Cost-Effective Vendor Management

“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

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

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,

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

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.

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

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

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

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.

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

Cost-Effective Vendor Management

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