Administaff is the country’s largest professional employer organization. It acts as an off-site, full-service human resources department for small and medium-sized companies, for which it arranges employee benefits, management services and productivity resources such as training. Client companies number about 5,000 with more than 90,000 employees who are served by Administaff’s 1,500 employees.
Among the services Administaff provides is health insurance for the employees of its client companies, and it was on this very important cost component that Administaff got blindsided that September day in 2001.
The company that provided the medical insurance had troubles of its own. It was responsible for providing Administaff with accurate and timely claims information, which Administaff needed to price the health insurance component of its service.
The insurance carrier was merging 17 claims systems into three and had problems with the data and payment processes.
“They were paying claims twice and paying wrong ones and crediting some to the wrong account,” Sarvadi says.
Data accuracy was compromised not just for Administaff but for the insurance company’s other clients, as well. As a result of its inaccurate cost data, the insurance company sought to reprice the contract it had with Administaff not just immediately but retroactively, despite a contract provision that required it to give Administaff six months’ notice for any rate increase.
“We had to make a decision at that point, and this is what led to the loss in the next year,” says Sarvadi. “If we didn’t pay them, they were going to terminate the contract within 30 days. That would put all of our employees and their families on the street without health coverage. That’s not an option, so we paid them.”
Sarvadi says Administaff could have tried to get reimbursed from its clients for the higher expenses, but its contracts with customers called for prices to be changed only once a year, when contracts were renewed.
“I had to make the decision that basically said, just because someone didn’t honor their contract with us, was I going to go back to all of our 4,000 customers and break my contract with them?” says Sarvadi.
Instead, Administaff paid the insurance company, absorbed the higher costs — and then constructed a strategy to help it avoid a similar situation in the future.
“We certainly weren’t going to continue to do business with someone who did business that way, so we left them,” says Sarvadi. “And, of course, we left them without the accurate, timely claims data that we needed to price our service.”
