Outsourcing is commonplace these days, so it makes sense that more and more businesses are turning to Third Party Administrators to help manage various insurance and benefit packages.

Historically, these companies have been contracted to administer workers’ compensation programs, as well as unemployment benefits. In Ohio, however, an increasing number of TPAs are helping employers handle 401(k) and managed healthcare plans. As with any partnership, choosing the right TPA can have a significant impact on your bottom line, as well as employee morale.

TPAs specializing in workers’ compensation remain the most common of these types of organizations. Under the Ohio workers’ comp model, employers must enroll with an MCO (Managed Care Organization) that is charged with the medical management of claims filed by injured workers. Business owners pay workers’ comp premiums to the state Bureau of Workers’ Compensation, and the BWC pays the MCOs for their work.

Hiring a TPA is optional, and businesses pay them a direct fee for services. What do they get in return? Usually a savings on their workers’ comp costs. First, TPAs help bring companies together to create group rating plans. By pooling their workers’ comp claims experience, these groups can qualify for lower workers’ comp insurance premiums.

Second, TPAs help companies reduce injured worker claims, challenge fraudulent ones and work with MCOs to get workers back on the job.

“It’s a very unique business,” says Dave Kiley, executive vice president of The Matrix Companies in Cincinnati, a TPA that specializes in workers’ compensation. “A lot of employers don’t have experience in it. There are a lot of rules and regulations, and Third Party Administrators help provide that expertise.”

Cincinnati’s Sheakley Group of Companies includes both an MCO company and a workers’ comp TPA service, plus other employer group-benefit plans including medical plans, retirement plan assistance (with a separate TPA devoted to that) and payroll services. Under workers’ comp regulations, Sheakley and similar companies that provide both MCO and TPA services must maintain a “firewall” between the two.

“Employers are required to maintain both unemployment and workers’ compensation coverage for their employees,” notes Angie Wright, a Sheakley vice president. Offerings such as 401(k) retirement plans and health insurance are at the employer’s discretion, as is the decision to manage these plans on their own.

“Employers of any size can administer many of these types of programs themselves,” Wright says. “However, what we bring to the table is expert knowledge gained from years of specializing in each of these products. This expertise allows employers to focus on what they do best: operate and grow their companies.” Additionally, Sheakley is actively involved in several lobbyist coalitions to help ensure that any industry changes are right for the clients they represent.

In larger companies, TPAs will often work with human resources departments, while in smaller firms they will deal directly with the business owner.

One of the biggest roles of TPAs is helping companies qualify for group rating discounts on their workers’ compensation premiums paid to the state. Group ratings pool the claims experience of companies engaged in similar businesses or industries. First, the company has to be a member of one of those pools: a trade or other “sponsoring organization” recognized by the Bureau of Workers’ Compensation. That list includes the Ohio Small Business Association, Better Business Bureau of Ohio, numerous chambers of commerce and smaller industry groups.

Second, to get those group discounts a company has to have a plan administrator to help control workers’ comp costs, and TPAs specialize in that.

Although the state is cutting discounts on group ratings insurance premiums, Kiley says the savings is still considerable — up to 77 percent.

“Ohio is a monopolistic state,” Kiley explains, “meaning you don’t go to an independent carrier to get the coverage. You actually get it through the state of Ohio.” Many employers see this as simply one of the costs of doing business, but Kiley adds that a carefully chosen TPA can help manage workers’ compensation in such a way as to keep it from becoming too costly.

Another area where TPAs can control cost is fraud investigation. Matrix offers this in-house, whereas most TPAs will traditionally outsource this type of service. “That’s kind of unique, because they’re going in to provide a service and they end up outsourcing a service,” he notes.

Besides fraud investigation, TPAs can help reduce workers’ compensation costs via vocational rehabilitation programs that help injured workers return to the job more quickly, Wright says.

With all of these services, the TPA moves beyond the role of administrator and establishes a valuable relationship with the employer.

“We’re taking the administrative burden off an employer’s shoulders,” Kiley says, “but we’re also (contributing) a return on investment in the form of savings as well.” That, he points out, is the key to using a TPA.

“An aggressive TPA can find significant savings for customers, and not all TPAs are created equal ... we’re going after those savings for our employers, and showing them in hard dollars the value of what we bring to the table,” he adds.

That kind of expertise is similarly applied to group health and retirement plans, although with the latter, employers should look carefully at who is administering what in such programs, says Garnet Wahlund, the owner and director of the Cincinnati Investment Council.

Unlike workers’ compensation, unemployment and the withholding of Social Security and Medicare taxes, employers are not required to offer retirement plans. Employers should examine just what the TPA is going to manage. “The second (an employer) offers a plan, they do have a lot fiduciary responsibility as far as educating the employees, and there is a huge liability risk,” Wahlund explains.

CEOs, CFOs and HR professionals are very busy people, and often there aren’t enough hours in the day to take care of everything they oversee. “How many of them take enough time to educate their employees (about investments)?” Wahlund asks. Very few, he estimates.

Wahlund believes it’s important to use a TPA that does everything in-house. “The investments are professionally managed daily, then the fiduciary responsibility falls to the money manger, not to the employer, and that’s huge.”

Typically, it’s a bank, stockbroker or investment firm that will bring the retirement plan to the table, then partner with a TPA or have the employer find one. “The problem,” Wahlund explains, “is when you take it to an outside entity, if there is a mistake the mutual fund companies are pleading the fifth, going ‘its not our fault,’ and the independent third party administrator doesn’t want to take the blame (either).”

Also, watch for hidden fees, Wahlund says, recalling one company whose employees were paying out $60,000 a year in fees, all of which were going to the financial representative or TPA. The company took no action, he says, because it was unaware of what was going on, and the fees came out of the employees’ portfolios.

Certainly with any venture, potential business relationships must be explored, and working with TPAs is no different. Partnerships are also important. Sheakley, for example, has partnered with many organizations, including the Cincinnati USA Regional Chamber and the Better Business Bureaus of Ohio. “These organizations offer numerous benefit programs to employers as well,” Wright says.

Not surprisingly, the key to finding a successful TPA, according to Wright, is experience. “(Make sure they have) knowledgeable consultants who actively and frequently communicate with the employer. The TPA has to be aggressive and very involved in the industry. One bad decision due to lack of experience or judgment could cost an employer thousands of dollars.”

Kiley concurs. “It’s pretty hard to have a positive return on investment when the claims rep doesn’t have the experience in the industry,” he says, adding, “Look for a TPA that offers a communication cycle that includes a single point of contact.”

And it’s something more and more employers are, indeed, trying to find. “They’re seeking out assistance and consultation more than ever because medical costs and premiums are shooting through the roof,” Kiley says. “We’ve been around for years, and it’s just hitting home now that employers are saying ‘I can’t do this on my own, I need the expertise in this area.’”

Employers Face Steep Rate Hikes for Workers’ Comp
The premiums that Ohio employers pay for workers’ compensation are climbing steeply. In fact, that expense could double within three years.

Under the Ohio system, companies enrolled with an approved provider are eligible for a group-rating discount. Last year, the Bureau of Workers’ Compensation lowered that maximum group-rating discount from 90 percent to 85 percent. This June, the BWC cut that discount again, to 77 percent, effective July 1, 2009. According to Sheakley, one of the companies providing group-rating services to Ohio companies, the BWC wants to lower the discount to 65 percent by 2010.

The state did cap premium increases in any single year to 20 percent, but Sheakley and other providers are sounding an alarm among their customers, encouraging them to voice their concerns to Gov. Ted Strickland and state legislators.

“Whatever changes may be needed to improve the group-rating program, the magnitude and abruptness of the premium rate increases approved by the BWC board fail to take into account the severe financial pressures being felt by Ohio employers in difficult economic times,” writes Angie Wright, a Sheakley vice president, in an online letter to customers. “An increase in workers’ compensation premiums is just the latest evidence of the ‘perfect storm’ businesses across Ohio are facing.”