Our firm is contacted on a regular basis by both insurance carriers and employers alike seeking an outside, independent, review of workers compensation claim files. In this post we’ll discuss the purpose and effect workers comp claim audits have from both the carrier and the employers perspective. We’ll break this down into two sections concentrating on each perspective.
Insurance companies seek independent, outside claim reviews for several specific reasons. Some may be combined in larger audit file reviews or narrowed down into very specific identified departmental purposes. General reasons include:
- Workers Compensation External Compliance Audits – State Insurance Departments audit insurance company files often on a reoccurring basis usually ever so many years. When a State Insurance Department finds that a carrier has failed to follow their specific rules, they will fine the insurance company. These fines can run into many thousands of dollars. We’ve even witnessed fines being imposed on carriers by a single state running into the millions of dollars. It only makes sense then that insurance carriers will focus on doing what they can to eliminate those types of fines. Compliance audits are designed to focus on carrier compliance with rules imposed on them by the individual states where they conduct business. Audits can be very focused or very broad depending on the goals established by the insurance company.
- Internal Compliance Audits – Just like individual states have rules as to how claim files must be handled and properly documented, each individual insurance company has their own internal rules that must be met. Insurance carriers will often look outside their walls and contract with an independent consultant to perform an internal compliance audit. A sampling of workers compensation files will be reviewed by the independent consultant to determine the level of claim department compliance with their own company rules and procedures.
- Leakage Audits – When it comes to understanding the purpose of conducting a workers compensation leakage audit just visualize dollar signs going down the drain! Leakage audits are a specialized type of audit almost certainly performed by an outside source. These consultants are tasked with the job of reviewing claim file details with the purpose of identifying procedures and actions that contribute to additional, higher costs associated with both individual claims and the overall claim process in use. In simple terms, where’s the money leaking from! Leakage audits help identify specific areas where an insurance company can implement tighter controls or adopt improved procedures that help reduce the overall cost of claims. When an insurance company handles thousands and thousands of claims even small errors costing in the hundreds of dollar range can add up to many hundreds of thousands of lost dollars every year. Lost dollars that will have a negative effect on the insurance carriers bottom line. And that pretty much describes why leakage audits are conducted.
- Workers Compensation Reserve Audits – For those of you out there who don’t play in the workers comp sandbox on a daily basis, the concept of reserving may sound a bit weird. In a nutshell, when a work comp claim occurs the insurance company adjuster will review the facts of the claim and will assign a reserve to the claim. The reserve is the ultimate amount the adjuster believes the insurance company will have to pay for both indemnity (loss of income) and medical expenses to settle the claim in question. Reserves are treated as actual dollars spent. Reserving practices are a big deal to an insurance company as reserves have a direct impact on the financial performance of the insurance company. Over reserving a claim means that the insurance company has set aside too many dollars for the claim. Under reserving a claim means that the insurance company has not set aside enough dollars to cover the ultimate cost of the claim in question. It’s always in the best interest of the insurance company to be as accurate as possible when reserving a claim. Reserve audits help identify problems the carrier may be experiencing in their reserving practices.
- Claim File Audits – At first glance workers compensation claim file audits may seem redundant when considering the more specific types of audits listed above. However in reality this type of audit provides an insurance company with the basis to make decisions on whether a more specific type of audit may be required. Claim file audits involve a detailed look into the individual claims tagged for review. This audit will often begin with the simple question “is this a compensable claim?” From that point every contact, every company procedure, every document found within the file will be examined. Physician and nurse notes will be reviewed. Interviews taken by the adjuster will be reviewed. Timely reporting and accuracy of the first report of injury document will be reviewed. Timely closing and final settlement will be reviewed. Everything that was done and everything that should have been done regarding the claim will be examined for accuracy and completeness. Following established carrier procedures is paramount when it comes to having a properly documented workers comp claim file. Independent consultant reviews help establish that the carrier has performed their duties properly in accordance not only with their own internal procedures but also to the established industry standards as well.
We could go on but it’s time to change channels and now take a look at claim audits from an employers perspective.
Typical reasons an individual employer will often reach out to our company to provide consulting assistance by conducting a full workers compensation claim file review will include:
- Identify and Control Premium Cost Drivers – You’ll discover the development of an employers workers compensation premium consists of a series of collected data being applied against an insurance carriers rates for any given classification code. Identifying the rating factor cost drivers in an employers premium is the starting point for establishing a premium control program. Claims effect premium in a variety of ways. Workers compensation claims are, depending on the type of policy an employer has, one of the most important factors involved in the process.
- Verify Experience Rating Factors or EMR’s – Claims have a direct impact on the premium an experience rated employer pays. As a primary factor in the development of an employers experience modification factor, EMOD or EMR, employers who have identified and established an active claim monitoring system are on their way to gaining significant control over the premium they pay. Workers compensation claim reviews are the starting point for an employer who has seen an increase in their EMR. Verification that a claim is compensable, that the claim has been properly handled by the insurance carrier and that reserving and settlement and ultimately the closing of a claim have been properly adjusted all play a large part in the collected data used in calculating an employers EMR. Gaining control over an experience rated workers comp policy should always include development of a claim monitoring procedure.
- Verify Retained Deductible Costs – You’ll find that for employers who have a workers compensation deductible plan verifying retained deductible costs will start with determining the accuracy of claim dollars spent for each claim that falls under their deductible. Deductible plans come in different forms. You can learn more about deductible plans by visiting this page on our website. Regardless of the form, when a deductible plan is in place the employer will be paying a portion of the claim. Whether that portion is paid direct to a service provider for an employees injury or whether it’s paid as some form of reimbursement to the insurance carrier for handling the claim, it’s money that comes directly out of the employers pocket. It’s pretty easy to see how important it is to an employer using this type of plan to make sure the claim is properly valued and that it is, and has been, properly handled by the insurance carrier. Under these plans mistakes in claim management by the carrier will lead directly to more dollars being paid out by the employer. To top it off, experience rated employers as mentioned above who are found in gross reporting states (those states who do not allow the deductible amount to be excluded from the total claim,) using deductible plans, may incur, not only additional dollars being paid out because of their deductible, but will also be impacted on by the increase in their EMR.
- Verify Retrospective Rating Costs – Retro plans are different from guaranteed cost workers comp plans. In simple terms, they are where an employer signs up with an insurance carrier to provide coverage and, depending on the type of retro, actually allows the carrier to process and settle claims and then bill the employer for the claim dollars paid. The employer will ultimately pay the entire claim cost out of their own pocket. There are different retro plans. Some will limit an employers total out of pocket cost but for the purpose of this post we’ll stick with this simple description. The insurance company will bill the employer for claims they’ve processed at scheduled time periods known as retro adjustment periods. Independent claim reviews are essential for employers on a retro plan. It’s easy to see how, with a retro plan, an employer had better pay close attention to the claim handling process of the insurance company. After all, the money to pay the claim comes directly out of the employers pocket!
For an employer, a claim review is centered in their efforts to control workers compensation premium cost. This is done by first identifying those areas where claims have a direct impact on the premium an employer pays and then by verifying that those costs incurred were in fact proper. As you can see from our examples above work comp claims touch many premium generation and direct cost areas of an employers workers compensation program.
Now how’s that old saying go? …Trust but verify!
Hope this helps you out and thanks for reading!