is an issue, what procedure does the claims administrator use?” Ward asks. “To whom is the case referred–on-line staff or physician consultants?”

Managed care is more than financial management and discounts. But too many claims administrators, says Clayton Field, president of First Choice Health Network of Washington, a Seattle-based PPO, have had too little real experience in managed care.

“Claims administrators really only know how to process and pay claims,” says Field, whose network is one of Washington state’s largest health plans. “A third-party administrator nowadays should have an ongoing relationship with a managed care plan. TPAs process claims; it’s what they do best. But by having a marriage with a good managed care plan, they can offer their employer sponsors even better services.”

“We recommend that employers try to negotiate a per capita rather than a per claims contract with the administrator, since the definition of what constitutes a claim can vary significantly,” suggests Blaine Bos, managing consultant with Foster Higgins’ New York City office. “Per capita charges are clearer and give the employer much more control over total health care costs, which is a large part of what managed care is all about.”

Bos also suggests that the employer evaluate the claims administrator’s willingness and ability to work with PPOs and HMOs. “Unless the claims administrator can interface with the PPO’s software or have a phone link with the PPO’s pricing mechanisms, the administrator will have to recreate, perhaps manually, the PPO’s benefit specifications, ID codes, levels of payment, etc., in order to process and pay claims,” says Bos. “Such duplication is costly and it increases the possibility of lost claims. And since claims must now be run through two separate administrative layers, both these layers must be audited–and that’s another increase in costs.”

Stop-loss insurance

Self-funding employers with inadequate reserves can find their health claims funds wiped out by a few catastrophic cases. Thus it is necessary, says Foster Higgins’ Owen Gillaspie, managing consultant in Seattle, either to maintain health fund cash reserves at roughly 120 percent of expected claims, or to “find a TPA that carries stop-loss insurance.”

“Many TPAs do,” says Gillaspie, “although not all their employer clients know that they do. Employers should certainly find out, however! For the employer who does not have a reserve in excess of 120 percent of expected claims, stop-loss insurance is essential.”

Flex plans

Just as managed care experience is essential for today’s TPA, so too is knowing how to administer flexible benefits plans. “Many claims administrators,” says Field, “have dealt with only one type of benefit package and may not be accustomed to the complexity and variety of flexible benefits, and of the complexities involved in processing different levels of benefits. A good administrator should be able to work closely with the employer to develop the best plan design to meet the employer’s needs.”

A competent administrator should also be able to prepare a plan document that gives the best cost structure to the employer; i.e., the administrator should be able to give more than advice on benefits.

“What you want,” says Mark Shaner, assistant vice president, SAFECO Life Insurance, “is a claims administrator who is capable of putting down in black and white a comprehensive–and comprehensible–benefits plan.”

Turned off by turnover

Good management practices and low staff turnover are excellent criteria by which to judge a claims administrator. Rapid staff turnover, especially, can be a warning signal of serious instability. If the claims administrator cannot keep key management staff or has high turnover in the claims staff, the likelihood of errors, processing delays and poor claims interpretation is high. “If there is high management and/or claims staff turnover, you can bet that there are higher training costs and frequent accuracy mistakes,” says Field.

Audits are another means of identifying effective management, and some experts advocate bringing in outside consultants or accounting and actuarial firms to audit TPAs prior to selection. Various theories exist on what should be audited. In addition to timeliness and accuracy, Peat Marwick’s Ward identifies payment procedures as being important to analyze in selecting a claims administrator.

“We like to look at how the administrator procures utilization andcost data,” says Ward. “While accuracy is an issue, it is not as important to us as the procedures used to determine costs and payments. We also like to know what the second level of review is. Are the supervisors brought in at the $5,000 claim, or not until the $10,000 claim? These are management issues that give the employer an idea of the scope of potential accuracy and scope of control of the administrator.”

References and reputation

“Experience is one of our major considerations,” says Tom Plumberg, manager of compensation and benefits, Hill’s Pet Products (a division of Colgate Palmolive), in Topeka, Kan. “We now self-fund in order to cover our 2,000-plus employees. Experience and accessibility were major factors in our TPA selection process. We look for an administrator whose staff could handle the complexity of the number and location of our employees. [Hill’s has plants in four states and a sales and marketing network that is spread throughout the country.] Responsiveness and adaptibility were also important, as was size. We felt hesitant, about going with a smaller, local administrator since we have so many employees in so many different states.”

Tom Barcelona, executive director of the National Association of Employee Benefit Administrators, suggests that size of the TPA–and even the level of experience–may be less important than other factors. “Accessibility and responsiveness are important as well,” he says. “Our 90-plus members are basically small, independent firms. But they also have less red tape than the larger insurers and agencies that have Administrative Services Only (ASO) contract. The smaller administrators can often handle greater demand for flexibility than can large insurers. In addition, with the smaller administrator, the employer sponsor can work directly with top management of the TPA. Also, size and longevity alone should not be indicators of expertise. Many of the smaller claims administrators have come from insurance brokerage or coverage firms, so expertise may exist even if the TPA doesn’t have a huge staff and hasn’t been in business since the Year Dot. The best gauge of a claims administrator’s qualifications is its references. Check especially its relationships with stop-loss insurance companies.”

While everyone is looking for experience, Bos believes that trade-offs between experience, financial resources, accessibility, etc., will always occur. “Employers will balance a TPA’s experience with, for example, its geographic reach,” he says, “as well as with its responsiveness, flexibility and its cost. Good reputation and management, of course, are essential, but if you demand a claims administrator that scores an A-plus in all areas, you may be searching a long time.”

Performance-based

reimbursement

The foster Higgins survey indicates that performance-based reimbursement arrangements are increasing as employers maneuver to secure more favorable cost agreement with claims administrators. Contracts often include provisions governing payment turnaround time, coordination of benefits savings, and accuracy; when targets are met or exceeded, the TPA is rewarded; when targets are not met, the TPA is penalized. “We like performance-based agreements,” Field notes. “They join the administrator with, for example, the PPO, in order to achieve common goals of quality and efficiency. If their performance is outstanding, they are compensated with a bonus, or else assessed a penalty if they do not achieve the agreed upon contract standards.”

AT the present time, employers with 5,000 or more employees are more likely to use these performance-based contract, but the trend is growing. According to Foster Higgins, the number of employers with incentive-based TPA contracts increased by 7 percent in 1989, to 17 percent of all employers surveyed.

The components of the performance agreement are negotiated by the employer and the claims administrator. Increasingly, data collection and information analysis have become, along with savings, key performance requirements.

“What we want from the administrator is information,” says Plumberg. “We want the capability to determine the costs by different geographic areas or by the percentage of our claims that are for, say, subtance abuse. The adminitrator should have the skills and equipment to collect data and provide information about types of care and cost patterns.”

Seattle-based Health Care Purchasers Association (HCPA), a business coalition composed of financial institutions, aerospace, timber, and mannufacturing firms, shares Plumberg’s concerns. “Health care is just catching up with electronic management,” says Andrea Castell, executive director of HCPA. “Employers are looking to electronic information technologies to give them information that can assist with management decisions. Godd information can help our employers make smart decisions about different plans as well as help us examine different cost areas and do small-area analysis for disease and practice patterns.”

Electronic management is an area of intense growth. Companies as large as American Express are testing electronic claims processing. “Amex’s health care credit card, called Quattro, debuts this month in Boston among Amex and John Hancock Financial Services employees.) Other smaller entrepreneurial firms and health plans, in conjunction with financial institutions or other partners, are exploring the electronic transfer of funds, on-site eligibility, electronic claims management, and so on.

“Employers who self-fund need some return on the time value of money–the float–which will be lost in the more rapid and accurate claims turnaround made possible by electronic management,” says Castell. “We are hoping quality management information will be that trade-off.”

Bos reiterates the need for management information. Data analysis and the information dissemination ability of the claims administrators are increasingly important, says Bos, to identify where the health care cost centers are. “If the administrator doesn’t have sophisticated coding capabilities,” he adds, “the employer won’t know where the cost centers are and will not be able to manage health care costs efficiently and effectively.”

Margaret Stanley, administrator of Washington state’s Health Care Authority, the agency managing the health benefits for state employees, stresses the importance of the claims administrator’s ability to provide information. “Having moved from an insurer to a purchaser,” Stanley notes, “I have a deeper perception of the importance of good data and information analysis, as well as the need for flexibility to meet employer management needs.”

The capability to keep up with design and management changes is essential for employers. “Technology keeps changing because benefit designs keep changing,” says Stanley, “as do utilization review requirements, length of stay and the claims system.”

A vision of health care

“One of the more important things a claims administrator has to offer the emplouer is a vision of the future of health care and the changes the employer should be prepared to expect in the rapidly changing health care environment,” observes SAFECO’s Shaner. “SAFECO self-funds its employee benefits through a large national commercial carrier. Since we have employees in so many different states, we wanted to work with a company that could offer a managed care plan in many different environments.”

Shaner believes that the claims administrator must help the employer anticipate changes, such as the impact of the forthcoming Medicare physician reimbursement changes. “The administrator should be able to anticipate what is going to happen and be prepared with alternatives,” he says. “It should interpret the health care environment for the employer and be prepared to suggest innovations that will help employers be effective fiscal managers of quality health care services.”

Improve the odds

Choosing a claims administrator doesn’t have to b as chancy as buying a lottery ticket. The complexity and rapidly of change of health benefit package components dictate that the decision should not be based on cost alone, but should include experience with managed care, access to quality stop-loss carriers, and the ability to meet the employer’s need for flexibility and responsiveness. Reputation and integrity can be verified by checking references with current and former clients and with the stop-loss insurer. Management capabilities are evident in a company’s management structure and staff turnover. High employee turnover at managerial or claims levels increases problems with accuracy andtimeliness and contributes to cost increases through continuous training needs.

Electronic management of claims and information is currently the Achilles’ heel of the health care system. The ability to collect and analyze data on-line is the latest hope in the battle to curtail health care costs.

Kathleen O’Connors, of Seattle-based O’Connor Communications, is an author and health care public relations consultant.

COPYRIGHT 1990 A Thomson Healthcare Company

COPYRIGHT 2004 Gale Group