Qualifications and Specialities: Selecting the Right TPA
An important goal of a successful risk financing program is generating underwriting profit. How is this accomplished? By keeping losses and allocated expenses within the aggregate stop loss. Since claims handling has such a significant effect on profitability, the decisions an agent/broker makes when choosing a third party administrator (TPA) can make or break a program.
TPAs vary considerably, from large national companies to smaller regional companies specializing in a particular type of claim or industry. Generally, larger companies will have greater resources and set procedures, while the smaller companies cater to more personal and regional concerns. The size and shape of the TPA chosen will largely depend on the individual needs of the insured(s).
Once you have selected the type of TPA needed, how do you determine whether or not a TPA has the proper qualifications? Due diligence is crucial. There are five key criteria to evaluate:
- Philosophy: Is it the TPA's intent to respond to insureds quickly, fairly and effectively? How does the TPA recognize and initiate control measures to "fight the right battles" in the event a legal issue arises?
- Chain of Command: Determine the chain of command. Who is the ultimate decision maker and can that person provide information in unusual circumstances?
- Accumulation of Data: How does the TPA collect and authenticate information?
- Reporting Methods: Identify the types of reports available. Can specialized reports be created? Good reporting will identify problems that can be dealt with proactively.
- Quality Control: Identify internal quality control measures. Duplicate and erroneous payment problems do occur. How the TPA identifies and deals with them will affect bottom line results.
Each TPA has a preferred method of bidding. Types of bids range from a flat fee per claim by category, to a percentage of either losses paid or earned premium. As a general rule, if the insured's claims volume exceeds 50 claims per year, some type of fixed fee can be negotiated. Bids usually encompass two major areas: services and contract length.
Services: Since it is difficult to apply them to a specific claim or occurrence, most TPAs include administrative costs as unallocated expenses. Some TPAs will build their fees into routine field investigation charges. Unless you have an unusual number of questionable claims, it may be better to charge them as allocated expenses. This way expenses can be tracked to a specific claim, achieving increased control over the process.
Contract Length: Currently, contracts are performance based, tying the TPA's overall performance to a specified length of time, such as two or three years. Some TPAs will agree to handle the claims solely for the contract year in question, but if a new contract is obtained, will handle any claims "in run-off" at no additional charge. This may be practical in a situation where services are stopped.
Many TPAs offer the option of a flat fee per case to be determined in the future, or on a time and expense basis at the prevailing rates. If possible, determine what the TPA expects to charge, or obtain a commitment on these run-off costs.
Some TPAs will handle claims to their conclusion for the first-year fee. Keep in mind that some claims take an extended period of time to pay out. Consider whether the TPA will still be in business after the entire fee has been advanced and what motivation there will be to best service the insured(s). Also, closely monitor the financial stability of companies charging a flat fee for lifetime handling. Structuring the fee arrangement over a 3 to 4 year period could provide additional security.
The TPA selection process is an important element of a well designed alternative risk financing program. Determining a TPA's strengths and weaknesses, the potential fit with insureds, and an appropriate compensation arrangement are all important to a program's success. An efficient TPA can minimize the effects of adverse experience and positively affect the insured's and, ultimately, an agent's/broker's bottom line.
SOURCE: <%=company%>, Spring 1997 issue of the Review.