Fiduciary Responsibilities of a TPA

1. Fiduciary Responsibilities of a TPA Daniel Sovocool Partner Thelen Reid Brown Raysman and Steiner LLP Direct: 415-369-7340 E-mail: dsovocool@thelen.com Pres. Title - Author - Date 1

2. The “Perfect Storm” Has Been Developing in California • Changes to the TPA business • Shortage of skilled labor • Lack of comprehensive regulation • Reform has made some TPAs “hungrier” • Employers demanding more accountability

3. The TPA Business • Over 1,000 P&C / workers’ compensation TPA’s • Fewer than 40 TPA’s have $20 million of revenue • Most large TPA’s are subsidiaries of: • large brokers • large carriers • 90% have revenues less than $5 million dollars • 50% out of business in five years • 85% out of business in ten years Source: TriStar presentation, “TPA Fraud and Embezzlement,” 2004 PRIMA Western Regional Conference

4. In California, The Labor Pool for Claims Adjusters Is Not Helping • There is a a shortage of skilled claims adjusters in California • Significant turnover at even the best TPAs • Worst TPAs can have turnover of claims staff of 40% or more each year • Heavy reliance on temporaries not the answer

5. In California, TPA Regulation Is Not Comprehensive • One agency license TPAs and audits reserves • Another agency audits TPA “performance” in terms of on-time benefit delivery and reserves • No one audits TPA performance in terms of timely contacts, investigation, closure, adherence to best practices

6. Inevitable Impacts • Gap in internal controls: • End up paying far too much for your workers’ compensation program • Increased benefit costs • Increased vendor and third party costs as well. • May end up having to restate your liabilities (Costco, IBC, Goodyear) • May end up in expensive litigation

7. Increasing Focus on Errors and Omissions Issues • TPAs owe their clients certain duties: • Duty to follow the contract • Duty to comply with all applicable statutes and regulations • Common law duties of due care • The internal “Best Practices” define these duties • Failure to discharge these duties can have E & O ramifications

8. Case Example: School District JPA v. TPA (Napa Superior Court, 2008) • TPA had handled claims for public school JPA for two decades • Audit found claims mishandling • Thelen sued TPA for negligence and breach of contract • Napa County (California) jury awarded client $4.66 million (reduced to $3 million)

9. Two Categories of Problems • Errors in Claims Administration • Overcharging and Self-Referral

10. Problem No 1: Claims Administration Errors – The Eight Most Common Problems • Failure to timely and completely investigate cases • Failure to develop and execute a claims strategy • Failure to identify and pursue subrogation opportunities • Failure to maintain medical control • Failure to provide notices and pay benefits when due • Failure to properly reserve • Failure to notify the excess carrier and collect excess insurance payments • Failure to document

11. Failure to Investigate Cases • Facts that support a denial must be developed within 90 days or cannot be used later, and invalid claims can be deemed presumptively compensable • Need prompt reporting by the employer • The TPA should have a solid handle on when claims can be denied (heavy penalties for unreasonable denial) • Questionable large loss cases should be reviewed with the client

12. Failure to Maintain Medical Control –The Most Common Issues • Failure to object to unnecessary or unreasonable treatment, or treatment that does not relate to the industrial injury • Failure to object to excessive or unnecessary medical bills • Failure to (correctly) use appropriate cost containment tools such as UR or agreed-upon fee schedules

13. Under-Reserving is the Canary in a Coal Mine • General rule is that estimates be adjusted immediately upon receipt of medical reports, orders of the Appeals Board, or other relevant information that affects the valuation of the claim • Be very wary of reserves that do not change – especially on young cases • Be very wary of reserves that change in a uniform way – indicates stair-stepping • Consider Client Service Instruction requiring mandatory, periodic reserve reviews

14. Failure to Notify the Excess Carrier and Collect Excess Insurance Benefits • Failure to timely notify the excess carrier can cause (depending on the policy) no coverage or a policy-based reduction in coverage • TPAs often do not do a good job following up on coverage issues, and on collection of excess reimbursements

15. Problem No. 2: Overcharging and Self-Referral • Replacing team that was “sold” with low quality personnel and temps • Charging for claim report access, for “special reports,” etc. • Bill review is a prime area for abuse: • Excessive (and/or ineffective) medical case management • Managed care and UR fees • Duplicate payments • Charging the file directly for services provided by TPA • Need transparency re money flow with “third parties”

16. Case Example: Broward County Florida Public Schools (2005) • Large self-insured school district • $34 mm in claims/year • 17 year relationship with TPA • $2 mm/year to TPA • $2 mm/year to Managed Care Service Provider (“MCSP”) – which did the selection, contracting and credentialing for providers

17. Audit was Critical of TPA • Found 292 cases open for longer than five years - Those cases alone had cost the District $81 mm • Found numerous examples of inadequate investigation, documentation and rationales. • TPA had defense attorneys setting reserves and billing the District for that work • Found numerous examples of vendors providing gifts to TPA • Excessive assignments to Field Case Managers • Inappropriate billing process for FCM and TCM

18. Audit was Particularly Critical of TPA Relationship with MCSP • TPA refused to provide the MCSP contract to auditors • TPA gave MCSP raises not permitted by the TPA contract • TPA used MCSP to provide same services TPA was to provide • Found no accountability relationship between MCS and the school district • Nurse case management on almost every case BUT no effective measurement of clinical outcomes • MCSP overly focused on obtaining a large quantity of discounted medical services, rather than facilitation of quality care

19. Contracts and Contract Management • Regular large loss meetings - at least quarterly for large accounts • Meet the new staff • Written, detailed claim status reports (not just loss runs) (provided or “on the system”) • Some TPAs now going to quarterly claim status reports (180 days for future medical claims)

20. Contract Management: Audits • At least once a year • Don’t use the broker’s “claims consultant” unless sure there is no relationship between the broker and the TPA • Sample audit of open, closed, MO and aged • New TPA relationship – initial audit at the six month mark • Don’t need to be huge audits – just sample audit • Exit conferences and audit memos in each file • Be proactive once you get the audit – statute of limitations issues

21. QUESTIONS? Daniel Sovocool Partner Thelen Reid Brown Raysman and Steiner LLP 101 Second Street San Francisco, California • Direct: 415-369-7340 • E-mail: dsovocool@thelen.com