Friday, October 13, 2017

White paper - TPA's

Below is a very long read.  This is the details to the keynote speech I will be delivering at the RIA - strictly content event in November 2017.  If you take time to review then I would also love your feedback.  

In this paper I will review the history, current state and make some projections for the disaster restoration third party administration programs (TPA).  These programs have grown over the years and as you will find in my conclusion, they will continue to increase in market share.

Before I dig too deeply into the subject I think it is important to announce my bias on the subject.  Some may find my bias to be a cop-out but I think it is a realistic approach.  My bias is to create successful businesses.  There is not a correct path to success – other than to operate with integrity.  Given this bias, I believe that TPA’s are both good and bad.  I will explain the various positive and negative factors later in this paper.  It is important that restoration companies create a strategic plan and then make deliberate decisions based on this plan.  I see many companies that jump onto programs and then find that they become too large a portion of their business or find that their business was not set to work well in the TPA environment.  Either of these situations can set your business for failure.  Paul Gross the founder of Code Blue stated once that no source should account for more than about 20% of your overall business.  If you limited the influence of any work source then you remain in control of your business and your strategy.  When this gets out of balance, you run the risk of being manipulated in that relationship.

There are many in the industry that would state that if you pursue relationships with TPA’s, are akin to lemmings jumping off a cliff and then swimming to their death.  They would say that restoration companies jumping on these vendor programs lack creativity in their marketing approach and are setting their business up for failure.  This failure is due to the vendor influence on scoping, price and claim treatment. 

The other side of this dialog will state that you cannot change reality and the TPA’s wil control the vast majority of claims.  Their argument is that if you are not participating in these programs then you are continually getting a smaller piece of the pie.  How can you argue with the outward success of so many restoration companies?  A visit to the Crawford Contractor Connections event every year will show that thousands of restoration companies are operating in this environment and achieving success.

Let’s take a look at the contributing factors to the emergency of TPA’s.  Back in the early 1990’s – maybe late 80’s, Mr. Paul Davis (founder of the franchise bearing his name) started Prism.  This program was created out of an apparent need for better claims control and management in the industry.  The program was sold and then later purchased by Crawford Companies.  It took time to change the process for managing claims but there were many contributing factors that drove the need for changes.  Prior to the 1990’s restoration was very fractionized.  There were few large or nationally recognized names.  Franchises existed but they did not have good control over work quality from location to location and the standardization of process was loosely defined.  The industry had no standards and work quality and scope varied widely from contractor to contractor and market to market.  Pricing was inconsistent and was largely dependent on the relationship between the restoration company and the adjuster.  This situation of lead to opportunistic pricing as well as relatively arbitrary approvals by the adjuster.  These realities created a comfortable situation where to a degree, all business was local.

The restoration environment was tainted by some faulty assumptions.  The first thought was that insurance companies used competence as the top judge of contractor selection.  The reality was that the company offering the strongest incentive often was selected as the approved contractor.  Often the incentive was simply that they job would be done well and the customer would not constantly complain to the adjuster.  Other selection criteria may not have been as innocent. Another misconception is that the customer can tell the difference between the quality of work completed by various companies.  In reality most property owners judge the quality of the work based on the relationship with the people completing the work rather than the work itself.   Another misconception was that restoration companies operated out of a desire to create value to the insurance company and property owner.  Too often this was not the case and the main motivating factor was how much profit could be squeezed from each job.

In the 1990’s thins started to change which set up and allowed the realities that you see today.  When I first learned to estimate, I would look at a job and then determine the cost of materials and then required labor to install the products. A realistic and defendable price would be applied and broke into units for estimating purposes.  It might have been 1991 or so when we purchased and estimating program called Project and shortly after that we picked up our first copy of Xactimate.  It turns out that standardized pricing was essential to any vendor programs and Xactimate became the vehicle to make that happen.  About this time electronic and digital communication was becoming a reality.  I recall coming into the office to find a 30 page adjuster estimate rolled up on the floor in front of the facsimile machine.  We networked our computers and found that this was becoming a means for immediate (although very slow compared to today’s standard) communication.  I recall meeting with the Allstate claims manager in 1993 and was very excited to find out that they were putting together their first mitigation (at that time they called it drying) program.  I knew we were a shoe in because we were hands down the best drying company in our area – we had made investments in drying equipment and training for years.  I was very surprised when the claims manager, who was disappointed, told me that ServiceMaster would be handling the claims and it was out of her hands.  I figured that it was only a matter of time for them to come back and include us on their program – it never happened.  The insurance world started to change in the 1990’s as well – Gieco was purchased by Berkshire Hathaway.  They quickly proved that you had a competitive advantage when you could make money on the claims loss ratio and have a negative cost of investing.  This reality has continued to impact the industry because previously it was assumed that in most years insurance would lose money on claims but make it up from investing activities.  There was a confluence of factors in the 1990’s that transformed our industry and made today’s claims programs possible. 

Insurance companies have been working in managed repair programs for some time in other verticals of their business.  HMO’s were started in the 1930’s to help manage health care coverage and costs.  Auto glass and auto repair programs have not been around that long but have ben in existence for decades.  Property restoration is more complex that many other areas that insurance is covering however these companies are familiar with programs and working through the restoration process is natural.

I recall reading an article in Claims magazine about two decades ago about the success of an auto vendor program.  It was interesting to me to find the claim that clients were much happier when utilizing the managed repair program.  For many reasons I believe this to be true in the restoration industry as well.  As it turns out the insurance companies desire for their clients to be happy with the insurance they purchased.  If people are happier on claims where the insurance company uses a preferred vendor in a managed environment then it makes sense that you will experience this more often.  It also make sense that insurance companies are looking for big solutions to managing claims – not individual project solutions.  In the past companies looked to the franchise group for claims solutions.  It was about ten years ago when I attended my first Crawford Contractor Connections event.  I encountered what I call a color blind environment.  Every color was represented: ServiceMaster yellow; ServPro green, Paul Davis Black; First General blue; and more.  It became apparent to me that insurance companies that allowed them to choose the best available contractor regardless of affiliation in each market – CCC took care of vetting and managing the contractors.

The current insurance industry trends are favorable for the TPA claim environment. The industry is in a quick and potentially radically changing situation. If this first statement is true then it makes sense to engage a claims specialist to manage this change.  One of the biggest influences in claims focuses on reduction of cycle time.  Managing dates and times appear to be a core competency for most TPA’s.  Insurance companies and TPA’s by their relationship have a large focus on reduction in cycle time.  This focus is beginning with the first notice of loss through payment and file closure.  Many of the other trends are connected to this focus.  Integrated communications systems will be used quickly identify damages, verify coverage, improve subrogation and limit fraud. These will also be utilized for improved client communications throughout the process.  New insurance products and companies are being created.  Often these are virtual companies without claims resources.  Video communication may be utilized to create a virtual adjusting environment where much of the adjusting functions are completed from an office or even utilizing artificial intelligence.  A race to be the point of first notice of loss assures control of the claim.  I expect this to be a robust area of competition and innovation as it is the key to the other portions of the claim management.

The hurricanes that hit in the summer of 2017 left a lasting impact on many insurance agents, companies, property managers and corporations.  They may have felt they had an adequate catastrophe management program only to find that their dependable solutions were maxed out and service was lacking.  TPA programs will offer a solution that make a lot of sense to many of these stakeholders.

For a contactor TPA’s offer many advantages. The first one became apparent when working with a client in South Florida.  The insurance market there is different than most other areas in North America.  There is an unusual amount of animosity between the insurance companies and contractors.  There are many contributing factors, which I will not get into in this paper.  One result of the challenges is that the approved insurance scope and prices vary widely with no apparent rationale.  One benefit with TPA programs is that they establish ground rules for claims handling.  I am not certain if this is going to make the situation better but one of the most challenging companies to work with has formed a recent relationship with one of the major TPA programs.  Time will tell how this will work out but it is my hope that they will become a reasonable arbitrator and establish predictable claims handling procedures that are fair to all – especially the property owner. 

There are many other benefits.  One thing that has always been a challenge in the restoration market is the lack of barriers to entry.  It takes very little to start a restoration company, establish several insurance relationships and you are in business. TPA’s have stronger entry requirements and provide some barriers to entry. A positive and negative to the program is the ability to get on a list and then not need to continue to manage a marketing route to continue to get work from that source.  Most programs will provide a consistent level of work on a routine basis so it keeps your equipment utilized and staff busy.  I have found several companies that have utilized programs as an effective resource to opening new locations. In the event they are successfully performing work for a program and want to expand the restorer asks the program administrator where they need additional contractors and a new office is established at that location with a built in volume of work.  One challenge in restoration is the payment terms for insurance companies.  The TPA’s usually have very established and predictable policies that provide a reasonably quick payment.  One additional benefit is that this is a growing area of the industry.  There are not more claims but the TPA’s are handling more of the existing claims.  There are many benefits of participating in claims programs and deserve a close look for most restoration providers.

While there are many benefits to working on programs, there are also many challenges to consider as well.  One of the top challenges that I have seen is that the insurance  industry has shifted a lot of administrative reponsiblitlies to the contractors without compensation.  Companies performing program work often need to increase the administrative staff just to handle the additional requirements and they often need to be updated every day when work is occurring – including weekends.  Due to the urgent nature of the projects it is difficult to prioritize projects – since they are all top priority and you are being measured on every project.  If you have a hundred thousand dollar job next door and a two thousand dollar job across town, they both need to be addressed immediately.  The emergent nature of the calls that are frequently smaller in nature may require different management staff to oversee and manage these projects.  I have found that TPA programs result in a high volume of smaller jobs that all require same day attention.  The pricing for claims programs is highly structured and is very inelastic.  The contactor does not have flexibility in scoping and pricing decisions. The price guideline is often treated as a price standard that cannot be adjusted.  The programs all have estimate reviews that assure you were complying with the program limitations and that you followed the rules. This often is perceived by the contractor as micromanagement of the jobs – (which it may be.)   An additional problem results from the program work as well due to the required uploads of the estimate. My understanding of Xacatimate tells me that when a job is uploaded it is used to verify market prices.  If this true then it results in stagnant or downward pricing.  Job margins are also influenced by the percentages paid to the program.  Some make the case that you don’t have to market to get the work once you are on a program.  That is true however it also leads to lazy marketing practices.  Companies on vendor programs tend to cut back on their marketing activities since you cannot market to the companies that are using the TPA.  When companies stop marketing then it is my opinion that you have lost control of that part of your business.  The more work you receive through vendor programs then I think that you need to market harder on the other segments of your business.  Some contractors are frustrated with the fact that claims administrators that often do not visit the jobsites make decisions.  These administrators may have a rudimentary education in restoration practices however they often lack any real world experience.  As restoration professionals know that jobs are rarely the same as the scripted hands on drying houses that are used for the ASD classes.  The structured nature of the TPA programs removes a lot of flexibility on jobs.  The program is designed to allow flexibility but in reality exceptions are hard to achieve.  When I first entered the restoration industry we were introduced to the claim triangle with the client, contractor and insurance company on each point of the triangle.  Managed programs often bring a fourth point into the equation.  This brings in more complexity in job communication and allows for more conflict.  As you can see the TPA programs have many advantages as well as disadvantages.

It is not be expectation that I am going to influence any company one way or another regarding managed programs after all as I expressed earlier I think they are both good and bad.  My hope is that I encourage restoration companies to take a strategic approach, not accidental, to working with these programs and then determine if they are an important element of their business. I feel that it is irresponsible to get so deep into program work that you cannot get out and equally irresponsible for contractors to be on the outside of the program and throw stones without an understanding of whether they might work for your business.  The restoration world is much more complex than ever. Contractors need to be nimble, educated, aware and strategic.  With all the changes in the industry, claims will be substantially different in ten years and quite reasonably much sooner.  Regardless of the direction for our business, it is essential for the health of your business that no individual source is responsible for more than 20% of your business.  If you maintain balance then you will continue to be in control of your business and not be at the mercy of any client, adjuster or company.  In the end, having a great customer service program and learning to exceed your customer’s expectations is a winning strategy. 

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