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Fiduciary Responsibilities of a TPA. Daniel Sovocool Partner Thelen Reid Brown Raysman and Steiner LLP Direct: 415-369-7340 E-mail: [email protected] Pres. Title - Author - Date. 1. The “Perfect Storm” Has Been Developing in California. Changes to the TPA business

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fiduciary responsibilities of a tpa

Fiduciary Responsibilities of a TPA

Daniel Sovocool


Thelen Reid Brown Raysman and Steiner LLP

Direct: 415-369-7340

E-mail: [email protected]

Pres. Title - Author - Date


the perfect storm has been developing in california
The “Perfect Storm” Has Been Developing in California
  • Changes to the TPA business
  • Shortage of skilled labor
  • Lack of comprehensive regulation
  • Reform has made some TPAs “hungrier”
  • Employers demanding more accountability
the tpa business
The TPA Business
  • Over 1,000 P&C / workers’ compensation TPA’s
  • Fewer than 40 TPA’s have $20 million of revenue
  • Most large TPA’s are subsidiaries of:
    • large brokers
    • large carriers
  • 90% have revenues less than $5 million dollars
  • 50% out of business in five years
  • 85% out of business in ten years

Source: TriStar presentation, “TPA Fraud and Embezzlement,” 2004 PRIMA Western Regional Conference

in california the labor pool for claims adjusters is not helping
In California, The Labor Pool for Claims Adjusters Is Not Helping
  • There is a a shortage of skilled claims adjusters in California
  • Significant turnover at even the best TPAs
  • Worst TPAs can have turnover of claims staff of 40% or more each year
  • Heavy reliance on temporaries not the answer
in california tpa regulation is not comprehensive
In California, TPA Regulation Is Not Comprehensive
  • One agency license TPAs and audits reserves
  • Another agency audits TPA “performance” in terms of on-time benefit delivery and reserves
  • No one audits TPA performance in terms of timely contacts, investigation, closure, adherence to best practices
inevitable impacts
Inevitable Impacts
  • Gap in internal controls:
    • End up paying far too much for your workers’ compensation program
      • Increased benefit costs
      • Increased vendor and third party costs as well.
  • May end up having to restate your liabilities (Costco, IBC, Goodyear)
  • May end up in expensive litigation
increasing focus on errors and omissions issues
Increasing Focus on Errors and Omissions Issues
  • TPAs owe their clients certain duties:
    • Duty to follow the contract
    • Duty to comply with all applicable statutes and regulations
    • Common law duties of due care
  • The internal “Best Practices” define these duties
  • Failure to discharge these duties can have E & O ramifications
case example school district jpa v tpa napa superior court 2008
Case Example: School District JPA v. TPA (Napa Superior Court, 2008)
  • TPA had handled claims for public school JPA for two decades
  • Audit found claims mishandling
  • Thelen sued TPA for negligence and breach of contract
  • Napa County (California) jury awarded client $4.66 million (reduced to $3 million)
two categories of problems
Two Categories of Problems
  • Errors in Claims Administration
  • Overcharging and Self-Referral
problem no 1 claims administration errors the eight most common problems
Problem No 1: Claims Administration Errors – The Eight Most Common Problems
  • Failure to timely and completely investigate cases
  • Failure to develop and execute a claims strategy
  • Failure to identify and pursue subrogation opportunities
  • Failure to maintain medical control
  • Failure to provide notices and pay benefits when due
  • Failure to properly reserve
  • Failure to notify the excess carrier and collect excess insurance payments
  • Failure to document
failure to investigate cases
Failure to Investigate Cases
  • Facts that support a denial must be developed within 90 days or cannot be used later, and invalid claims can be deemed presumptively compensable
  • Need prompt reporting by the employer
  • The TPA should have a solid handle on when claims can be denied (heavy penalties for unreasonable denial)
  • Questionable large loss cases should be reviewed with the client
failure to maintain medical control the most common issues
Failure to Maintain Medical Control –The Most Common Issues
  • Failure to object to unnecessary or unreasonable treatment, or treatment that does not relate to the industrial injury
  • Failure to object to excessive or unnecessary medical bills
  • Failure to (correctly) use appropriate cost containment tools such as UR or agreed-upon fee schedules
under reserving is the canary in a coal mine
Under-Reserving is the Canary in a Coal Mine
  • General rule is that estimates be adjusted immediately upon receipt of medical reports, orders of the Appeals Board, or other relevant information that affects the valuation of the claim
  • Be very wary of reserves that do not change – especially on young cases
  • Be very wary of reserves that change in a uniform way – indicates stair-stepping
  • Consider Client Service Instruction requiring mandatory, periodic reserve reviews
failure to notify the excess carrier and collect excess insurance benefits
Failure to Notify the Excess Carrier and Collect Excess Insurance Benefits
  • Failure to timely notify the excess carrier can cause (depending on the policy) no coverage or a policy-based reduction in coverage
  • TPAs often do not do a good job following up on coverage issues, and on collection of excess reimbursements
problem no 2 overcharging and self referral
Problem No. 2: Overcharging and Self-Referral
  • Replacing team that was “sold” with low quality personnel and temps
  • Charging for claim report access, for “special reports,” etc.
  • Bill review is a prime area for abuse:
    • Excessive (and/or ineffective) medical case management
    • Managed care and UR fees
    • Duplicate payments
    • Charging the file directly for services provided by TPA
  • Need transparency re money flow with “third parties”
case example broward county florida public schools 2005
Case Example: Broward County Florida Public Schools (2005)
  • Large self-insured school district
  • $34 mm in claims/year
  • 17 year relationship with TPA
    • $2 mm/year to TPA
    • $2 mm/year to Managed Care Service Provider (“MCSP”) – which did the selection, contracting and credentialing for providers
audit was critical of tpa
Audit was Critical of TPA
  • Found 292 cases open for longer than five years - Those cases alone had cost the District $81 mm
  • Found numerous examples of inadequate investigation, documentation and rationales.
  • TPA had defense attorneys setting reserves and billing the District for that work
  • Found numerous examples of vendors providing gifts to TPA
  • Excessive assignments to Field Case Managers
  • Inappropriate billing process for FCM and TCM
audit was particularly critical of tpa relationship with mcsp
Audit was Particularly Critical of TPA Relationship with MCSP
  • TPA refused to provide the MCSP contract to auditors
  • TPA gave MCSP raises not permitted by the TPA contract
  • TPA used MCSP to provide same services TPA was to provide
  • Found no accountability relationship between MCS and the school district
  • Nurse case management on almost every case BUT no effective measurement of clinical outcomes
  • MCSP overly focused on obtaining a large quantity of discounted medical services, rather than facilitation of quality care
contracts and contract management
Contracts and Contract Management
  • Regular large loss meetings - at least quarterly for large accounts
  • Meet the new staff
  • Written, detailed claim status reports (not just loss runs) (provided or “on the system”)
  • Some TPAs now going to quarterly claim status reports (180 days for future medical claims)
contract management audits
Contract Management: Audits
  • At least once a year
  • Don’t use the broker’s “claims consultant” unless sure there is no relationship between the broker and the TPA
  • Sample audit of open, closed, MO and aged
  • New TPA relationship – initial audit at the six month mark
  • Don’t need to be huge audits – just sample audit
  • Exit conferences and audit memos in each file
  • Be proactive once you get the audit – statute of limitations issues

Daniel Sovocool


Thelen Reid Brown Raysman and Steiner LLP

101 Second Street

San Francisco, California