Well-defined, mutually agreed-upon, contractual performance guarantees (PGs), tied to key performance indicators and industry best practices, are essential components of a plan sponsor’s vendor oversight and monitoring program. When constructed properly, these guarantees serve as an objective means for the plan sponsor and its vendor to ensure the service provider is meeting the contract’s expectations.
Because each service provider’s functions and contracts will be unique, PGs need to be aligned to the contracted services and plan expectations. For example, a service provider responsible for processing claims would be responsible for one or more PGs in the following categories: account management, enrollment, claims processing, cost containment, and customer service. Penalties for failing to meet the guarantees need to be meaningful to generate change. It is not uncommon for 20% or more of total administrative fees to be placed at risk and spread appropriately amongst all the PGs that are implemented.
Once PGs have been determined, it is important to identify the tools and techniques that will be used for measurement and monitoring. When drafting PGs, it is important to clearly define the standard to be achieved along with the measurement criteria and metrics, measurement period, fees at risk, and liquidated damages for failing to meet the standard.
To mitigate the risk of ambiguity, guarantees should also contain the liquidated damages calculation. When performance guarantees are measured using sampling, the following should be defined to ensure proper measurement:
- The population at risk (otherwise known as the target population), sampling methodology, sampling confidence levels and intervals, and procedures to be performed
- The sampling frequency and reporting process
- The department responsible for measuring performance guarantee compliance, ensuring its independence from the department subject to review, and the individual credentials of those assigned to perform the test work
- The procedures to address result variances achieved by the third-party administrator from those achieved by an independent plan audit conducted at a later date
Since PGs are self-reported, it is important that plan sponsors periodically engage an auditor to independently verify the results of the guarantees. It is not uncommon for audits to identify large discrepancies from those reported by the vendor. The scope and frequency of audits will often be dictated by the contract an organization has with its vendor, so it is important to capture PGs in The Right to Audit clause of your contract.