SANTA MONICA, Calif.-More employers are asking their workers compensation third-party administrators to sign contracts with pay-for-performance guarantees, a recent Towers Perrin survey reveals.

About 10% of the total contracts among 18 major TPAs surveyed now have some form of pay-for-performance guarantee. About 25% of those pay-for-performance contracts are based on bottom-line results; the rest are based on the claims-handling process the TPA follows.

The number of pay-for-performance contracts varies among the survey respondents, but growth is evident. For example, one respondent who said that two years ago it did not have any such contracts now estimates that 30% of its contracts have pay-for-performance features.

While the number of TPA contracts containing pay-for-performance agreements is small now, the "best practice" idea is gaining momentum with larger self-insured employers, Jenny P. Emery, principal and practice leader for total health and disability management with the Towers Perrin consulting firm in Weatogue, Conn., said during a session at Business Insurance's Fifth Annual Workers Compensation Conference held last month in Santa Monica, Calif.

A "balanced scorecard" approach is gaining popularity among employers, Ms. Emery said. The method relies on the blending of bottom-line results, the process the TPA follows and benchmarking. Bottom-line results include factors such as a decrease in claims severity. The claims-handling process includes issues such as medical management.

Ms. Emery cited the case of one employer who worked in partnership with its TPA to assign a weighting of importance to categories under bottom-line results and the process the TPA followed.

However, employers will want to first establish a relationship with a TPA and learn about its costs and performance before entering into such contracts, Ms. Emery recommended.

"You want to find out your baseline of cost for this vendor and what their services are," she said. "Then you can move on to bottom-line results, and that may take a couple of years. I would build a partnership first."

But while more employers are using pay incentives to improve TPA performance, Evansville, Ind.-based Atlas Van Lines rejects the idea. Putting a TPA's fees at risk will result in less skilled and less motivated claims adjusters reviewing the claims, said Thomas R. Lowe, assistant vp-risk management for Atlas.

"Good people cost money, and when we pay less, we are the only ones that are going to be hurt," he said. "I like to choose a TPA that pays its adjusters well enough, and if we put the fee at risk, I don't win anything. You are basically saying that you are happy with poor adjusters, and that's not what we want. We think that our TPA should be compensated in a way that maximizes their desire to do a professional job."

Mr. Lowe said Atlas meets regularly with its TPA to ensure its managers understand his company's business and his claims-handling philosophy. While Atlas has not put the TPA's fees at risk, the moving company has established performance guidelines.

For example, the TPA's adjusters have to show that they have taken steps to explain in required filings to the state the wages a worker earns. That is important to Atlas, because many workers who load and unload trucks only work occasionally. So simply reporting to the state that they are paid $12 an hour does not accurately reflect how much they earn during a month or a year.

In addition, Atlas drivers are contractors, and Atlas provides workers compensation coverage though Legion Insurance Co. for the drivers and their helpers. Under this arrangement, Atlas must ensure that the wages reported for these workers accurately reflect their earnings from Atlas and do not factor in the contractor's own business expenses. Otherwise, weekly benefits would be inflated. Reporting just how much they are paid does not explain the truck mortgage expense and other overhead they incur.

The adjusters also must show they have a specific game plan for resolving outstanding problems; they must identify lost time apart from indemnity claims and for severe-injury claims they must obtain a tape-recorded statement in which the worker states the history and nature of the injury.Atlas uses the recorded statement to question claimants who claim an injury impacts one part of their body and later another part. The recorded statements help "us control or remind the claimant what the original injury was and hopefully try and prevent injury creep that impacts us a lot."

Mr. Lowe also relies on other creative methods to motivate his TPA's claims adjusters. He has given them stuffed monkeys dressed in Atlas garb. The monkeys often end up on the adjusters' computer monitors.

"It reminds them as they are looking at our claim that maybe an extra 30 seconds (of review) may not be the worst thing in the world," he said.

"Lastly, visit your TPA often to let them know you care about them as people and that you want the best work out of them. And hopefully you can avoid an incentive program that consumes resources and is sometimes difficult to administer unless you have a lot of experience doing it."

Ms. Emery and Mr. Lowe were joined in their presentation by Al Rhodes, president of Sigma Actuarial Consulting Group Inc. in Nashville, Tenn.

Meg Fletcher, senior editor of BI, moderated the session.