Independent Consulting: Perception or Reality?

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.

TCO: Measuring Risk

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 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.