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6 Essential Elements To Explore When Choosing A Third Party Administrator

Don’t Roll The Dice To Choose A Good TPA Just Do A More Complete Due Diligence

A Third Party Administrator (TPA) is often the best way to handle claims for an organization. Many self-insured and captives choose to outsource their claims instead of creating their own internal operation (see my prior post of A checklist of the 8 critical issues to be concerned about when self-managing claims). Whether to get expertise in a particular areas, or not wanting to invest in the infrastructure to build a claims department, using a TPA can be a smart business decision. In fact, many insurance companies will outsource some, or all, of their claims for the same reason. Regardless of what type of company you are, choosing the right TPA is imperative. The TPA will become the face of your company for claims and, how well or poorly, they handle claims will be a reflection on your organization.

So what make a good TPA and what should you look for? In order to find out you must conduct a comprehensive due diligence of the TPA you are about to hire. This is especially the case when that TPA will be holding and managing your claim dollars. Besides understanding the financial strength and capabilities of the TPA, it is also important to know whether they will be able to meet your data needs, provide consistent claims handling, and work to lower costs where they can.

While not an exhaustive list by any means, below I address 6 essential elements, and questions, that should be explored as part of any due diligence when selecting a TPA:

  1. Claims Systems – A strong claims system is an essential tool for any claims organization. Take time to understand the capabilities and limitations of a TPA claims system. Can they provide remote access so you can review your claims online? Do they have a paperless file system? Can they capture information that would be critical to your organization such as specialized loss codes or basic policy information? Do they use any other systems to help lower costs such as litigation management billing software or some unique estimating program?
  2. Reporting Capabilities – With a good system loss reporting should be easy. Regardless, it is important to understand the types of loss runs and reports that can be provided. How frequent can they be provided? What format will they be provided in? Can you easily request specialized reports, or do they have a system that you can customize reports on your own?
  3. Litigation Management Program – Litigation management is one of those things that seem to be less emphasized in a lot of organizations. Nonetheless, this is an area that if ignored could result in higher legal costs. Ask if the TPA trains their staff on litigation management cost reduction techniques. How are legal bills reviewed and what kind of program is in place to review counsel performance? Do they have a panel of law firms, and if so how are those firms selected?
  4. Quality Control and Internal Audit – Consistent handling across multiple claim offices is difficult to accomplish without clear handling best practices and internal controls. Does the TPA internally review their claim handler’s performance? How often are claim files reviewed for good practice compliance internally? What kind of metrics do they use to ensure files are proactively managed and consistent across the board? If they produce an annual internal audit report, ask if you can review it and see how they deal with deficiencies. No operation is perfect, but how well they recognize and address problems can be very telling.
  5. Subrogation/Salvage Capabilities – Many claims organizations fail to actively push subrogation and salvage opportunities. These areas, when done correctly, can lower claim loss dollars and return money to the coffers. How aggressive is the TPA in driving these key cost savings initiatives? Do they have a separate unit, or are the handlers expected to manage subrogation and salvage? How are they tracking returns? Are their results within industry expectations for a particular line of business?
  6. Special Investigation Unit and Anti Fraud Initiatives – All TPA’s will tell you they train their staff and actively pursue fraud when identified. This information should be readily available and reviewable. Ask the TPA how many fraud referrals they made to the states for a given line of business. Is the number consistent with the industry expectations on fraud reports? Do they have an SIU onsite or do they use and outside vendor to manage fraud? Have the TPA’s claim handlers received their annual fraud training as required by certain states?

A few other items worth considering would also include:

  • Management structure
  • Reserve philosophy
  • File loads per adjuster
  • Turnover
  • Financial stability
  • Banking arrangements

Hiring a TPA is a critical process that must be reviewed carefully. Take the time to perform a thorough due diligence, or hire an expert to do it for you. Getting a comprehensive analysis will ensure you are choosing the best TPA for your organization.

A little extra effort in the selection process will pay dividends in the future with a better customer experience and lower costs.

Posted in Due Diligence, SPOT on Ops.

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4 Responses

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  1. Marc Lanzkowsky says

    I wanted to again share some comments that were made on LinkedIn –

    From Pamela Popp – Executive Vice President at Western Litigation Inc.:

    1. “a review of the financial processes” since a lot of programs may have escrow type accounts for payment of expenses/indemnity; and
    2. “interviews of staff” since the actual staff involved on your program can make all of the difference in the world as to how the program is managed.

    The first is self explanatory – make sure that the checks and balances are in place so that any funding and payment review can be periodically audited. The second, sometimes more important, criteria here is to truly get to know the individuals who will be handling the program. Can they articulate the goals of the client’s program? (anything from “early return to work” or “the pursuit of patient safety”) Do they have years of experience in order to validate their personal approach? Are they people that the client would choose to hire if the program was self insured?

    The personnel piece cannot be underestimated. It truly can make all of the other criteria/answers moot.

    And from William Berglund:

    I think you’ve missed some key components that should be considered when selecting a TPA. Several include:

    1. Acceptability to the excess market. Most excess carriers have a defined group of TPAs they agree to work with. If you select one that is not in the group, they may not agree to accept them.
    2. Geographic spread of TPA locations. How do they match the client’s exposure base. State licensing requirements.
    3. Pricing. How inclusive is the TPA fee? What, if any, add-ons are there? Such as for: field investigation, supervision, litigation management, nurse case management, claim triage, customized reports, filing with the Index Bureau, bill review, utilization review, the taking of recorded statements (inhouse, or outsourced), etc. Also, is the pricing cradle-to-grave, or time specific? What are the run-off provisions.
    4. If the program is large enough, will the client have dedicated adjusters, or will they handle other clients?
    5. Will the TPA agree to your specific claim handling requirements; authorization levels/protocol, taking of recorded statements, three-point contact, regular meetings, settlement practices, etc.


  2. Kris Kennet - Aon Risk Services West says

    As you correctly stated, there are many thing to consider. Here is what I would add to your list:
    Training and Resources for Adjusters: I want to see the training plan and budget for professional development of adjusters, especially consider that more and more states are requiring some form of state certification or license. How do they meet the ce requirements? With something meaningful to help them execute their jobs at a higher level, or what ever freebees are available from vendors. I like the suggestion about requesting a copy of the most recent company QA audit, but also ask to see how they responded to the audit results. What type of training plan did they implement to respond to deficiencies? How about on-line tools and resources, access to medical and legal advisors, Roundtable discussion groups, etc. The adjusters who are well supported, trained and equipped are noticably more effective.
    – What about the medical? For TPA’s in the casualty field, it is imperative that adjusters are either well trained on basic medical terminology, anatomy and physiology, orthopedic tests and signs, etc., or they be given ready access to medical professionals and resource libraries to make informed decisions on their claims. That is where I am seeing the most leakage. Which leads to my next point…
    – Medical Management Programs and Vendor Relationships: It is also important to know what type of medical networks the TPA has contracts with, especially in those states where an employer is allowed to direct care. Has the TPA established a relationship with the managed care provider to facilitate effective dispute resolution, panel selection flexibility, etc.? How are those programs being measured?

    I can’t disagree with anything on the list you shared, but find that sometimes lists don’t work. You can never have one that is comprehensive enough to suit the needs of every organization. I also find that during the RFP process, all the candidates will proclaim that their systems, processes, Best Practices, and staff are “the best of the best”. What the client wants to be able to determine is how the TPA is going to positively impact their cost containment efforts. This needs to be demonstrated, not discussed. I find a good way to have the demonstration is by having the companies prepare sample Stewardship or Benchmarking reports based on data provided. What advice do they have? Where would they focus attention to reduce the clients claims costs?

  3. Raghunath says

    Interesting post with excellent insights and ideas.

    In the context of TPAs in India (a market expected to grow from US$1 billion in 2009 to US$ 7 billion in 2015), take a look at my blog

  4. Marc Lanzkowsky says


    Great additions as well. And I agree that lists don’t always work. Like best practices – they are benchmarks to consider and not absolutes. What a particular program is concerned about will vary from account to account and TPA to TPA. I hope that through this post and the comments that followed we are able to give those seeking a TPA something to consider before making a selection.

    Thanks for reading and thanks for adding to the discussion!


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