Claims processing is one of the cornerstones of outsourcing in the insurance industry.  This primarily back-office task is often seen as a great opportunity to save money ¨C as it is primarily ministerial, not customer-facing and based on specific rules and guidelines.  Many insurers have grasped this concept and moved their processing to lower-cost offshore locations.

While fairly straightforward, claims processing does present specific, unique issues for both the Customer and Vendor.  The Customer may face regulatory scrutiny, customer abrasion, undue expense and privacy risks.  Vendors, on the other hand, may face diminishing volume, undue regulatory risk and impossible customer satisfaction goals.

Customer-side Concerns

In many industries, timeliness and accuracy of claims processing is subject to regulation and/or government scrutiny.  Obviously, the elapsed time to process a claim is the sum of the time taken for the Vendor and the Customer to perform necessary processes.  Delays, particularly systematic ones, can be costly ¨C and can lead regulatory action or lawsuits.

Undue denials, by their nature, create customer abrasion.  While claims processing is generally governed by business rules, the internal communication between initial adjudication and claims reexamination may be lost ¨C and insured parties may be subject to undue procedural burdens that may erode customer loyalty and company reputation.

Undue approvals, on the other hand, lead to the obvious problem of too much money being paid out.  Again, losing the informal knowledge and network that often exists within a claims processing organization can lead to these errors ¨C as more processes are done ¡°by the book,¡± without regard to the quality of the ¡°book.¡±

Privacy concerns must also be taken into account.  Claims generally contain non-public financial information (regulated by the Gramm-Leach-Bliley Act) and may contain protected health information (regulated by HIPAA).  Also, given that many (but not most or all) claims require manual processing ¨C exposure of such information to Vendor staff is going to be more frequent and all-encompassing.

Finally, process mobility may prove to be more difficult than originally believed.  With an outsourcing usually comes an exodus of Customer¡¯s qualified staff ¨C and their knowledge.  Bringing the process back in-house or to another vendor may prove difficult, costly and time consuming.

Vendor-side Concerns

As mentioned above, Vendors face risks in claims outsourcing as well.  Insurance claims are generally subject to some automatic adjudication process (known as ¡°auto-adjudication¡±).  Insurance companies are constantly trying to improve their auto-adjudication rates through improved software and analysis tools.  As auto-adjudication rates increase, the number of claims that require manual processing will, naturally, decrease, reducing the volume of claims being processed by the Vendor.  A significant reduction in volume can substantially affect Vendor margins.  Thus, pricing should take into account the likelihood of improved auto-adjudication rates.

Many potential outsourcing Customer¡¯s attempt to push significant regulatory risk onto their outsourcing vendors.  This is facially troublesome, as Customers are generally in the best position to understand regulatory schemes that affect their business.  It sometimes even goes so far as to state that the Customer must approve all changes (without regard to reason), while making the Vendor responsible for regulatory actions and fines ¨C even if the Customer does not allow the change.  While it is fair and reasonable to expect the Vendor to take responsibility for its own actions ¨C including delays and inaccuracies caused by its processes, pushing compliance risk to the Vendor, without the corresponding authority to meet compliance responsibilities, is patently unreasonable and should be avoided.

Oftentimes, internal Customer claims processing metrics do not translate cleanly to an outsourced environment.  Sometimes, in fact, the internal metrics are wholly inaccurate or engineered to meet specific internal goals.  Domestic agents may wear multiple hats, making their productivity difficult to measure, may have significant company experience (oftentimes as long-term employees) and have generally learned how to deal with the ¡°warts¡± that exist in any automated system.  Offshore vendors, with more accurate measurements, more significant turnover issues and less significant Customer-specific experience, may find it difficult to meet these unrealistic metrics.

Solutions

Although there are no magic bullets, I believe that clear lines of demarcation is the first and most significant driver to success in outsourced claims processing relationships (and, for that matter, in all outsourced relationships).  Knowing clearly where the line between Customer and Vendor responsibility is drawn and building ¡°interfaces¡± to hand off the procedures eliminates much of the confusion and difficulty in these relationships.  These interface points are also a natural location for service level measurement ¨C and creating service levels at these handoff points can help ensure that the incentives remain aligned between Customer and Vendor.

Developing (and improving) processes and procedures is another key driver to claims processing success.  While it may be impossible to capture every nuance in a specifications manual, clarity within the captured nuances is a must.  Claims processing rules are often overly complex ¨C and not permitting process improvement through an outsourcing will maintain such undue complexity.  Thus, an outsourcing may be an opportune moment for some process reengineering ¨C with Vendor participation.

Using a reasonable pilot procedure to determine accurate service levels can address incompatibilities in the service delivery model and be used to better determine service levels.  However, this should be done with both Customer and Vendor employees where possible ¨C as doing so will balance the incentives to create beneficial inaccuracies.

Risks should be fairly shared, too.  While customers and vendors often disagree on what a fair risk allocation is, I would suggest that each party should be responsible for its actions and areas of expertise under the agreement.  Thus, I would argue that the Customer is responsible for developing compliant procedures ¨C and should be held responsible if the procedures are not compliant.  The Vendor, then, is responsible for executing such procedures ¨C and should be held responsible for its failure to do so accurately.  With respect to protected health information ¨C often a stumbling block in negotiations for health care outsourcing ¨C the Customer should be responsible for, again, developing compliant processing and for reasonable mitigation of disclosures, while the Vendor should be responsible for stewardship of such information in its possession.  However, neither the Customer nor Vendor should be expected to insure the other party through its outsourcing relationship.

Outsourced claims processing has become a relatively mature process in recent years.  Better understanding between Customers and Vendors has generally, but not always, led to better results.  However, like any other BPO transaction, a claims outsourcing creates risks that must be taken into account.  Both buyers and sellers of outsourced services are well advised to use an experienced attorney to assist with entering into an outsourcing deal, as such an attorney will assist the Customer and/or Vendor in describing, with accuracy, their agreement.