Best in Class vs. The Most Cash The Evolution of Pay-to-Play from Yesterday to Today

This is not a new revelation by any means. If you have been in the industry for more than a decade you have most likely heard of the scenarios where a vendor provides some form of remuneration in exchange for a seat at the proverbial table. In some instances the vendor is asked for it. Personally, I can recall some pretty indirect but direct requests for things. Back in the day, these exchanges included everything from tickets to games and weekends at someone’s beach house to televisions and good old fashion cash. There was a time in the not so distant past when access to every referral source was as easy as walking through the door to your local claim shop, this was pretty much considered the cost of doing business. This practice wasn’t exclusive to Third Party Administrators (TPAs). It included government and quasi-governmental agencies down to even the vendors themselves. There were plenty of physician groups that were more than happy to send tickets to games and/or bottles of Dom to their “favorite” IME companies to keep that referral blood flowing. For purposes of this I’m going to focus TPA to vendor or service provider game. To employers that is really the most relevant.

Now before I continue, this was not and is not the practice of every TPA just was and is not the practice of every vendors to just comply and pay the piper. What follows is the tale of those that did and do. For obvious legal reasons, we will not identify or allude to any company or vendor that participate in this practice. So the spoiler alert is there is no spoiler, just insights and information on a practice that impacts your dollar as an employer and can potentially impact the outcomes of your claims.

We’ll begin with the story of an IME company almost 20 years ago that was trying to land a rather large account. It was a relationship that brought them the introduction to the Claims Director. After several meetings and an established comfort level, it came time for the ask. The Director who had final say, alluded to the fact that he was a big fan of a very famous musician the was going to be performing in town the following month. Tickets as you could imagine were impossible to come by except for an extraordinary price. The Director noted how much it would have meant to see this performance. Bruce Lee had a famous line from Enter The Dragon, he called it the “Art of fight without fighting.” This is its equally effective counter part, the art of “asking without asking”. If you want to play the game with the big boys back then, you needed to know it. So that company went out and secured two tickets for the Director and a guest but it didn’t end there. Later the director noted that transportation would be required due to an out of town trip, from which the return was scheduled the same day only hours before the concert. You guessed it, they arranged for a limo from the airport to the show and then home. So did they land the account, well of course they did and it was a lucrative one at that. However, were they the best suited for the job? Did they provide the best service, the best pricing or the best results? Who knows, they paid the best price and so they were in and the employers who they provided services for were none the wiser. They were now an approved vendor.

Much has changed over the years since that time. For the most part, gone are the days of department heads calling to say they haven’t been to a Yankee game in “so-o-o-o long” (that one happened to me directly). What prompted the change, well it was multi-fold and the attack on the practice came from all directions at once, it came fast and it came hard. First it began with vendors who could not afford to play this expensive game as well as others who refused to play ball. They believed (rightfully so) that they should be judged on their performance not their gifts. They complained to the heads of these organizations and more importantly, they complained to the employers themselves who in turn began to inquire into these practices within their claim administrators. Many entities began to launch internal investigations, and for some of the government related entities there were consequences. You may recall stories on the news of heads of departments in NYC being walked out in handcuffs because of their part in taking bribes for services. Thus ended the era of the handshake and exchange contract negotiation and entered the age of RFP for literally everything.

Rules changed within virtually every entity. Governmental agencies restricted gifts to a $5 maximum. Lunches and dinners were out for them as well unless they were paying for part of the bill. The days of the individual benefiting from providing contractual obligations of the organization were at an end. Now make not mistake, it was not because they were terribly upset my the ethical implications of what had been going on. Many of the decision makers implementing these changes were beneficiaries over the years themselves. They were just smarter about it. But the title of his article is the evolution of pay-to-play not the end of it. Smarter players meant a smarter game.

While the individual restriction on monetary benefits and gifts were implemented for employees and management, a new and more creative practice was created. One which did not benefit the individual but the corporation as a whole. One which would present to clients as a progression in service level, providing a non-offensive route to eliminating vendors and providing for direct to bottom line revenue impact. Here are the three steps to today’s pay-to-play model:

STEP 1 - The RFP: following the time honored bidding process ensures that they are able to select some quality providers and creating a vast list of reasons to eliminate others from the mix. It will provide the appearance of equal opportunity for the vendors and in the end they can’t complain about losing a bid they had a fair chance to win. This now places the finalists in the position for negotiation. Those of us who have submitted responses know the negotiation process requires a lot of pencil sharpening and sometimes creative solutions. By creative in this sense we’re talking about essentially, a kick-back. 

STEP 2 - The Profit Share / The Credit / The Discount - all polite terms for a kick back when you are paying a fee for something which provides you no added benefit other than to secure the business. This has been structured by companies in several ways but the most common and less detectable is the Profit Share. This results in a payment being issued at the end of the quarter or annually equivalent to an agreed upon percentage of the total revenues provided by the company issued back. These have ranged from 2% and I’ve heard them as high as 10%. When you’re talking about a couple hundred items that may not seem like much. But take a large employer that does 300 exams per month at an average of $350 per exam. That equates to $1.26 million in revenue. Which as a profit share produces $25,000 up to $126,000 in bottom line profit from one client. Now when you’re talking about a couple of hundred thousand items across varying services and costs this becomes quite significant even at a mere two percent.

STEP 3 - The Preferred Program - this is not an official name for any existing program just what I’m calling it. The creation of a select vendor program in theory should be exactly what they say it is. An appropriate vetting of service providers to ensure that the client obtains only the best services available to them. Unfortunately, what this is for many is the means to ensure the vendors receive the guaranteed volumes they assured them. Channelling of the services to the providers allowing for maximization of the revenue share. Visual appearance to our clients that we are providing them with best-in-class service based on performance, pricing and outcomes. Sadly the reality is quality is secondary and while fees in these agreements may be slightly lower than retail, they are far from discounted as the truly discounted rate is issued to them and not their clients in these scenarios. This makes sense when you realize that lower rates on services would equate to lower revenues for which they would see a percentage of. So logically the hard fee negotiations which you commonly see in these bids tend to fade away.

Now it is worth repeating that this is not the practice for every TPA out there. There are many who have approved vendor programs in place based strictly on that vendors quality and outcomes.

As an employer, the next logical question is how can you tell if your TPA is doing this? The truth of the matter is you really can’t. The way these programs are generally structured is they provided discounts or profit shares which as a customer you would rarely, if ever see. Then what is the point of this article and how can I as an employer address this? 

Good questions. First the point of the article is simple, knowledge. It is impossible to even to begin to address situations that you are not aware are impacting you. As for ways you can address this below are my three suggestions.

Suggestion 1: If you are working with a broker, speak with them. Your brokers often have tremendous connectivity and insights into the inner workings of the industry or they know someone who does. Brokers I work with and/or have spoken to all recognize this issue exists. If the quality and outcomes they anticipate for their clients are their, then it does not present a problem for them. Conversely, if the outcomes are not there and there are quality and/or service issues related these vendors then it becomes an issue that needs to be addressed. Either way, the odds are if you work closely with your broker they know who the potential offenders are and you can jointly work on suggestion number two.

Suggestion 2: Opt Out. Whether you work with a broker or not, you have the ability to establish your own client instructions. Select the vendors that you want to work with on your account. Keep track of their performance and outcomes holding them accountable for same. Make sure that you are getting the quality and attention you are paying for in the service. There are TPA’s that will tell you it is required for you to use their program and service providers as part of their services. It those instances the rule is simple. Remember who the client is. In the end, whether they like it or not, the TPA is another service provider.

Suggestion 3: Insist on Transparency. Whether a large or smaller program you should be reviewing your vendor/ancillary expenses just as you do your legal expenses. You should insist that vendor invoices be available for review and made part of the file. Some vendors actually reflect their agreed upon discounts per invoice (well maybe not after reading this) but it is something that has been done in the past, dependent on how they have structured their agreement. It may be reflected as a credit or discount. If there is a consistent credit and/or pattern identifiable in your claims then you know you should look into it further. You want to have invoices from the service providers and not just bill notations in your allocated expenses.

In the end, the primary objective is to obtain outcomes, the secondary objective is to do so as cost efficient as possible. It would certainly be ideal if the best service providers for the job were being utilized all the time. However, as you have read this is not always the case. There is no simple answer I can provide for the pay to play issue. Preaching from the soapbox about integrity in performance only matters to those who share that common sentiment.

To all employers, my last words on the subject are be aware, take a little more control of your programs to ensure that you are getting the best for what you pay for and not just the best deal that they were able to get paid on.

About Damien Jonathan Caldwell - he is the CEO and co-founder of Adjudication Services Group (ASG) a technology solutions company offering unique claims and vendor management solutions to employers, brokers and TPAs. In his 25 years in the industry he has consulted and worked on every side of the claim industry. From claim management, ancillary services to healthcare, diagnostics and practice management. Since 2009 he has been one of the private equity industry’s go to experts in the property and casualty space. He has also provided services as a business consultant in the private sector.