“Journal of Workers Compensation”
                        Published 7/2009


                Cost-Effective Vendor Managem...
implement an integrated vendor referral and management process that
consists of three critical stages.




          Three...
claim risks and reduce exposures. Vendor rates are increasing due in part to
the rising costs of doing business, but the p...
internal and external influences can be eradicated or minimized. An example
of an internal influence could be an insured o...
Vendor Referral Strategy

The VRS is a documented “action plan” with definable steps and
benchmarking, including set diary...
Management may view this level of communication between claims and
vendor personnel as a risk. Specifically there may be a...
vendor. The VRA takes into account the total expenses incurred and the
usability of the vendor results or work product in ...
behavior. Moreover the existence of a VRA program can also be a
significant motivator for vendors because they know that t...
their familiarity with vendor resources available in the area.

Vendor controls might also hinder the ability of claims pe...
Claims organizations have for year’s utilized “round-table” discussions
where claims and management personnel meet to revi...
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Cost-Effective Vendor Management

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Cost-Effective Vendor Management Article Published in Journal of Workers Compensation in July 2009

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Cost-Effective Vendor Management

  1. 1. “Journal of Workers Compensation” Published 7/2009 Cost-Effective Vendor Management “Strategies for Successful Outcomes” James P. Corbett It has been said that the financial crisis that has befallen corporate America can be attributed to uninformed decision-making, egregious societal influences, insufficient regulatory oversight and a general lack of accountability. While the financial crisis has not directly impacted the majority of insurer’s to the same degree that it has affected other industries, it could be argued that these same “causative” factors pose a risk to claim organizations that partner with and outsource to third- party vendors. Claim organizations spend billions of dollars annually to contract a multitude of medical, legal, financial and investigative vendors with the goal of mitigating claims expenditures and exposures. Considering the significant financial impact to insurers and employers, cost-effective vendor management controls need to be in place to ensure appropriate referral and successful outcomes. The issue at the forefront of these contractual relationships is the desire by claims organizations for greater oversight and accountability over the vendor referral process. At the same time, there is emphasis placed on claims personnel for due-diligence relative to making informed decisions. However the implementation of stringent management controls could be impeding the referral process, specifically controls could affect the ability of claims personnel to effectively communicate and exchange claim information that is necessary to empower the vendor in the field. To achieve overall success, it is important for claims organizations to
  2. 2. implement an integrated vendor referral and management process that consists of three critical stages. Three Critical Stages Of The Vendor Referral Many claim organizations have undertaken a “best practices” approach with the goal of striking a balance between adequate management control and claim personnel autonomy. With this approach, “cost-effective” vendor outcomes are achieved through the implementation of a structured vendor referral process that incorporates three critical referral stages: the Vendor Referral Criteria (VRC), Vendor Referral Strategy (VRS) and the Vendor Referral Assessment (VRA). The VRC speaks to the issue of making informed decisions and will be the litmus test that will mandate claims personnel to document the referral rational or “thought processes” that precipitate the referral. The VRS will be that “action plan” that incorporates both benchmarking for management oversight and control and a collaborative effort on the part of claims and vendor personnel in outlining the service steps necessary to achieve the goals of the referral. The VRA will be that accountability “metrics tool” that is utilized by management to evaluate and measure the “cost-effectiveness” of the referral process but more importantly the “cost-savings” of the vendor referral overall. By cost-effectiveness one can sight the “usability” of the vendor results or work product to achieve the goals of the claim and by cost- savings one can sight the “return on investment”. The VRA can also be undertaken initially to review the myriad of procedures, protocols and policies that comprise a vendor management program. The VRA will measure their efficiency and effectiveness to assist claims and vendor personnel in attaining successful vendor outcomes. What Is Driving Claim Organizations To Review Their Vendor Referral Process Considering the changing economic landscape, claims organizations more than ever are scrutinizing their “expenses”. Management is reviewing the “cost-effectiveness” of using the array of vendor organizations to minimize
  3. 3. claim risks and reduce exposures. Vendor rates are increasing due in part to the rising costs of doing business, but the preeminent reason for reviewing a vendor referral process is the “cost-savings” success rate. A comprehensive review or analysis of vendor data is revealing excessive payouts and a disproportionate number of poor outcomes. In response, some claims organizations are asking their adjusting staff to curtail referrals. This response, however, is counterintuitive, whereas the goal of utilizing vendors is to decrease claim expenditures, exposures and overall claim values. By incorporating a VRC, referrals would be reduced not because of a corporate directive but because non-meritorious referrals would be averted. Also driving vendor reviews is management’s contention that to achieve a greater return on investment, specific internal and external influences that are affecting decision-making… need to be controlled. Vendor Referral Criteria The VRC stage requires claims personnel to review, answer and document a series of questions regarding referral rational using a claim-system based referral program/ template. The questions take on the form of “triggers” that measure the “reasonableness and necessity” of the referral in light of the facts and goals of the claim. The VRC will also assess the “appropriateness” of a referral to a particular vendor. For example, was the most qualified vendor utilized based on jurisdiction, available personnel, costs and history of success? The VRS will assist claims organizations in making informed decisions based on claim facts, claim issues, and the goals of the claim. This is not to say that claims personnel are incapable of making informed decisions, they more than anyone else are most qualified given their familiarity with their claims. Rather the VRC will serve as a “sounding board” where the Q & A will be that “check and balance” whereby claims personnel are prompted to examine and reexamine the referral rational thus validating the referral. The success of this stage will depend on the extent to which claims organizations embrace and enforce the referral criteria. If done judiciously,
  4. 4. internal and external influences can be eradicated or minimized. An example of an internal influence could be an insured or an agent requesting a vendor referral where such a referral is not supported by the facts or goals of the claim. Typically such a request is more prevalent in the self-insured or third party administrative setting. Although a somewhat contentious subject matter, an external influence could take on the form of a vendor marketing campaign, where lobbying on the part of marketers can influence the direction of a referral. The VRC can be tailored to suit the needs of the claims organization. For example, the questions that will be posed will differ depending on the type of vendor being utilized and the complexity of the service goals. Alternatively, questions can be presented in such a way that they are broad enough to address the referral rational for all vendors. The format of these questions and the manor in which they are delivered will depend on the length to which a claims organizations desires to integrate the VRC into its formal claims system. An example of the questions that could be implemented within the VRC are as follows: “What is the goal of the referral and what claim issues, claim facts, and claim goals precipitated the referral?” “How and by whom will the vendor results be utilized to achieve the goals of the claim?” “What vendor qualifications, credentials or work history are being considered in choosing the vendor?” “What cost-savings are projected should the goal of the referral be achieved?” When first implemented, the VRC stage may be deemed burdensome by claims personnel because of the time investment required. However, through this interactive validation process, the goal of averting non-meritorious referrals will be achieved, saving claims personnel time in the long run. The information documented will serve as a blueprint for the development and implementation of the second stage of the referral process, the vendor referral strategy
  5. 5. Vendor Referral Strategy The VRS is a documented “action plan” with definable steps and benchmarking, including set diary dates whereby both management and claims can evaluate the success or cost-effectiveness of the referral. The benchmarking will allow claims and management to refine or revamp the VRS, if need be, so that monetarily and procedurally the referral is on track to achieve the goals of the referral and the goals of the claim. The goal of the VRS is to empower vendors in the field by providing them with the necessary claim data along with an explanation as to what they need to accomplish to contribute to a successful resolution of the claim. To achieve this end, the vendor will formulate a clear and definable strategy that takes into account the goals of the referral and, more importantly the overall goals of the claim. It is imperative that claims personnel and vendors work together to educate each other and exchange information, such as the necessary claim data and available vendor service options, which will serve as the building blocks for the VRS. It’s paramount at this stage of the referral that claims personnel and vendors keep an open line communication that encourages expert input by vendor personnel into the creative strategy process. It has become increasingly common for a vendor contact, often the marketing representative, to have a background in claims. It would behoove claims personnel to make use of their experience and expertise. Engage that vendor representative as to the best strategy steps to employ to achieve the goals of the claim. Claims personnel should also consider involving the insured, defense council, or even other vendors in developing the VRS. Information is power -the more input and feedback by all involved parties, the greater the likelihood of vendor success.
  6. 6. Management may view this level of communication between claims and vendor personnel as a risk. Specifically there may be a history of vendors monopolizing claims personnel’s time and unduly influencing the direction of referrals. Unfortunately in response to this, many claims organizations have instituted communication policies that impede the development, implementation and success of the VRS. At the time of the referral, management should instead be encouraging claims and vendor to collaborate. To ensure control and accountability, claims personnel will be asked to document the file relative to the VRS developed. Documenting the VRS will reinforce vendor’s fiduciary duties to adhere to the service steps outlined and agreed to at the time of referral. As to the claims professional, the VRS could incorporate an incentive based referral component whereby “success stories” are documented over a period of time will result in either a monetary reward or used by management at the time of a performance review. Vendor Referral Assessment The VRA is a multifaceted management tool that will procure for management the referral data necessary for greater vendor control, oversight and accountability. As to the specific steps for conducting a VRA, and what will be achieved, will depend on the claim or vendor issues that are driving the VRA. The VRA can assist claims organizations to achieve several distinct but interwoven goals. One goal of the VRA is to evaluate and measure the abilities and performance of vendor personnel to act upon and effectively execute the procedural tasks outlined in the VRS. Claims personnel would also be evaluated relative to their decision-making and their ability to work with vendors to develop and implement the VRS. The VRA will also evaluate and measure the effectiveness of any and all vendor referral procedures, protocols and policies that are in place relative to their intended goals or purpose. Another goal of the VRA is to measure the cost- effectiveness of the vendor referral process as a whole and the cost-savings achieved. Once a referral has reached its conclusion, with all vendor expenses paid and vendor goals for the claim realized, claims organizations will then review and analyze the return on investment delivered by the
  7. 7. vendor. The VRA takes into account the total expenses incurred and the usability of the vendor results or work product in achieving the goals of the claim. Typically the goal of any vendor referral is the mitigation of any and all current or future claim expenditures and exposures. Cost savings fall into two categories, both of which will be identified and measured –“hard savings” and “soft savings”. Hard savings are direct, typically easily measured. For example, a claims organization contracts a vocational rehabilitation vendor with the goal of transitioning an injured worker back to gainful employment. Because of the vendor’s efforts, the worker is returned to employment at a salary level sufficient to enable the claims organization to discontinue total compensation payments of $400 per week. Based on the laws of the state where the injury occurred, the worker would have been able to collect benefits for 100 more weeks had he or she not returned to work. Considering a total vendor expense of $2,000, the hard savings realized would be $38,000. ($400 weekly benefits x100 weeks= $40,000- $2,000 vendor expense). Soft Savings are more subjective in their calculation, nevertheless what is collected provides a claims organization with quantifiable data. For example, a claims organization contracts an investigative firm where video footage has documented a claimant’s extracurricular activities. Claims or defense council will then use this video documentation to posture the case for settlement. The plaintiff attorney had offered to settle for $60,000 and the claims organization made a counter offer of $30,000 with an insured cap of $50,000. The evidence obtained in the investigation brings into question the functional abilities of the claimant. The plaintiff attorney concedes that the video evidence could be used to reduce benefits through litigation. Negotiations sighting this evidence allowed for a settlement of $40,000. The soft savings in this case amounts to $10,000 ($50,000 insured cap -$40,000 settlement). There is also another benefit to a formal VRA. Albeit not common, the potential for vendor indiscretions in billing or outright fraud does exist. For example, a vendor was contracted to provide a specific service for which the claims organization was billed. The vendor invoice denotes the services rendered but a VRA reveals that the service had in fact not been performed. If a claims organization alerts all of their vendors- as they should- about their VRA program, such notice may serve as a deterrent to fraudulent
  8. 8. behavior. Moreover the existence of a VRA program can also be a significant motivator for vendors because they know that their performance is being reviewed continuously compared to other vendors that provide the same or similar service. This psycho- social benefit of the VRA is far reaching and should not be underestimated. The importance or value placed on having a formal VRA have prompted some vendors to be proactive in providing their own analysis and documentation as to cost-savings. At this time it is interesting to note that claims organizations regularly undergo a variety of internal self audits, internal management audits, external third party audits and various state audits. All of these audits are initiated to evaluate and assess compliance with state filings and compensation payments. In light of the significant monies being paid out to a multitude of vendors and the financial impact the success -or lack of success has on the claims organizations bottom line, it is surprising to find that more claims organizations are not employing some level of VRA. Striking the Right Balance The three- stage vendor referral process is just one component of a more comprehensive vendor management program. Some claims organizations are electing to put together formal internal vendor panels that interview and credential those vendors that will be part of their network. Those on the panel will provide oversight and accountability of the vendor referral process with respect to compliance with established referral procedures, protocols and communication policies. Alternatively, claims organizations are contracting intermediary vendor organizations to achieve the same goal. These organizations will represent and work on behalf of the claims organizations to oversee and manage all that is the vendor referral process. Ostensibly, all these measures speak to the desire by claims organizations for more control, oversight and transparency in the vendor referral process. As started earlier, these vendor management controls may lead to unintended consequences. Implementing stringent vendor controls may strip claims personnel of their decision-making power. These claims personnel are on the front lines of a claim, and are often in the best position to make decisions on vendor referrals because of their extensive knowledge of the claim and
  9. 9. their familiarity with vendor resources available in the area. Vendor controls might also hinder the ability of claims personnel to communicate effectively with vendors- a necessary step in bringing about cost-effective claim outcomes. To strike the right balance between adequate vendor management control and claims personnel autonomy, while focusing on effective and efficient communications, claims organizations –specifically management must embrace and judiciously implement the three stages of the referral process. To further facilitate an open line of communication between claims and vendor personnel claims organizations must introduce creative solutions consistent with the referral process. For example, some claims organizations are coordinating vendor fairs where approved vendors are invited to meet with claims personnel to discuss open claims, conduct workshops and presentations, etc. The claims organization will set the agenda ahead of time so that claims and vendor personnel are prompted to review and document those claim issues or vendor referral strategies that precipitated the meeting. Management, with feedback from claims, will dictate what presentation topics or workshops would be of value in light of claim trends and “hot button” claims issues. Claim organizations might also want to invite their insured’s to participate in the workshops that involve case studies and vendor referral scenarios. The insured will then have a better understanding of referral rational and thus be empowered in the future to make “informed decisions” relative to the viability of using a particular vendor given the jurisdictional laws in place. Also important in cultivating an open dialogue between claims and vendor personnel is the use of stewardship meetings. The vendor manager, select claims personnel and claims management can meet regularly to review claim data that has been mined. The preset agenda might include the review of select problem cases. Those in attendance can brainstorm on the best VRS to implement to achieve the goals of the claim. In addition this forum would provide management with an opportunity to review case- specific hard and soft saving or the lack of and any corresponding benchmark performance issues.
  10. 10. Claims organizations have for year’s utilized “round-table” discussions where claims and management personnel meet to review and formulate claim strategies to resolve case specific issues that are driving risks. With that said, it maybe beneficial for claims organizations to selectively involve vendor personnel in these same round table discussions where their resources and expert service input would contribute to the strategic claim resolution process. An alternative strategy is to hold vendor-specific round table discussions. Rather than viewing individual claims, the parties would explore which vendor services would best resolve specific claim issues. CONCLUSION Considering the significant monies being paid out to insurance vendors and the financial impact that vendor results have on total claim costs and the resulting premiums paid by their insured’s, it is imperative that claim organizations and employers be vigilant in developing or refining their vendor management programs to ensure “cost-effective” vendor results. Central to achieving this end, is the need for informed decision- making, adequate vendor oversight, and a vendor referral process that will keep all parties accountable while also encouraging an open line of communication between vendor and claims personnel. BIO James P. Corbett is president of Insurance Vendor Network, Inc. an insurance vendor consulting company that matches claims organizations with appropriate medical, legal, financial and investigative services and programs. James Corbett has been an insurance professional for 20 years. He spent 10 years as a worker’s compensation adjuster. For 10 years he worked in a marketing /sales capacity where he worked with claims, risk managers, human resource and legal professionals in coordinating and implementing vendor services. Mr. Corbett can be reached at Jcorbett@insurancevendornetwork.com

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