Vendor Management and Cost Control in P&C Claims – Is your claims organization at a disadvantage?

I was approached later during the meeting by another senior manager from a mid-sized regional carrier asking me “can you teach us to audit legal bills?”  My answer was that we would be happy to, and that Allegient has the most professional and experienced team of legal cost management attorney-auditors who will work with you. But why, I asked, stop there when additional value lies in using data accumulated via a systematic e-billing program to manage expense, obtain key management reports and develop predictive models of which firms would be most appropriate in future situations?

On the surface, the former question as to why more carriers do not have formal programs to receive and review legal bills electronically is particularly perplexing when you consider that most such programs experience an ROI of 5:1 or better, and can improve combined ratios by 1% or more. Add this clear cost benefit to the ability to discern which outside counsel is performing most effectively and you can see why those who have implemented formal programs consider them such a powerful contribution to their bottom line.

The issue many carriers struggle with is whether this will impact the business relationship they have with outside legal firms. The surprising and time-tested truth is that implemented properly, an e-billing solution can and should enhance the relationship between the carrier and the external firms because it can improve communication and the speed at which payments are processed. Today, almost all major national and regional law firms submit invoices using an e-billing solution offered by P&C carriers. Most will agree that it is a vast improvement over using paper invoices.

The fact is that most of the top thirty U.S. P&C carriers (as measured by direct premiums written) have implemented and derive significant benefits by using a legal e-bill review program. And this has been one of the key catalysts in bringing the vast majority of the U.S. legal community on board with the idea. Conversely, many medium-sized and regional companies have been reluctant to implement similar programs. That said, there is a growing trend among the regional and mid-size carriers to explore this option, and with good reason. Given the cost, productivity, and information benefits derived by a legal e-bill review solution, carriers without an e-billing system face the risk of falling behind and being at a competitive disadvantage. These disadvantages include:  paying higher legal costs, making less than optimum use of their claim professionals, and not having the data to objectively evaluate and optimize their use of outside counsel for the job and location.

With recent advances in technology, and commitment from several large U.S. P&C carriers, the concept and processes developed in e-legal bill review have been extended into other key cost areas such as independent adjusters, accountants, engineers, court reporters and others.

Let’s look at some of the typical questions and concerns that claims executives grapple with when evaluating the potential of a cost management system for key vendors.

Law firm and vendor relations

Many claims executives are concerned that implementing an e-billing and review solution for legal and other professional vendors may damage the relationship with key service providers. I agree that this may have been the case five years ago. However, I can assure you that the vast majority of law firms and independent adjusting firms today cooperate with an e-billing and review solution. In addition, large carriers are requiring other professionals to follow suit. At the end of the day, this turns out to be a win-win for the carrier and the professional provider. As mentioned above, most law firms are very “e-billing friendly” and are routinely submitting bills electronically for some of the larger carriers. They benefit from rapid and inexpensive bill submission as well as faster turnaround on their bills. E-billing systems typically check bills “on their way in” and notify the law firm if charges are outside guidelines, allowing an appeal or the submission of further documentation.

Are the savings worth the effort?

One of the most common pitfalls is a lack of understanding of the magnitude of the cost problem itself as vendors (law firms, adjusters etc.) increase rates and litigation continues to accelerate year after year. Many claims executives would be astonished by the increase in the absolute amount of fees their company has paid over just the past five years. I have been in situations where claims executives simply do not know how much they are spending on various different vendor groups. One thing is a virtual certainty – fees are going up, and at a higher rate than inflation. Indeed, we have seen situations where absolute legal spend is increasing even as claim volumes decline.

Staffing for the solution

A third concern among claims executives revolves around the structure of their internal adjuster groups and the staff they have on board. Many cannot see implementing a “change of culture” by asking adjusters to become bill auditors. This can indeed be difficult, depending on the organization and the willingness of management to introduce change. However, while our experience indicates that a “Central Bill Review” unit or group does yield best practice in terms of cost control, it can certainly also work well with only a few designated individuals providing bill auditing, and for smaller carriers, this is a good approach.

IT support

Some claims executives are concerned that they will have to obtain material support from their IT departments in order to be successful with a vendor management program. In fact, most of the extant bill review systems are Application Service Provider (ASP) software applications and require no internal IT support. Salesforce.com is another example of such an application. These ASPs are entirely hosted by the service provider and can be implemented with little or no upfront cost to the carrier. An ASP-hosted solution should deliver rapid, measurable results on a “pay as you go” basis in under 90 days.

Challenge to Claim Executives without e-billing and review solutions

I would ask each executive who is reluctant to move forward with a legal e-billing review solution whether they would be willing to conduct a pilot program for 90 to 120 days? Would it make things easier if the pilot program included only law firms who are currently submitting to a legal e-billing review solution on behalf of other carriers?  Finally, if an implementation program could be designed that does not require any IT resources and would have minimal impact to your claims organization would you be willing to investigate further?

I am convinced that carriers who have not moved to implement legal and vendor e-billing review solutions are behind the curve – and they need to catch up. I fully understand that  many struggle with moving forward because they have not yet seen the business case. Others may be concerned their panel counsel will react in an adverse fashion. And, of course there are always competing projects such as the implementation of new claims systems and other projects. With all due respect for these and other concerns, I believe each claim executive has a responsibility to seriously consider implementing such a program – even if it happens to be a limited pilot program initially.

Questions for those who have already adopted existing solutions

What if a system is already in place? Carriers who have put in place a system that is mere “pipework” should evaluate whether their system is providing them with the right kind of data and whether it is adaptable to other vendor types besides outside counsel.

Most older e-billing systems have poor reporting and business intelligence capabilities. A relatively simple “pipe” that imports bills into a claims system for a math check and settlement simply will not offer the benefits of more modern and sophisticated systems which can effectively audit bills at a line item level against guidelines and then produce meaningful management information for better future planning.

Is it hard to switch systems? It can be, depending on the degree of programmatic interface work that has been done with the claims systems (for example, to pass payment details post-bill review, or to import data regarding the claim). However, most executives believe that switching at the law firms will be the most difficult hurdle to jump. In fact, it’s the easiest. Why? Because as I noted earlier, most law firms e-submit to several or all of the various e-billing systems, and moving from one to another is a very straightforward exercise for them.

Do we really need to change our existing system? Perhaps, or maybe you need to add other vendor types, either to your existing arrangement or by taking a different approach to auditing other vendors. While some carriers have focused on implementing new claims systems and eliminating leakage from excessive loss payouts and they have brought pressure to bear on adjusters and claims managers to improve accuracy on settlements, many have not forecast the significant rise in law firm bills over the past several years and this has broadened the leakage concern into legal fees. A few carriers have put e-billing systems in place and are seeing some cost improvements. Now they are ready to “take the next step” and begin to analyze their spending patterns and streamline their vendor choices.

The pressure to gravitate from clerical legal audit to bill review and ultimately performance measurement and performance management reflects the emerging interest in going beyond merely monitoring legal costs to developing proactive budgeting and bill management programs. In addition, insurers are putting pressure on litigation departments to shorten the cycle time from commencement to closure of litigation. This enables them to minimize the amount of money that needs to be set aside in reserve pending litigation. Freed up reserve monies can be reinvested in underwriting and related revenue generating activities.

Don’t miss the boat
Perhaps reading this you fall into one of the following three circumstances:

• Have no system and probably should investigate further
• Have a system but there is poor business intelligence, maybe we should re-evaluate
  
• Have a good system for legal vendors but nothing for other vendors

No matter what your situation, it may well be worth investigating the degree of automation and rigor that your organization has in place in respect of managing vendor costs and improving vendor selection and assignment. If there is no system in place, a legal cost management program is a good first step. Further cost savings and benefits can be obtained by implementing a system for cost management and automated payment to independent adjusters, investigators and other vendors. Older e-billing systems typically lack the capabilities of the latest generation in the key areas of business intelligence and reporting, providing only “pipe work” to eliminate paper and nothing more.

It’s certainly never too late to implement a vendor cost management solution to improve the bottom line of your claims organization, or to expand and improve upon whatever systems the carrier may already have in place.

Whatever your situation, a thorough review of vendor budgets should be enough to persuade any senior claims executive that cost control and better vendor selection remains critical to organizational competitiveness. Seize the day!