What is a performance agreement and what is its purpose?
A performance agreement (also called performance guarantee or performance standards contract) is a written contract between an employer, or between a healthplan and PBM or an outsourced claims administrator (third party administrator, HMO or insurance company) that sets certain criteria, benchmarks or goals to be met in the administration of claims. The agreement is a tool that a plan sponsor can use to monitor efficiency and accuracy and assign accountability for service excellence.

What are common components of a performance agreement?
The common components integral to a comprehensive performance agreement include:

• Performance benchmarks for accuracy (financial, payment and processing)
• Turnaround time commitment
• Customer service goals (call answer, abandonment rate)
• File update turnaround time (eligibility, benefit plan changes, network discounts)
• Required management reports
• Stop loss reporting, as applicable
• Non-compliance penalties
• Plan Sponsor’s right to audit without additional costs

In general, a plan sponsor should consider incorporating any benchmark that is important to the company as long as the standards can be clearly defined, measured, monitored and results can be independently verified.

What are some of the pitfalls to be avoided when negotiating performance agreements?
Allowing the administrator to present their version of a performance agreement without plan sponsor input, review, and approval is a big mistake. Another frequent mistake is the lack of precise definitions for benchmarks and time periods. If the term and periods are not meticulously analyzed, the administrator is likely to present standards and measures in such an advantageous way that they are virtually assured of meeting them even if they are doing an unsatisfactory job.

Another unacceptable term of a performance agreement is the idea that an error corrected prior to an audit should not be counted in accuracy rates. This approach places no value on the administrator’s obligation to do the right thing the first time. Attempts to define or measure accuracy in this way should not be accepted by the plan sponsor.

Who should draft the performance agreement?
Representatives from both the plan sponsor and claims administrator should participate in drafting the performance agreement. The plan sponsor’s representative should be familiar with claim administrationand best industry practices. As with any contract, legal review may be helpful. How is performance agreement compliance measured?

This is an important point. Short-term results (weekly, monthly) can be reported by the claims administrator and monitored by the plan sponsor for compliance. However, the employer should insist on the right to an independent periodic audit (usually annually) of the administrator’s performance.

Accuracy measures should be verified by a random sample of a representative sample of items (claims, payments, telephone records, etc.) Uncollected overpayments to be recovered are best identified through a review of large dollar claim payments.

Care should be taken to ensure that an independent firm with in depth experience and using a defined methodology performs the review. Terms of the audit should also be spelled out in the agreement, including who will pay for the audit.

What types of penalties are included in the performance guarantee?
The most common means of performance enforcement involves financial penalties. Penalties can be expressed as dollars or percentages of fees/premiums refunded to the plan sponsor for failure to meet the benchmarks. In some cases, the penalties can be geared to a sliding scale depending on the level of performance.

Chicago-based DJ Risk Solutions offers a wide spectrum of medical risk consulting and product solutions to employer and labor coalitions and plan sponsor associations in conjunction with their group purchasing organizations. DJ Risk Solutions has a strategic alliance with Evergreen Re.