Self-Insured Health Plans: Checking the Health of your Third-Party Administrator

To provide quality health care benefits at a reasonable cost, many employers sponsor a self-insured health plan because they have determined that they are more cost effective than fully insured health products. As part of the administration for this type of plan, employers may hire a Third-Party Administrator (“TPA”) to process medical and pharmacy claims.

Employers sponsoring a self-insured health plan are accountable to certain standards of fiduciary responsibility as established in the Employee Retirement Income Security Act of 1974 (“ERISA”). These standards include the selection and monitoring of your service providers such as TPAs.  By monitoring or “auditing” your TPA’s performance, employers can demonstrate their fiduciary oversight to corroborate that the TPA is processing claims properly.

Since TPA’s are processing employers’ self-insured healthcare claims which typically represent a significant amount of annual expenses, every employer should periodically perform an audit of their TPA which would mitigate risks associated with claims processing. A typical claims audit has the following objectives:

• Assess whether claims are being adjudicated in accordance with the plan document and only for eligible participants;
• Assess whether claims are being adjudicated timely in accordance with contracts between providers and the TPA;
• Identify processing errors and compare to performance guarantees, if applicable;
• Determine if industry best practices are being met regarding claims processing; and
• Identify process improvements that can further optimize claims processing to minimize costs, reduce errors and improve identification of fraudulent billings by providers.

TPA audits are a powerful tool employers can use to meet their fiduciary duty, and they offer an unbiased view of the TPA’s accuracy of processing claims. A typical claims audit includes the following components:

1) Review the Administrative Services Agreement (“ASA”)

A review and analysis of the ASA governing the TPA’s performance should include, but not be limited to, the following questions:

• Are all parameters for claims to be processed defined (covered services, deductibles, stop loss insurance, etc.)?
• Are there any restrictions related to an audit performed by an independent firm or vendor (e.g., scope of audit, frequency, sample size, sampling method, etc.)?
• Are there performance guarantees and measurement criteria (e.g., financial accuracy, claim accuracy, and turnaround time, etc.)?

2) Analyze the Data

Use data analytics to identify trends and anomalies that can help target further attention. Some of the categories to analyze include:

• Services;
• Providers;
• Industries; and
• Network savings.

Additionally, the following tests can typically be performed through data analytics on 100% of the claims processed during the audit period:

• Duplicate claims;
• Ineligible member claims;
• Claims where the amount billed is the maximum allowed under the plan’s coverage rules; and
• Outlier claims, such as those with potentially unreasonable total payment amounts, unreasonable aggregate patient or provider activity, or other risk factors.
• Non covered services

3) Test a Sample of Claims

Summarize risks of improperly paid claims identified through the planning and data analytics phases of the audit. This summary can also include non-quantifiable risks such as categories of claims subject to manual adjustment by processors. This list should be utilized to organize the entire population of claims paid during the audit period and select a sample of individual claims. It is also worthwhile to include a random sample of claims to allow opportunity to discover unexpected errors.

For the sample of claims selected, perform detail testing, which can include the following procedures:

• Recalculate the amount due for each network provider claim (e.g., inpatient, outpatient, emergency, pharmacy, etc.) based on the TPA’s pricing system and applicable contracts, if available, with the provider;
• Verify that deductible and out-of-pocket maximum (including copayments) are accurate;
• Verify pre-authorizations for applicable claims;
• Determine the employee or dependent was eligible to receive benefits;
• Confirm findings with the TPA;
• Based on findings from the testing of claims, consider whether there are other claims beyond those sampled that could have the same processing errors identified from the detailed testing; and
• As applicable, oversee the TPA’s collection of overpayments and adjustments to the claims system for processing of future claims.

Summary

There are no explicit rules regarding the frequency of conducting claim audits.  Some employers perform these audits annually, while other set audit frequency based on changes to plan documents and results of past audits. For example, if previous audit results were satisfactory and there have been no significant changes to plan design, performing an audit once every three years may be adequate. If audit results are unsatisfactory, then the employer should certainly consider conducting audits more frequently. The frequency of these audits is usually covered in the ASA, so it’s important that the plan sponsors negotiate the audit terms before signing the contract with the TPA.

Also, especially for those who have not performed audits in the recent past, employers often discover that the cost of performing these audits is very quickly recovered in full by the overpayments recovered as a result of the audit findings.