Some risk managers want more transparency from their third-party administrators on the financial arrangements they have in place with vendors of workers compensation services.

Too often, TPAs don't break out details on the arrangements and some risk managers fear the lack of transparency results in higher costs for employers and conflicts of interest, several sources say.

Employers and brokers want to know how any undisclosed financial arrangements between claims administrators and the vendors affect employer costs and whether they undermine optimum claims outcomes or limit employers' ability to measure the effectiveness of workers comp claims services, several sources said.

Through contracts with claims administrators, the vendors ultimately provide employers with services such as medical case management, utilization review, physical therapy, radiology, doctor networks, legal advice, investigation services as well as durable medical equipment and pharmaceutical prescription services, sources said.

Charges for the vendor's services typically appear as allocated expenses in a claim file. But those charges usually do not provide details about expenses being charged to a client nor do they reveal various revenue arrangements reached between the vendors and claims administrators—including third-party claims administrators and insurers' claims administration units, several sources said.

Several large TPAs said they eliminate any perceived conflict of interest by fully disclosing all revenue derived from vendors, especially after former New York Attorney General Eliot Spitzer's accusations in 2004 that brokers steered clients to maximize contingent commission payments.

But brokers, several employers, vendors and some claims administrator executives said undisclosed fees remain an issue.

“There is no question that there is a lot of undisclosed profits, markups and add-ons that the TPAs hide behind their vendor programs,” said Fred O. Pachón, vp of risk management and insurance at Santa Barbara, Calif.-based Select Staffing Inc. “The typical hideouts are under subrogation, utilization review, medical case management, investigative services and bill reviews. I am not aware of any TPA that is transparent or willing enough to disclose all of those profit venues.”

Claims administrators often fail to disclose precise details about financial arrangements, which leads to a conflict of interest, said Judie Tsanopoulos, director of workers comp and loss control for St. Joseph Health System in Orange, Calif.

“It's amazing to me how evasive TPAs can be about that,” Ms. Tsanopoulos said.

Employers, for instance, may not know of all fee markups claims administrators charge for interfacing their technology with a vendor, said Paul Braun, managing director at Aon Risk Solutions in Los Angeles. Or they may not know of all the fees charged for the service of providing employers with access to the vendors.

Most buyers understand that claims administrators must earn revenue for such services, Mr. Braun said. But if fee markups are not transparent, it hampers employers' ability to determine whether they are paying a competitive price, he said.

Claims administrators also may earn revenue by obtaining undisclosed discounts from vendors in return for pushing volume business to those vendors and then not passing those discounts on to clients, said Pam Ferrandino, executive vp and casualty practice leader for Willis HRH in New York, a unit of Willis Group Holdings P.L.C.

Such undisclosed arrangements may be misaligned with employer interests, Ms. Ferrandino said. It raises questions of whether a vendor is selected because of its claims-servicing capabilities or because of its discounted pricing.

“There are different ways (vendors and claims administrators) can approach how they are going to get compensated,” said Ken Martino, president and CEO of the Atlanta-based TPA Broadspire Services Inc.

For example, a case management company may enter into a revenue-share agreement with a claims administrator by saying, “You give me X amount of cases and I give you X dollars per case, or I will give you X dollars based on the spend as a return,” he said.

Broadspire uses its own in-house case management services rather than contract them out so clients are not exposed to that risk, Mr. Martino said.

Increasingly, large, sophisticated employers want to measure claims outcomes, leading them to inquire about claims administrators' revenue transparency, Ms. Ferrandio said.

“We are starting to hear more of the larger risk management buyers wanting more transparency and disclosure from the carrier and the TPA, and it's one of those questions that when it is asked there is not a direct answer and response” Ms. Ferrandino said.

More requests for proposals submitted to Dublin, Ohio-based Avizent for its TPA services are seeking information about the company's revenue transparency, said Jeff Steiner, Avizent's executive vp of claims administration in Fayetteville, Ark.

“There is lots of discussion and lots of questions around what fees are being paid to which vendors,” Mr. Steiner said. “We want people to understand what they are paying for and if there are any arrangements from a revenue-sharing perspective that those are fully disclosed.”

But most recent RFPs seeking revenue disclosure are coming from brokers on behalf of their clients, rather than directly from employers, Mr. Steiner said.

Some RFPs require that TPAs fully disclose all fees or break them out by services provided.

But there are additional questions asked during the RFP process when a proposed per-claim fee appears significantly lower than that offered by a competitor, Mr. Steiner said. Buyers see low per-claim fees as a red flag that a TPA may be earning revenue through other means, he said.

Efforts by TPAs to earn revenue through undisclosed fees is not driven by malfeasance or dishonesty, said Joe Paduda, a consultant and principal at Health Strategy Associates in Madison, Conn. But their business models are under pressure from employers demanding discounts in per-claim handling fees while the recession has caused a steep fall in claims.

But Dave North, CEO of Sedgwick Claims Management Service Inc. disagrees. The TPA industry has been improving its disclosure practices and the quality of its services, Mr. North said.

“Our overall position is that...we have to deliver a value proposition to customers that makes their total costs of risk a good value,” Mr. North said.

There may be many vendors participating in a single claim, depending on a customer's program demands, and each vendor may have a different compensation arrangement with Sedgwick, Mr. North said.

But that does not suggest collusion and all financial arrangements are disclosed to the customer, he said.

Several risk managers said they agree with Mr. North that their TPA relationship is based on their total cost of risk rather than individual fees and they believe their TPA selects its vendors, in part, on their service quality.

“If they can handle a claim appropriately and close a claim timely and shut down the cash flow from that claim, I am not as concerned about how we get there as long as we are not being gouged in any way,” said Cameron Shirley, director of claims management for Starwood Hotels & Resorts Worldwide Inc. in Phoenix.

But Starwood is among employers that unbundle several services rather than purchase them through a TPA. It unbundles nurse case management, bill review and its PPO networks.

Like other employers, Starwood unbundles for cost savings, a closer relationship with the vendors and improved claims outcomes, Mr. Shirley said. But it also does so to help avoid undisclosed fees.

“It does factor into those decisions, absolutely,” Mr. Shirley said.

Several large claims administrators did not return calls seeking comment for this story.