Through the Looking Glass - Head First? - BodyShop Business

Through the Looking Glass – Head First?

Considering the complex nature of collision repairs compared to those of glass, it's debatable whether networking collision shops will be doable. It's also debatable whether networks are in the best long-term interest of the collision industry, consumers or even insurers.

Some 15 years ago while glass shops were occupied making reasonable profits, they failed to pay attention to the development of glass networks. The stage for networks was set when State Farm wanted electronic billing, a move that many glass shops agreed would streamline paperwork.

It all seemed innocent enough.

Receiving little flack from shops for this move, State Farm soon upped the ante, pushing an ever-tightening multi-tiered “offer and acceptance” (O&A) agreement between independent shops and the insurer. Other insurers followed suit.

Under the terms of State Farm’s original O&A, small-town shops were limited to something in the range of list-plus-10-percent, and big city shops about 25 percent off list. This O&A pricing was based on glass shops accepting a flat-rate price (currently around $40) for installation labor, rather than an hourly rate plus a flat-rate price on installation materials.

Though few glass shops were enamored with this arrangement, most were still able to make a parts profit. They managed to stay in business by streamlining the installation labor process to make up for what was – and still is – a totally unrealistic labor charge for glass installation.

For decades, glass shops have cost shifted the labor costs of installation to markup on the parts being installed – a ridiculous, yet commonplace practice that’s finally being recognized by the National Auto Glass Specifications (NAGS), which once again is restructuring its pricing for glass replacement in early 2005.

Shops had been making money on the glass itself, but nothing on installation materials and labor. Therefore, they cost shifted labor and materials costs to come out of the glass markup. Of course, with ever-increasing glass discounts, what was profitable in the past isn’t profitable today.

Bigger shops could make additional money on volume purchasing of the approximately 800 most-used pieces of glass. But when insurer bean-counters realized this, they wasted no time whittling parts profit to below list cost. An adjuster for a major insurer stated the pathetically obvious: “The glass industry is the only industry that would probably pay [insurers] for the privilege of installing glass.”

Says another adjuster: “We’ll continue to discount glass installation pricing until less than 50 percent of glass shops are still signed up.”

And so the race to the bottom of the barrel began in earnest.

Ever-increasing insurer-generated interference encouraged a blight of shops taking risky labor shortcuts and installing inferior sealers and glass, as they scrambled to maintain market share and a semblance of profitability.

Since glass is fragile and has to be shipped many miles to installers, shipping prices (typically in the $50 range) that previously had been often absorbed by shops – back when they had reasonable profit margins – now became an additional expense very seldom covered by insurers. A multitude of similar negatives resulted in many shops that refused to compromise on quality being forced out of business.

A further squeeze was put on all glass shops some years ago when NAGS restructured its pricing schedule, reportedly to more accurately reflect fair prices to glass shops, insurers and consumers. (It’s worth noting that although insurers and others frequently refer to the NAGS price as list price, NAGS considers their prices to be merely a benchmark.)

Why am I giving you all this background information, you ask? Because the same network forces at play in the glass industry are now implementing the same process in the collision repair industry. But considering the extremely complex nature of collision repairs compared to those of glass, it remains to be seen whether networking collision shops will be doable.

Doable or not, it’s the opinion of many in this industry that collision industry networks are not in the best long-term interest of the collision industry, consumers or even insurers – in part because by their very nature, networks virtually eliminate personal contact with the insurer to settle claims fully, fairly and efficiently. They also shed insurers of liability and accountability, instead placing these responsibilities totally on shops.

Why Insurers Like Glass Networks
Networks sell shops a “quality validated program” for insurers to back. You, as a shop owner, are expected to believe that you’re signing onto a program that will get you referrals from insurers for quality work.

But what many collision shops fail to comprehend is that quality cannot be sold by any network to insurers, any more than you can sell Mephisto shoes to someone who refuses to pay for anything more than functional equivalents from K-Mart. Insurers want low cost and the quality “monkey” removed from their back.

Though there are presently many glass networks, LYNX Services and Safelite Glass Network are the two major players. Second-string networks vying for prominence include Harmon Solutions (currently owned by Glass Doctor/Dwyer Group) and Alliance Claims solutions (owned by Iowa Glass, which also owns Auto Glass Centers and a couple other small glass chains). A number of third-string networks follow.

Networks are middlemen, a firewall of sorts between the insurer and the shop/consumer relationship. Generally speaking, networks make their money by taking all or most of the responsibility off the insurer.

Insurance companies originally hired the services of glass networks to provide wholesale claims administration services and to shift the costs of administration to the cost of the claim. This shifting is a huge bonus to insurers when we consider that state Department of Insurance (DOI) offices must approve of premium increases before an insurer can implement them.

And DOIs, while more hesitant to approve of rate increases based on increases in administrative costs, will virtually always approve them if based on an increase in claims costs.

The reason for this is that DOIs view “administrative” costs as something insurers should be able to control and “claims” costs as being largely beyond insurers’ control. So there are distinct monetary advantages for an insurer, through a network, to shift its administrative costs to that of claims.

Insurance companies are in the claims business and, as such, are required to investigate claims. Networks, however, administrate insurers work more economically by taking their own shortcuts, one of them being not investigating claims.

Networks also seldom consider the fact that additional cleanup may be required, as in many vandalism claims, or that glass may need to be replaced on a weekend in order to prevent further damage (both resulting in additional costs to shops). And while an adjuster’s investigation often includes speaking directly to the insured, or at least sending the correct paperwork in order for him to file a claim, when networks receive a “notice of loss,” they often ignore it if it doesn’t show a corresponding claim number.

A more common scenario would be that the network would contact the participating glass shop, telling them to contact the insured to have him call the 800-number. And it’s not uncommon for a network to ignore “good faith” statutes requiring adjusters to quote the portion of the policy dealing with the reason for claim-payment denial or short-payment, and the proper method of contesting the denial or partial denial of payment.

In essence, many networks have increased their profits by collecting an administrative fee from the insurer while shifting much of that work to the shop – a handling fee for work the shop didn’t want to send to the network in the first place. And yet networks typically take months to pay their claims that, when finally settled, are often short-payed.

From an insurer’s point of view, however, it’s much more profitable – and easier – to keep a lid on outlay expenses when dealing with a limited number of networks, rather than thousands of shops.

For a relatively minor fee, then, networks must compete among themselves for insurance work, based on how inexpensively the network can get shops to work. Promising that they can get glass shops to work for 5-10 percent less than that of competing networks (in addition to taking care of insurer paperwork) will definitely convince an insurer to switch networks.

And, thus, the downward spiral begins for shops – caught in the middle as networks scramble to attract insurers through ever-deepening cost-cutting pricing. Meanwhile, it’s common practice among networks to tell shops, both in their network or not, that it’s insurers that are dictating the allowable rates that networks can pay.

The Economies of Network Cost Cutting
Cost-cutting pressures brought to bear on shops arise when networks contend for the business of the choicest insurers. Networks that are owned by glass companies, Safelite and LYNX being major ones, wield a distinct advantage over networks not owned by glass companies by being able to “navigate” jobs to their own shops under the disguise of “First Notice Of Loss” (FNOL) – which equates to “first contact with the customer.”

A July 2004 article in the insurance industry magazine Claims, titled “The Earlier the Better,” stated in part that, “Insurers have come to understand that improved results can be achieved by performing select claim tasks earlier in the process. A good example is direct repair network use for auto claims. … As time elapses between the first report and the adjuster review, many claimants find repair shops on their own, which usually is more costly for the insurer. In fact, one mid-sized personal auto insurance carrier projects its annual loss/expense savings at $3 million as a result of recently moving its direct-repair referral process nearer to the first notice of loss.”

This is doable because very few customers realize they’re being marketed by the network. Rather, they believe that they’re being told limits and provisions of the insurance policy. But shops lose the game when they lose first contact with the customer.

In order to reduce the expensive costs of glass shipment, networks such as LYNX (which is owned by a glass company) can navigate insureds to glass shops that use primarily the glass that they themselves produce, an advantage of monumental proportions, as outlined by LYNX’s Paul MacFarland in early 2004.

Speaking in a Nebraska Legislative Committee Session, MacFarland stressed the impact of LYNX on the glass replacement industry, stating that LYNX alone processes more than 3 million claims each year and that last year, they paid more than 26,000 different glass service providers (shops).

Honing in on the awesome effectiveness of highly structured networks to navigate the mass of available work, the most recent U.S. Economic Census report stated in part that, “Though a multibillion-dollar business, the collision industry remains competitive and highly fragmented … with the top 50 [collision firms in 2002] accounting for only 7.7 percent [of collision repair sales]. By contrast, the 50 largest firms in the auto glass-replacement business accounted for 46 percent of the sales.”

These figures are staggering in their implications of the directing power that networks have exerted over glass shops and consumers – and of the power they’re beginning to exert over collision repairers. Will all glass and collision shops soon be subject to “fair and reasonable” pricing as established by networks via their members, being effected even against those shops that are not members of the network?

Once networks can say they have 50 percent of the marketplace, will their price become “fair and reasonable” for all and their way of doing business the “industry standard”?

To add insult to injury, Safelite recently sent out letters to all shops, including those that haven’t signed a contract with Safelite, announcing new fees that shops will be charged for claims processing. Basically, this is akin to a cable TV company demanding that you have to pay their line maintenance charges for the cables in your alley, even though you use a satellite dish.

Safelite’s paper invoice fee (not for electronic billing of invoices) is for a service for which insurers are already paying Safelite – and from a network that shops had no part in hiring. Has demanding such a fee become an “industry standard”?

As networks compete for insurer administration jobs, they compete using the price at which they can get shops to work. And this competition has become so intense that even many large shops can’t compete anymore.

It’s worth noting here that the sale of network Harmon Glass last year resulted in an immediate improvement in the finances of their previous owner, APOGEE. Likewise, the network Diamond Triumph’s first three-quarter financial statement showed $171 million in sales, down $7 million from the previous year. Further, Olympic glass and several other large U.S. chains closed last year, and Safelite and Alliance made many personnel cuts.

Networking Collision Repair Shops
Last year, Pittsburgh Business Wire reported in part that, “(PPG) LYNX Services announced today that it has become the exclusive national provider of automotive physical damage (APD) repair management services for Ohio Casualty Group. The LYNX-managed repair services include the LYNXSelect direct repair program (DRP), estimate auditing and rental car concierge. LYNX Services connects Ohio Casualty adjusters and customers with a national selection of qualified repair shops via a Web-based portal, allowing for easy dispatch and retrieval of repair estimates and images.”

Within weeks of this announcement that LYNX was expanding into the collision-claims arena, other networks also announced they were developing – or were ready to release their own – collision-claims processing systems. In fact, all the paint manufacturers announced within weeks of each other that they intended to enter into claims processing via a network of shops.

One major liability in all this for collision shops in any way tied to networks is that shops are likely candidates to be dragged into lawsuits brought against networks and/or their insurers. As in many collision DRP contracts, most glass-network contracts contain “hold harmless” agreements, wherein the glass or collision shop agrees to hold the network and insurer harmless in case of a liability claim. And since repairing the vehicle is the obligation of the shop (in court, insurers and their networks will insist their only responsibility lies in paying the claim; the shop is the repair expert), courts will most likely hold shops at least partially accountable for what is and is not repaired or replaced.

For this reason, before joining networks, shops should be aware that the hold-harmless agreements they make require contractual acceptance of liability and that accepting this additional liability frequently voids the shop’s own general liability policy coverage.

And when a collision shop subcontracts out glass or other work to another shop, the terms, practices and materials used by the other party should be carefully considered. Considering that many experienced, quality-minded glass installers have been forced out of business, are all those taking their places properly trained in safe installation? The cheapest rate available is seldom worth the liability risk.

There Is Some Good News …
Since so many collision industry problems so closely mirror those faced by glass installers, certain people from both industries have begun working together on several fronts. One avenue with great promise is in their cooperation in establishing a database of experts on various issues common to us both.

A forerunner in this, NEON Claims Advantage is currently building a database of experts who’ll be available for shops to access. This database league of experts in the field of repair and replacement would receive expert opinions free of charge in exchange for the opinions they provided – other shops then being charged a small administrative fee for accessing these opinions.

The expert opinions then can be used when insurers or their networks refuse to pay for legitimate and necessary labor or materials or when they attempt to short-pay.

Also, NEON will be offering collision and glass shops a short-pay collections service by spring 2005.

If you’d like to be part of the database or want to be notified as soon as NEON’s short-pay program is available, contact them at (402) 223-4700.

Additional good news for shops is that many states are attempting to beef up their anti-steering laws through legislation that closely mimics that of California. And a new avenue of business providing similar services for shops as glass networks provide for insurers is opening for independent glass shops.

Performing many of the time-consuming, frustrating paperwork chores that shops typically lack time to do, this much-needed service could easily include collision shops. Its genius is in its ability to increase shop efficiency through consolidating much shop paperwork from many shops into single calls, keeping constant pressure on insurers/networks to force them to comply with their particular state’s bad-faith time regulations.

Some states allow a payment deadline of as little as 10 working days before these become “bad faith” issues, after which declaration they can be dealt with in court and without short-pay.

Shops’ right to full payment, due to waiver and estoppel, may be brought to bear when the party responsible for compensating glass installers and collision repairers has done nothing to settle accounts within the limited time frame allotted in individual states’ codes. Generally speaking, when the paying party ignores a legitimate request for payment for services beyond the state’s allowed time frame, it’s illegal for the insurer/network to short-pay the shop.

The Demise of DRPs?
Networks are popular with insurers because they take care of the claims-handling details, administrate and schedule which shop will receive the work, and they eliminate insurers’ need for expensive claims centers and employees – all for a negotiated fee of around $15-$20 per claim to insurers. This partially explains why network employees are typically unwilling to invest any extra time working out bugs in the claim; their agreed profit margin with insurers doesn’t allow for it.

But for shops left with the scraps, networks typically require ridiculously deep, controlling discounts. And installers have reported having their money tied up for as long as 60 days (by some reports, as high as six months), while shop expenses, liability insurance and other business expenses accrue. And there’s no guarantee that labor and materials will be fully compensated when the check finally does arrive.

Yet shops can’t get referral work without joining the network the insurer uses. And some network representatives are skillful at “navigating” work from the insured’s non-network shop of choice, even in states where this is illegal.

Now, by the looks of things, it appears that glass networks are determined to replace the collision DRP system. And once insurers are employing networks, is it not logical to expect that these networks will treat the collision industry the same way they treat the glass industry?

For example, glass claims not submitted electronically are sometimes charged an additional paperwork fee, and all claims must be for the exact amount the network has told the shop to charge – or not charge – or the bill will be rejected. Also, if the shop doesn’t send in a claim that the network will accept within 90 days, they characteristically reply that they don’t owe the shop anything.

Current collision repair DRP programs at least allow shops to speak to an adjuster, but the network program will introduce the collision industry to the experience of not being able to talk to anyone. And shops that try to circumvent the network through the insurer will be told the company no longer handles those claims and will be forwarded to a network operator who has authority only to say “no.” (Network operators may tell you that they can pass a message on to their supervisor but that they can’t allow you to talk to the supervisor.)

During the collision industry’s “honeymoon,” networks will be easier to work with than DRPs. But as they gather more companies, they’ll begin choosing which shop will get the work. And when customers call in an insurance claim, they’ll be informed that their chosen shop is not preferred, that there may be warranty problems if they go to that shop and that they may have to pay more than their deductible.

Says a glass industry spokesperson: “I once asked the vice president of claims for a large insurer why no other segment of the auto collision or repair industry has to deal with the problems that auto glass companies do. He answered, ‘When insurers tried to squeeze the body shop, they all joined together and it didn’t work. Insurers then tried to squeeze the mechanical and engine repair shops, but that didn’t work either. Finally, they tried to squeeze the auto glass industry, and this was the first industry that blinked.”

Though disorganization has, thus far, cost the auto glass industry much more than the collision industry, this could soon change. The auto glass industry has begun uniting and organizing and is making inroads into regaining control. For the most part, however, collision repairers remain estranged from each other.

As someone in the glass industry said: “We bent over backwards to please insurers; we arrived where we are today, incrementally.”

Best advice: Get smart and learn from the glass industry’s mistakes. Walk in with your eyes open, and keep consumers and their best interests in mind at all times – and don’t let that change. What’s good for the consumer is good for shops and, ultimately, good for insurers.

Writer Dick Strom and wife Bobbi own and operate Modern Collision Rebuild, a 10,000-square-foot shop in Bainbridge Island, Wash. Strom can be reached at [email protected]

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