The intersection between HR strategy and HR technology

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In a prior post I wrote about the Total Cost of Ownership (“TCO”) in the context of risk.  Today I would like to write about techniques to measure the cost of risk, particularly in the case of administering benefit plans.

The shortfall of TCO modeling for administrative functions is that typically, quantifying the costs of poor administration is difficult to accomplish.  Just as with investment returns “past performance is not an indicator of future returns,” if poor administration in the past resulted in additional costs, we don’t know that it will in the future. 

We can, however, quantify those past costs from penalties, fines, lawsuit settlements etc., and include them in a TCO calculation.  Unfortunately, when it comes to benefits administration, the potentially biggest cost of poor administration is typically never known.  That’s the cost of overpayment of medical, dental or pharmacy claims.

Companies attempt to ascertain these “claims leakage” costs through a traditional claims audit conducted by a benefits consulting firm such as Mercer, Hewitt or Watson Wyatt.  (Now, now, if you work for Towers, PwC, Deloitte or some other firm and do claims audit, don’t get upset.  I just used those firms as examples.  Fact is there are brokerages and other “independents” that do this work as well.  More on them later and next week.)

A “traditional” claims audit will follow a common methodology:

  • Randomly select a number of claims that have been paid (say 200)
  • Manually review the claims for reasonableness including eligibility, reasonable and customary amounts paid, covered procedures, formulary – you get the idea
  • Note any exceptions within the selected group and calculate the amount of the overpayment
  • Note the availability of recovery of overpayment from the claims payer or recipient
  • Total the amount of overpayments in the select group and extrapolate a total overpayment amount cross all claims

So at the end of the project, you have been provided two or a series of numbers by your consultant which tells you how much was paid in error for the select group, and how much we can assume has been erroneously paid out across the entire claims pool.

To this, I respond with an unequivocal and resounding “SO WHAT?” 

You may have just paid $100,000 to get this information.  What can you do with it – pay another amount to check the next 100 claims?  Try to recover the amount that was identified in the first select group?  There really won’t be enough there to go after the claims administrator.

As a Senior VP of HR recently said to me while recounting the story of a traditional audit he engaged on of the large consulting firms for: 

“It was ridiculous; I mean here I was on a conference call with these auditors getting all excited about finding a $5,000 over payment.  They were asking if I was going to try to recover it.  All I could think was that it was costing more to talk about it.  I have over $100 million in annual benefits spend and they’re getting excited over $5,000?  Bring me some real money!”

This is a valid comment.  In a world where 1% – 2% of claims are paid to ineligible employees or dependents, the Senior VP above is probably experiencing up to $1 – $2 million in claims leakage from eligibility problems alone.  Add stop loss errors, subrogation, coordination of benefits, etc., and this Senior VP might be leaking up to $5 million in claims overpayments. 

For a company the size of his, self insured plans are the rule.  In this case, then, up to $5 million per year is coming directly off the bottom line of the company.  Assuming a 20% margin, the company would have to increase sales by $25 million to make up for this.

Of course, we started by talking about quantifying risk.  Better administration might prevent some of this leakage.  Problems in point-in-time eligibility can occur any where in the work stream from field HR through to claims payer.  A root cause analysis is difficult to perform until all the data points are available, however.  How can the points be identified when traditionally, only 200 claims out of many thousands are looked at?  The answer, in a word, is technology.  Appropriate given the name of this Blog known the world over.  (SystematicHR, for those of you who have actually read this far and may have forgotten where you were).

Technology is truly a wonderful thing and today I am happy to tell you that technology has been brought to bear on this very problem (not by SOURCING ANALYTICS, but what a great idea).  Start with a time variant data warehouse of claims, eligibility and enrollment, census and COBRA enrollment information,  add a dash of creative data mining and compare programs and out comes the ability to perform 100% claims audit of any set of claims you’d like: medical, dental, pharmacy – whatever.  From there, you can accurately and completely identify real claims leakage with a real hope of recovery from the claims payer.

But this is just the beginning.  If you think outside of the box, you’ll quickly realize that the data collected allows you to identify much more information that can assist in cost containment and avoidance programs such as root cause identification and process improvement, disease management, wellness programs, or plan design changes to name a few. 

Next week, space permitting, I’ll write about one company leading the way in this approach.  But first, I’ll comment and highlight a Wall Street Journal article published today which take a close look at the traditional claims audit in the context of carrier selection and independence within the broker and consulting ranks.  It’s a fascinating read, and directly on point with the topic of this post.

About the authorDonald 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.

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4 responses to “TCO: Measuring Risk”

  1. You may have just paid $100000 to get this information. … As a Senior VP of HR recently said to me while recounting the story of a … The answer, in a word, is technology. Appropriate given the name of this Blog known the world over. … more

  2. […] 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? […]

  3. […] The last two weeks I wrote about the ineffectiveness of traditional claims audit and the inherent conflict of interest some companies face when they perform such audits.  This week I’d like to introduce a company that brings a different approach to the industry: HR Best Practices. […]

  4. […] 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 […]