Weighing claims administration options - includes checklist

Business & Health, Nov, 1989 by Maria R. Traska

Weighing claims administration options

There's a lot to consider in deciding whether to bring claims administration in-house or to hire an outside administrator. This article outlines what you need to know and tells what other firms have done.

In the mid-1980s, employees of the Olin Corp., Stamford, Conn., were not pleased with the way their medical, dental, and long-term disability coverage was being handled. Complaints about the third-party administrator responsible for the company's coverage were frequent, and the claims backlog was anywhere from six to eight weeks.

In addition, Olin suspected that the arrangement then in use wasn't as cost effective as it might be.

In January of 1987, after nine months of careful planning, Olin began administering its own health and disability coverage. Now, says Sandra Dooley, manager of the Olin DIRECT Claims Service Division, the company feels self-administration is "frankly, the only way to go." After all, she says, "We know more about our own benefits than any third-party administrator."

Self-funded since 1980, Olin already had some experience in administering its own pension fund, thrift program, and flexible spending account. Today, Olin's claims department handles the paperwork for 13,000 employees and 3,000 retirees in some 15 plant locations nationwide. The claims backlog is down to an average of two weeks, and the estimated savings in claims administration costs for the first year alone is $100,000.

Is self-administration for you?

While testimonials from firms like Olin Corp. make self-administration sound tempting, most experts stress that it's not for everyone.

Robert Griffith, a consultant with A. Foster Higgins & Co., Inc., Los Angeles, says flatly, "Self-administration can be a real pain in the neck. Nine times out of 10, when we're asked by an employer to look at self-administration, the client decides not to do it."

Griffith, who does feasibility studies for clients interested in doing their own claims administration, says he's compared notes with other consultants, both in and outside his firm, "and their experience is generally the same."

At the least, self-administration is a balancing act. The employer must weigh the trade-offs and walk a thin line between being a provider of health benefits and an enforcer of benefit design.

Still, for the right company, of the right size (between 5,000 and 40,000 employees), the rewards can be considerable: A self-administered employer enjoys control over all phases of the process, is better able to deal with unusual employee needs, can accommodate direct provider contracting, and can install benefit changes more quickly than a third-party administrator. Also, under the right circumstances, a self-administered company can enjoy major savings in administrative costs.

On the minus side, a self-administered claims processing operation has to field all complaints directly, worry about employee confidentiality, deal with laws and regulations, and, because of the need for additional staff and equipment, may wind up paying as much, or even more, as it would using a third-party administrator.

How can you decide whether to "do it yourself" or go outside for help? Read on.

What to consider

"We're not proponents of self-administration, because there are a lot of pitfalls," says Donna Frisch, an associate with Towers Perrin Forster & Crosby, Pittsburgh. Frisch, like other consultants, does assist clients who are determined to self-administer. She makes sure, however, that clients know the drawbacks and the degree of commitment required.

Foster Higgins health benefits survey data show that on average, 7 percent of all companies and 11 percent of self-funded firms were self-administered last year.

The energy/petroleum companies and utilities had the highest proportion of self-administered firms (24 and 22 percent, respectively), whereas state, county, and local governments had the lowest (3 percent).

Size is a factor

Foster Higgins' Griffith says that company size seems to be an important factor in successful self-administration of claims. Companies with 5,000 or more workers are, as a rule, twice as likely to process their own health claims as are smaller firms. (See table.) Companies need a critical mass of employees to get any economies of scale, according to Griffith.

Griffith notes the percentage of self-administered companies falls off after 40,000 or more workers, because those companies may find health claims processing too unwieldy.

In addition, the larger a company is, the greater its bargaining power with third-party administrators and insurers. Enormous companies, Griffith says, "generally can and do get good performance standards from third parties."

Advantages

A self-administered employer has control over the use and storage of its health care claims data. It also has control over the turnaround time for processing claims: It can offer walk-in claims service and issue checks to workers within a few days, or schedule payments to coordinate with the company's cash flow.