A Fishy Deal

Published in the October 2008 issue of Risk & Insurance.

The rise in home heating costs in northern states this coming winter will drive some households over the financial brink. We are looking at a doubling of residential oil costs over a one or two-year period.

What’s this to do with workers’ compensation? The apartment renter in the north may be vulnerable to abuse over oil deliveries in the same way that self-insured employers can be – in fact are – taken advantage of by third party administrators.

As is often the case, an apartment renter, metered individually, may pay the oil supplier directly. The landlord picks the supplier from a number of competitors.

The landlord could strike a deal with the supplier to kick back a share of its revenue. Prices go up; the kickback grows. Oil suppliers could compete for business by offering larger kickbacks.

This scenario, or the threat of it, looms over most TPA clients today. Although the TPA normally engages the managed care vendor, it is the self-insured employer’s money that is used to pay the vendors. In many of these arrangements, the TPA participates in “wholesale-retail relationships” with discounts that may not be passed onto its self-insured clients.

Market conditions foster this self-dealing. TPA claims pricing tends to be too low on its own to cover the TPA’s costs.

Say that the magic number for a TPA to get a contract is $1,200 per lost time claim. It probably needs $2,000 to $2,500 a claim to cover its costs and make a reasonable profit. It makes up the shortfall through side deals with managed care firms and other claims vendors.

A TPA could also close the gap by running its own bill review service, using leased software, at a high contingency-driven profit margin. That’s an improvement over kickbacks but it doesn’t resolve the problem of obscurantist pricing.

One consequence is that list prices for claims services are unreliable measures to compare TPAs. They promote a questionable pricing model wrapped inside an enigmatic package.

What about the fiduciary obligation of the TPA?

There are three ways for the employer to neutralize this enormous temptation for the TPA. One is to negotiate deals directly with the vendors. That’s impractical if the employer doesn’t have the right skills, which could be provided by a broker or risk advisor.

Another way is to inspect the contracts between the TPA and its subcontractors. This also takes an expert to interpret the provisions.

A third way is to insist on a pledge from the TPA to eschew the practice entirely.
Specialty Risk Services, the TPA affiliated with The Hartford, has in fact done this.

Its pledge says, “Specialty Risk Services, as a fiduciary of our clients’ money, does not participate in any so-called wholesale-retail relationships with our vendors nor do we request or accept administrative fee arrangements from them.”

Over the years, TPAs have incrementally shifted their business models to find profits through vendor deals, especially in managed care. So long as medical care grows as a share of total costs, this trend continues. There’s so much money to be made and so many transactions to play with.

It’s time for more honest pricing. Do state regulators have the stomach to require a blue sky standard for TPA pricing? All that is needed is the regulatory agency of one major state to step up.