Part Two: Achieving a Reasonable Price
In the previous article, we provided the “cost containment formula” and discussed the foundation to every home modification project, “establishing an accurate scope”. In this article we’ll take a closer look at the second addend in the equation, “establishing a reasonable price”.
Cost Containment = Accurate scope + Reasonable Price + Time Efficiency
At the end of the day, it’s my opinion that carriers get a bad rap when it comes to their reputation about being too conservative with benefits. This is especially true with home modifications. It seems to me that most carriers really want to provide modifications that are reasonable and necessary however most don’t have systems in place to help them determine necessity. Even if they’re confident with the agreed scope, there’s always the question if they’re paying too much for the completed job. While I understand the desire to achieve the lowest price for the project, I also know that the lowest price is usually accompanied with shortcuts, cheaper products and future supplements. So how can you be confident that you’re paying a reasonable price for home modifications? Before you can achieve a reasonable price, you first have to know what a reasonable price is. Here are three things to consider when trying to achieve a reasonable price:
- A reasonable price is based on fairness that equally represents the interest of the carrier, the injured worker and the contractor.
- A reasonable price doesn’t expect the carrier to pay a greater price than what is appropriate and doesn’t expect them to pay for more work than what is considered medically or functionally necessary.
- A reasonable price doesn’t expect the contractor to charge less than what is appropriate for their completed work.
At the David Corey Company, we have a corporate definition of cost containment that is one of the pillars of our business model;
To provide home modifications that are determined to be functionally necessary, and to do so in the most cost efficient manner without compromising the integrity of the project, the rights of the injured worker and without expecting the contractor to complete the work for less than what is reasonable for their services.
You might notice that we don’t use the term “reasonable and customary” in our definition. We purposefully omit the term “customary” because we believe what is customary in the industry isn’t reasonable. I know from experience that “business as usual” with home modifications (as well as DME) is network service providers re-typing contractor’s estimates and burying significant mark-ups in the bottom line. The coversheet states cost savings are provided however I’ve never seen where they can document tangible savings. The shroud of secrecy places a cloud of doubt over the entire process. Unless a carrier knows the legitimate price, how can you know whether or not it’s reasonable or accurate? The only way to know what you’re paying for is to require transparency in billing. The carrier is footing the bill so the carrier has the right to know where every penny is going.
In an effort to control costs, the industry has traditionally worked under the bidding process. The bidding process usually starts with a superficial scope, “modify a bathroom”. Three contractors are then contacted and asked to submit a bid. Each contractor then completes a site visit, determines how they would modify the bathroom and then submits a price based on their design. The carrier reviews the estimates and then chooses one to authorize. While this can work, in order for it to truly be a bid process, it must be based on an identical and specific scope of work created for each contractor to estimate. Subtle differences in scope can create substantial differences in price. If each contractor is allowed to create their own design and establish a price based on that design, it’s not a bid at all, it’s simply three individual estimates based on three different ways to complete a project.
Another challenge in obtaining a reasonable price is the format in which they’re submitted. Lump sum estimates are common place with remodelers and general contractors when it comes to home modifications. Lump sums simply provide a list of what’s being performed and the total price is listed at the bottom of the estimate. Individual pricing for specific items are omitted and the bottom line is the only revelation of costs. While the bottom line might be all that matters to some, many carriers desire to know more specifically where the money is being allocated and have started requesting line item estimates. A line item estimate takes much longer to prepare. However, the end product is an estimate demonstrating specific costs for each item included. The result is a detailed description of the work being completed and a specific cost listed for each item including labor, materials, overhead, profit and taxes. Though many workers’ compensation adjusters don’t know how to read a line item estimate, most recognize the value of obtaining one.
I was at the home office of a major carrier and I was asked about our contractors and the estimates we submitted. When I explained our process they were inquisitive as to where the idea came from. I simply suggested that the process could be found just a few levels up in the building where their property claims offices were located. For many years, estimates submitted on property claims have been required to be completed using unit price estimating systems. Xactware is the most commonly used estimating system on property claims and as of October 13, 2014, over 42 million claims have been processed using the system. If the Xactimate estimating system and its unit prices have been considered “reasonable” on 42 million property claims, it would seem logical to assume home modification estimates completed in Xactimate might also be considered reasonable. While Xactware is the most widely recognized, there are several other systems that are also used. The challenge with estimating systems is there is a manual override option that allows the contractor to manually change pricing that they might not agree with. The manual override is flagged by the software giving the carrier the opportunity to ask for a justification of the change.
When incorporated in the cost containment formula, the estimating system can standardize the approach to estimating and help ensure consistent pricing that is considered reasonable with insurance claims. However remember to establish the scope of work prior to assigning a contractor. Base the agreed scope of work on medical necessity and avoid authorization or denial based on price. If it’s reasonable and necessary, it should be authorized regardless of price. Then control the price using the right contractor using the right estimating systems. The cost will take care of itself, you can rest a little easier and you can feel relatively assured that you have an accurate scope and are paying a reasonable price. It’s not perfect but property insurers have been using the process for years and it has worked out pretty well. If it’s good enough for them, it might be good enough for you.
In the next and final article, we will take a closer look at time management and field practice guidelines. A few simple steps will be discussed that, if applied, can decrease the time and expenses associated with getting the claimant home at the time of discharge.
By Corey Staver, OTR, CHAMP, CAPS
CEO David Corey Company, a full service home modification company that provides skilled home assessments by occupational therapists.
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