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Auditing Third Party Claim Administrators “TPAs”

by Richard A. Schacht, CPCU, CDP President, Risk Auditing & Advisory Services,Inc.

Montclair Risk Advisors is pleased to present this Free Tool authored by our strategic alliance partner, Richard Schacht. We recently provided staffing to Risk Auditing & Advisory Services, Inc. “RAAS, Inc.” on two assignments. In these assignments we utilized all of the excellent ideas in this piece. A lengthier version was published in the Self-Insurer magazine.

The Administrative Services Contract: The first step in auditing a TPA is the review of the administrative services contract. Some of the essential elements of the contract as they relate to the audit include the following:

  • The contract should stipulate that the self-insurer has ownership of its claim files even though they will surely be physically maintained and stored in the offices of the TPA. Otherwise, the customer may not be able to secure the files for examination by the auditor.
  • Typical services included in the contract are the investigation of the claim to determine compensability, disbursement of indemnity payments, payment of vendor bills and assignment of medical case managers and legal counsel. There are many important details to each of these broad categories – and the contract should stipulate what these services are and how they should be delivered by the TPA.
  • Settlement authorities should be clearly stated in the contract. If the TPA is new to your organization, you may want to assign a lower level of settlement authority until you can evaluate the TPA’s performance.
  • Other services included in the contract will be the filing of claims with second injury funds and reinsurers and negotiating recoveries from third parties through subrogation.
  • The agreement should also recite the responsibilities of the self-insured or plan sponsor. These include verification of employment, reporting changes in eligibility for coverage, providing the claimant’s average weekly wage and cooperation in the investigation of the claim.
  • The contract will stipulate the initial amount of the claim deposit fund and the means by which the self-insured will replenish funds disbursed by the TPA.
  • The prospective TPA is probably going to insist on being held harmless for acts other than its sole negligence. The contents of the hold harmless agreement should be reviewed in detail by counsel to the self-insurance program. It is prudent to ask the TPA for a certificate of errors & omissions liability insurance and a fidelity bond.

 

TPA Performance Monitoring:

The self-insured employer or association should provide the TPA with a set of standards against which to measure their performance. Here are a few examples:

  • Periodic review of a sample of claim files. This review can be completed by personnel within the self-insured’s organization or by an independent third party claim audit firm. The audit firm selected should have a database of objective attribute tests against which to measure TPA performance.
  • A claim financial review should also be completed. This review is comprised of a detailed review of individual payments on the sampled claim files. Some of the tests completed in this type of review include verification of support for each payment made on the file.
  • Check to see that the average weekly wage and compensation rates were accurately computed to assure that employees are receiving all they are entitled to under the law.
  • Verify that payments made to medical providers and other vendors are appropriate. Look for duplicate payments and excessive amounts.
  • File reserves should be reviewed for accuracy and timeliness. Check the TPA’s calculation of reserves on files involving lost time and potential permanent disability.
  • Evaluate the TPA’s technical performance. The self-insurer and risk manager may not have the years of experience required judging the decisions made by the claim service personnel of the TPA. This is where the services of an independent claim auditing firm can add value.

 

What is your TPA service costing you?

As part of a performance review, the total cost of your claim adjudication process should be determined. TPAs typically charge their customers for specific services in addition to the per claim administrative fee.

In conclusion, once you have evaluated your TPA’s performance against the objective standards cited above, you need to consider the overall level of satisfaction. This is a subjective evaluation that can only be done through interviews with the “customers” of the claim process. You need to find out if your injured employees understand their benefits and are satisfied with the way they have been dispensed. You want to find out how their supervisors feel, too. The board of directors or trustees of the plan sponsor should feel confident that the TPA is providing them best in class service – and at fair prices. Naturally, we think that a periodic audit by qualified experts is the best way to achieve this level of satisfaction and value.

For more information about RAAS, Inc. contact Richard Schacht at (888) 878-9579, raasone@cs.com or visit his Web site, www.RAASInc.com