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Overseeing Audits of Your Health Plans

Although fiduciary responsibility and health care reform are driving such audits, cost cutting serves as a major impetus.

0710cover.gifDue to a prolonged economic downturn, a sputtering recovery and comprehensive health care reform, employers are facing pressure to ease financial strain by changing their health care benefits. HR professionals and benefits leaders are looking for ways to relieve the stress by conducting plan audits and design reviews.

“We have absolutely seen an upswing in all types of audits,” says Bruce Caputo, national audit practice leader with the Chicago office of Towers Watson. His company’s audit volume grew 10 percent from 2008 to 2009.

Even before health care reform was enacted in March, many business leaders expected to revise their health care programs. In total, 83 percent of companies have changed or plan to change their strategies, compared with 59 percent in 2009. New strategies include stepped-up audits, Caputo says, pointing to results from a January survey of 507 U.S. employers, each with 1,000 or more employees, by Towers Watson and the nonprofit National Business Group on Health in Washington, D.C.

Findings show that 69 percent plan to conduct eligibility or enrollment audits this year, compared with 61 percent in 2009 and 55 percent in 2008. Eligibility audits identify plan participants, such as divorced spouses or adult children, who should be purged from the rolls because they no longer qualify for benefits. Enrollment audits then reconcile eligibility data with official records.

Medical claims audits and clinical audits are also becoming popular, with half of employers either conducting them or planning to conduct them, according to a 2009 Aon Corp. survey of 1,300 senior HR leaders and benefits managers at companies of all sizes.

Checking Up On Medical Claims

Benefits consultants and auditors estimate that average medical claims error rates typically range from 2 percent to 5 percent of total claims paid. Couple that with the fact that claims costs are expected to soar 10.2 percent to 13.3 percent in 2010, and the importance of ensuring accurate claims processing becomes clear.

The findings are based on forecasts by managed-care organizations, health insurers, benefits managers and third-party administrators participating in a 2010 health plan cost trend survey by The Segal Co., a consulting firm in New York.

HR and benefits leaders know that medical benefits are arguably perhaps the most visible employee benefit. How they’re handled plays a vital role in shaping employees’ perceptions of their quality.

A recent survey by the nonprofit International Foundation of Employee Benefit Plans in Brookfield, Wis., asked more than 30,000 U.S. and Canadian employees about their attitudes toward their benefits. It found that 64 percent of those who felt positive about the processing of their medical benefits had positive feelings about the quality of their health care plans.

Only 31 percent of employees who had negative feelings about the way their medical benefits were handled felt good about their health care plans.

A medical claims audit typically includes an audit team review of a sample of claims—usually about 250, going from a zero-paid claim to the highest-paid claim in the system. They check for financial and payment accuracy, proper categorization, and turnaround time. Such audits identify overpayments, other errors, facilitate recovery of funds due from the recipients of overpayments, and make suggestions for improving claims processing.

Claims audits reveal discrepancies such as covering services not provided, paying for services not performed and circumventing referral requirements. They discover duplicate payments and examine application of benefits maximums per an employer’s plan—be they annual, per visit or per day.

Because claims administration is highly automated, when errors are found they are often “systematic errors,” notes Michael Thompson, principal of PricewaterhouseCoopers’ global human resource solutions group in New York.

Still, a portion of certain claims—usually complex, larger claims— may be processed manually. Therefore, he recommends that employers combine an audit of a random, stratified sample—to increase the likelihood that the key element of the claim payment logic is tested—with focused reviews in areas that often require manual intervention or have higher chance of error, such as coordination of benefits.

—Susan J. Wells

The motivation is clear, notes Thomas Lerche, senior vice president and health care practice leader for the consulting firm in Chicago: Because many employers essentially hand their checkbooks to third-party administrators, auditing those administrators is sound business practice. “Audits have become a popular tactic to reduce program costs—with vendor payments contingent on the amount of savings,” he notes. In other words, the auditor gets paid based on the savings identified.

Fresh Trends Emerge

Indeed, protection and prevention are new themes among auditors as HR and benefits professionals strive for precision in managing health plans.

For example, more employers are conducting pre-implementation audits, experts say, as a way to catch potential problems before rolling out a plan design.

The method essentially acts as a “test run” whereby sample claim scenarios for each plan option, benefit and limit are processed and adjudicated to make sure they correctly interpret plan provisions—and to avoid costly systemic errors before the plan goes live, Caputo says.

“Prevention is worth a pound of cure”—and pre-implementation audits prove that, he says.

Another trend involves putting guarantees in place to ensure that vendors meet employers’ clinical and financial goals, says Dean Hatfield, senior vice president and health practice leader of Sibson Consulting in New York.

One type of performance guarantee subtracts penalties for unacceptable service from vendors’ payments—and therefore also reduces plan providers’ costs. For instance, an employer can establish a guarantee to be reimbursed for the cost of time and expense needed to correct inaccurate claims payments or to complete an on-site audit of a claims office with numerous errors.

According to the 2009 Aon survey, 53 percent of employers plan to negotiate these types of performance guarantees with thirdparty administrators or insurers, thereby encouraging vendors to reduce the need for expensive audits down the road.

Another type of performance guarantee rewards vendors for positive results, Hatfield says. A common method reserves a portion of the vendor’s premium or administrative fee until after a yearend performance assessment. The results determine whether the vendor has earned the entire amount or a portion of the money.

Such guarantees are becoming the standard now, and the structure is “even richer and tougher,” he says, noting that the penalty for problems is typically twice as much as the incentive for doing well.

The bottom line: “The deeper you get with this, the more you’ll rise to the top of their attention level, which is where you want to be” with vendors, Hatfield advises.

Not Just a Quick Fix

Audits may be sparked by events such as:

  • Compliance obligations.
  • Major plan changes.
  • A new plan administrator.
  • Unexpected utilization trends.

HR and benefits professionals conduct such audits to drive longer-term health plan objectives or to receive immediate, shortterm returns or a one-time recovery of funds. Michael Thompson, principal of PricewaterhouseCoopers’ global human resource solutions group in New York, says employers are focusing on value in their health plan audit practices and looking for opportunities that deliver savings. “They’re challenging the effectiveness of existing health management programs and, where appropriate, seeking to redirect investments in areas of more value.”

Plan design audits, for example, examine a plan’s structure to assess how cost-effectively it serves the workforce, how it compares with competitors’ plans and how it can be improved.

As reported in the Society for Human Resource Management’s 2010 Employee Benefits survey report, 79 percent of respondents said their organizations review their benefits programs annually and 10 percent reported reviewing them even more frequently. Only 1 percent said their companies never conduct such reviews.

At the same time, the recession’s impact has led to morefrequent revamps of plan design. Compared with responses in 2009, more respondents this year indicate significant increases in point-of-care cost sharing in medical and pharmacy plans through higher deductibles, co-pays and co-insurance rates, according to the Towers Watson survey. An even greater number of employers are planning to take such steps in 2011, the data suggest.

Audit Shapes Plan Design

Like many employers, Navy Federal Credit Union, a $40 billion institution based in Vienna, Va., reviews its medical benefits every year. About 75 percent of its 7,100 employees are enrolled in a health maintenance organization (HMO) or a preferred provider organization (PPO) network. The employer pays 80 percent of health plan premiums, and health coverage costs are about $60 million per year before employee contributions. An insurance broker helps with the annual analysis and major changes have recently been made as a result of reviews, says Nancy Astorga, vice president of compensation and benefits.

Last year, for example, the credit union saved $6.5 million after reducing the number of PPO networks from three to one. The one chosen—the Blue Cross nationwide network—provides much deeper discounts.

Navy Federal also added a $100 out-of-network deductible and a $50 deductible for nongeneric prescriptions. Pricing for the HMO option was aligned with the PPO health plan to drive coverage decisions based on delivery of care rather than the cost of coverage per paycheck. Those alterations were effective in shifting enrollment from the credit union’s fully insured HMO plan to its self-funded PPO plan. The changes are expected to save more than $7 million annually.

“We want employees to make their health coverage choices based on how they want their health care delivered and by whom—not on the per-paycheck cost,” Astorga says.

Although Navy Federal doesn’t make such dramatic changes with every health plan review, the regular audits almost certainly contribute to managing costs.

“We’ve kept our cost increases below the national average,” she says. The organization’s health care costs decreased 13 percent from 2008 to 2009 and are projected to rise only 1 percent in 2010—an enviable percentage.


Plan audits enable Navy Federal to compare its health benefits with those of banks and call centers in its region every other year, Astorga says. And, she looks at federal and local governments’ health plans for comparison. “We make incremental changes to ensure that employees have ‘skin in the game,’ ” she adds, “and share in the cost of the health care choices they make—or neglect to make.”

Compliance Audits Gain Importance

National health reform will shine a bright light on the value of compliance audits as employers strive to satisfy the law’s sweeping requirements, experts say. States’ health care reform legislation could also increase employers’ administrative and financial burdens.

“With the impacts of health reforms, it’s going to be extremely important for employers to avoid challenges,” predicts Dean Hatfield, senior vice president and health practice leader of Sibson Consulting in New York.

That’s a main goal of compliance audits. They examine how well health plan sponsors comply with federal and state laws and regulations as well as their own plan documents. For example, audits of compliance with the Health Insurance Portability and Accountability Act confirm that employers meet the law’s privacy, security and other provisions. Such audits are geared toward avoiding legal claims.

The Employee Retirement Income Security Act, meanwhile, sets standards of conduct for employers that manage benefits plans—including regular monitoring of service providers.

These standards call for establishing and following a formal review process at reasonable intervals to decide whether to continue using or to replace the current provider. At a minimum, employers must regularly:

  • Review third-party administrators’ and insurers’ performance.
  • Read reports they provide.
  • Check actual fees charged.
  • Ask about policies and practices such as claims processing systems.
  • Ensure that plan records are properly maintained.
  • Follow up on participants’ complaints.

“Prudence and fiduciary responsibility demand that employers take steps to oversee that administration,” says Michael Thompson, principal at PricewaterhouseCoopers’ global human resource solutions group in New York.

Typically, major employers audit health plans once every three years. If multiple health plans are offered, they audit different plans each year, he says.

Recent evidence shows that employers aren’t shying away from such compliance schedules, even in the recession’s shadow. In fact, spending on compliance has remained stronger than anticipated, according to a late-2009 survey of 1,900 U.S. health care compliance professionals from companies of all sizes by the Society of Corporate Compliance and Ethics and the Health Care Compliance Association, both in Minneapolis. Roughly three of four companies kept compliance spending even or increased it in 2009, and a third of those polled planned a compliance budget increase in 2010, says the organizations’ Chief Executive Officer Roy Snell.

“While the economy may be coming back, fears of compliance failures remain,” he says. —Susan J. Wells

Challenging Existing Plans

Financial reviews have been a popular way to focus on the cost drivers of health plans that have been trending at higher rates. Employers are also taking a fresh approach to audits to propel health-improvement goals.

At Andersen Corp., a 10,000-employee window and door manufacturer based in Bayport, Minn., benefits leaders recently used an avoidable-claims analysis to discover what was driving double-digit increases in health care costs.

Many costs were related to preventable conditions, says Kathy Prondzinski, director of corporate benefits design.

That analysis led to the hiring of a full-time health-improvement program manager, the creation of a comprehensive wellness program, a stronger focus on consumerism in health benefits choices and a new medical plan vendor.

After the first full year of its plan design changes, executives saw a decrease in per-employee health care costs and a 13.5 percent reduction in employee health risks. In 2006—before the changes took place—annual health care costs per employee in the self-insured plan were $8,586. In 2007—after the changes— that figure declined to $7,843, Prondzinski says.

“Dig into what your data are telling you,” she advises. “There’s always value.”

Prondzinski says lower plan costs delivered bottom-line savings during a decline in the housing industry. It was one of several “rings of defense” leaders implemented to preserve financial strength, sustain medical coverage for the long term and reinforce the company’s commitment to employees’ health.

Managing the Process

Many employers use outside benefits consultants and auditors to conduct various types of health plan audits. HR professionals’ involvement typically occurs at the beginning and end of the process.

Medical claims audits, for example, require employers, thirdparty administrators and insurers to collect and make available for review documents and financial information. Eligibility audits require a current census of employees with enrolled dependents, a full plan description, and communication and education campaigns advising employees of pending audits and required verification.

Following these steps, auditors typically take control of the analysis. Once results are complete, it’s up to HR and benefits leaders to take appropriate actions based on the findings, explains Mark Rucci, senior vice president of audit services at Healthcare Analytics, a division of Gallagher Benefit Services Inc. in Itasca, Ill.

“It makes no sense to do an audit and not make changes,” he says. The service employees get is related to audits and how well employers stay on top of vendors after findings are shared and enforced.

Weighing Costs and Merits

Returns and savings from audits vary widely, as do fees. Depending on company size and the complexity of the health plans, consultants quote fees ranging from $10,000 to $150,000 for eligibility and claims audits. For employers with few workers, however, certain types of audits can cost as little as $20 per enrollee.

The payoff? Before health care reform legislation was implemented, auditors estimated that an average 3 percent to 8 percent of enrolled employees’ dependents would be ineligible. Assuming a $1,900 average annual cost per dependent, savings can be substantial: Plans with 3 percent ineligibility per 10,000 dependents would save $570,000; those with 8 percent ineligibility might net a return of about $1.5 million. But keep in mind that under health reform, some previously ineligible adult children will now remain covered until age 26.

While compliance and cost-effectiveness rank high on the list of reasons to conduct regular health plan audits, Rucci reinforces their basic worth: “The value of an audit is not always measured in recovered dollars.” Audits certify, through independent assessment, that vendors are doing a good job for the employer, he says. “Getting a clean report back is the best evidence of your management and due diligence.”

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