Claims management: To self-administer or outsource?
Here are the key considerations for professional liability claims management.
There is little debate that effective claims management is critical to improving an organization’s claims outcomes, protecting its reputation and significantly reducing its overall cost of risk.
Determining how the organization should go about managing its professional liability claims, however, requires a careful evaluation of its internal capabilities as well as its overall objectives.
The most critical step in this process is the organization’s decision of whether to hire internal staff to self-administer those claims or outsource its claims management function to a third-party administrator. It is important to examine the pros and cons of managing professional liability claims internally and the criteria organizations should consider in determining whether they could benefit from outsourcing that function.
The benefits of self-administration
To be truly successful, an internal professional liability claims management team needs to possess a multidisciplinary skill set that includes both insurance and legal expertise. These skills are essential to evaluating insurance policies and coverage issues, managing outside counsel, and reserving and critically assessing professional liability claims. A successful claims management team will also require the support of accounting, compliance and IT professionals.
In addition, the team needs to secure a suitable risk management information system (RMIS) database to house the organization’s claims data, which generally requires both substantial initial investment and ongoing licensing fees.
Recruiting specialized talent is another important consideration, one that becomes increasingly complex as an organization’s geographical footprint expands. That is because the laws, licensing obligations and insurance regulatory requirements impacting claims management vary from state to state.
Thus, the first question an organization needs to answer is whether its C-suite is fully committed, both operationally and financially, to recruiting and hiring the appropriate talent and procuring the systems necessary for self-administration. Next, the organization must determine whether it has access to a suitable and accessible talent pool to address future growth or staff departures.
For those organizations that commit to self-administration, their decision to proceed in that direction is often based on the historical experience of the key decision-makers, as well as two critical assumptions:
- Self-administration allows the organization to more diligently control both the claims function and its claims data; and
- Self-administration allows the organization to better support its employees and speak with one voice, both internally and externally.
These two assumptions should be weighed against the increased risk an organization assumes through self-administration. Undertaking the financial responsibility for errors and omissions in the claims-handling process is, arguably, diametrically opposed to the concept of transfer of risk. It can also be more challenging for an organization that self-administers its claims to fully assess the effectiveness of the team’s performance since the only benchmarks the organization will generally possess are its own claim results.
Outsourcing considerations
As an alternative to self-administering their professional liability risks, many organizations decide to retain a third-party administrator to serve as their claims management partner. A qualified third-party administrator can offer turnkey claims management services or more tailored solutions that supplement the organization’s existing internal resources.
There are numerous reasons why an organization should consider outsourcing its claims handling obligations. They include:
- The cost savings achievable through reduced headcount, salary and benefits.
- The cost savings of not having to procure an RMIS database, which is furnished by the third-party administrator as part of its service fee.
- The freedom to focus on its core business and let professionals who manage professional liability claims on a daily basis perform those services on the organization’s behalf, subject to strict service instructions and controls.
- The elimination of internal management issues related to staffing, training, turnover or conflicts of interest.
- The transfer of obligations for federal and state regulatory reporting, including Medicare reporting, and more importantly, the transfer of liability for fines related to any deficiencies associated with those reporting obligations.
- Enhanced credibility in the excess insurance and reinsurance marketplace based upon the reputation of the retained third-party administrator.
- The transfer of any liabilities related to claims-handling errors from the organization to the outsourced provider.
- Access to national benchmarking capabilities and industry best practices, and greater leverage in areas such as the procurement of litigation services, including defense counsel representation.
Weighing the options
Determining how professional liability claims will be managed is a critical decision for any organization. Here are some key considerations when weighing self-administration versus outsourcing of claims:
Benefits of self-administration
- Greater control over the claims function and claims data
- More flexibility in supporting employees
- The ability to speak with one voice, internally and externally
- Brand protection
Benefits of outsourcing
- Headcount, salary and benefits cost savings
- Access to an RMIS database is included in the service fee
- Liability for claims-handling errors or regulatory deficiencies is transferred to the third-party administrator
- Access to national benchmarking capabilities and industry best practices
- Freedom to focus on the core business
A bit of this and that
Finally, there may be situations in which the most appropriate claims-handling model for an organization is a hybrid involving a combination of self-administration and outsourcing. As noted previously, claims management encompasses a myriad of services, some of which could be performed internally while others are outsourced.
For those organizations that may be contemplating a hybrid model, it is even more critical that they coordinate this model carefully with their selected claims administrator to delineate the scope and performance of services and avoid any duplication of efforts.
The ultimate success or failure of an organization’s professional liability claims management program will be largely dependent on how well those claims are managed. That is why it is so important for an organization to carefully weigh the advantages and disadvantages of outsourcing versus self-administration before determining which path to choose.
Rob Blasio (Robert_blasio@gbtpa.com) is managing director of Gallagher Bassett Specialty, a division of Gallagher Bassett Services, Inc.
Keep reading…