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6 June 30, 2014 Mr. Farid Saffar Director of Auditing Office of the City Controller 200 N. Main Street, Suite 300 Los Angeles, CA Subject: Audit of Payments to Workers Compensation Medical Providers under the City of Los Angeles Aon Contract Dear Mr. Saffar: Moss Adams LLP is pleased to submit our Audit of Payments to Workers Compensation Medical Providers under the City of Los Angeles Aon Contract. This report was prepared on behalf of the Office of the Controller, City of Los Angeles and includes our analysis, findings and recommendations. A draft report was discussed with the Personnel Department after the completion of fieldwork. Management comments received at an exit conference held on June 25, 2014, were considered in drafting the report. We appreciate the opportunity to perform this work with the City Controller s Office and we thank the personnel of the Personnel Department for their cooperation. Sincerely, Curtis Matthews, Partner In Charge for Moss Adams LLP

7 City of Los Angeles Audit of Payments to Workers Compensation Medical Providers Under the City of Los Angeles Aon Contract June 30, 2014 controller.lacity.org

8 TABLE OF CONTENTS EXECUTIVE SUMMARY... 1 INTRODUCTION AND BACKGROUND... 6 AUDIT FINDINGS AND RECOMMENDATIONS APPENDIX I SUMMARY OF AUDIT FINDINGS AND AUDIT ACTION PLAN APPENDIX II CALCULATION METHODOLOGIES... 22

9 EXECUTIVE SUMMARY Moss Adams LLP was retained by the City of Los Angeles Controller s Office to perform an audit of the payments to workers compensation medical providers processed by Aon esolutions, Inc. (Aon) for payment by the City of Los Angeles. As medical costs related to workers compensation accounted for 46 percent of the $209 million total workers compensation costs for FY , the City must ensure that medical expenditures are reasonable and appropriate prior to payment. From July 2010 through June 2013, the City contracted with Aon to provide medical bill review and cost containment services. 1 From the contract s inception through January 2013 the City paid approximately $160 million in medical bills related to workers compensation claims, as processed by Aon. This audit sought to verify if the amounts paid were correct and complied with State mandated fee schedules, and if overpayments, underpayments or duplicate payments occurred. The audit found Aon did not identify coding errors submitted by the providers (codes are used to define the service provided and related payments) and made incorrect payment calculations. Based on the errors noted from our sample and the medical bills subject to the scope of this audit, the City overpaid medical providers a projected $1,425,799. However, the overpayment could increase by an additional $303,768 if the same rate of errors found is applied to the bill population over Aon s entire contract period. The audit also found that Aon s performance measurement for medical bill review accuracy was below Medical Insurance/Payer industry standards. Specifically, Aon s performance of percent of dollars paid correctly was percent compared to a Medical Insurance/Payer industry standard of 99 percent. Aon s performance for the percentage of bills paid correctly was percent compared to a Medical Insurance/Payer industry standard of 97 percent. While Aon s performance appears to be within a range that might seem to be reasonable, variations from acceptable standards indicate potential errors that range over a million dollars for the population of bills reviewed. The Personnel Department s practice is to release a Request for Proposals (RFP) as contracts expire. An RFP was issued in November 2012 and a new contractor, Stratacare, LLC, was selected through a competitive process to provide the City s medical bill review services. Stratacare, LLC s contract term started in July While this audit focused on activities performed by Aon, the Controller s Office has initiated other audits related to workers compensation to determine what the City is doing to ensure costs are controlled while still delivering legally-mandated benefits. A 1 The City also has a contract with Aon to provide for hosting an implementation service that will provide an integrated system to manage workers compensation claims, including the reporting, tracking and analysis of these claims. The replacement system was implemented in late May Page 1

10 separate audit of workers compensation claims management for Police and Fire sworn personnel is being release simultaneously herewith. In addition, audits examining the Fire and Police Departments efforts in preventing workers compensation injuries and claims, including the promotion of safety and wellness are currently in progress. Prior audits include: a) Investigation of Workers Compensation Overpayments to Medical Care Providers (issued June 25, 2012); b) Audit of Salary Continuation Payments Made to Non-Sworn Employees under the city s Workers Compensation Program (issued April 17, 2013) and c) Performance Audit of the Los Angeles City Attorney s Workers Compensation and Subrogation Program (issued October 13, 2010). I. BACKGROUND The City of Los Angeles (City) is self-insured for its workers compensation program, which is managed centrally by the Personnel Department. 2 Workers Compensation expenditures include both temporary and permanent disability payments made to injured employees as lost wages, as well as medical and other expenses related to their recovery and rehabilitation. The Personnel Department directly administers the claims process for civilian personnel and contracts out the administration of sworn personnel claims to Tristar, a third-party administrator (TPA). 3 In July 2010, the City began contracting with Aon for bill review and cost containment services for both civilian and sworn personnel workers compensation claims. From the contract s inception in July 2010 through January 2013 (our audit period), the City paid approximately $160 million in workers compensation medical bills for work-related injuries, as processed by Aon. Aon was charged with verifying that bills were certified as payable by the Personnel Department or Tristar, and then matching the billed services to the appropriate billing code and pricing. Pricing allowances are determined using the State s mandated fee schedules or a Preferred Provider Network (PPO) negotiated rate. Aon s bill review services included both standard and complex bills. Standard bills are claims paid based on State mandated fee schedules, PPO network rates or other contracted rates. Complex bills are those bills which are not paid according to a pre-determined rate but need in-depth review or require additional medical information to price. Aon s cost containment services included Medical Disability Case Management and Utilization Review. Utilization Review is the review and approval or denial of bills based on the medical necessity of treatments. Aon sub-contracted the Utilization Review services to Comprehensive Industrial Disability Management (CID). Aon also provided PPO pricing and pharmacy benefit management through subcontracted third-party networks. 2 Including all Offices, Council-Controlled departments, Los Angeles World Airports and the Harbor Department. The Department of Water and Power manages its own workers compensation program. 3 As of May 2013, workers compensation claims for sworn personnel are administered by two TPAs. Page 2

11 Medical providers bills for civilian personnel are submitted to the City and then were forwarded electronically to Aon via the ivos claims system 4 for handling. Medical bills for sworn personnel were submitted directly in paper form to Aon by Tristar. 5 Aon also received bills directly from a select number of contracted providers. Aon reviewed the bills and processed the claims for payment in the ivos system. The City paid health care providers based on Aon s benefit determinations. Aon s contract term was from July 2010 through June 2013 for a total cost of $10.6 million. II. OVERALL ASSESSMENT This audit identified that payments were not always in compliance with State mandated fee schedules, preferred provider rates or other negotiated contracted rates. This put the City at a greater risk of overpaying medical providers and incurring unnecessary workers compensation costs. Specifically, the audit noted: Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed resulting in a projected overpayment amount of $1,425,799. Aon s performance for paying bills correctly was below acceptable thresholds that are recognized by the Medical Insurance industry. While our work is subject to the inherent limitations of sampling performance audit procedures, the compliance variations observed indicate potential errors that can range over a million dollars for the population of bills reviewed during this performance audit. III. KEY FINDINGS 1. Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed. Based on the error rate noted, the total overpaid is projected to be $1,425,799. Based on the sample of bills, Moss Adams found bills with coding errors and incorrect payment calculations. As a result of these errors, Aon recommended payments to medical providers that resulted in both overpayments and underpayments. The auditors excluded any bills that were related to pricing networks where Moss Adams has a client relationship, which resulted in a population of 298,711 bills totaling 4 Aon used its ivos claims system for processing the City s medical bill reviews. Bill payment files are created in ivos and were uploaded to the City s workers compensation systems for payment. 5 Personnel uses an electronic imaging system for documents related to civilian claims, but has not provided such a system to Tristar. The planned replacement system to be used for all claims management activities, anticipated to be in use during 2014, will include this feature. Page 3

12 $117,379,769 that was included in the audit scope of bills processed through January Using the sample results, Moss Adams calculated the total overpaid and underpaid amounts for the audit population. The extrapolated results projected a total overpayment amount of $1,425,799 and projected total underpayment amount of $774,884. However, the overpayment could increase by an additional $303,768 if the same rate of errors found is applied to the bill population over the entire contract period. Underpayments to providers may have been resolved through a number of ways, such as resubmission of the bill, provider appeal, or applying for adjudication with the Workers Compensation Appeals Board. Aon s payment errors were caused by errors made by Bill Analysts in selecting the correct factors to calculate payments and selecting the correct schedule rates from the State s fee schedules, as well as a lack of oversight, routine auditing and monitoring of its subcontractor s payment recommendations. 2. Aon s performance measurement for medical bill review accuracy was below Medical Insurance/Payer industry standards. Aon s Financial and Payment Accuracy metrics were below our expectations based on our industry experience. Aon s performance for percent of dollars paid correctly was percent (Financial Accuracy) compared to the Medical Insurance/Payer industry standard of 99 percent. In addition, Aon s performance for the percentage of bills paid correctly was percent (Payment Accuracy) compared to the Medical Insurance/Payer industry standard of 97 percent. While Aon s performance appeared to be within a range that might seem to be reasonable, it is not acceptable because the dollar impact can be significant. The variations from acceptable standards indicate potential errors that can range over a million dollars for the population of bills reviewed, particularly as it relates to dollars overpaid and underpaid. Although the City s contract with Aon established minimum standards of performance, the contract did not include performance guarantees, whereby Aon was expected to meet or exceed established performance standards, such as Financial and Payment Accuracy metrics. By not establishing and monitoring a bill review contractor s performance, the City is at a greater risk for paying medical providers the incorrect amounts, and as a result, workers compensation medical expenditures are not minimized. Specific recommendations to address these issues are summarized in the Audit Action Plan. More detail regarding the audit s findings and recommendations is provided in the body of this report. Page 4

13 Review of Report The payment errors identified by this audit were presented to Aon and the Personnel Department for their review. During the audit, the payment errors related to standard bills were validated by Aon. However, Aon and the Personnel Department disagree with the payment errors related to complex bills. Aon contends that its review of complex bills was sufficient and no overpayments occurred. Aon indicated that its responsibility is to ensure that the services billed by the medical providers are supported by the medical reports and other documentation. Aon has asserted that it is not responsible for ensuring the medical provider correctly coded the submitted bill for the services provided, even when a different code would more accurately reflect the services provided (such as a bundled procedure/service) and result in a lower billed amount. Within the healthcare industry, there is an accepted, standardized methodology for determining payments for medical services. Medical providers assign codes for the services rendered when submitting bills for payment (e.g., Diagnosis Related Group/Ambulatory Payment Classification for hospital billing and CPT codes for medical professional services). The City s contract with Aon was specifically for the purposes of medical service cost review and cost containment services and required an experienced reviewer to read the report and compare the level of service rendered to the level of service associated with the Current Procedural Terminology (CPT) code being billed. This type of review should ensure that the correct coding was billed and supported with appropriate documentation. Our audit identified bills that were reviewed by Aon that were coded incorrectly by the medical providers, and as a result the City paid incorrect amounts for services rendered to injured employees. A more thorough review of the medical documentation should have identified the coding errors and sought to resolve and correct the billed amounts. A draft report was provided to the Personnel Department and we discussed the contents of the report with Department management. We considered the Department s and Aon s comments before finalizing this report. We would like to thank the Personnel Department s management and staff and acknowledge Aon s staff for their cooperation and assistance during the audit. Page 5

14 INTRODUCTION AND BACKGROUND A. BACKGROUND California Workers Compensation law requires employers to provide payments for injuries incurred by their employees that arise out of and in the course of employment. When an employee sustains a work-related injury he or she is eligible for workers compensation benefits that can cover salary compensation as well as medical and other expenses. Like most public-sector employers, the City is self-insured for its workers compensation program, which is managed centrally by the Personnel Department. 6 Workers compensation expenditures include both short and long-term disability payments made to injured employees for lost wages, as well as medical and other expenses related to their recovery and rehabilitation. During Fiscal Year (FY) , the City paid approximately $209 million in workers compensation expenditures, including $97 million 7 in medical and $3 million in other expenses; with the remainder paid as $66 million in temporary disability benefits, and $43 million in permanent disability benefits, both paid directly to employees. For FY , the City paid approximately $205 million in workers compensation expenditures, including $96 million in medical and $2 million in other expenses; with the remainder paid as $66 million in temporary disability benefits, and $41 million in permanent disability benefits. The Personnel Department administers civilian personnel claims and contracts out the administration of sworn personnel claims to Tristar, a third-party administrator (TPA). 8 Medical expenses related to workers compensation claim may continue for years. This report only covers the audit of the workers compensation medical expense payments made by the City of Los Angeles under its contract with Aon. Aon In July 2010, the City began contracting with Aon for medical bill review and cost containment services for both civilian and sworn personnel. Under the terms of the contract, the City paid Aon a flat annual service fee of $2,661,120 for integrated cost containment services in the following areas:1) medical bill review and Preferred Provider Organizations (PPO) and Medical Provider Networks; 2) Pharmacy Benefits Management Program; 3) Durable Medical Equipment PPO; 4) Radiology PPO; and 5) 6 Including all Offices, Council-Controlled departments, Los Angeles World Airports and the Harbor Department. The Department of Water and Power manages its own workers compensation program. 7 Not all expenditures coded as medical are reviewed by Aon, e.g., expenses that are not on State-fee schedules or contracts, reimbursements to employees of out-of-pocket medical expenses, medical-liens, etc., are not reviewed by Aon. 8 As of May 2013, workers compensation claims for sworn personnel are administered by two TPAs. Page 6

15 Specialty Physical Medicine Network. Medical providers bills for civilian personnel were submitted to the City and then forwarded electronically to Aon for handling. Medical bills for sworn personnel were submitted directly in paper form to Aon by Tristar. Aon also received bills directly from a select number of contracted providers. Aon verified that bills were certified as payable by the Personnel Department or Tristar and then matched the billed services to the appropriate billing code and pricing. Aon reviewed the bills and processed the claims for payment in the claims system. Aon analyzed all medical and pharmacy bills and provided maximum reductions for each bill. The City paid health care providers based on Aon s benefit determinations. Medical Bill Review and Cost Containment Services Aon s Bill Review services included both standard and complex bills. Standard bills are those that were paid based on State mandated fee schedules, PPO network rates or other contracted rates. Complex bills are those bills which were not paid according to a pre-determined rate and which needed in-depth review or required additional medical information to price. Aon s Cost Containment services also included Medical Disability Case Management and Utilization Review. Utilization Review is the review and approval or denial of bills based on the medical necessity of treatments. Aon sub-contracted out its Utilization Review services to Comprehensive Industrial Disability Management (CID). Aon also provided PPO pricing and pharmacy benefit management through the third-party networks with which they contract. Medical Bill Coding and Payments Methodologies Hospital Payment Methodologies Payments made to hospitals for inpatient and outpatient services are based on different Medicare-based methodologies. Common payment systems are Diagnosis Related Groups (DRGs) for inpatient services and Ambulatory Payment Classifications (APCs) for outpatient services: Hospital Inpatient Services Payment System Diagnosis-Related Group is a classification system for determining the amount of payments by insurance plans to hospitals for inpatient charges. The system was originally developed for Medicare Part A and is now a standard payment model throughout the United States of America s (U.S.) healthcare industry. A DRG number is assigned by diagnosis, average length of hospital stay and therapy received. DRG payment amounts are defined by a specific formula established by the Division of Workers Compensation (DWC). Factors that comprise these amounts, such as Composite Number and Weight, are obtained from published Page 7

16 schedules on the DWC Official Medical Fee Schedule (OMFS). The OMFS is promulgated by the DWC administrative director under Labor Code Section and can be found in Sections et seq. of Title 8, California Code of Regulations. The OMFS is used for payment of medical services required to treat work-related injuries and illnesses. The OMFS schedules are updated at various times during a yearly period. Hospital Outpatient Services Payment System Ambulatory Payment Classification is a system for determining the amount of payments by insurance plans to hospitals for facility outpatient charges. The system was originally developed for Medicare Part B and is now a standard payment model throughout the U.S. healthcare industry. An APC number is assigned by diagnosis and therapy received. APC payments are made to hospitals when a patient is discharged from the emergency room or is transferred to another hospital (or other facility) which is not affiliated with the initial hospital where the patient received outpatient services. If the patient is admitted from a hospital clinic or emergency room, then there is no APC payment and the hospital is under DRG coding methodology. Like DRGs, APC payment amounts are defined by a specific formula established by the DWC. Factors that comprise these amounts, such as Conversion Number and Weight, are obtained from published schedules on the DWC OMFS. B. OBJECTIVES, SCOPE AND METHODOLOGY Objective The Professional Services Agreement between the City and Aon specified Aon s responsibilities as the Contractor performing Bill Review services. Article II, Section E.3 Bill Review, Medical Service Cost Review and Cost Containment Program Requirements stated: Contractor shall analyze all medical and pharmacy invoices and provide maximum reductions for each bill to amounts allowed by the California Division of Workers Compensation s Official Medical Fee Schedule or the respective fee schedule for out-of-state bills, Preferred Provider Organization (PPO) rates, usual customary and reasonable (UCR) rates, and other negotiated contract rates. Additionally Contractor shall identify and correct fee schedule excesses, duplicate charges, billing infractions and ability to unbundle service codes as needed to achieve savings. Moss Adams was engaged by the City of Los Angeles Controller s Office to conduct an independent audit of Aon s bill review services. The primary objective of this audit was Page 8

17 to ensure the accuracy and appropriateness of payments to medical service providers as reviewed and approved by Aon. Specifically, the audit evaluated the following: Scope Payments to medical service providers were correct and in compliance with the State mandated fee schedule(s), PPO rates, or other negotiated contracted rates. Overpayments, underpayments or duplicate payments did not occur and expenditures were reasonable. The audit focused on payments made to medical service providers processed by Aon from the inception of their contract in July 2010 through January For the audit period, the City paid 469,826 bills totaling $159,280,117 in workers compensation medical bills processed by Aon. However, we excluded any bills that were related to pricing networks where Moss Adams had a client relationship; this resulted in an audit population of 298,711 bills totaling $117,379,769. The population of bills that was included in the audit scope represented approximately 64 percent of the total population of bills processed by Aon and approximately 74 percent of amount paid over the audit period. Methodology Sampling Approach Based on the data extract provided by Aon for bills paid from July 2010 through January 2013 for pricing networks included in the audit scope, a statistically valid random sample of payments was selected for substantive testing. Auditors often do not perform a 100 percent review of universe data; rather, they utilize statistical sampling, a technique that uses the laws of probability for selection and evaluating a sample from a population for the purpose of reaching a conclusion about that population. A valid statistical sample requires that each sampling unit has a known chance of selection within a stratum, all sampling units must be randomly selected, and sample results must be evaluated statistically. Statistical sampling is the preferred method of projecting results to a population because of its advantages, which include objectivity, overall defensibility and measurability of the risk of substantial (or material) sampling error. We applied the stratified sampling method (partitioning of the audit universe into smaller groups) to obtain an audit sample that represents a large total paid amount with the fewest number of bills. Strata (i.e., bands) were chosen based on paid dollar amounts for the population of bills paid during the review period ($117,379,769). The number of strata (five) was selected in accordance with observed Medical Insurance industry practices. In order to determine the sample strata, the population was divided into approximately equal total paid amounts. This resulted in having each stratum with a total paid amount in the range of $23,405,261 to $23,502,299. Page 9

18 Moss Adams utilized the RAT-STATS 9 statistical software package to determine the sample size. Confidence level and precision were the primary statistical qualities factored into the size of each stratum within the sample. In statistical sampling, confidence level and precision are used to determine the sample size and to measure the reliability and accuracy of a particular universe characteristic. The confidence level deals with sureness (or assurance) while precision deals with closeness (or accuracy). Ninety-five percent confidence level and 10 percent precision were selected as they exceed the Office of Inspector General s (OIG) minimum standard for overpayment extrapolation. 10 The OIG s standard is 90 percent confidence level and 25 percent precision. However, when we applied these factors to the population, the results were a total sample size below 50 bills, which was deemed too small for the purposes of this audit. Therefore, we increased the statistical stringency to each stratum, applying 95 percent confidence level and 10 percent precision. This resulted in a total sample size of 155 bills. We then added 10 bills to each of the five stratums to increase the total sample size to 205 bills, which is a total sample size that is most consistent with observed Medical Insurance industry practices for claim audits. Sample bills were randomly selected using the random number function in Microsoft Excel. Once the sample was selected for each stratum, the average paid amount of the sample was confirmed to be within a +/ 5 percent variance from the average paid amount for all bills in the stratum. The population and final sample statistics are shown below: Strata Population No. of Bills Dollars Paid No. of Bills Sample Dollars Paid 1 233,654 $23,405, $4, ,734 23,495, , ,889 23,502, , ,438 23,492, , ,484, ,874,082 Totals 298,711 $117,379, $2,079,758 9 RAT-STATS is a statistical software package developed by the U.S. Office of Inspector General (OIG) to assist in bill review projects. It is the primary statistical tool for OIG s Office of Audit Services. It can be found here: 10 Dorfschmid, PhD, Cornelia M. Confidence and precision in claims audits: Quality of the estimate. Health Care Compliance Today (2011): Print. Page 10

19 Testing Approach The sample of 205 bills was reviewed for accuracy of payments (Standard Bill Review). Where applicable, a more comprehensive review was performed for complex medical billing issues (Complex Bill Review). Standard Bill Review Standard Bill Review services performed by Aon entailed the review and recommendation of Workers Compensation medical and pharmacy invoices to Statemandated fee schedules, PPO rates, other negotiated contracted rates, fraud and other problems in bills that require adjustments. In order to test standard bills, we performed the following for each of the 205 bills in the sample selection: 1. Verified pre-payment review of high dollar bills was performed by Aon; 2. Confirmed that bill was not a duplicate payment; 3. Verified that bill information in Aon s system matched the providers bill submission image; 4. Determined correct application of fee schedule rates; 5. Confirmed proper calculation of bill payment based on ancillary vendor contract terms, if applicable; 6. Verified that any network discount applied was only obtained through networks included in the audit scope; 7. Reviewed documentation needed to support bill amounts and payments; and, 8. Verified proper calculation of bill payment based on appropriate codes. Complex Bill Review Complex Bill review performed by Aon involved bills not governed by a fee schedule or bills contained in a fee schedule but their level of service is an issue or additional information/clarification was requested from the provider. Complex bills are defined as those that require an experienced reviewer to read the documentation and compare it to the services being coded. Per the contract these services may include: consultations, surgeries, catastrophic injuries, multiple anesthesia codes, extensive diagnostic testing and/or medical-legal evaluations. For testing purposes, Moss Adams identified complex bills within the sample as those bills that contained several codes or were of high dollar amount, included medical documentation from the provider and contained a certification number from Comprehensive Disability Management (CID), an Aon subcontractor for Utilization Review Services. Twenty-nine bills from the sample were identified as complex bills. In order to test complex bills, Moss Adams performed the following: Page 11

20 1. Reviewed medical documentation to support code(s) assignment and/or payment recommendation; and, 2. Determined correct code assignment and payment amounts, where applicable. Fieldwork was performed between March 2013 and July 2013, with the audit sample review performed at the Moss Adams Irvine, California, office. The audit was conducted in two phases. The first phase focused on data gathering and a preliminary assessment of Aon s processes applicable to medical bill reviews. The preliminary assessment included interviews of three site management personnel at Aon s offices in Sacramento, California, and the review of 13 procedural documents that detailed their bill processing operations. The second phase focused on fieldwork which was comprised of detailed audit procedures and substantive testing (bill sample review) on individual bills. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Page 12

21 AUDIT FINDINGS AND RECOMMENDATIONS Finding No. 1: Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed. Based on the error rate noted, the total overpaid is projected to be $1,425,799. Based on the sample of bills, Moss Adams found bills with coding errors and incorrect payment calculations. As a result of these errors, Aon recommended payments to medical providers that resulted in overpayments and underpayments. The audit sample had an error rate of 14 percent (28 of 205 bills had errors). To determine the impact of the sample error rate on the population of bills reviewed by Aon, Moss Adams used ratio estimation to calculate the overpayment and underpayment amounts. As the bill sample was stratified by paid amounts, we calculated overpayment and underpayment rates for each stratum, and we then applied these rates to its corresponding stratum of the bill population. The results were an estimated overpayment amount of $1,425,799 and an estimated underpayment amount of $774,884 in the bill population. Underpayments to providers may have been resolved through a number of ways, such as resubmission of the bill, provider appeal, or applying for adjudication with the Workers Compensation Appeals Board. Table 1 - Aon s Over/Underpayments to Medical Providers Strata Population Paid (a) Sample Paid (b) Overpayment (c) Underpayment (d) Sample Overpaid (e)=(c)/(b) Extrapolated Overpaid Error (f) = (e)x(a) Sample Underpaid (g)=(d)/(b) Extrapolated Underpaid Error (h)=(g)x(a) 1 $23,405,261 $4,712 $12 $ % $61, % $232, ,495,739 13, % % ,502,299 42, % % 29, ,492, , , % % 229, ,484,454 1,874, ,847 22, % 1,363, % 284,222 Totals $117,379,769 $2,079,758 $108,860 $24,194 $1,425,799 $774,884 For a more detailed description of the method used to calculate the extrapolated overand underpayment amounts, see Appendix II. The specific types of errors noted in the sample are described below. Page 13

22 Incorrect Coding of Diagnosis-Related Groups (DRG) or Ambulatory Payment Classifications (APC) Seven of 29 complex bills (24 percent) contained DRG or APC coding errors based on medical bill coding standards and the American College of Occupational and Environmental Medicine (ACOEM) guidelines. One bill was identified as an underpayment in the amount of $9,783, and six bills were identified as overpayments in the amount of $67,069. These bills had documentation that supported different service(s) than the ones Aon utilized for payment processing. For example, documentation for one of the bills did not support the medical condition reported and the DRG code billed. In these cases, a different DRG was supported, and as such, a different payment amount should have been processed by Aon. For those bills which require Utilization Review, medical documentation accompanies the bill for payment determination. These bills are considered complex bills, and the payment recommendation is based on the documentation of services provided, as well as applicable coding and billing guidelines. Aon utilized the CID for utilization review support. The CID reviews the request for treatment and once approved certifies the request. Once the service has been rendered, Aon reviews the documentation and compares it to the CID approved request. Incorrect Hospital Payment Calculations The contract between the City and Aon specifies that Aon analyze all medical and pharmacy bills and provide maximum reductions for each bill. Accordingly, Aon was responsible for reviewing and recommending payments to hospital providers. Payments made to hospitals for inpatient and outpatient services are based on different Medicare based methodologies. Common payment systems are Diagnosis-Related Groups for inpatient services and Ambulatory Payment Classifications for outpatient services. Hospital Inpatient Payments Eleven bills from the sample (5 percent) were paid in error due to DRG miscalculations. The result of these errors was a total underpayment of $10,781 related to eight bills and a total overpayment of $41,777 related to three bills. Diagnosis-Related Group is a classification system for determining the amount of payments by insurance plans to hospitals for inpatient charges. DRG payment amounts are determined by the following formula established by the DWC: Composite No. multiplied by Weight multiplied by 1.20 (Inpatient Factor) equals California WC DRG Price. The Composite Number is a base payment amount (in dollars) as established by the DRG. The Weight is a variable used to accommodate local economic factors. The Page 14

23 DWC OMFS has assigned an inpatient factor of 1.20 to each payment calculation that allows a payment greater than the Medicare allowance. Factors that comprise these amounts, such as Conversion Number and Weight, are obtained from published schedules on the DWC OMFS. The schedules are updated at various times during a yearly period. The hospital inpatient payment errors identified were due to either an incorrectly selected Composite No. and/or Weight by an Aon Bill Analyst when processing the bill for payment. Hospital Outpatient Payments Three bills from the sample (1 percent) were paid in error due to APC miscalculations for outpatient hospital charges. The results of these errors were total underpayment of $1,092 related to two bills and a total overpayment of $1 related to one bill. Ambulatory Payment Classification is a system for determining the amount of payments by insurance plans to hospitals for outpatient charges. APC payment amounts are determined by the following formula established by the DWC: Conversion No. multiplied by Weight multiplied by 1.22 (Outpatient Factor) equals California WC APC Price. The Conversion Number is a base payment amount (in dollars) as established by the APC. The Weight is a variable used to accommodate local economic factors. The DWC OMF has assigned an inpatient factor of 1.22 to each payment calculation that allows a payment greater than the Medicare allowance. Factors that comprise these amounts, such as Conversion Number and Weight, are obtained from published schedules on the DWC OMFS. The schedules are updated at various times during a yearly period. The hospital outpatient payment errors were due to either an incorrectly selected Conversion No. and/or Weight by an Aon Bill Analyst when processing the bill for payment. Incorrect Medical Professional Payment Calculations Seven bills from the sample (3 percent) were paid in error due to fee schedule miscalculations. This resulted in one overpayment totaling $12, and six underpayments totaling $2,538. The contract between the City and Aon specified that Aon analyze all medical and pharmacy bills and provide maximum reductions for each bill. Accordingly, Aon was responsible for reviewing and recommending payments to medical professional providers, i.e., physicians, laboratories, pharmacies, etc. Payments made to medical professional providers are often paid based on the maximum amounts allowed by the Division of Workers Compensation Official Medical Fee Schedule. The DWC OMFS is updated at various times during a yearly period. Page 15

24 These payment errors were due to incorrectly selected scheduled rates from the DWC OMFS by an Aon Bill Analyst when the bill was processed for payment. Personnel management indicated that periodic audits are performed on a sample of bills reviewed by Aon. If overpayments are identified, Aon is to compensate the City. Any previously identified and reimbursed overpayment(s) should be considered as Personnel pursues recovery of the projected overpayment. Recommendations: Personnel Management should: 1.1 Pursue recovering the projected overpayment of $1,425,799 from Aon for incorrect medical provider payments. The overpayment could be increased by an additional $303,768, if the same rate of errors found is applied to the bill population over the entire contract period. 1.2 Consider reviewing bills that were not included in the audit scope to identify any potential billing errors and recover any additional identified overpayments. 1.3 Determine whether identified underpayments to providers were resolved through lien settlement or other means. If not, take appropriate action to resolve the incorrect payments. 1.4 Review and amend the current contract for billing review services to ensure it requires the contractor to perform a robust retrospective bill review process. Special attention should be provided to DRG/APC related bills and bills with payment amounts based on the DWC OMFS. Future contracts for billing review services should also include the described performance requirements. 1.5 Review and amend the current contract for billing review services to ensure it requires that bill examiners consistently fulfill the responsibilities for Complex and Standard bill reviews outlined in the contract. Future contracts for billing review services should also include the described requirement for bill examiners review responsibilities. 1.6 Investigate potential enhancements to the bill payment process, e.g., auto adjudication of bills based on fee schedule payments, application of Correct Coding Initiative (CCI) edits, etc. Page 16

25 Finding No. 2: Aon s performance measurement for medical bill review accuracy was below Medical Insurance/Payer industry standards. Overall, Aon s Financial and Payment Accuracy metrics were below what Moss Adams has observed at other similar Third Party Administrators (TPAs). 11 While Aon s performance appears to be within a range that might seem to be reasonable, it is not because the dollar impact can be significant. The variations from acceptable standards indicate potential errors that can range over a million dollars for the population of bills reviewed, particularly as it relates to dollars overpaid and underpaid. The Medical Insurance industry has established various metrics to measure bill processing accuracy. Moss Adams selected Financial Accuracy and Payment Accuracy metrics to assess Aon s performance. These metrics enabled a comparison of Aon s performance relative to similar third-party administrators previously reviewed by Moss Adams. Financial Accuracy Financial Accuracy is based on the percent of dollars paid correctly in the sample. For the purposes of measuring dollar accuracy, the absolute value dollars are measured, that is underpayments and overpayments are given the same weight as dollar errors. We have observed that other similar administrators have a Financial Accuracy Standard of 99 percent while Aon s was percent based on the data presented in Table 2 below. Table 2 - Financial Accuracy Strata Population Paid (a) Sample Paid (b) Overpayment (c) Underpayment (d) Absolute Error (e) = (c) + (d) Sample Absolute Error Rate (f) = (e)/(b) Financial Accuracy Weighted (g) =(f)x(a) 1 $23,405,261 $4,712 $12 $47 $ % $292, ,495,739 13,507 $ % ,502,299 42,760 $ % 28, ,492, ,697 $1 1,413 1, % 230, ,484,454 1,874, ,847 22, , % 1,648,609 Totals $117,379,769 $2,079,758 $108,860 $24,194 $133,054 $2,199, Moss Adams team members collectively have over one hundred years of experience reviewing medical bills. We have observed that third-party administrators and health insurance plans that process medical claims utilize similar claims accuracy metrics as performance standards. Governmental entities, such as the California Managed Risk Medical Insurance Board, also apply such performance standards; an example report can be found here: Page 17

26 To determine Aon s Financial Accuracy percentage, the sum of the weighted errors for each stratum was divided by the sum of the total dollars of bills paid for the population of bills and subtracted from 1. Aon s Financial Accuracy was calculated as percent (1-$2,199,599/$117,379,769) which is less than the 99 percent standard performance for other similar TPAs. The steps followed for presenting the data in Table 2 are described in more detail in Appendix II. Payment Accuracy Payment Accuracy is based on the percent of bills that are paid correctly. We have observed that other similar administrators have a Payment Accuracy Standard of 97 percent; while Aon s was percent based on the data presented in Table 3 below. Strata No. Bills in Population (a) Table 3 - Payment Accuracy No. Bills in Sample (b) No. Bills in Sample (b) Sample Error Rate (d)=(c)/(b) Payment Accuracy Weighted (e)=(d)x(a) 1 233, % 9, , % , % , % % 281 Totals 298, ,251 Based on the audit sample, Aon s Payment Accuracy was calculated as percent (1-11,251/298,711) which is less than the 97 percent standard performance for other similar administrators. The steps followed for calculating payment accuracy in Table 3 are described in more detail in Appendix II. The causes for Aon s performance being less than Medical Insurance/Payer industry standards resulted primarily from: errors made by Bill Analysts in selecting the correct factors to calculate payments, errors made by Bill Analysts in selecting the correct scheduled rates from the State s fee schedules, and a lack of oversight, routine auditing and/or monitoring of its subcontractor s payment recommendations. The City s contract with Aon established minimum standards of performance; however, the contract did not include performance guarantees, whereby Aon was expected to meet or exceed established performance standards, such as Financial and Payment Page 18

27 Accuracy metrics. To ensure the contractor s performance is acceptable and medical provider bills are paid correctly, specific performance measurements should be established in the contract. The contract should also stipulate how the performance will be monitored. By not establishing and monitoring a bill review contractor s performance, the City is at a greater risk for paying medical providers the incorrect amounts, and as a result, workers compensation medical expenditures are not minimized. Recommendation: Personnel management should: 2.1 Review and amend the current contract for bill review services to ensure performance guarantees are required. Page 19

28 APPENDIX I SUMMARY OF AUDIT FINDINGS AND AUDIT ACTION PLAN Description of Finding Recommendations Entity Responsible for Implementation Ranking 1 Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed. Based on the error rate noted, the total overpaid was projected to be $1,425, Pursue recovering the projected overpayment of $1,425,799 from Aon for incorrect medical provider payments. The overpayment could be increased by an additional $303,768 if the same rate of errors found is applied to the bill population over the entire contract period. 1.2 Consider reviewing bills that were not included in the audit scope to identify any potential billing errors and recover any additional identified overpayments. 1.3 Determine whether identified underpayments to providers were resolved through lien settlement or other means. If not, take appropriate action to resolve the incorrect payments. 1.4 Review and amend the current contract for billing review services to ensure it requires the contractor to perform a robust retrospective bill review process. Special attention should be provided to DRG/APC related bills, and bills with payment amounts based on the DWC OMFS. Future contracts for billing review services should also include the described performance requirements. Personnel 1 Personnel 1 Personnel 1 Personnel 1 Page 20

29 APPENDIX I SUMMARY OF AUDIT FINDINGS AND AUDIT ACTION PLAN Description of Finding Recommendations Entity Responsible for Implementation Ranking 1 Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed. Based on the error rate noted, the total overpaid was projected to be $1,425, Aon did not determine the correct amount to pay medical providers for a significant number of claims reviewed. Based on the error rate noted, the total overpaid was projected to be $1,425, Review and amend the current contract for billing review services to ensure it requires that bill examiners consistently fulfill the responsibilities for Complex and Standard bill reviews outlined in the contract. Future contracts for billing review services should also include the described requirement for bill examiners reviews. 1.6 Investigate potential enhancements to the bill payment process, e.g., auto adjudication of bills based on fee schedule payments, application of Correct Coding Initiative (CCI) edits, etc. 2.1 Review and amend the current contract for bill review services to ensure performance guarantees are required. Personnel 2 Personnel 2 Personnel 2 Description of Recommendation Ranking Codes 1- Urgent-The recommendation pertains to a serious or materially significant audit finding or control weakness. Due to the seriousness or significance of the matter, immediate management attention and appropriate corrective action is warranted. 2- Necessary- The recommendation pertains to a moderately significant or potentially serious audit finding or control weakness. Reasonably prompt corrective action should be taken by management to address the matter. The recommendation should be implemented within six months. 3- Desirable- The recommendation pertains to an audit finding or control weakness of relatively minor significance or concern. The timing of any corrective action is left to management s discretion. N/A- Not Applicable Page 21

30 APPENDIX II CALCULATION METHODOLOGIES Calculation Methodology for Extrapolated Over/Underpayments Strata Population Paid (a) Sample Paid (b) Overpayment (c) Underpayment (d) Sample Overpaid (e)=(c)/(b) Extrapolated Overpaid Error (f) = (e)x(a) Sample Underpaid (g)=(d)/(b) Extrapolated Underpaid Error (h)=(g)x(a) 1 $23,405,261 $4,712 $12 $ % $61, % $232, ,495,739 13, % % ,502,299 42, % % 29, ,492, , , % % 229, ,484,454 1,874, ,847 22, % 1,363, % 284,222 Totals $117,379,769 $2,079,758 $108,860 $24,194 $1,425,799 $774,884 The table above shows the strata, population and sample testing results for the bill review audit. A description of how the extrapolated overpayments or underpayments were calculated is provided below. The extrapolated overpayment calculation is described in the following steps: Step 1 per Strata 1-5: (c) No. Overpayment / (b) $ Paid Sample = (e) Sample Overpaid % Step 2 per Strata 1-5: (e) Sample Overpaid % X (a) $ Paid Population = (f) Extrapolated Overpaid $ Error Step 3: Sum of Strata 1-5 [(f) Extrapolated Overpaid $ Error] = Extrapolated Population Overpayment Amount Extrapolated Population Overpayment Amount = $1,425,799 The extrapolated underpayment calculation is described in the following steps: Step 1 per Strata 1-5: (d) $ Underpayment / (b) $ Paid Sample = (g) Sample Underpaid % Step 2 per Strata 1-5: (g) Sample Underpaid % X (a) $ Paid Population = (h) Extrapolated Underpaid $ Error Step 3: Sum of Strata [(h) Extrapolated Underpaid $ Error] = Extrapolated Population Underpayment Amount Extrapolated Population Underpayment Amount Calculation = $774,884 Page 22