The economic conditions these past few years have compounded the pressure for companies and public entities to identify every way possible to reduce costs. While there are some signs that the economy may be improving, companies recognize that cost control is here to stay and is extremely vital to successful ongoing operations.

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

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

The Current Environment

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

Rely upon an insurance company for their coverage and claims administration.
Select a TPA to manage their claims if they are a qualified self-insurer or have a large deductible program.
Administer their own claims, especially if the company is self-insured and regional rather than national in scope.
Become a risk pool member, in which case the risk pool may elect to administer the claims or may select a TPA to administer the claims.

Many claims administration programs, however structured, have adopted best practices to manage claims. This is a good start toward more favorable outcomes, but in many cases the program's emphasis may eventually shift to processing claims by following a checklist rather than managing claims through a combination of technical claims knowledge, appropriate procedural steps, effective time management, and action plans, all of which lead to faster and more favorable results. This transition, when combined with more liberal awards and rulings and escalating medical costs, means claims costs and loss adjusting expenses (LAE) may be increasing in spite of the company's attempts to reduce exposures and mitigate costs.

Workers' Comp Claims Handling

Insurers, TPAs, and insurance vendors have also developed more sophisticated claims systems, best practices guidelines, and partnerships in efforts to reduce claims costs. However, these guides, activities, and partnerships, while helpful, are not all that is needed for an effective claims management operation. This is especially true in the workers' compensation world, which may represent one of a company's highest costs. Workers' compensation claims require more frequent “touches.” This means there is generally more planning, coordination, communication, and teamwork involved when compared to other claims types. Let's shift focus to a workers' compensation claims audit to illustrate the nuances of the process.

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

Why Conduct A Claims Audit?

Some companies or public entities underestimate the value of a claims audit, considering it to be an expense that does not provide a direct benefit or cost savings, or a task that can be performed by the internal audit department. Others are resistant to claims auditing because it is incorrectly viewed as a “gotcha” rather than a springboard to better claims outcomes. A claims audit, however, not only determines whether the claims administrator is managing claims as it should, but also provides information about the work of other corporate departments or divisions that can improve their participation to achieve better outcomes.

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

Comfort or assurance that the program is operating as it should, if that is indeed the case.
Identification and documentation of areas of improvement or functions that could be executed more efficiently.
Confirmation to the insurer or TPA that its client is paying close 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 their participation in the claims process is also being examined as part of the claims audit process.

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

Are they properly handling their supervisory responsibilities and promptly reporting claims?
Are the supervisors, medical providers, human resources professionals, and safety /ergonomics specialists working cooperatively to arrange modified duty when possible?
Are the safety representatives investigating incidents and reporting findings and recommendations to the claims organization so objective input can be incorporated in the investigation and company's overall loss control process?

Therefore, the findings, observations, and recommendations arising out of a claims audit offer numerous benefits. That's because the findings and recommendations gleaned from a claims audit will ultimately lead to the greatest benefit to a company: a stronger and more complete program that will help reduce claims costs and loss adjustment expenses.

The Mechanics of An Audit

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

1. Interview the corporate representatives with primary responsibility for the insurance/claims program to gain an understanding of the program as it has been set up and how it should operate.

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

Special account instructions between corporate risk management and the TPA or insurer on the company's key needs and service expectations.
Claims procedures manuals or other documents that cover items such as the supervisors' responsibilities; return to work (RTW) programs; subrogation requirements; litigation management procedures; authority levels; authorized vendors; and other topics.
Actuarial reports that reveal trends in the claims history.
Cost allocation models that reveal how the company allocates the claims costs back to the operating units.
Claims budgets that project the company's expectations for claims costs, and some of the assumptions on which these estimates are based.
Training documents for employees, supervisors, adjusters, and other ersonnel to understand their roles in the claims management process.
Process maps, if available, that describes and illustrates the path that a reported claim takes.
Management reports (loss reports, exception reports) that illustrate the data that the company uses to measure its results and the financial outcome, as well as determining if reports provide meaningful data that can be used to better manage the claims program.

3. Selection of an audit sample to provide a reasonable evaluation of the TPA's claims handling to include a broad cross-section of claims as well as work performed by different adjusters or branch offices.

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

Evaluation of the planning and resolution steps that went into the sample of claims reviewed may be the most important findings arising out of the claims audit. It is vital to understand whether the adjusters' work met industry standards. However, the claims auditor must also determine whether the adjuster actively sought needed information and used that information and effective communication to move the claim toward a better outcome, or did the adjuster merely check the blocks of the best practices checklist, resulting in a high best practices adherence score that still resulted in an unsatisfactory outcome? It is only through the planning and timely execution of the practices that better outcomes are achieved.

Click here to access a sample audit checklist

Expected Audit Output

The claims auditor performing a claims audit should provide a report that provides findings and recommendations in each of the key areas. The report should include strengths that the program should 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 times between specific steps that have been or should have been taken—that clearly illustrate the timing of the work, which is important.
Deviations from appropriate reserves.
Examples and data to clearly illustrate the findings.
Specific recommendations in any area where claims management performance did not meet leading industry practices.

The recommendations that the claims auditor provides should be rooted in the real world, and based on the company's environment, budget, size, and other factors. The claims auditor should work with the company and the TPA to establish priorities and action plans to gain the largest financial improvements as soon as practicable.

In summary, claims audits should be construed as opportunities to grow your claims program so that it reflects leading industry practices, which will help to steer the claims toward more successful and less costly outcomes. During the process, the company, its representatives, and its TPA will gain more understanding on the proper interaction between parties and the proper interplay of the required claims management steps for successful outcomes.

Gary Jennings, CPCU, ARM, ALCM, AIC, ARe, SCLA,is the principal consultant at Strategic Claims Direction LLC. He may be reached at 678-520-3739; Gary.Jennings@StrategicClaimsDirection.com.

Special Reports /

Claims Auditing Is A Springboard To Cost Reduction

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