Cost Shifting: Just Say NO

If there ever was a doubt that "cost shifting" is a significant problem in the industry, it was laid to rest in October 1998. At the Collision Industry Conference (CIC) in Colorado Springs, Colo; Bill Eveland of Eveland Bros. Body Shop in Shawnee Mission, Kan. informally polled the shop owners in attendance, asking how many had never had an adjuster say the insurer wouldn't pay for a line item on the shop's estimate.

"The adjuster will say something like, 'Yeah, I know you need to do that, but my supervisors say we don't pay for that, but what I can do is give you two more hours on the rocker panel, which computes to the same amount of money,'" Eveland said. "How many of you haven't had that happen?"

Not a single hand went up.

As defined by CIC, cost shifting occurs during the process of writing or negotiating a damage report or final bill for repairs when all or some of the cost of one line item is transferred to another. "This may involve adding unnecessary procedures or exaggerating labor times or costs in one area to offset costs not included elsewhere in the damage appraisal or final bill," says Al Estorga, a past CIC chairman who recently sold his California collision repair business. "It may also involve using a less expensive part than one listed on the appraisal or final bill or [repairing a part that is listed as replaced] in order to cover labor times or costs or parts not included elsewhere in the appraisal or final bill."

Eveland said the problems with the entrenched system are obvious: It increases the "friction costs" of shops and insurers haggling over line items. It can be perceived as fraud by consumers or regulators even if the resulting payment by the insurer is no more or no less than the shop or insurer feels is reasonable. It can distort technician pay if some shop compensation for refinish procedures is attributed on the paperwork to the metal shop (or vice versa). Finally, it can result in incorrect information when shops or insurers compile data.

"Wouldn't you rather know what you're spending money for, whether you're buying Freon or actually straightening a rocker panel?" Eveland rhetorically asked insurers at CIC. "Your actuarial folks would probably like to know that when it comes time to start rating policies."

Matejzel, a former insurance and shop consolidator executive who is now an independent consultant, says, "All we would like to see is that if there is an operation that needs to be done to repair the car, it should be on the estimate. If it doesn't need to be done to that particular car, it shouldn't be on the estimate."

The end goal is obvious. How to get there is the tougher question.

Tackling a problem like cost shifting-one that impacts the livelihoods of many businesses, large and small-is not easy. But addressing the issue has been one of the goals of the CIC's "Write it Right Committee" in recent years.

CIC Committee Takes on the Challenge

The committee, established in 1994, drew its name from a California Bureau of Automotive Repair (BAR) document making headlines back then. In a high-profile effort to crack down on fraud within the automotive repair industry in the state, the BAR's "Write It Right" document laid out rules that, for example, required the types of parts (new, used, OEM vs. non-OEM) that are included on an estimate be clearly and more consistently described and that paint and other materials charges should be more accurately detailed. In short, the BAR wanted shop paperwork to be an accurate, detailed description of what was done to the vehicle. The BAR announced that it was backing its "Write it Right" document up with 256 investigators and 300 "sting" vehicles as evidence of body shop fraud. Its efforts were getting play in the media.

While the issue wasn't pursued as aggressively by regulators elsewhere, crackdowns on fraud in Texas and a number of other states were also getting the industry's attention. Participants at CIC-insurers and shops-realized that it was time to move cost shifting and similar issues higher on their list of priorities.

"We believe that working with the California law will help the committee develop a uniform model operation code that could be used, modified or adapted by any state," Write it Right Committee member Linda Holcomb said at the time.

Working primarily in Southern California but gathering input from CIC participants around the country, the Write it Right Committee has met once or twice a month since its inception. One of its early subcommittees focused specifically on eliminating cost shifting and "funny time" by developing "a method of writing an estimate that accurately reflects the time and materials needed to restore the vehicle to pre-accident condition."

As work progressed, it became clear that the work of its four subcommittees was leading to one set of "recommended practices and methodologies," says Matejzel, who chaired the committee until just recently.

"Every state has unfair claims practices acts," Matejzel said. "What we want to come up with are 'fair practices acts' for insurers and repairers that we'll all buy into and follow. I'm not going to say that we're going to solve the problem because this problem has been around since I was a kid doing body work with my dad. But if we can work together, we can set up the guidelines."

Throughout 1996 and 1997, the Write it Right Committee offered glimpses of its "work in progress" in order to solicit input, and in January of 1998, the "Best Practices Guidelines for Estimating and Processing Auto Physical Damage Claims" were finalized and approved.

Writing the Guidelines

The document, which can be downloaded at the CIC Web site (www.ciclink.com), calls for shops and insurers to:

• eliminate unnecessary requirements that inhibit the claims handling, repair and payment processes, creating delays or increased expenses;
• agree not to participate in the "illegal, unethical and fraudulent practice of cost shifting";
• list on the estimate all procedures and parts necessary to repair the vehicle, whether or not they are included or recognized by the estimating system providers;
• write "true judgment time that reflects the costs of all labor and economic factors necessary to perform the repair";
• ensure that the final paperwork be an accurate report of repairs made to the vehicle.

Gene Scambray, a former insurance executive and committee member and now director of industry relations for Copart, adds, "We want to see everything that is done to that vehicle listed as a line item. As an insurer or shop owner, it's up to you whether you negotiate a price for that line item, but it should be listed as a line item."

Once the guidelines were completed, the committee's next task-an ongoing one-has been to convince shops and insurers to adopt the guidelines and put them into practice. Although a number of CIC participants initially questioned whether insurance companies would be willing to participate in the recommended changes, committee members said insurers on the Write it Right Committee supported or even suggested the proposals.

Getting 'Buy In'

"They're sick of arguing about the same things again and again and again," Estorga said. "They are some of the strongest supporters of the recommendations that we have developed because we all agree it will help reduce fraud or even the perception of fraud."

In 1998 and 1999, the committee sent letters to about 300 insurer vice presidents, informing them about-and urging them to adopt-the best practices guidelines.

The committee also held a 1998 meeting with eight insurers to introduce and explain the document. Ray Trevethan, manager of physical damage claims for the Automobile Club of Southern California and a Write it Right Committee participant, recalls that virtually everyone in the room acknowledged that the guidelines were "a matter of common sense" but that they are not practiced consistently.

Trevethan's company was one of three at that meeting-along with two other California-based insurers, 20th Century and PARNET-that agreed to make the document part of their claims handling procedures and provide their staffs with copies. "We [insurers] need to look at building relationships with autobody shops," Trevethan said at the time. "This document is a step in that direction. If these guidelines are followed, time and money will be saved. It will be a win-win-win situation for shops, insurers and consumers."

More recently, Trevethan added, "Insurance companies across the nation for years have helped create this system, and we need to stop it. If we're going to pay for hazardous waste [disposal], put it on the estimate and pay for hazardous waste [disposal]. If you're going to pay to bag a car, pay to bag the car and put it on the estimate as a line item. Trying to put it somewhere else is not proper."

The Write it Right Committee also called on the estimating system providers to help combat cost shifting by publicizing the guidelines. Today, these guidelines are published in the printed estimating guides. The committee recently presented a CIC resolution calling for Mitchell International, Motor Information Services and ADP to "include in their database all procedures to completely and accurately repair the vehicle to pre-accident condition, whether or not insurers traditionally compensate for these items??The committee believes that a thorough and complete listing of all repair items will counteract the practice of cost shifting."

The committee also provided more than a dozen examples of procedures that are often necessary, but that often lead to friction and cost shifting because they aren't an integral part of the estimating systems. When a headlamp assembly is installed, Estorga pointed out, the estimating system should prompt the user about aiming. Or when a suspension part is repaired or replaced, a "pop-up window" should call for an alignment. Some items, such as sound-deadener or adhesive kits, are vehicle-specific but aren't included in the estimating systems.

Some shop owners say CIC efforts are not making an impact.

Is the Effort Paying Off?

"It has no teeth," says John Neznik, owner of Crystal Collision Center in Crystal, Minn. "You see it all the time. A shop straightens a hood it was supposed to replace. The penalty for that is to give the money back. Can you imagine if you went down the street and knocked over a convenience store and if you got caught, all you had to do was give the money back? In this whole thing there has to be a deterrent, some punitive damage."

But Ron Guilliams, manager of Saturn Paint and Body in Fountain Valley, Calif., says he has found it helpful to have the guidelines posted in his shop. "If one of our estimators is speaking to someone about a vehicle and something comes up that is in conflict with this guide, our estimator will say, 'Obviously you haven't heard about rule No. 16,' and show them the guidelines," he says. "It increases awareness and helps get them implemented."

John Loftus, who retired last year from his position as executive director of the Society of Collision Repair Specialists (SCRS), says implementation of the CIC guidelines will be a gradual process. He points to a similar CIC document that defines a "Class A" collision repair facility. "We developed that at CIC, and for a long time, nothing was done with it," he says. "Then lo and behold, over the last four or five years, it's become the standard by which the industry has come to measure the better shops in the country. This best practices guidelines document is beginning to circulate and appear on the walls of repair facilities and insurance claims offices all over the country, and as that happens, the awareness of the 'rules' will increase. People will see that it is reasonable, that it makes sense."

At a CIC meeting earlier this year, Rod Enlow, director of auto industry affairs for USAA, was among those saying that if direct repair programs (DRPs) increase shops' administrative costs, for example, cost shifting is not the way to address that change. "It's a cost that we cannot continue to hide in the estimate," he says. "I don't want to see it in the frame time. I don't want to see it in the refinish time. We either need to have it in the door rate or we need to have it as a line item. Those costs have got to be somewhere because they're real."

Enlow says he would prefer to see such added costs reflected in "a realistic door rate" rather than as a line item, so the estimate is more clearly just an assessment of what needs to be done to repair the vehicle.

And while he remains optimistic about the document, Matejzel, under whose leadership the Write it Right Committee created the best practices document, cautions that no one said it would be "the savior of the industry." "We were charged to present a document that would get people to write an estimate the right way," he says. "We could recommend anything, but it's up to the shops and the insurance companies to follow through."