The economic conditions these past few years have compounded thepressure for companies and public entities to identify every waypossible to reduce costs. While there are some signs that theeconomy may be improving, companies recognize that cost control ishere to stay and is extremely vital to successful ongoingoperations.

Many p&c carriers may not have yet examined ways in-depth toenhance their claims operations to reduce claims costs, likelybecause of more pressing financial issues. Still more companieserroneously think certain claims costs simply fall into the “costof doing business,” thereby assuming little can be done to curbexpenses. However, claims programs can be improved in many ways,the first step being conducting audits.

Claims audits are an efficient and cost-effective method forevaluating how well a program has been structured, developed, andmaintained in this difficult environment. Claims audits, which canbe performed for any insurance line, may sometimes be necessary todocument whether an insurer's or a TPA's performance has fallenshort of its duties (and possibly resulted in significant financialloss to the client). In the majority of cases, however, claimsaudits should not be viewed as a “gotcha,” but rather as a methodfor improving the full suite of claims management activities toachieve better outcomes.

The Current Environment

Insurers and other entities may take one of several routes formanaging their claims. They may:

1. Rely upon an insurance company for their coverage and claimsadministration.
2. Select a TPA to manage their claims if they are a qualifiedself-insurer or have a large deductible program.
3. Administer their own claims, especially if the company isself-insured and regional rather than national in scope.
4. Become a risk pool member, in which case the risk pool mayelect to administer the claims or may select a TPA to administerthe claims.

Many claims administration programs, however structured, haveadopted best practices to manage claims. This is a good starttoward more favorable outcomes, but in many cases the program'semphasis may eventually shift to processing claims byfollowing a checklist rather than managing claims througha combination of technical claims knowledge, appropriate proceduralsteps, effective time management, and action plans, all of whichlead to faster and more favorable results. This transition, whencombined with more liberal awards and rulings and escalatingmedical costs, means claims costs and loss adjusting expenses (LAE)may be increasing in spite of the company's attempts to reduceexposures and mitigate costs.

Workers' Comp Claims Handling

Insurers, TPAs, and insurance vendors have also developed moresophisticated claims systems, best practices guidelines, andpartnerships in efforts to reduce claims costs. However, theseguides, activities, and partnerships, while helpful, are not allthat is needed for an effective claims management operation. Thisis especially true in the workers' compensation world, which mayrepresent one of a company's highest costs. Workers' compensationclaims require more frequent “touches.” This means there isgenerally more planning, coordination, communication, and teamworkinvolved when compared to other claims types. Let's shift focus toa workers' compensation claims audit to illustrate the nuances ofthe process.

Claims audits should start, but should not end, with comparingthe program's claims management performance against best practicesor so-called “leading industry standards,” which apply regardlessof the industry or the claims program structure. After all, aclaims program should operate under the premise that it should bethe best that it can be, regardless of ownership or form.

Why Conduct A Claims Audit?

Some companies or public entities underestimate the value of aclaims audit, considering it to be an expense that does not providea direct benefit or cost savings, or a task that can be performedby the internal audit department. Others are resistant to claimsauditing because it is incorrectly viewed as a “gotcha” rather thana springboard to better claims outcomes. A claimsaudit, however, not only determines whether the claimsadministrator is managing claims as it should, but also providesinformation about the work of other corporate departments ordivisions that can improve their participation to achieve betteroutcomes.

In terms of benefits to an organization, claims audits provideseveral, including:

• Comfort or assurance that the program is operating as itshould, if that is indeed the case.
• Identification and documentation of areas of improvement orfunctions that could be executed more efficiently.
• Confirmation to the insurer or TPA that its client is payingclose attention to their performance and has high expectations,which should in turn yield better performance.
• Notification to corporate representatives—for example,supervisors, human resources, safety representatives—that theirparticipation in the claims process is also being examined as partof the claims audit process.

For example, the following questions may be answered as theresult of a claims audit:

1. Are they properly handling their supervisory responsibilitiesand promptly reporting claims?
2. Are the supervisors, medical providers, human resourcesprofessionals, and safety /ergonomics specialists workingcooperatively to arrange modified duty when possible?
3. Are the safety representatives investigating incidents andreporting findings and recommendations to the claims organizationso objective input can be incorporated in the investigation andcompany's overall loss control process?

Therefore, the findings, observations, and recommendationsarising out of a claims audit offer numerous benefits. That'sbecause the findings and recommendations gleaned from a claimsaudit will ultimately lead to the greatest benefit to a company: astronger and more complete program that will help reduce claimscosts and loss adjustment expenses.

The Mechanics of An Audit

Claims audits should be viewed as a diagnostic evaluation of acompany's entire claims program, not just an audit of a sample ofclaim files. The audit should not be limited to reviewing a sampleof claims. Rather, it should include other steps to determine howwell the overall claims program is managed. The claims auditorshould perform the following phases or components to arrive at thefinal findings and recommendations:

1. Interview the corporate representatives with primaryresponsibility for the insurance/claims program to gain anunderstanding of the program as it has been set up and how itshould operate.

2. Review reference documents pertaining to the program,including (but not limited to) the following:

1. Special account instructions between corporate risk managementand the TPA or insurer on the company's key needs and serviceexpectations.
2. Claims procedures manuals or other documents that cover itemssuch as the supervisors' responsibilities; return to work (RTW)programs; subrogation requirements; litigation managementprocedures; authority levels; authorized vendors; and othertopics.
3. Actuarial reports that reveal trends in the claimshistory.
4. Cost allocation models that reveal how the company allocatesthe claims costs back to the operating units.
5. Claims budgets that project the company's expectations forclaims costs, and some of the assumptions on which these estimatesare based.
6. Training documents for employees, supervisors, adjusters, andother ersonnel to understand their roles in the claimsmanagement process.
7. Process maps, if available, that describes and illustrates thepath that a reported claim takes.
8. Management reports (loss reports, exception reports) thatillustrate the data that the company uses to measure its resultsand the financial outcome, as well as determining if reportsprovide meaningful data that can be used to better manage theclaims program.

3. Selection of an audit sample to provide a reasonableevaluation of the TPA's claims handling to include a broadcross-section of claims as well as work performed by differentadjusters or branch offices.

4. Review and analysis of the sample of claims, measuring theTPA's performance against leading industry practices. A workers'comp review should include the following claims managementcharacteristics. There are numerous criteria under each major topicthat should be considered while evaluating that component.

Evaluation of the planning and resolution steps that went intothe sample of claims reviewed may be the most important findingsarising out of the claims audit. It is vital to understandwhether the adjusters' work met industry standards. However, theclaims auditor must also determine whether the adjuster activelysought needed information and used that information and effectivecommunication to move the claim toward a better outcome, or did theadjuster merely check the blocks of the best practices checklist,resulting in a high best practices adherence score that stillresulted in an unsatisfactory outcome? It is only through theplanning and timely execution of the practices that better outcomesare achieved.

Click here to access a sample audit checklist

Expected Audit Output

The claims auditor performing a claims audit should provide areport that provides findings and recommendations in each of thekey areas. The report should include strengths that the programshould retain as well as areas where improvements are needed,whether they are related to the process or execution. Furthermore,the report should provide details such as:

• Objective measurements when possible—for instance, lag timesbetween specific steps that have been or should have beentaken—that clearly illustrate the timing of the work, which isimportant.
• Deviations from appropriate reserves.
• Examples and data to clearly illustrate the findings.
• Specific recommendations in any area where claims managementperformance did not meet leading industry practices.

The recommendations that the claims auditor provides should berooted in the real world, and based on the company's environment,budget, size, and other factors. The claims auditor should workwith the company and the TPA to establish priorities and actionplans to gain the largest financial improvements as soon aspracticable.

In summary, claims audits should be construed as opportunitiesto grow your claims program so that it reflects leading industrypractices, which will help to steer the claims toward moresuccessful and less costly outcomes. During the process, thecompany, its representatives, and its TPA will gain moreunderstanding on the proper interaction between parties and theproper interplay of the required claims management steps forsuccessful outcomes.

Gary Jennings, CPCU, ARM, ALCM, AIC, ARe, SCLA,is theprincipal consultant at Strategic ClaimsDirection LLC. He may be reached at 678-520-3739;[email protected].