Last week, Barbara Martinez wrote a very in-depth article which appeared on the front page of the Wall Street Journal (September 18, 2006; Page A1). A subscription to WSJOnline is necessary to view the article, but I encourage you to read it if at all possible. In the article Ms. Martinez writes about independence in the health care industry with regards to product placement and claims audit. More on that in a moment, in the meantime, allow me to digress.
Enron. The word means different things to different people. For people working in the audit and professional services industry, it has a very personal meaning. The Enron scandal affected hundred of thousands of lives: perhaps millions. Tens of thousands of Enron and Arthur Andersen employees lost their jobs directly as a result of the scandal, and the ripples continue to be felt today.
The limitations placed upon the provision of professional services firms provide to they also audit has left the consulting practices of the Big Four audit firms in tatters. For example, at PricewaterhouseCoopers, the firm had to choose between providing audit services or actuarial services. The choice was easy. PwC resigned as actuaries for up to 60% of their actuarial book of business.
The Enron case was the classic juxtaposition of perception versus reality. Just because a firm derives millions in revenue from consulting services, does it necessarily follow that the corporate audit will be completed with a wink and a nudge? Sarbanes-Oxley thinks so, evidently. Of course, David Duncan didn’t help the perception any when he shredded all those work papers, did he?
So how does this relate to the article written by Ms. Martinez? The parallels are striking. By my read, there are two main points made in the article:
- Consultants who are engaged to select heath insurance providers often have an inherent conflict of interest because of the compensation they receive from the providers
- Consulting firms that receive significant fees from claims payers also have claims audit as a core service offering thereby creating a significant conflict of interest.
Now, just because there is a conflict of interest, does it follow that services provided are of any less quality? In a Kissingerian sense, it doesn’t matter. If Enron taught us anything, it’s that perception supersedes reality. Ms. Martinez gives example after example of serious conflict which leads us to the conclusion that there is something seriously wrong in the industry. When search consultants receive 15 times their consulting fees in provider compensation from the health carrier, the perception will always be that the recommendations were at a minimum clouded by payments. At worst, the recommendations were directly bought and paid for by the carrier.
In her first example, Ms. Martinez tells of the $517,000 a consultant received from UnitedHealth Group after they were selected as the health insurer for the Columbus Ohio School District. The consulting fees paid by the District? $35,000. For their $35,000, the School District expected (and contractually agreed to) fully independent consulting in the best interests of the District. The consultant did not disclose the “commission” arrangements, and his insurance license was ultimately suspended for three years by the Ohio Department of Insurance.
This type of situation is not new in the industry. We frequently saw it with 401(k) plan placement also. Brokers get paid through commission. It’s when there is less than full disclosure that the perception turns.
The perception turns big time when we see that the firms that are engaged to perform traditional claims audits are also receiving significant revenue from the firms they are auditing. Ms. Martinez gives a striking example in which Mercer is engaged by Suffolk County, NY to audit claims paid by Express Scripts. After initially estimating that Express Scripts had over billed by $1.1 million, Mercer later adjusted that number to just $14,000. Mercer, by the way, also had consulting arrangements with Express Scripts which were evidently not disclosed. The kicker? Suffolk County fired Mercer after they found only $14k in over billings and brought in a different auditor that found and recovered $865,000 in over billings.
The perception in this case is that Mercer did not find the over billings because there was a financial disincentive to find any. Mercer would certainly put its relationship with ExpressScripts at risk if it had found the $865,000 themselves.
In this case the reality may be, however, that traditional claims audits (as discussed last week) are just unable to find the real problems lurking in claims data. Without 100% audit, are auditors really looking for a needle in a stack of hundreds of thousands of claims forms?
Perhaps it doesn’t matter. Whether it’s an inability to find the problems or unwillingness due to conflict of interest, this story does not bode well for Mercer or the other traditional firms who derive revenue from the companies they audit. Full disclosure should be the norm here. If you are a purchaser of these services, let the buyer beware! Ask for the disclosures, do the research and make informed decisions about who to trust.
And just one side note to Barbara Martinez: We enjoy your work as a “comic-book superhero, defending the downtrodden from the greedy.” We look forward to seeing more of your in depth reporting.
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.