Damage Control : Car Insurers Are Busy Signing Up Preferred Provider Shops

The concept of preferred provider networks, popular for years in the health care industry, is gaining acceptance among auto insurers looking to cut costs.

Under the arrangement, auto body repair shops agree to meet minimum equipment and training standards and, in most cases, grant insurers price breaks. Insurers, in return, refer policyholders to the shops.

The networks give insurers some control over accident repairs, limiting fraud and incompetence and costs associated with those problems. The networks also allow insurers to reduce jobs and labor costs, since preferred shops assume the function of claims estimators.

Unheard of only five years ago, the preferred provider networks, known as direct repair programs, have grown quickly. It is believed that preferred shops now handle at least 15% of accident repairs, up from less than 5% in 1989. Many think that percentage could swell to 40% by the end of the decade.

Among companies with programs are Farmers Insurance, the Automobile Club of Southern California, Allstate Insurance and 20th Century Insurance.

The networks are mostly invisible to policyholders until they have an accident. While state antitrust law prevents insurers from directing policyholders to a shop, insurers are permitted to explain their direct repair programs and offer a referral. Policyholders have the final say on where they take their cars.

If they live up to expectations, the programs could lower accident repair costs and, in turn, regulators say, cut car insurance premiums.

But there are concerns that an overemphasis on cost-cutting could lead to abuse. Mark Rakich, California Department of Insurance senior counsel, said some consumers have accused the shops of cutting corners to save money, although such complaints are not widespread.

“We’re concerned the programs could lead to ‘repair mills’ where cheaper, sub-quality parts are substituted,” said Michael Shames, executive director of U-Can, a San Diego-based consumer advocacy group.

Regulators say direct repair programs aren’t immune to fraud.

To the collision repair industry, preferred provider programs are problematic. The arrangements can generate huge amounts of revenue, but they require shop owners to cede some control over their business to insurance companies. Auto body shops must submit to surprise inspections and negotiate their prices with insurers.

Collision shops outside the networks risk losing out on all-important insurance claims, which account for 90% of all accident repairs. The programs “are the bogymen of the ‘90s,” said John Loftus, president of the Society of Collision Repair Specialists.

There’s no count of how many shops participate in the programs, but the number is easily in the thousands. Farmers alone has 835 direct repair shops in 27 states. The Auto Club has 53 shops in its Southern California network and expects to have 75 by year’s end.

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While insurers don’t offer policyholders price breaks for using preferred shops--a situation regulators would like to see changed--they dangle other enticements. Most insurers offer speedier claims processing, as there is no need for policyholders to see a claim estimator. Another common benefit is a lifetime guarantee on repairs.

Individual insurers may toss in extras. The Auto Club, for example, gives preferred shop patrons a free lift to a nearby rental car agency.

The networks have evolved partly in response to low standards in the collision repair business. The Bureau of Automotive Repair reported this month that nearly 40% of collision repairs statewide involve fraud or ineptitude. It also said that many shops lack equipment needed to properly repair cars and less than 20% of technicians have any formal training.

Insurers say they are choosy about which shops join their networks. Shops must have modern equipment, trained employees and a clean business record. Shops caught cheating or doing poor work may be thrown out of the networks, insurers say.

“The insurance companies are making it mandatory for the shops to improve themselves,” said Rick Johnson, who owns a body shop in Sacramento.

While not every insurer has a direct repair program--State Farm Insurance Co. is the most prominent exception--collision shop owners say they are becoming too strong a force to ignore. Though insurers deny it, collision repair technicians say the special benefits of direct repair programs--such as lifetime guarantees--point consumers to preferred shops. Thus membership in a network can make or break a shop, they say.

“There are quality shops not in the direct repair programs, but the customer isn’t going to find out about them,” said Los Angeles body shop owner David Truslow. “The reality is, you become part of the system or be out of business.”

Hundreds of shop owners are making themselves over, trying to link up with insurance companies. They are spending thousands of dollars on new equipment and sending self-taught mechanics to school. When Farmers brought its program to Sacramento last year, technical classes at nearby American River College filled to overflowing.

Orange County shop owner Rick Reiss, intent on impressing the Auto Club, spent $40,000 for new auto framing equipment and $5,000 to redecorate restrooms and customer waiting areas.

His efforts a year ago are paying off. Reiss said that since linking up with the Auto Club three months ago, business has climbed 30%. If the pace continues, Reiss said he will recover his investment by December.

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But, for all the emphasis on standards, regulators say there is no evidence that direct repair programs are less prone to fraud or incompetence, which, according to one study, increases repair costs by an average of $866.

“We’ve had cases where repairs at direct referral shops were not up to snuff,” said Dan Povey, who heads auto body repair investigations for BAR. “I don’t see anything that suggests repairs are necessarily of a higher caliber.”

Insurers say much of the savings from the programs results from taking over tasks once performed by the insurance company. Using special computer software, direct repair technicians can perform standardized claim estimates and send copies electronically to insurers for review. One company, Stonewall Insurance Co., further reduces costs by having shops videotape repairs, eliminating the need to check completed work on-site.

Stonewall executives acknowledge they’ve received complaints from customers about the quality of repairs, but, says claims Vice President William Dibble, “not as many as you’d think.”

Insurance companies also save because shops waive charges on vehicle storage, typically $20 a day, and grant discounts on certain jobs, such as wheel alignments.

State legislation defeated last year would have allowed consumers to benefit directly from the savings. The bill would have allowed insurers to offer consumers a choice between a traditional insurance policy and a discounted preferred provider policy. In return, insurers would have been exempted from applicable antitrust laws.

The Department of Insurance advocated the measure, which received lukewarm support from insurers.

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Meanwhile, some body shop owners grumble that insurance companies demand too much from them. Sacramento shop owner Harold Nunn said he dropped three direct repair programs because insurers wanted bigger price breaks than their repair volume warranted. He wouldn’t name the insurers, saying he continues to work for their policyholders.

The experience hasn’t soured him on preferred provider networks. He belongs to three others. “I’m not against them or in favor of them,” Nunn said. “I accept them as reality.”