When it comes to managing their self-funded workers' compensation programs, many cities and counties find working with Third Party Administrators (TPAs) a confusing task. As a result, they often shop around until they find the TPA that quotes them the lowest administrative fee, then hire the administrator on that basis alone.

San Mateo County, Calif., decided instead to develop a workers' compensation program around delivering high-quality services to employees while containing costs for the county. As a result, it implemented a strategy to find a proven TPA, pay the administrator a fair fee for its services and judge its performance according to criteria such as claim closures and bottom-line cost savings. Benchmarks for this performance were ultimately included in the administrator's contract.

When this strategy was conceived in 1994, the county had 879 open claims for workers' compensation at an estimated future liability of $8.5 million. After just one year, open claims had dropped to 675 and the estimated future liability had declined to $6.4 million.

By mid-1996, the liability figure was at approximately the same level, in spite of the tremendous increases in statutory benefit rates that occurred each year beginning in 1994, and the county continues to realize savings on a monthly basis.

Other counties and cities might benefit from rethinking their workers' compensation management and focusing on ultimate cost issues like medical cost management, claim closures, litigation management and bottom-line numbers, rather than only seeking low up-front TPA administrative fees. Working to treat employee claimants more like customers and minimize adversarial relationships is also important.

Getting people back to work and closing cases quickly with improved claims management are the real keys to cost savings. In general, cities and counties can derive three major benefits from improving this management:

* Saving money. It is important to understand that the up-front administrative fees charged by a TPA are just one part of the total program costs - for most agencies, less than 20 percent of their annual workers' compensation expenditures are for administration of the program. Employing a comprehensive claims management initiative with a reputable TPA can reduce agencies' overall program costs and improve their bottom lines;

* Better communication. A good program will provide avenues for a high level of communication between the agency administrators, the employees and the TPA. For instance, municipal officials should have immediate online access to all claims data being handled by their program administrator. Such access improves communication and provides the local government with the information it needs to monitor the TPA's performance; and

* Stability. It is often tempting for an agency to switch to a lower-cost provider that comes in with an enticing bid every few years. However, an effective program will require some degree of long-term commitment from the local government for its optimal efficiencies to be realized. For example, the TPA usually faces a significant learning curve when working with an agency's employees, departments, labor unions and retirement program. The administrator must have the time to learn all of these groups' needs before it can best serve them.

In return for a long-term commitment, the program administrator should provide the local government agency with a high degree of stability and cost predictability - two invaluable commodities for city and county governments.