Executive Summary: Internal Audit Report # 07-18 Risk Management Audit January 23, 2008 Organization Impact: Overall Conclusions: Workers Compensation Is workers compensation coverage appropriate and cost-effective given risk exposure and needs of Authority? Workers compensation law is meant to provide prompt, complete medical treatment and fair, reasonable income benefits to workers who have been injured on the job. The premiums for workers compensation coverage are calculated using payroll estimates multiplied by various rates based on the various employee classifications. (A higher rate is used for safety-sensitive positions than is used for administrative positions.) Annually, Texas Municipal League (the third party administrator or TPA) conducts a payroll audit in order to adjust premiums based on verified payroll totals. Capital Metro s workers compensation insurance is obtained through an interlocal agreement with the Texas Municipal League (TML) Intergovernmental Risk Pool. Unlike a standard insurance company, the Pool is underwritten for the benefit of the members (municipal authorities in the State of Texas) and is the most cost-competitive insurance available. Along with TML s lower base rate, Capital Metro has a favorable experience modifier of 0.31 1 (against a market base of 1.0). The experience modifier translates into a reduction of nearly $3.3 million to the premiums paid for coverage (i.e., 69% below the base rate). It is also an indicator of a well controlled loss history. Are effective controls in place to identify trends, prevent accidents, contain costs, and deter or detect fraudulent claims? The Risk Management Department has implemented effective controls to contain costs and deter or detect fraudulent workers compensation claims. For example, the Authority s Return-to- Work (RTW) program encourages employees to return to work as soon as possible following a work-related injury by finding light-duty, modified-duty, or other adjusted responsibilities which meet the physician s activity restrictions. The RTW program, currently consisting of ten lightduty and modified-duty positions, is well utilized and is broad enough to meet the Authority s needs. Research has found that employers with RTW programs experience lower costs, reduced lost time, and reduced possibilities for fraud and malingering by providing opportunities for their 1 The 0.31 experience modifier correlating to the fiscal year 2007 audit period has increased slightly to 0.34 in 2008 but still represents a favorable claims history.
injured workers to continue to do productive work while they are recovering. Related to this, a contracted review to evaluate and adjust the physical requirements of some safety-sensitive positions was completed in September 2007. Accurate job requirements also assist physicians in returning employees to suitable job duties in a timely manner. One improvement opportunity is speeding up preparation of the statutorily required First Report of Injury. Risk Management receives internal notice of injuries an average of 6.7 days after the date of occurrence while the submission deadline to TML for the First Report of Injury is eight days. 2 While Risk Management generally has a quick turnaround for processing the form, this initial lag can impact the Authority. An independent study found that partial and temporary disability claims with reporting lag times of more than seven days were increasingly more expensive than those filed within the first six days of injury. 3 These lags can also adversely impact the Authority by hindering adequate accident investigations and putting unnecessary pressure on Risk Management staff. The third party administrator, TML, assists the Authority in controlling the cost of workers compensation claims. TML investigates fraudulent claims and performs subrogation for workers compensation claims when responsible outside parties are identified. Also, in July 2007, TML joined a physician s alliance whose goal is to provide quality medical care to their public employees without spending unnecessary public funds. The alliance creates a cooperative relationship with healthcare providers and is another means to contain costs and reduce the risk of fraudulent claims. Are claims paid appropriately and accurately? The Risk Management Department relies on TML to administer and process workers compensation claims. For example, TML s medical review officers review medical billings and ensure appropriate payment. Sample testing by Internal Audit did not reveal instances of claims paid inappropriately to injured employees. To ensure the ongoing reliability of TML s claims processing controls, the contract with the Authority s risk consultant (A.J. Gallagher of Texas) includes performing annual workers compensation claims and quality control audits. Although previous claims audits had revealed no material issues, the current consultant has not performed these audits on the Authority s behalf. 4 Corrective actions have been developed to ensure regular audit coverage. The audit did find instances in which the Risk Management Department did not provide TML with required or timely statutory notifications (i.e. DWC-3 Employer s Wage Statement and DWC-6 Supplemental Report of Injury, respectively). These required notices are necessary to ensure that injured employees indemnity payments are paid timely and in the correct amounts. Liability Coverage Is procured liability insurance appropriate and cost-effective given risk exposure and needs of the Authority? Liability insurance coverage is appropriate and cost-effective given risk exposure and needs of the Authority. General liability coverage is rated based on the number of bus stops in the Capital Metro service area. Similarly, auto liability coverage is based on the quantity of insured vehicles. Property insurance premiums are assessed at $0.12 per $100 of all real and personal 2 Per The Workers Compensation Act 409.005 requires that an employer shall report to the employer s insurance carrier not later than the eight day after the employee s absence from work for more than one day due to an injury. 3 The referenced study by The Hartford found that claims with lag times of 7-14 days, 15-28 days, and greater than 29 days were 18%, 30%, and 45% more expensive, respectively. Glen-Roberts Pitruzzello, The High Cost of Delays, Findings on a Lag-Time Study (The Hartford Financial Service Group, Connecticut: 2000), pgs. 1-5. 4 The most recent claims audit was conducted in July 2004, covering claims from 2002-2004, and was performed by a prior consultant. Capital Metro Risk Management Audit #07-18 Page 2 of 6
property value owned by the Authority. The 2007 annual premium review by the Authority s risk consultant, which benchmarked against competitor pricing, found that the cost of insurance through TML was extremely competitive. In 2002, Capital Metro chose a high deductible of $25,000 per claim for its bus fleet which led to a decrease in the number of claims submitted for insurance reimbursement. 5 Total claims paid to third parties fell 7% from an average of $951,000 per year prior to FY2002 to $885,000 per year during the period of FY2002-2006. 6 Are claims properly reviewed and do payments reasonably reflect the Authority s obligations to claimants? Audit sample testing of vehicle claims found no instances of inappropriately paid claims. As with the workers compensation coverage, the Authority s risk consultant is supposed to conduct annual quality control and liability claims audits. Corrective action plans developed will ensure that the contracted audits are conducted in order to provide ongoing assurance that claims are paid appropriately. Are subrogation opportunities properly pursued and documented? Risk Management manages subrogation 7 against third parties who have caused accidents resulting in damages to Capital Metro fleet vehicles. The success of subrogation claims is dependent upon documentation and other evidence gathered during the investigation of accidents. This evidence may come from the vehicle operator, passengers, bystanders, cameras, law enforcement reports, and/or other sources. Audit testing showed that subrogation was properly pursued when another responsible party could be identified. However, all aspects of the subrogation process have been controlled by Risk Management (primarily the Claims Specialist) without appropriate segregation of duties. In the future, subrogation procedures will be coordinated with the Finance Department in order to provide adequate internal controls and segregation of duties. Though less material, it was noted that subrogation has been pursued in instances in which the costs and effort to subrogate the claim may exceed the value anticipated (e.g., a $42 claim). Also, some data quality control issues were found which could impede the Risk Manager s ability to accurately monitor subrogation activity. Accident Reporting & Trend Analysis Are processes in place to ensure complete and accurate reporting of safety-related data? A universally-accepted definition of an accident does not exist within the transit industry. However, both the Transit Cooperative Research Program (TCRP) and National Transit Database (NTD) use similar criteria which mirror standard underwriting and claims management definitions. Adopting an Authority definition which reflects these criteria will improve consistency in reporting and enable meaningful comparisons between contractors. 5 Previously there was no deductible on the bus fleet liability coverage. Deductibles for vanpool vehicles are established at $1,000 per claim. 6 The averages include total loss amounts for all claims (above and below the deductible) and capture both payments and outstanding reserve for closed and open claims. Given the TPA s conservative approach when reserving for potential losses, this average may decrease further. FY2007 data was incomplete so it was omitted from calculation. 7 Subrogation is the substitution of one person [party] in the place of another with respect to a legal claim so that the substituted party gains the rights of the original. Subrogation may include claims against other parties insurance carriers as well as private individuals/companies directly. Source: http://www.legaldefinitions.com/s/subrogation.htm. Capital Metro Risk Management Audit #07-18 Page 3 of 6
Currently, events which do not meet industry standard accident definitions (e.g., resulting in injury/property damage) have been included in the monthly CEO Report accident statistics. A lack of standardized definitions increases the risk of errors in accident reporting to the CEO and Board of Directors (e.g. under-, over-reporting) and misinterpretation of results. For example, inconsistencies with the accident definitions used by Capital Metro contractors StarTran, Veolia, and First Transit can distort interpretation of the contractors relative performance. Similarly, to ensure complete accident data is provided to the NTD and federal authorities, all qualifying employee injuries must be disclosed and the cost of property damage to non- Authority assets must be considered. Is safety data proactively used to prevent future incidents and minimize losses? Safety-related data (e.g., accidents, other non-reportable incidents) is analyzed and used proactively to prevent future incidents and minimize Authority losses. For example, the Accident Prevention & Planning Committee, which includes Risk Management, Safety & Security, and Operations staff, meets monthly to review safety trends and identify risks such as common accident types or problematic locations. Operational units also individually review accident and incident data. For example, Fixed Route Services (FRS) prepares an At Risk report which provides accident data and other performance information. A Special Transit Services (STS) Accident Report is reviewed monthly for accident trends. Lastly, both STS and FRS also use DriveCam recordings for coaching operators since the system captures events where the vehicle made a hard stop, turn, or made contact with a fixed object. Audit Highlights Major Issues and Action Plans: This executive summary includes only the most significant audit issues. All audit issues and corrective action plans are included in the detailed audit report. For additional information, refer to the corresponding recommendation in the detailed audit report. 1. Focus risk consulting services on identified risks. Periodic audits are the primary means to monitor the performance of Capital Metro s third party administrator (TPA), ensure proper and cost effective claims handling, and to verify that the Authority s funds are properly used and accounted for. The current risk consulting contract requires 1) an annual quality control review of workers compensation and liability coverage claims handling processes and 2) an audit of the claims paid by Capital Metro s TPA. To date, the contractor has not performed these reviews. To address this, the Risk Manager has directed the contractor to audit workers compensation and casualty claims over $5,000 which were incurred during the period FY2005 - FY2007. 2. Identify repetitive Workers Compensation claimants prior to hiring. Repetitive claims can indicate employees who possess a higher risk for injury and/or serve as red flags of possible fraudulent claims. 8 Beginning April 1, 2008, the Human Resources (HR) Recruiters will obtain Prospective Employment Authorization & Certification background reviews from the Texas Department of Insurance (TDI) when hiring safety-sensitive positions. This TDI service provides prospective employers with data if a job applicant has filed at least two workers compensation claims within the past five years. 8 Internal Audit sample testing did not reveal any instances of fraudulent claims. Capital Metro Risk Management Audit #07-18 Page 4 of 6
3. Coordinate subrogation activities with the Finance Department. Risk Management performs in-house subrogation 9 of vehicle and property damages. Subrogation activities are largely controlled by the Claims Specialist in the Risk Management Department. As such, there is a lack of segregation of duties associated with invoicing, receipt and handling of payments, recordkeeping, and writing off uncollectible balances. Proper segregation of duties is necessary to prevent and/or detect errors, embezzlement, and other forms of fraud. By April 30, 2008, the Risk Manager and Finance Controller will develop formal subrogation procedures which ensure proper segregation of duties for invoicing and establishing payment terms, aging of receivables, collection and deposit of funds, write-off of uncollectible amounts, and reporting. 5. Define criteria and report accident data consistently. Inconsistencies exist in the accident definitions used by Capital Metro contractors: StarTran, Veolia, and First Transit. The lack of standardized definitions increases the risk of errors in accident reporting (e.g. under-, overreporting) and distorts relative performance perceptions. The Director of Transportation and Risk Manager will establish and communicate a standard accident definition and criteria for reporting accidents which will be applied beginning April 1, 2008. Also, the Director of Safety & Security will work with the Director of Transportation to adjust FY2008 safety performance goals, as appropriate. 6. Consistently assess and report on accident preventability. StarTran superintendents are required to use National Safety Council (NSC) guidance when evaluating if a vehicle or passenger accident was preventable. Purchased transportation contractors, on the other hand, are not bound to specific preventability assessment criteria. Effective April 1, 2008, all purchased transportation contractors will be required to assess vehicle and passenger accident preventability using National Safety Council Guidelines. Consistent application of criteria across vendors allows valid internal comparisons and benchmarking of accident statistics. Industrial accidents (i.e., employee injuries) have not been investigated to determine if unsafe actions or conditions contributed to an accident s cause. Beginning in April 2008, the Industrial Safety Specialist in the Safety & Security Department will perform follow-up investigations on employee accidents, analyze industrial accident trends, and verify whether necessary corrective actions are implemented in a timely manner. ACCEPTED: Signature on File Margaret Gomez Chair, Planning, Finance & Audit Committee Signature on File Fred M. Gilliam President/CEO cc: Capital Metro Board of Directors Andrea Lofye, Chief of Staff Randall Hume, EVP Finance & Administration Michael S. Nyren, Risk Manager Donna Simmons, Director, Human Resources & Risk Pam Laine, Controller 9 Subrogation is the substitution of one person [party] in the place of another with respect to a legal claim so that the substituted party gains the rights of the original. Subrogation may include claims against other parties insurance carriers as well as private individuals/companies directly. Capital Metro Risk Management Audit #07-18 Page 5 of 6
Sallie Crosby, Chief Counsel Dwight Ferrell, EVP/COO Dottie Watkins, Director of Transportation Brian Whelan, Director Operations Staff Development Inez Evans, Director Paratransit Operations Ralph Villarreal, Assistant Director Transportation Paratransit Mark Ostertag, Director of Safety & Security Scott Phebus, Assistant Director Operations Performance and Analysis Capital Metro Risk Management Audit #07-18 Page 6 of 6