How Did WC Get To Be Pay for Play?
Workers’ Compensation. A system in the United States created 100 years ago to address a critical issue in the country, workplace injuries and the emergency of major manufacturing, primarily in the metropolitan areas of the county. Until the workers’ compensation system was ‘invented’, a person injured at work had to bring a tort lawsuit against their employer and prove that the employer was negligent in order to receive any compensation for their injuries. As the country moved from a primarily agriculture economy towards a manufacturing economy, workplace injuries were increasing as were the numbers of lawsuits brought by workers against their employers. In the words of John Burton, Jr., “the system was like a lottery”. The system was lopsided. Most injured workers received no compensation, after losing their suit against their employer. While others, very few however, recovered by way of huge liability judgments against their employers. In most cases, unfortunately, most workers lost everything when they were injured at work, including their ability to obtain gainful employment after losing their job and the lawsuit against their former employer. Employers at this time were understandably anxious as well. While they would win most of the cases, defending themselves against litigation brought by their own employees took too much of their time and resources away from their core businesses, and when they lost…the amounts were huge.
The country needed something different. A system where employees were guaranteed certain wage loss and medical benefits when they were injured at work, and employers could benefit by having more predictable costs, with both sides agreeing that the new system would be the “exclusive remedy” for work-related injuries. The basic workers’ compensation quid pro quo was born. And the foundation was laid for today’s workers’ compensation system.
Today, nearly all of the states in the U.S. have a similar form of workers’ compensation in place. In Montana, as with many states, employers have options on how to finance their workers’ compensation liabilities. Some choose to purchase insurance from private, for-profit insurance companies, others may have few options but to purchase their insurance from a state-based organization, typically referred to as a state fund. In Montana, the Montana State Fund calls itself the ‘insurer of last resort’, meaning that if a risk is uninsurable through the private markets, it will be accepted, underwritten and statutory limits insurance provided by MSF to the otherwise uninsurable employer. A third option exists; most states allow some form of self-insurance. Employers that choose to self-insure apply to do so with the applicable state agency, post a significant financial bond (or guarantee), purchase and maintain insurance for large dollar, catastrophic losses…and important for this article they use their regular income and profits to fund their all of workers’ compensation costs and liabilities. They pay their own claims. There is no premium paid to some far off insurance company, transferring financial and other responsibilities. They pay their own claims and manage their own program.
Part of self-insured program management is deciding how to handle the most important, the most costly part of program management, claims management. If insurance is purchased, the employer simply reports claims to the insurance company and they take care of ‘everything’. However, this is not so for self-insured programs. Self-insured employers can handle their own claims (self-administer) or hire a third party claims administrator (“TPA”).
In Montana, self-insuring entities are referred to as Plan 1 organizations. Plan 1 organizations have the same responsibilities and are subject to the same statutes, laws and regulations as Plan 2 (for-profit insurance companies) and Plan 3 (State Fund). And yet these organizations pay for their own claims, many using TPAs to handle the claims of their workers, make the payments, report to the appropriate state agencies and Medicare/CMS, correspond with WC Excess insurance companies and insurance brokers from across the U.S.
The job of the WC claims TPA has become increasingly complex over the past two decades. Montana (as with most states) has moved to 100% electronic reporting, all claims must be run electronically through Medicare/CMS and those workers that are on Medicare (or will be within 30 months, creating the need to monitor claims as they progress for Medicare entitlement), increasingly sophisticated data reports and dashboards are needed for the employers and their brokers to aid in program monitoring and improvement, and the general profile of the injured workers has changed to include workers that are more advance in age (many working far past the age of 65) and far more baseline medical conditions such as obesity, joint disease and diabetes than in the past. These issues combine to make the work of managing a book of workers’ compensation claims more complicated, time consuming and longer in duration to work with a recovering worker from open to conclusion.
This bit of historical background is provided to allow for some perspective, where we’ve been and where we are now. Twenty years ago, most claims TPA organizations were under contract with insurance companies and self-insured organizations. Most of these agreements gave certain levels of authority to the TPA, including making compensability decisions, issuing payments, signing checks and overall claim program management as a professional extension of the insurance or self-insured organization’s claim and financial departments. The professional services were for the most part paid on a Time and Expense basis. If a claim took 8 hours of the workers’ compensation claims adjuster’s time, their company was paid for 8 hours of professional services. If a claim consisted of only 4 medical visits and no lost time or physical impairment, commonly called a Medical Only claim, the adjusting organization’s time spend handling the claim (paying the bills, reporting to the appropriate state agencies, maintaining the claim records (paper and electronic) and providing telephone and in-person support to the recovering workers and employers was paid also on a Time and Expense basis. MO claims were far less expensive to manage, many took less than 1 ½ hours of TPA time to go from start to conclusion and could involve lesser experienced claims professionals.
TPAs were paid on the same basis as other stakeholders and professionals in the workers’ compensation process. The stakeholders include attorneys, Vocational Rehabilitation consultants, Medical Case Managers, Independent Medical Examiners, Private Investigators, Consulting Physicians and other experts. All typically paid on the basis of their Time and Expenses necessary for the proper administration, investigation of and involvement in the workers’ compensation claim. On this basis, there were hundreds of local expert claims TPAs across the U.S. They competed with one another for the insurance and self-insured business by getting better results in their local areas. Of course, the price of TPA services was always a factor in the decision making of the service purchasers. But in those times, the overall cost of the program ,including the TPA cost, was weighted far more heavily in the decision making process than simply the TPA cost line item.
And then something change. There has been a move towards “flat rate” claim administration pricing. “Flat rates” typically are inclusive of all TPA service fees and range in duration from one year from the date of claim report to life of claim. We were told by a national broker recently during an RFP evaluation process that unless the TPA cost could be put in the format for the life of the claim they would not be able to include our proposal in their evaluation. Why? Because they needed to be able to put the costs in a spreadsheet so that they could do an “apples to apples” comparison to other RFP respondents. In fact, they admitted that they had never worked with a workers’ compensation claims TPA on a time and expense basis, never even heard of it. This from the large national broker to whom the evaluation of the TPA had been entrusted by the self-insured. If the numbers could not be evaluated in a spreadsheet, they couldn’t provide any consideration…regardless of the advantage that we had when looking at ultimate cost per claim, service levels, local expertise, computer/report sophistication and significant professional, multi-state experience. No spreadsheet, no consideration.
We are not whining. We’ve successfully competed with and won a number of contracts, despite the inability of some of the decision makers and / or their brokers to “understand” the time and expense, pay for the required service model. We are pleased to compete with the national companies. But we’ve noticed a distinct disadvantage.
The “pay for play” model exists in the workers’ compensation TPA space. Many regional and national claims TPAs go into the competitive / marketing process professing lower flat rate charges. Many self-insured and insurance organizations believe them and ask few questions about “other income”. The simple fact is that many of these regional and national workers’ compensation claims TPAs augment the low flat rate service fees with side deals with other stakeholders in the process. Otherwise, despite some advantages that may exist with regionalization or centralization and economies of scale, these companies would not be able to profit from their WC claims operations and hold anything near the service levels that are expected of them by their clients.
This is not inherently a bad deal. The client saves some of the TPA expense, has a fixed cost for these non-loss costs, and their broker has an easy time compiling a spreadsheet comparing costs of RFP respondents. However, there are two aspects that are unhealthy for the payers and the industry.
First, the client’s workers’ compensation costs are shifted from allocated loss adjustment expense (“ALAE”) to loss. How does this work? The TPA charges a lower flat rate than may be necessary to provide the appropriate level of staffing and service for the claims services. They are able to do this and still profitably provide claims services because the “other income” flows to them from external service vendors in the form of “pay to play” checks. We are aware of these types of agreements with companies that provide bill review, vocational rehabilitation, medical case management, pharmacy benefit management and durable medical product services. When one of these external vendors is hired, a portion of the payment made by the TPA with the client’s loss dollars are sent back to the TPA later. Pay for Play. Of course the TPA can charge less for their claims services, they are getting paid by external vendors (some actually owned in common with the TPA service provider’s ownership). Loss dollars are paid for these external services, and therefore not reflected in any TPA cost evaluation. The client’s costs are artificially higher than need be to support the Pay for Play system.
In Montana, the funding mechanism for the Department of Labor and Industry – Employment Relations Division (“ERD”) is provided by the payers in the form of an annual assessment to each payer. These assessments are based upon paid loss expense. TPA costs are not loss, they are internal costs. If a TPA agreement shifts some of the TPA expense to loss, it damages the payer by abnormally increasing their losses paid…and ultimately the state assessment. With the assessment level at 4% of paid losses, shifting dollars from ALAE to loss can be a very costly, undiagnosed cost for payers.
Second, the lack of transparency leads to a break in understanding between the TPA and the payer. When a workers’ compensation program is highly successful, the coordination and communication level between the TPA and the payer is high. Handling workers’ compensation is unfortunately not a commodity. Much like the services provided by specialists, such as attorneys and certified vocational rehabilitation consultants, claims services require educated, experienced staff. They must be fully aware of the controlling laws and statutes, and constantly vigilant of case law changes that may impact existing and new claims. Continuing education is a must. Sufficient staffing is a must. Lower caseloads is a must. Frequent contact with the recovering worker is a must. All of these requirements take ongoing investments in salaries, benefits, equipment and tools. All of these cost money. Joe Paduda recently wrote a question something to the effect that is $1,200 life of claim flat rate enough to pay for the appropriate resources to provide these claims services. A life time quadriplegic claim may take several hundred hours of professional claim services time. A hotly litigated causation issue may require dozens of adjuster hours to investigate, work with defense counsel, attend hearings and mediations. And as referenced above, lost time claims are not getting smoother or easier, the complexity of issues is increasing every year. So TPAs that are on flat rate deals must achieve increases in much needed income in other ways. Some do so with Pay to Play deals. If such deals are not fully disclosed to the payers, they may make the assumption that losses will continue at the same cost levels or that the TPA should find a way to work more efficiently so that they can charge less. Deals of this nature that are not disclosed verge on an area of ethics, perhaps even to the level of “bribery”. Does anyone really think that a $1,200 flat rate is going to provide the necessary income for the TPA to hire the right people, maintain service levels, invest in equipment and software and provide human / humane contact with the recovering workers to help the legitimately injured to find the correct, timely treatment to recover from their injuries / diseases? So the system now separates the payer from the true cost of their program by diverting loss dollars through an external entity back to the TPA service provider.
We are not here to tell payers how to make their decisions with respect to choosing a claims TPA. If a payer is educated to how the TPA generates income (for itself and/or the upstream ownership) and they decide that is how they want to do business, great. However, when these Pay for Play deals are not fully disclosed to the payer, and vetted by them, they are not able to make fully informed choices. Without transparency and full disclosure, the system produces dishonest financials, increased loss costs and poor service for recovering workers. Payers beware. But as Dennis Miller might say, "that's only my opinion".