ALBUQUERQUE, N.M.-A third-party administrator can offer numerous advantages to a self-insurer over handling claims in-house, though it's critical to hire the right TPA for the organization to realize those advantages.

Speaking to the annual conference of the Public Risk Management Assn. last month in Albuquerque, N.M., Cecilia E. Norat, president of the AIG Vendor Services division of AIG Insurance Services Inc. in New York, noted that for self-insured public entities, hiring a TPA can be the quickest and easiest way to obtain a high level of claims-handling expertise.

"If you're going to do it in-house, you have to plan to set up a claims operation," Ms. Norat said.

"It's expensive to set up a claims operation," she said. "It's not only expensive to do it; you have to find the right professionals. Obviously, if you hire a third-party administrator, you immediately have the whole setup right there."

But in choosing a TPA, "One of the main considerations is that the TPA must be able to adjust to your philosophy," Ms. Norat said.

That TPA "is you" to those whose claims it's handling, she noted, and "if you hire a TPA and you don't do it properly, they may not be flexible enough, or they may be unable or unwilling to adjust to your claims-handling philosophy."

Consequently, a self-insurer looking to hire a TPA must first set out very specific selection criteria, Ms. Norat said.

"Not all TPAs are the same, and you must know what you want them for," she said. "Choosing the wrong one can have significant negative ramifications for you," with potential cost, efficiency and public policy implications, she said.

Among the criteria she suggested were: location, linking the proximity of the TPA's claims-handling facility to an area or areas where the employer has large claim volumes; and considering the breadth of the TPA's coverage geographically, as many employers prefer adjusters to be available locally.

Another key consideration is the TPA's employee turnover ratio. A transient claims-handling staff is a problem, Ms. Norat said, because the self-insurer needs continuity among those handling its claims.

"That is something you really need to look at very, very carefully," she said, noting that the growth in the TPA industry has made it possible for highly qualified individuals to move among companies more easily in search of higher-paying jobs.

"What you're really focusing on and trying to uncover is constant turnover," Ms. Norat said. While she said it's difficult to set a definite figure for what's acceptable, a 10% to 15% turnover rate "would probably be acceptable," she said.

One way to check on employee turnover is to request a current client list from the TPAs under consideration and talk with those clients.

Another important item to consider is the claims load per adjuster, Ms. Norat said. If adjusters are expected to handle too many cases, "the cases are not handled," she said.

The volume could vary depending on the nature of the claims being considered, she said, with adjusters handling more complex cases having fewer on average than those handling more routine claims. "If you're handling a very serious long-term disability case, you'd better not be getting close to 100 cases," Ms. Norat said.

Other considerations are the average duration of claims handled by the potential TPA, the average amount paid per claim, the number of settlements vs. litigated claims, and the process by which litigation counsel is selected.

"You have to have the ability to choose counsel with the TPA," she said. "You need open dialogue and partnership. You're all in this together."

The entity also needs to gauge the TPA's willingness to negotiate on certain cases where a government unit might face particular problems of public perception if it takes a hard line on a claim.

"This is very important," Ms. Norat said. "Aggressive claims handling has to be adjusted to your needs."

An entity considering a TPA also should examine its financial condition and become familiar with any award or incentive compensation it provides adjusters for their performance. "We have found that if an adjuster is properly trained and part of their reward is based on how they pay a claim, there is major impact," Ms. Norat said.

"Benefits and salaries of adjusters are important," she said. "They should be well paid, otherwise they're not going to stick around."

"One of the things that we have found very valuable is that you want to go and visit their office," she said. "You want to talk with those claims handlers."

It's also important to check the TPA's track record for reporting in compliance with state regulatory and labor guidelines. Another important factor is the capabilities of its risk management information systems.

"You want to know how accessible it is," Ms. Norat said, making sure that the TPA's RMIS

is compatible with the client's system so that information can be downloaded.

Also, the management reports that the TPA provides should meet the client's needs and should be accessible over the computer. "This should be a true tool for you to provide effective oversight of the TPA," Ms. Norat said.