INDEPENDENT INTERNAL AUDITOR S REPORT ON APPLYING AGREED-UPON PROCEDURES TO WORKERS COMPENSATION PROGRAM

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1 STEPHEN J. BARRON, JR., CFE FRANK S. KEDL, CIA Audit Manager TIMOTHY P. BRENNAN, ESQ. Solicitor CONTROLLER OF NORTHAMPTON COUNTY NORTHAMPTON COUNTY COURTHOUSE 669 WASHINGTON STREET EASTON, PENNSYLVANIA PHONE (610) FAX (610) INDEPENDENT INTERNAL AUDITOR S REPORT ON APPLYING AGREED-UPON PROCEDURES TO WORKERS COMPENSATION PROGRAM Members of the Northampton County Council John Stoffa, County Executive County of Northampton, Pennsylvania We have performed the procedures enumerated below, which were agreed to by the County Executive solely to assist you with evaluating certain aspects of the Workers Compensation (WC) Program. Management is responsible for maintaining adequate internal controls and complying with laws and regulations. This Agreed-Upon Procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and the standards applicable to attestation engagements contained in Government Auditing Standards issued by the Comptroller General of the United States. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. Procedures and Findings 1. Procedure: We will obtain WC claims information for the preceding three years (2007, 2008, 2009) and report on the following statistics: a) Cost of claims paid, b) Number of claims filed, and c) Workers Compensation rates charged for the various classifications of workers. Findings: Claims data for 2007, 2008, and 2009 was received from the County s Third-Party Administrator (TPA), Alliant Insurance Services, Inc. Fiscal Affairs provided a summary of administrative costs associated with the Workers Compensation Trust Fund for the same time period. This information was used to compile a summary of all costs for the Workers Compensation Program. See Exhibit A for a schedule of WC Program Costs. This information was also used to compile a summary of the number of WC claims filed. See Exhibit B for that summary. Workers Compensation rates are calculated by the County s Actuary, PricewaterhouseCoopers (PwC). See Exhibit C for a summary of those rates.

2 INDEPENDENT INTERNAL AUDITOR S REPORT ON AGREED-UPON PROCEDURES Workers Compensation Program Page 2 of 9 Several items with regard to the TPA came to our attention during our procedures. The annual increases in the administrative fees charged by the TPA could not be explained and no documentation was available to substantiate these increases. The TPA categorized claims in a manner that was not always descriptive of the actual status of the claim. The TPA had control over withdrawing funds directly from the County s trust fund bank account. These transfers were not always made in the correct amounts and proper documentation for withdrawals from the County s trust bank account was not sent to Fiscal Affairs for proper posting to Bi-Tech and reconciliation to the trust fund account activity. It was not possible for the County to verify overall if the proper amounts had been withdrawn by the TPA. Other items came to our attention during our procedures: No claims could be found that were over the $400,000 limit for stop loss insurance purposes for 2007, 2008 or Therefore, the decision to increase this threshold to $600,000 resulted in reducing premiums, reducing costs to County. Not all costs associated with WC are being charged to the WC Program. Charges for the County Solicitor assigned to handle WC issues are not reimbursed from the Program. Payments were made to claims classified as denied. Cases can be active for years until they are considered closed. Payments were made after cases were classified and dated as closed by the TPA. Quarterly meetings between the TPA and the County ceased as of September Not all departments follow proper procedures when coding WC time in the payroll system. This issue has been addressed in previous audits performed by our office, but the issue has not been corrected. 2. Procedure: We will obtain County policies and procedures, obtain an understanding of the processes followed for handling workers compensation claims and comment on whether or not these processes are being followed, are properly documented and note any improvements that can be made. We will benchmark with other organizations for this analysis. Findings: County Policies and Procedures (P & P) were reviewed. The County P & P are included in the Human Resource (HR) Employee Policies Manual on the intranet and are meant to apply to all County employees that are not covered by a specific collective bargaining agreement. In addition, we contacted other organizations for their input with regard to their procedures for handling WC claims. With regard to County P & P, the following was discovered: While some P & P do exist for WC, these P & P do not address all issues related to the WC Program. In some instances, written policies are in direct conflict with actual County practices. Lack of proper guidance in WC issues leads to poor communication between the departments and HR. Procedures in HR for handling WC claims by the Benefits Administrator are not documented and there is no cross-training in the HR department to handle duties of the Benefits Administrator when not in the office. In addition, there are no procedures in place to ensure the County is receiving all WC reimbursement checks from the TPA

3 INDEPENDENT INTERNAL AUDITOR S REPORT ON AGREED-UPON PROCEDURES Workers Compensation Program Page 3 of 9 for those individuals receiving County paychecks or to ensure that the County is receiving all reimbursements for benefits from employees out on WC claims. Light duty programs do not exist for all classes of employees. Risk Management duties have not been consolidated. Our office benchmarked across the country and with local county governments to ascertain how they handled their WC Programs. The following information was gathered during this process. Areas key to effective management of a WC Program include: o Controlling WC costs o Returning injured workers to work o Managing claims effectively and in a timely manner o Deterring and investigating fraud The majority of respondents did not pay any class of employees at 100% and did not treat payments as salary. Some did, however, allow employees to supplement WC benefits with their own leave time to bring their total payment up to 100% of their regular salary. Half of the respondents stated that they have a Risk Manager. None of the respondents stated that they allowed their TPA access to their fund bank account. Some responded that audits of their WC Program showed that workers had the ability to earn higher take home pay by supplementing WC benefits with payments of leave time. One observation made by a respondent stated that the growth in cost was due to increased utilization of the program, not an increase in the number of claims. There was a disincentive to return to work because of generous benefits. 3. Procedure: We will review the County policy with regard to the calculations of amounts paid to employees for workers compensation claims, performing an analysis for the potential cost savings given a change to County policy. We will consult and work with Fiscal Affairs for this analysis. Findings: Claims data information by department for 2009 was obtained from the TPA and indemnity payments (payments for lost wages) analyzed. The TPA ceased cooperating with the County and certain data for 2007 and 2008 could not be obtained. Payroll data was obtained from Fiscal Affairs and WC pay codes were summarized and analyzed. Payments recorded in the TPA s data file included all indemnity payments (Gracedale and Year 2 Prison claims) as well as payments for settlements on claims. Payroll information is recorded by pay code based on information entered by the department timekeepers. Since information is tracked by pay code, these codes can be summarized for employees receiving County pay checks. Information entered in the County s payroll system will be used in the potential cost savings calculation. We did not consider the Sheriff Department s Heart and Lung claims in this analysis. Payments for these claims in 2009 amounted to $32,124. These claims are not covered under the Trust Agreement for the WC Program. The County has been generous in the benefits it offers employees. The County offers more than is required by law with regard to WC payments to non-gracedale employees and Year 1 Prison employees. The County Solicitors had rendered an opinion on the matter of WC claims paid as wages. Per a letter dated September 5, 2008 from the law firm of Tallman, Hudders & Sorrentino, it is their opinion that the amounts paid by the County to its employees for occupational injuries or illness shall be excluded from their gross income, but

4 INDEPENDENT INTERNAL AUDITOR S REPORT ON AGREED-UPON PROCEDURES Workers Compensation Program Page 4 of 9 only to the maximum amount permitted by the Pennsylvania Act. The portion of the payments that are in excess of what the Pennsylvania Act would permit under each employee s particular circumstances shall be included in each employee s gross income. Gracedale claims are paid as WC payments (66 2/3% of wages per the Pennsylvania Act) and are not processed and paid via County pay checks as wages. Year 2 payments to Prison employees are also paid as WC payments and are not processed as wages. Since these payments are not included in the County s wages paid, there are no additional employer payroll costs associated with these payments. All other claims are paid as wages (non-gracedale and Year 1 Prison) and; therefore, are subject to employer payroll taxes. It was discovered that the HR Policies Manual, Code 3.601, Safety, Worker s Compensation states that Gracedale employees, who do not receive a County paycheck, shall pay the regular employee contributions by check or money order by the regular pay day. Failure to pay the employee s contributions timely shall result in termination of health care benefits. The County is not collecting this reimbursement from Gracedale employees, but they are requesting that Year 2 Prison employees pay these amounts. Since the TPA was no longer cooperating with the County, only data from 2009 could be analyzed to determine the overall potential lost revenue to the County. For Gracedale employees, the County lost out on approximately $6,150 to $7,680 in employee reimbursements for healthcare benefits in The payroll data was summarized by WC pay codes to calculate the additional cost to the County as a result of paying WC claims as taxable wages. See Exhibit D for a complete analysis. The additional cost to the County for 2007 through 2009 totals $378,640. In addition to these quantifiable costs, there are many other costs that can be affected with the way the WC claims are paid. See the Exhibit for more information. We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on all aspects of the Workers Compensation Program. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the management of the County of Northampton, Pennsylvania and is not intended to be and should not be used by anyone other than these specified parties. October 12, 2010 Stephen J. Barron, Jr., CFE County Controller cc: J. Conklin, Director of Administrator V. Mazziotti, Director, Fiscal Affairs P. Siemiontkowski, Director, Human Resources

5 EXHIBIT A Analysis of Workers Compensation Program Costs Claims Paid (Per TPA): Medical 719,573 1,105,193 1,392,793 Indemnity 818, ,017 1,135,474 Vocational Rehab 162 1,872 3,328 Total Claims Paid $ 1,538,676 $ 1,937,082 $ 2,531,595 Administrative Costs (Per Fiscal Affairs): Investment Fees 6,668 3,068 5,825 Claims Admin Fees to TPA: Claim Admin Fee Admin Fee Mo. Computer Svc Fee 56,779 36,954 6,615 59,618 38,697 6,600 62,599 40,632 4,950 Stop Loss Insurance Fees 193, , ,434 Claims Re-pricing Fees 47,618 68,174 78,145 State Self-Insured Fees State Assessment Fees 65,286 45,420 57,422 PwC Actuarial Services 16,500 21,600 18,900 Other Expenses: Legal Defense/Attorney Investigations/Surveillance Expert Witness Court Reporting 7,700 8,814 13, ,102 9,230 3, ,200 11,600 2,048 Total Administrative Costs $ 460,723 $ 375,671 $ 404,316 Total WC Program Costs $ 1,999,399 $ 2,312,753 $ 2,935,911

6 EXHIBIT B Analysis of Claims Filed # of Claims Filed by Claim Type: Indemnity Medical Medical Only Heart & Lung Non-Reportable Total # of Claims Filed # Claims with Payments # Closed claims with Payments: # Claims by Department as % of Total: Gracedale Prison Public Works County Administration Unallocated Total by Department Claims $ by Department as % of Total: Gracedale Prison Public Works County Administration Unallocated Total by Department There is a question as to the accuracy of this data in the TPA data files. Since the TPA stopped cooperating with our office, we were not able to gather any further information or get an explanation about this figure.

7 EXHIBIT B Analysis of Claims Filed Other Miscellaneous Claims Data - Continued Top Claims by Nature of Injury: Strain Contusion Laceration Top Claims by Body Part: Multiple Body Parts Lower Back Lower Arm Knee Fingers Denied Claims Statistics: # of Denied Claims with Payments Total Payments on Denied Claims Total Indemnity Payments from above 79 $ 573,788 $ 556,225

8 EXHIBIT C WC Rates as Calculated by Actuary The following table is a summary of WC rates as calculated by the County s Actuary, PricewaterhouseCoopers, LLC. These rates are used for chargebacks to the departments for their WC costs based on payroll paid. These rates are based on every $100 of wages paid. Classification of Worker 12/2006 6/ /2007 6/ /2008 6/ /2009 Field Workers Clerical Gracedale Nursing Home Juvenile Home, Prison, Public Works Deputies, Investigators & Enforcement Officers

9 EXHIBIT D Calculation of Potential Cost Savings Total County Payments for Non-Gracedale employees coded to WC pay codes: Payment as Wages : Code 55 2/3 WC 142, , ,619 Code 56 1/3 County 63, , ,296 Total Wages $ 206,372 $ 378,955 $ 353,915 Note that the initial days of a WC claim are coded in the payroll system to leave time until the claim is approved. If in the interim, the employee is issued a paycheck, this time will not show up under these WC pay codes in the payroll system. Therefore, the figures in the County payroll system do not necessarily reflect a complete picture of WC claims. Calculation Actual Liability vs. Total Paid Wages and Employer Taxes: Liability Per WC Law 142, , ,619 Less: Total Paid as Wages Additional Payroll Taxes 206,372 15, ,955 28, ,915 27,075 Total Cost to County 222, , ,990 Additional Costs that can be Quantified $ 79,354 $ 153,915 $ 145,371 Considering WC payments as wages has an impact on other costs to the County. These items cannot be easily quantifiable since there are many factors that also affect these calculations. Per the HR Policies Manual, while on acceptable WC leave, an employee will continue to accrue seniority and paid leave time. WC rates are based on total wages paid. By including these payments as wages, it has the potential to increase these rates since it impacts the actuarially calculated rates charged to the various departments and impacts the reserves the County must maintain. Payments for claims under the PA Unemployment laws are based on gross earning of the employees. Paying WC claims as wages could increase the County s future liability for these employees if a claim were to be filed. Retirement benefits and the annual cost to the County to fund the retirement program are calculated using various factors. By including these WC payments as wages, it could impact the eventual retirement benefit payments to employees. In addition, the HR Policies Manual has been interpreted to mean that employees continue to earn service time toward retirement benefits as well, impacting the eventual payments to retiring employees. There is also an administrative cost to the County for the HR staff responsible for administering and monitoring the WC claims for those individuals receiving County paychecks and those required to reimburse the County for benefit costs.