Scott Walden wrote an excellent article, The Squeeze, in Cleaning & Restoration Magazine. While I encourage those to read the full article, he stated in part how managed care has morphed into a win situation for only the insurance carriers and third-party administrators:
Some time ago, property insurance carriers began insulating themselves from unscrupulous, litigation-prone, transaction-driven contractors by ‘partnering’ with contractors they could trust. They formed departments responsible for locating and vetting contractors of various trades, and in exchange for feeding claims to these contractors, the contractors would abide by the carrier’s service level agreement – including mostly reasonable estimating guidelines. In concept it makes sense. The estimating guidelines typically resulted in lower invoices, but the contractor was receiving these claims with no business development expense. The carriers, for those claims they could steer towards the program, were recognizing reasonable invoices and reduced litigation – seems like a clear win-win, right? Most importantly, these relationships didn’t include any network referral fees. So, what happened? Why are these type programs mostly a thing of the past?
Primarily what happened…was the insertion of Third-Party Administrators (TPAs) / Contractor Networks – into the picture. I’ve written previously about TPAs, and from a business perspective, I still applaud the concept because it’s brilliant. Provide the carriers a huge savings by eliminating the administrative costs of a vendor management department, administrate the claims and track performance of the network vendors, and in many cases it doesn’t cost the carriers a dime… where do I sign up? It didn’t take long for the TPA concept to take hold, and we are seeing more pop up all the time, each vying for the carrier’s love. The competition amongst TPAs must be brutal. Each is trying to differentiate themselves, and many carriers are spreading out the love amongst several TPAs. Most TPAs charge contractors a flat rate Network Referral Fee (NRF) per claim, some add on administrative specific carrier-mandated reductions that have made performing program work less attractive/profitable. The additional overhead includes a significant amount of claim administration (things the TPAs require so they can gather statistics to evaluate compliance – most of which I am all but convinced the carriers could not care less about), NRFs and mandated software initial setup/monthly fees, application and annual membership fees, mandated attendance at annual conferences – the list goes on. Restrictive estimating guidelines include such things as forbidding use of after-hours line items, regardless of the time the work was performed, no emergency service call fee during hours, indicating you cannot charge for a respirator because it is a ‘tool of the trade’ – I could write an entire article on some of the ludicrous restrictions I have witnessed over the years. My absolute favorite carrier-mandated reduction is a 10% discount of drying equipment costs – seriously? (You know who you are and shame on you).
Let’s reflect on the origin of this program work concept – (carriers) insulating themselves from unscrupulous, litigation-prone, transaction-driven contractors by ‘partnering’ with contractors they could trust. What this has morphed in to is the constant squeeze on the very contractors they sought after to help save them money. Networks where they have lost sight that without contractors – there is no network, and without a network, the carriers are right back to square one. I see it coming. All of these fees and additional burden will continue to push away contractors because they simply cannot find a way to make this work profitable.
Jen Silver has been collecting a survey from those that have participated in preferred contractor programs. I can hardly wait for the roll-out of her educational seminar program later this fall. Here is one comment she shared with me:
Lots more work for less money. Unfriendly contractor guidelines. High company cost to be a part of these with significance.
In 2006 when we started, these programs were much different than they are now. In my opinion, the game has changed a lot. In the early days it was very profitable for us and led to a lot of great relationships. It jump started our business with leads if a storm hit, and was steady without storms. There were a lot less rules and guidelines to follow as far as estimating, documenting, and timing, and our profit margins were high. Carriers didn’t have near the damage pushback, and homeowners signed with us at a very high percentage.
Now – it’s the office, computer, documentation work that is so time consuming. For a contractor doing regular MRP work, you need to basically have someone in the office paid to keep up with all the daily tasks, updates, and calls – it’s a ‘hidden’ expense. The guidelines keep changing to benefit the carrier and the MRP – not the contractor.
These concerns are similar to what I called attention to in Policyholders, Restoration Contractors, and Public Adjusters Should Be Concerned About Managed Repair and Third-Party Administrators Working in Preferred Contractor Networks, where I made the following comment:
You cannot serve two competing masters at once. Jones suggests that policyholders need construction consultants to criticize the restoration work as a check against those who cut corners or simply do not have trained workers who know how to do a quality job.
The managed repair angle takes this one step further by making it part of the bargain when purchasing insurance. The policyholder is sold a policy that requires the policyholder to use contractors selected by the insurers or in an approved network. In return, the policyholder gets a discount on the premium.
For those that saw The Vince Perri Interview of Chip Merlin, I noted that the two biggest issues facing policyholders are the growing gaps of insurance coverage and the insurance industry managing the repair process.
I want to applaud United Policyholders for its efforts to raise these concerns at the national level. United Policyholder leaders have been advocating for a review of these at the NAIC meetings and raising the alarm. Just writing and talking about these problems is not enough; action needs to be taken so that regulators see how these harm insurance customers, are bad for the insurance product, and harm everybody in the industry in the long term. Other industry trade associations need to join United Policyholders in efforts to stop these problems.
Thought For The Day
Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.