Following on yesterday’s post, I received several emails from payers and vendors alike suggesting other pertinent questions payers may want to pose to their vendors. The most common pertained to fee-sharing between TPAs and vendors.
This practice has long existed in comp; TPAs have charged clients to build links to networks, bill review vendors, pharmacy benefit managers, and case/utilization management firms. These charges may appear as one-time fees, but more often as a percentage of the vendors’ revenue from the client. And in some cases, these costs don’t appear unless you look very, very closely.
That’s not to say it is unethical or illegal or immoral or bad business for vendors and TPAs to share fees – but it certainly is a problem if they don’t fully inform their clients. Clients aren’t blameless in this either; many employers have beaten TPAs down on admin costs so far that TPAs have to make up the lost revenue from somewhere – and fee splitting is the perfect ‘somewhere’.
Several TPAs, most notably Gallagher Bassett, pride themselves on full disclosure of fee sharing. Others will disclose if asked, and a couple – SRS (the Hartford’s TPA) and Broadspire – do not participate in commissions (although they may charge an upfront implementation fee, again fully disclosed).
Recently I reviewed proposals from several TPAs for a large self-insured employer in the northeast. Broadspire’s administrative fees were considerably higher than the competition, (who shall remain nameless for obvious reasons). But when managed care fees were added in to the calculation, their bid was quite competitive. Several of the other TPAs had low per-claim adjusting fees, but their estimated fees for managed care services were much higher.
(Broadspire is not a client and HSA has no business relationship with the firm)
What do you do with this?
You may want to require your TPA’s CEO to sign a document (after your attorneys polish the language) stating words to the effect that “We will fully disclose any and all financial transactions involving (TPA) and any and all managed care entities providing services to (employer) and employer’s claimants. This disclosure includes but is not limited to service fees, commissions, implementation fees, RFP and proposal assistance charges, transaction fees, connection fees, membership fees, and any and all other transfer of monies from managed care entities to (TPA).”
Then, ask the same question of your managed care vendors. Hopefully there won’t be any surprises.

Here, in no particular order, are a few questions you may want to pose to the folks who manage your work comp medical dollars. Whether the answers are ‘right’, ‘wrong’, or neither depends on your situation, but regardless of the answer, these are things you should be thinking about.
1. Are your incentives aligned? To know, you’ll obviously need to have a tight grasp on the strategic objectives for your comp program. Minimize cost? Maintain strong employee relations? Avoid antagonizing union workers? Maximize employee productivity? And the follow on question – do your vendors know and understand those objectives, and finally how have they demonstrated that understanding?
This is the foundation for a successful program; if you aren’t starting with the same strategic goal you’ll be constantly battling over direction, focus, resources, cost. The relationship will be time-consuming, frustrating, and ultimately fail. To be successful you, and your vendors, must ‘succeed’ together, or fail together. Here’s an example. If your objective is to manage total program cost, make sure the vendors are aware of their role in that effort, and specifically how their fees add to the program’s cost. Pharmacy Benefit Managers make money on each and every script that flows thru their network, yet several have very effective clinical management programs that reduce overuse of expensive drugs. How does your program recognize and address this apparent conflict?
2. Are their reports meaningful? I’ve seen hundreds of reports from managed care vendors, and only a few have been useful. Most recently, I have been reviewing reports on bill review and network results from a couple of the big TPAs; they include ‘savings’ below billed charges; network ‘savings’ below billed charges, and network penetration as a percent of billed charges.
The continued focus on billed charges as the basis for calculating savings makes little sense. Paying what you are legally required to pay and no more does not create ‘savings’. It’s analogous to your credit card company telling you it ‘saved’ you a thousand dollars by not charging you for fraudulent use of your card.
Savings should be based on cost per claim. How much did you pay for medical expenses – in total and by separate category – and how does that compare to prior years and benchmarks? That’s a big difference from the industry’s traditional view of ‘savings’, which look only at reductions in cost on each line item on each medical bill. That metric is helpful, but it can also be very misleading.
If a claimant gets lumbar surgery at a high cost hospital, which bills you $100,000, and your PPO gets a 20% discount, you ‘save’ about $15,000 – the amount of the discount less the PPO fee.
But lets say the claimant goes to a less expensive, but nonetheless equal quality facility, which only charges $75,000. This hospital happens to be out of network, so there are no PPO ‘savings’, yet your costs are still $10,000 less than the PPO facility.
So your savings reports show the PPO hospital visit creating $15,000 in savings, the non-PPO stay creating no savings, and your medical costs are $10,000 higher. Oh, and your bonus plan and performance appraisal take a hit too…
That’s not to say ‘savings’ reports aren’t useful, but they can divert attention from the key metric – cost per claim. Make sure the PPO reports show savings below fee schedule or UCR, and agree on the basis for UCR as well.
3. Is your utilization review/case management function electronically linked to bill review? My firm conducted a survey of bill review in workers comp earlier this summer, and found that most programs are still not connected. While there are manual workarounds and checks and audit schemes in place at many payers, we all know that they are poor substitutes for automated connections.
After you’ve asked the initial question, audit several cases to determine if UR determinations actually show up in bill review. A couple places to check – PT visits, MRIs, and drugs. Check the claimant’s paid medical records for several months after the initial determination, and look for payment to any provider for that service.
If you’ve decided to buy bill review and UR from different vendors, it is going to be incumbent on you to ensure they are connected; and this is going to cost you. That’s fine, if the benefit is worth the added expense.
These are just a few of the questions that should be on your list, but these should be at the top.

Work comp is affected by several factors, but none are as significant as the economy. After over a year of horrible news, things look to be slowly getting better. As activity picks up, we can expect the comp industry to start breathing again.
Last week the index of leading economic indicators improved again, marked by increases in housing starts and sales of existing homes, and manufacturing hours worked. Things have been on the upswing since April, although digging out of the worst recession since the 1930s is proving hugely difficult.
The employment picture also brightened somewhat in July, but the improvement is an indicator of just how bad things have been. 247,000 jobs were lost during July, the lowest total since last August. Auto sales were also up fifteen percent in the month driven in part by the ‘cash for clunkers’ program, and Ford announced it will actually increase production by 21% later this year.
The big concern has been inflation, which would choke off any recovery; so far, there appears to be no dramatic increase in consumer prices, with the consumer price index flat last month.
Those of us deep in the workers comp business have watched as the injury rate has declined along with the economy; with fewer people working fewer hours, particularly in high-frequency industries such as manufacturing, construction, and transportation, the number of claims ‘fell off a cliff’ during the winter. Moreover, the people who were laid off were the ones with less experience, and the pace of work likely lessened as well.
The drop in frequency hammered many workers comp service firms; with fewer claims, there has been much less demand for claim intake and triage, claims management, primary medical care, physical therapy and diagnostic imaging, medical case management, bill repricing, and utilization review. Provider networks have suffered as well with fewer bills resulting in lower revenues.
The decline in frequency was somewhat offset by a continued rise in severity – medical expenses and wage replacement costs.
Now what?
As economic activity increases, premium volume will increase in line with payroll. That’s the good news – more revenue for comp writers. The bad news – for those comp writers, is the injury rate is likely to jump, and there are no indications that severity is going to decline. We may well be looking at an increase in the number of injuries coupled with higher costs per injury.
The good folks at the NCCI have looked at the impact of economic recoveries on workers comp, finding “Job creation is related to an increase in the proportion of workers who are inexperienced in their current job and, hence, more likely to sustain a workplace injury.”
As firms staff up to meet demand for new houses, cars, and services, the faster pace of work, coupled with the inexperience of the new hires, will likely result in more injuries both in total and as a function of hours worked. Again, according to NCCI, “On net, the effect of job creation dominates quantitatively, thus generating the observed pro cyclical behavior in the growth rate of workplace injury and illness incidence rates. Further, it is shown that the growth rate of frequency tends to overshoot during economic recoveries, although this effect is not common to all recessions.”
In layman’s terms, we can expect a ‘higher than expected’ increase in the number and frequency of injuries. Here’s how this will affect the comp industry:
– Insurers – higher claims volume and higher medical/indemnity expense equals greater losses, which may not be balanced by premium increases. I’m expecting combined ratios to increase this year and next, as premiums tend to lag experience (the continued soft market is a contributing factor, as some comp insurers persist in fighting price wars,)
– Claims organizations – TPAs can’t wait much longer for a better market. Several have cratered, and others are losing business at a scary rate. Many TPAs get paid on a per-claim basis, and the drop in frequency has just murdered their top line, while the increase in severity means they are spending more resources (or not, for those TPAs near death) to manage those claims that do occur.
– Medical providers – The occ clinic companies – Concentra, USHealthworks, and their regional and health system-affiliated competitors, have been hammered by the drop in frequency. These clinics are primary-care focused, and are directly, and immediately, affected by any changes in frequency. Increases in severity have little effect on their results, as more expensive claims are almost always treated by specialists which don’t practice at clinics.
– Managed care firms – While Coventry has continued to increase revenue during the recession, this has been driven by price increases and hard bargaining. Other firms, including Genex, IntraCorp, and the regional players have seen precipitous drops in activity for two reasons. The obvious one is there are fewer claims to handle; the less obvious is many of their customers – TPAs and insurers – have internalized managed care functions in an effort to hold on to revenue and capture whatever margin went to vendors.
– Specialty managed care firms – Companies focused on PT, pharmacy, and especially durable medical equipment and home health care have been affected less severely than other service firms. As the injury rate picks up, they will see more volume, particularly in the areas of PT and pharmacy.
What to watch for
Tracking trends in work comp requires the ability to see ‘over the horizon’; none of the reporting agencies or entities have been able to collect data in real time, or anything close to it. Unless you want to wait for eighteen months, you’ll have to rely on anecdotal ‘data’. Here are a couple potential sources.
– TPAs and case management firms posting new jobs
– Individual company hiring notices, especially in manufacturing, construction, transportation, health care
– Employment statistics, particularly increases in hours worked and jobs created

Today’s NYTimes confirms that the deal struck by big PHRMA and the Administration over drug costs is set in stone; the White House confirmed that they will not go back to drug companies and ask for concessions beyond the $80 billion already promised. House Speaker Nancy Pelosi (D CA) has said Congress is not bound by the deal, but it appears that pharma is safe.
I’ll leave the sticky policy implications for a later post, but for now consider what this means for workers comp.
Recall that the current law of the land prevents negotiations by the Secretary of HHS with drug companies over price. This significantly limits the Feds’ ability to reduce costs, and is somewhat unique as most other of the G20 countries do negotiate directly with drug companies – either for prices directly or via a reference or index price scheme.
With yesterday’s ‘announcement’, the concern that work comp PBMs and payers (should have) had over the potential for a massive cost shift to comp appears allayed. There was significant concern that had the Feds forced the pharmaceutical industry to cut prices (via price negotiations, reference/index pricing, or a mandated Medicare rebate) manufacturers would raise prices charged to other payers – and the softest target out there in most states is the comp industry.
The big PBMs – CVS Caremark, Medco, Express – are all large enough to negotiate attractive deals on their own, and many of the payer-based PBMs would also be able to protect their pricing (or piggyback on deals cut by the big three). Not so for comp PBMs, which traditionally pay higher rates to pharmacies due to the higher handling and transaction costs associated with complying with state regulations and identifying and routing scripts.
What does this mean for you?
This doesn’t mean all is fine in the comp drug world, but it does mean the $2 billion plus industry has dodged a very large bullet.