So how did we get here? Why do third-party or negotiated scope? The TPA would manage contractor administrators (TPAs) exist in our industry? Why do TPAs even get a say on who does what and how? Well, it may be prudent to give a little background on the emergence of TPAs. Long before the TPA term was applied to our industry, there was this idea of a “Managed Repair Network” among several insurance carriers.
The repair networks were originally developed to bring high-performing insurance restoration contractors together to service pre-qualified claims from financially stable and customer service-oriented carriers. There was a real need because our contractors were all over the map when it came to price, quality and service. There was little standardization, training, or science in our industry. Some contractors provided top service for top dollars, some provided top service for low dollars, some provided very poor service for top dollars and some were even willing to negotiate away one-third to one-half their estimate value for direct payments, quick starts, a promise of future work and so on.
In 1994, PRISM became the brainchild of three gentlemen with whom who you may be familiar since they are still engaged in the restoration industry today: Eric Ordway, currently COO of BrightServ, Jay Southerland, founder and CEO of First Choice (now Vericlaim), and John North, president of MoistureMapper. Then in
The repair networks were originally developed to bring high-performing insurance restoration contractors together to service pre-qualified claims from financially stable and customer service-oriented carriers
1996, they joined forces with the rebranded Xactware and their newly developed claims management software Xactanalysis. The idea of a TPA for contractors was born. Contractors would be vetted through financial stability, customer service track records, proper business insurance, appropriate equipment and training, and standardized software systems. In exchange for compliance, they would receive a high volume of screened and qualified claims that needed service or wanted service and agreed to set terms, such as a quick start, co-pay or direct pay, or negotiated scope. The TPA would manage contractor vetting, screen carriers, and programs so that they were equitable and appropriate for both sides, provide estimating standardization to streamline the payment process and assign and control workflow. The end goal was to provide superior, efficient, and expedited service to clients that experienced a covered loss.
Today there are more than a dozen TPAs with widely varying fees, requirements, and carrier programs. Some of the larger and more well-known ones are Alacrity, BrightServ, CodeBlue, Contractor Connection, DCMG, Innovation Group, and Nexxus, Vericlaim (formerly First Choice).
Jumping onboard the TPA bandwagon is a serious decision and not one to be taken lightly. But how do you choose the one(s) right for your business? Do you just sign up for any TPAs and hope you get claims? Not every business is an ideal candidate. Not every business owner has the inclination or temperament. Your staff may not have the temperament or fortitude. If you do decide to use the TPA model to grow your business, you need to ask some hard questions.
Things to consider: What may be required of you? Initial enrollment fees and annual renewal fees can be a deciding factor, especially if you operate multiple locations. Fees vary greatly from several hundred to thousands. How is the fee structure built — fee per claim, by the percentage of revenue, flat monthly rate? What are the software/ estimating requirements? What are their business insurance requirements? What financial information are they requesting? Do they require special employee verifications, such as drug testing and background checks? These are some of the potential overhead costs to consider and how they will affect your budget or margin.
Other things to consider: How might your business benefit? What is their coverage area? What is the average claim rotation per contractor per month? Average dollar amount per claim? What carriers do they represent in your market? How quickly would you be activated — what need is there in your market? These are some of the potential revenue outcome points to consider. The worst possible scenario is to go through all the enrollment vetting, pre-qualifications requirements, and paying the enrollment fee just to sit there and not be activated or receive work.
However, you’re going to spend money either way. To be clear, you will spend money driving direct sales by hiring marketing staff, advertising, promotional gifts and events, trade booths, and conferences. If not, you will spend money with TPAs by paying enrollment and referral fees, added administrative burden, reduced scoping items, required software, required TPA conference attendance, and so on. There is a cost of doing business. In fact, our industry spends an average of 13 percent of our revenue on marketing and advertising (CMO study published in The Wall Street Journal January 2017).
My challenge for you is to look at the TPA costs as more of a marketing expense. You should strive to keep the TPA fees and associated costs to a portion of your marketing budget. I recommend limiting it to under six percent. This will allow your business to develop other revenue-generating avenues with the balance.
By now you may be asking, “So what are the benefits of signing up with a TPA?” There are several:
- Hot leads: The leads can be about as solid as you are going to get. You really have to try and mess up to lose the sale in most cases. The property owner has called into their carrier and said they want and need the work done — and have agreed to the program guidelines.
- Steady volume of opportunities: If you are a high performer, you will receive a steady volume of work that you would be hard-pressed to find elsewhere. With most programs, the better performing you are, the more work you will receive. It’s about serving the property owner and understanding the metrics being used.
- Customize your opportunity leads by service line offerings: Most TPAs offer programs by service lines, with water mitigation being one of the biggest.
However, there are programs for a large loss, small/light repairs, board-up/tarping, fire and smoke mitigation, contents and cleaning, and even some commercial programs. You can build your strategy around the services you offer.
- Exposure to multiple carriers and adjusters: Through the course of handling TPA work, you will be exposed to different carriers and adjusters at all different levels that would most likely take you years to reach on your own.
- A method to quickly grow your business: Some companies lack the resources necessary to put a top-notch sales and marketing team in place. Maybe you just aren’t there yet but have a great business plan otherwise and provide top-notch work. Going the TPA route can get you the volume of work quickly while you grow your business and develop a marketing plan.
All signs indicate that TPAs are here to stay, but be aware that it isn’t all rainbows and unicorns. Every opportunity comes with challenges, whether you are building a crack sales team or you go the TPA route. With TPAs, you are going to have more overhead associated with administrative costs. In fact, you may even consider hiring someone dedicated to maintaining compliance and control points. TPAs also have structured guidelines on what you can and can’t include in job scopes. Most TPAs have requirements on what type of estimating and moisture documenting software you use. These overhead costs need to be considered in addition to the standard fees.
If you can get your head around giving up a little control in these areas, you may find that the TPA route is still a profitable way to grow your business. Just be aware of the potential for increased fees or escalating administrative transfers, both of which can add to an overall marketing budget that would near or exceed the 13 percent threshold mentioned earlier.RIA