Third-party administrators may be generating revenue through undisclosed “side agreements” that drive up public employers' workers compensation costs, a report by the New Jersey Office of the State Comptroller warned recently.

The side agreements, or “undisclosed revenue-share agreements,” involve money paid to TPAs by companies they contract with, such as managed care providers and medical bill repricing services.

The money paid to the TPA is hidden from employers that contract with the TPA for claims management services.

New Jersey's comptroller's office investigated the practice after a public entity reported that the workers comp TPA it contracts with received undisclosed money back from a managed care and bill repricing vendor.

“Upon reviewing this TPA's contracts with other public entities, OSC found other examples of these undisclosed revenue-share agreements,” the OSC's Aug. 29 report states. “In fact, industry experts claim that this practice is pervasive among TPAs, indicating that numerous other public entities in New Jersey may have incurred these hidden costs.”

Industry experts have criticized the arrangements for compromising the ability of employers to determine whether their workers comp program is administered in a cost-effective manner, according to the report.

“As these experts have pointed out, such arrangements create perverse incentives in that TPAs are in the precarious position of deciding whether to refer a case to a vendor with which the TPA has a revenue share agreement or to another vendor that has not entered into any such agreement but may be better suited to perform the service in question,” the report states. “As a result, there arises a potential conflict between minimizing client costs and maximizing the TPA's revenue.”

As a result, the OSC recommends that public entity employers should require disclosure any financial arrangements in contracts with their TPAs. They also should periodically review their programs and consider unbundling services received through TPAs.