By the end of the 1980’s, self-funding of employee health plans under ERISA had emerged as one of the primary ways plan sponsors were dealing with the double-digit health care cost inflation of the time. Instead of paying an insurer to underwrite their risks, they found they could save money by underwriting the risks themselves. In lieu of administering their plans themselves, however, most self-funded sponsors turned to the use of Third Party Administrators (TPA’s) or insurance carriers to pay their claims. 

 

Engendered by the fiduciary requirements of ERISA and the desire to reduce costs, the formation of multiple employer groups, plan design changes, creation of provider networks, and aggressive purchasing tactics created a variety of administrative challenges for TPA’s. Plans became more complicated to administer while at the same time costs were rapidly escalating. The need for independent oversight became self-evident and “claims audits” quickly became commonplace. The nature and form of audits being done however, was (and still remains) widely varied in methodology and effectiveness.

 

Today plan sponsors face the same inflationary and fiduciary concerns …

§         Double-Digit Health Care Cost Inflation

§         More Complicated Plan Designs and Payment Systems

§         Pressure on Administrator Fees and Margins

§         Inadequate Training / High Turnover of Administrator Staffs

§         Continuous TPA Mergers, Acquisitions, Reorganizations

§         Consumer Marketing Strategies for Pharmaceuticals

§         Lack of Focus on Process Variation and Controls

§         Improper Administrator Incentives

§         Lack of Accountability

… and so the need for effective audit and control again is underscored. Now for public companies, compliance with Sarbanes-Oxley 404 adds yet another layer of cost as well.

 

Claims Administration Audits are performed at large by three types of firms: Accountants, employee benefits consultants, and claims administration audit specialists. Additionally, in larger organizations, Internal Audit departments also do claims testing and reviews. While risk exposure has become better understood, not well understood is the significant leverage that claims administration processes have on claims expense and service quality. Small amounts of variation in these processes, when leveraged against millions of dollars in claims, can have material adverse effect. Conversely, with the right kind of management information, there exists the opportunity (and obligation under ERISA) to reduce claims expense and improve service by bringing key administrative processes under control.

 

Plan Trustees and Fiduciaries are charged under ERISA with acting in the best interests of plan participants. The following table presents types of claims audit objectives that come under this umbrella:

 

 

The two most common methods used in claims administration audits are Statistical Sampling and Electronic Screening.

 

Statistical Sample sizes and designs vary, but common practice (driven in part by cost) favors a stratified random sample of a sufficient number of claims (usually 200-250) to yield a confidence level and precision rate of 95% +/- 3%. For smaller populations, reduced sample sizes and increased precision bounds (e.g., - +/- 4%) also are used. Stratification is necessary due to a low numbers of high dollar claims accounting for a high percentage of total claims expense (the “80-20” rule). Sampled claims are audited to see if they have been paid, as required by ERISA, in accordance with the plan document. Audit results are typically rendered in “report card” form indicating average performance for a preceding 12-month period or plan year. Common measurements focus on Financial Accuracy, Claim Turnaround, Coordination of Benefits (COB) Savings, Accurate Payment Frequency, and Data Coding. 

 

Electronic Screening techniques were initially introduced as way to identify certain types of systematic fraud, particularly in state and federally funded plans. As self-funded plan designs were modified to reduce costs, the challenges of accurate claims processing began to be understood and electronic screening techniques also were developed to focus on identification of systematic errors and recovery of overpayments. Opportunistic practitioners based their fees on sharing in what they could get back. For a period this practice found a degree of acceptance, but it eventually fell into disfavor because of windfall findings, difficulty in recovery, and administrator distrust. Additionally, to the extent that the causes of the overpayments failed to be identified or addressed, the benefits were short-lived. Some of the techniques, however, proved useful in sifting out data that, when coupled with statistical sampling results, can be very beneficial. Because 100% of the claims processed in a given period can be reviewed, a window into administrative problems and recoverable overpayments can be achieved.

 

With respect to both methodologies, the question Benefits Managers, Plan Fiduciaries, and Trustees must address is how to use audit results effectively in acting (per ERISA) in the best interest of plan participants going forward.

 

Traditional claims audits only measure past results of administrative processes and therefore have limited value going forward. Pure contingent fee recovery audits only identify the symptoms and not the causes of administrative process weaknesses. A third alternative provides a systematic, statistical basis for identifying, analyzing, and prioritizing costly administra­tive problems; and preventing them from reoccurring.

 

In addition to measuring the accuracy and timeliness of claim payments, electronic screening and statistical process control techniques are used to focus not only on past performance, but also on what can be done to improve claims administration processes going forward. Effective audit and control of claims administration is a continuous process in and of itself. A comprehensive claim audit approach includes five phases: Data collection ... data analysis ... problem prioritization ... action planning ... and continuous process monitoring.

 

This approach makes it possible not only to identify (and in some cases recover) costly errors, but also to improve claims administration processes. The former is of particular importance in assuring timely intervention on problems that would otherwise go undetected. The latter is where the greatest benefits can be realized over time due to the dramatic leverage that controlling administrative processes has on reducing claims expense and improving service.  Whereas the audit report has traditionally marked the end of the audit, it should also the catalyst and basis for follow-up and corrective action. 

 

Although the need for self-funded plan sponsors to maintain oversight of their administrators is clear, return on investment (R.O.I.) in the cost of auditing still must be taken into consideration. Additionally, the objectives of a properly designed audit and control approach should serve to advance the best interests of plan participants. Minimum expectations should include: