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ARC: EMPLOYERS CAN USE A MANAGED CARE APPROACH TO REDUCE WORKERS COMPENSATION COSTS

Third-party administrators taking managed care in-house

Data integration, revenue drive trend

In-House Managed Care

Workers compensation third-party administrators are building their own managed care operations, a trend that may or may not benefit claims payers.

Aside from increasing their revenue, the increased number of TPAs offering their own managed care products also is driven by workers comp payer complaints about a lack of transparency in TPA markups for managed care services, reducing expenses, coordinating data to improve claims management and the ongoing rise in medical expenses, experts say.

While some TPAs have purchased workers comp managed care companies outright in recent years, hiring managed care executives with the expertise needed to build in-house services is more common, said James P. Bradley, vice president at The Reny Co., a Plano, Texas-based medical management company.

“That has been a big trend,” Mr. Bradley said. “A lot of them are building their own.”

Managed care services that TPAs have focused on “internalizing” include bill, utilization and peer review services, said Joe Paduda, principal at Madison, Conn.-based Health Strategy Associates.

Such in-house services can improve data coordination for better claims outcomes. “It also captures all that top-line revenue (for TPAs that otherwise) would be paid to an outside entity,” said Mr. Paduda, who advises private equity firms acquiring workers comp service companies. “They get to keep that.”

He and other observers say they believe that TPAs are internalizing services in part because they can earn more revenue and profit from providing managed care products than from administering claims. Charging payers a percentage of savings derived from bill review services and wrangling discounts from preferred provider networks can generate substantial profits, they said.

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Those services generate significant revenue and profit for some TPAs, said Kimberly George, Chicago-based senior vice president of managed care practice and client services for Sedgwick Claims Management Services Inc.

But improving the value for payers is questionable when such services focus solely on obtaining discounts and not on improving injured workers' care, she said.

Sedgwick developed its own in-house bill review practice seven years ago, about seven years after doing the same with nurse case management services. It did so because service providers at the time were inflexible in their delivery of technology, fee structures and service levels that clients demanded, she said.

The integration also allowed Sedgwick to drive down its costs. It did so by using in-house data to establish networks of doctors scored for their abilities to deliver outcomes such as reduced litigation and claims durations, Ms. George said.

Other TPAs are following a similar strategy, sources said.

Still, others continue to contract for most managed care services. Services that have proved challenging to internalize include developing medical provider networks and pharmacy benefit management services, sources said.

Some TPAs building in-house managed care capabilities are doing so, in part, to eliminate payer concerns about price markups when TPAs contract for managed care products and bundle them with their claims administration services. “They want to provide transparency so they don't have to deal with that question,” Reny's Mr. Bradley said.

According to Boca Raton, Fla.-based NCCI Holdings Inc., medical expenses now account for 60% of workers comp claims costs and continue to rise. Those factors also allow TPAs to consolidate services to drive down expenses, observers said.

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But the total value that claims payers derive from TPAs' consolidation of managed care services will depend on how well a TPA performs, Mr. Paduda said.

“Everything else being equal, an integrated program is better, but everything else is not equal,” Mr. Paduda said. “If you are getting all of your services from one entity, some of them may be good, some of them not so good, some may be indifferent.”

To determine whether bundling managed care with TPA claims administration is working well, evaluate the resulting savings and whether medical utilization is reduced while the quality of care is improved, said Frank X. Altiere III, president of PMA Management Corp., a TPA unit of PMA Insurance Group in Blue Bell, Pa.

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