Are Referrals “The Right-Thing” Resistant?

Published in New England Automotive Report – Thomas Greco Publishing

Should insurer referral and program contracts be canceled?

Last month, several shop owners shared their opinions on this topic with New England Automotive Report (available at grecopublishing.com/near0922coverstory), and a common trend developed: Many shops have extracted themselves from programs due to the belief that these contracts allow insurers to usurp control over their businesses – and prevent them from doing the right thing for their customers.

“You have to perform repairs correctly from a liability, quality and service standpoint, regardless of what the insurer says,” according to Jack Lamborghini (Total Care Accident Repair; Raynham). “Establishing a strong customer base begins with quality repairs, and honestly, 80 percent of a shop’s program and referral customers were already that shop’s customers to begin with…so, why do we, as an industry, allow insurers to continue to control us through this program/referral mechanism?”

“Anyone who owes you money shouldn’t be telling you how to complete the job,” emphasized Al Correia (A.P.C. Auto Body; Dartmouth). “Insurers are all about fast and cheap – but with severity so high, how can you lower costs of items that are only getting more expensive? The only ‘best interests’ they’re concerned with are the ones related to their wallets. Insurers need to control costs, but what entity controls ‘what the car needs to be restored to pre-accident condition’ if shops are dictating repairs? Insurance companies need to be removed from the repair process and recognize their only job is paying the bill.”

“Today’s vehicles are extremely sophisticated, yet our industry doesn’t even have basic standards,” Jeff White (North Andover Auto) lamented. “Technology is advancing by leaps and bounds, so we have to really pay attention to every aspect of the repair. Even a simple bumper cover replacement may require calibrations, but if a shop doesn’t know any better, they could send that car back onto the road without the forward radar being correctly calibrated…and someone could get hurt.”

“This is becoming a very specialized industry,” contributed Rick Starbard (Rick’s Auto Body; Revere). “I foresee some shops getting themselves into trouble by attempting to repair something that they should not be repairing. This will inevitably lead to some getting into situations that they can’t buy themselves out of.”

Of course, most Commonwealth shops cannot afford to buy themselves out of any jam, given the fact that they contend with the lowest labor reimbursement rate in the country, despite being located in a market with one of the highest costs of living. Are programs and referrals profitable?

“It’s profitable in the sense that it makes us more efficient,” offered Correia. “We can disassemble, photograph and keep going, but there’s not an additional profit from them sending more cars our way. Right now, the entire industry is so backed up that there’s plenty of work, whether a shop contracts with insurers or not.”

“I can’t see how it would be profitable, and it’s been many years since I’ve actually participated in any referrals or programs,” White acknowledged. “If you’re able to push repairs out like an assembly line, there might be money in the sheer volume, but today’s cars aren’t built that way…You can’t just whip them in and out of the shop. They require knowledge of the different materials and research on the OEM procedures. It’s hard to imagine a high-quality assembly line facility or how that could produce a profitable model.”

“There’s no way that programs and referrals can be profitable in Massachusetts with a $40 per labor hour multiplier,” Ray Belsito (Arnie’s Auto Body; Charlton) dissented. “You cannot begin to make money at that rate. In a functional market with steady volume where you can come to a meeting of the minds with the insurer on certain issues, it might be manageable at the right rate, but as an independent shop, we need every single dollar to stay operational.”

Labor reimbursement rate is such a prevalent problem in Massachusetts that it was identified as the most pressing issue impacting the collision repair industry by the majority of shops polled during New England Automotive Report’s inaugural survey (available at bit.ly/NEARsurvey22).

“Insurance company referrals and DRP contracts have been the bane of the collision industry’s existence since inception,” Starbard vented. “If shops didn’t sign these things, we would not have a labor rate problem, a parts problem or many other problems that repairers face. These contracts have caused all repairers to be held to the lowest common denominator of shops willing to sign on versus competition within the industry like most others. These contracts allow insurers to drive the bus when it is the repairers who should be driving it.”

“Fast and cheap and profits, that’s all they care about,” Correia bemoaned the current state of the industry. “They’ll give you a pat on the back for a fast, cheap repair, but they don’t want to talk about increasing labor reimbursement rates. Shops have to take their businesses back – insurers aren’t going to just hand it over. They created this problem, and it’s not going to be solved by politely asking them for more money. If AASP/MA’s legislation doesn’t get passed, the only option I see is for every shop to remove themselves from these programs/referrals and balance-bill the customer. Getting the customers involved has been working for us; they realize that $40 an hour is obscene, even if the insurers refuse to acknowledge it.”

How did Massachusetts get stuck with such an offensive labor reimbursement rate in the first place?

“The biggest hurdle we have to overcome is the clause in Part 7 of the Massachusetts Auto Policy which the insurance industry had added in 2016 and which states that the most an insurer will pay is the amount for which they can secure those repairs from a licensed facility located conveniently to the customer,” Lamborghini explained. “When shops agree to a discounted labor reimbursement rate in exchange for being added to these programs and referrals, the insurer then controls the rate they’ll pay in that market. How can one industry determine the rate for another entire industry? It’s unethical and immoral, and I don’t understand how it’s not also illegal.”

While contracts between insurers and shops are legal, situations can arise that put the shop in jeopardy. On many occasions, Tim Ronak (AkzoNobel) has warned shops about violations related to the Sherman Antitrust Act. The Sherman Antitrust Act prohibits anti-competitive behavior, including Hub-and-Spoke Conspiracies in which “a dominant purchaser (the hub) enters into a series of agreements with its suppliers (the spokes). The hub facilitates and enforces collusion between the spokes, often because they want to achieve a specific objective,” according to Ronak, using the example of a market where two of four shops signed an insurer contract agreeing to lower contract pricing.

“There’s no problem with a closed agreement to perform work at a lower rate – until customers don’t want to go to those shops. Now, the insurer enters an exchange with parties that aren’t part of their agreement, and they may insist that the prevailing rate is lower than the average market rate because they’re including contract rates in their calculations.

“That insurer could now be accused of a Hub-and-Spoke Conspiracy because they’re using this information to harm those outside their agreement. Further, if a referral or program shop surveys at their door rate and the insurer coerces them to change their survey to reflect their contract rate, that coercion gives the Clayton Act footing, so the shop could be sued. Shops should avoid complicity in any such conspiracy by always surveying at their retail rate.”

Insurers’ insistence on controlling an entire market’s rates based on contracts with a handful of shops has contributed to the stagnant rate in Massachusetts, and it’s also fueled the frustrations of shop owners who simply want fair and reasonable compensation for the difficult work performed.

“Everyone on a referral or program is part of the labor rate problem, and I used to be part of the problem too,” Lamborghini admitted. “After recognizing the economics of how insurers used those contracts to control our rates, I removed my shop from all those lists and will never be on another one.”

“Shops invest too much into training, equipment and tools to collect such a low amount,” White objected. “Our jobs are difficult, labor-intensive and intricate, and it’s already nearly impossible to stay on top of this inflation. At the same time, we have to do what’s right for the customer, and that means making sure their vehicle is safe to drive, even if we have to bill them the unpaid balance.”

Lamborghini encouraged shops to “understand that the main reason we’ve been unable to collect a fair and reasonable labor reimbursement rate comes directly from insurers being able to point to shops working for a discounted rate…and then being permitted to impose that rate on everyone, which is ridiculous when you think about it. They simply point to that referral shop and say, ‘They fix the car for x amount, so we won’t pay more.’ I wish more shops would remove themselves from these programs, and I really respect my industry colleagues who are moving past the fear and trying to do the right thing.”

Doing the right thing is impossible unless shops are safely restoring vehicles to their pre-accident condition using the right parts, equipment and processes. For most shops in today’s environment, that means following OEM requirements and recommendations, and in recent years, adherence to repair guidance from vehicle manufacturers has become increasingly important as OEMs have become more interested in how their vehicles are repaired due to its impact on consumer loyalty to the brand.

Following that trend, industry leaders have suggested that insurer referral and program contracts may fall to the wayside as shops focus more on pursuing OEM certification.

“You need to be cognizant of the fact that OEs are playing – and will continue to play – a much bigger role in how their brand is being repaired, and that momentum will continue,” stressed Pete Tagliapietra (Datatouch, LLC) during a training session at SEMA 2021. “There’s an argument to be made that OEs will have greater influence over insurers as things move on.”

His predictions seem reasonable given that 38 percent of surveyed Massachusetts shops indicated that they had obtained at least one OEM certification, while another 27 percent were pursuing certification.

“I suspect that we’ll see more specialization,” said Lamborghini, whose shop has earned seven certifications and plans to add more in the future. “Since we rarely see high-end European vehicles, we’ve chosen to recommend those customers to a certified shop. It’s not worth assuming the liability or aggravation on those cars for $40 an hour, and the high cost of OEM certification will drive the industry to the point where we’ll be unable to afford the equipment and training to effectively work on every make and model. It’s just not viable.”

Belsito agrees.

“I’m 100 percent set up to be OEM certified, but I just don’t see any reason to do it. There’s no return on investment right now, but if something changes, we’re prepared with the tools, equipment and training to just flip a switch, write a check and get certified pretty quickly.”

Some shops have obtained certification, only to let it lapse due to the prohibitive costs associated with it.

“It costs tens of thousands of dollars,” Correia recounted. “Meanwhile, we’re so limited in funds due to the labor rate suppression that I had to let go of the certifications we obtained because it just wasn’t affordable. We’ve had to pick and choose which makes and models to deal with since training is so expensive, not to mention the tools and equipment needed.”

White had obtained four certifications but is now down to one.

“Staying on those certifications didn’t make sense given the low return on those types of vehicles. We see a lot of Honda/Acura, so we’ve decided to specialize in those vehicles, and I can definitely see the benefit of that training and subscription. I think the incident in Texas opened a lot of repairers’ eyes to the importance of following OEM requirements, and hopefully, they’ll start to see the value of certification. Even though I can’t imagine referrals/programs going away completely, it’ll be a good thing if shops are forced to follow manufacturer procedures – and insurers are required to pay for them.”

Starbard’s shop has obtained several certifications and is considering adding more to their repertoire. He’s uncertain whether the push for certification will drive shops away from insurer contracts, but he believes there’s a definitive benefit to hopping on the OEM train.

“OE certifications allow you to train, equip and market yourself to brand specific vehicle owners. Frankly, I see the industry moving toward this model of operation. Various brands are very specific and require specific training and equipment. I am already seeing scenarios where repairers are referring certain clients to other repairers based on those facility’s certifications. All of this will be good for the industry if we can just get shops to invest in their business and market accordingly so that they don’t have to sign contracts to be beholden to the third-party payer.”

Belsito’s hesitance to pursue certification largely relates to his concerns about whether “OEMs will make deals with insurers, leaving us secondary to the process. It feels like we’re never going to eliminate insurers’ control over the process, and though manufacturers issue position statements and requirements, it’s just a piece of paper until they step up and support shops for properly repairing vehicles. Until OEMs get more involved, it’s difficult for independent repairers to operate without some kind of insurer relationship.”

Despite the challenges, Lamborghini hopes that the industry is moving away from insurer contracts and toward OEM certification. “We’ve always had one entity that assumes the liability for repairing the car correctly, and we need to get paid appropriately to do that. On the other hand, we have an entity focused on cutting costs. And now, OEMs are getting more involved because it’s a way to solidify their relationship with the customer, and since they’re the ones who engineered and built the vehicle, it stands to reason that they have some idea of how it should be repaired.

“Anyone interested in surviving and thriving in the collision repair industry of tomorrow needs to look at OEM certification to keep their business moving forward,” he added. “If you’re not repairing cars to OEM requirements, there’s a problem, and insurers need to recognize their part in that problem.”

Although Correia foresees OEMs getting involved enough to require research and documentation, he doubts that will resolve the problem. “We’ll still have to deal with the insurers, and we’re already doing a ton of work that didn’t exist 10 years ago. When you’re on a program or referral list, you can’t even balance-bill the customer, and while I don’t want to charge the customer for administrative fees, I don’t see another solution to getting our industry back.”