In recent years the growth of self-insurance has been dramatic. As health care inflation continues to escalate, many more employers may look to self-insurance as a means to better manage costs.
When employers self-insure, they usually look to hundreds of available external administrative firms to manage claims and managed-care services. However, there is little oversight on these companies from public regulators or private compliance specialists. Thus, the most effective tool for vendor management is a two-fold approach that requires performance guarantees up front and ongoing oversight through periodic claim audits to evaluate and confirm reported accuracy results.
Cost savings
One very important reason for reviewing administrators is often overlooked: cost savings. For a health plan to be successful, claims administrators must remain committed to delivering value long after the administrative service agreement has been signed. Claims administrators are far more likely to stay vigilant on the accuracy and efficiency of claim payments when subject to performance guarantees and periodic reviews by an independent firm hired by the employer.
Including monetary penalties or incentives for maintaining standards for accuracy, turnaround time and financial performance reinforces to administrators the importance employers place on effective health plan administration. Performance guarantees are fundamental vendor management tools that encourage a better working relationship with administrators by providing a forum for discussing employer needs and priorities, plan objectives and service expectations. In addition, a periodic claims audit can identify overpayments that can be recovered, again resulting in cost savings.
Compliance issues
It is employers' responsibility to do rigorous due diligence of their service providers to comply with fiduciary obligations under ERISA, as the law can link personal liability to plan sponsors that breach their fiduciary duty by improperly selecting service providers that harm the plan and its assets. Further, service providers must also aid plan sponsors in meeting other legal requirements, such as the Statement of Auditing Standards 70 (SAS 70) and the Sarbanes-Oxley Act.
Plan sponsors are obligated to perform a thorough initial analysis of their claims administrators in addition to periodic performance reviews - not only because it is prudent business practice, but also to satisfy these compliance regulations. In most cases, such initial and ongoing oversight is also likely to result in quality service and cost savings.
SAS 70 stipulates that any benefit plan that files annual 5500 financial statements must review the adequacy of internal control structures at any service organization processing financial transactions on behalf of the plan. Claims administrators, such as third-party administrators and some commercial insurance carriers, qualify as service organizations under SAS 70 and are subject to annual reviews by the plan sponsor.
Sarbanes-Oxley is the most sweeping legislation affecting corporate governance, disclosure and financial accounting in more than a generation. Under Sarbanes-Oxley Section 302, CFOs and CEOs must certify that their companies' quarterly and annual filings are true and omit no material facts. Quite simply, facts about employee health care are becoming nothing if not more material.
(See the "Ask the Auditor" column in the Sept. 1 EBN to read more about employers' obligations to comply with SAS 70 and Sarbanes-Oxley.)
Experience counts
After completing a performance agreement, a claims audit that compares results to performance guarantees requires in-depth knowledge of health benefit plans, managed care and claims processing.
However, in most cases, accounting firms using auditors with only accounting backgrounds conduct such audits. Generally, accountants have little familiarity with health insurance policies and procedures and the best practices for claims administration. Similarly, an accounting background is not usually sufficient to determine the adequacy of claim decisions for the more complex claims issues such as utilization review, coordination of benefits, third-party liability, Medicare coverage, procedure upcoding/unbundling and medical necessity.
As such, self-insured employers must make sure claim auditors have experience and specialized services to meet their needs. An extensive background and familiarity with different types of health plans, claims administration and hands-on knowledge of the components of successful operations management will enhance the possibility of discovering problems, suggesting workable solutions and ensuring long-term improvements.
Cost justified?
Employers are finding that comprehensive operations reviews and claims audits performed by independent, specialized firms are sound business practices that will control costs, heighten legal compliance and lay the groundwork for a comprehensive approach to total health-plan management. Additionally, in some cases, the recovered overpayments and service fee rebates realized from audits make up for its costs.
According to a recent McKinsey quarterly report, benefits represent a company's third-biggest expense, trailing only cost of goods sold and non-manufacturing payroll.
Finance executives should take a hard look at their companies' contracts with claims administrators for proper incentives and focus on not only turnaround time, but also on the accuracy of claim payments.
Jack Hill is a partner at Performance Trust Insurance Group, a Buffalo Grove, Ill.-based consulting firm. Kathy DelFavero, CEBS, is vice president at Performance Trust Insurance Group.
