Audit of Third Party Administration for Workers' Compensation

Audit of Third Party Administration for Workers' Compensation March 5, 2004 REPORT 2004-01

Audit of Third Party Administration for Worker's Compensation Table of Contents Page EXECUTIVE SUMMARY PURPOSE AND AUTHORITY SCOPE AND METHODOLOGY BACKGROUND 1 2 2 3 CONCLUSIONS 1. Posting Errors by TPA 4 2. 13-Week Wage Calculation Not Automated or Documented 5 3. 119 Employees had more than one Workers' Compensation Accident in a 6 Single Year 4. No Procedures to Deter Those With Possible False Representation of 6 Disability 5. Procedures for Follow-up of Settled Claims Need Enforcement 7 6. Untimely Completion ofnotice ofinjury Forms by Schools and 7 Departments 7. TPA Improper Record Keeping 8 8. Recovery Documentation Needed 8 9. No Retirement Reinstatement Documentation 9 APPENDIX Management's Response 10

Audit of Third Party Administration for Workers Compensation Executive Summary The primary objectives ofthe audit were to determine whether (1) the Third Party Administrator (TPA) accurately maintained records for Workers' Compensation transactions, (2) Workers' Compensations payments were accurately computed, (3) procedures were in place to monitor accidents and Workers' Compensation expenses, and (4) claims and settlements were properly approved and documented. This audit covered the period from July 1,2002 to June 30, 2003. The audit found that the TP A paid medical bills and employees in a timely manner and complied with most of the terms oftheir contract with the District. Risk Management was proactive in keeping employees who filed Workers' Compensation claims on the job with a light duty program and in attempting to reduce lump sum settlements. However, the audit identified several areas that needed improvement. These included the need to (I) consider the use of an outside agency to research applicants' history of Workers Compensation claims; (2) automate and document current procedures; (3) provide proper followup of settled claims; and (4) require the TPA to provide more accurate monthly reports and properly maintain all accounting records. The audit also found a trend of employees with multiple Workers' Compensation accidents during a short one-year time period; and schools and departments were not timely completing Notice ofinjury Forms and Workers' Compensation Accident Investigation Reports. The draft was sent to Risk Management, Accounting Services, and Human Resources for review and comments. They concurred with all of the findings and in many cases, corrective actions have been implemented. (See page 10.) 1

THE SCHOOL DISTRICTOF PALM BEACH COUNTY, FLORIDA OFFICE OF DISTRICTAUDITOR 3346 FOREST HILL BOULEVARD, SUITE 8-302 WEST PALM BEACH, FL 33406 (561) 434-7335 FAX: (561) 434-8652 LUNG CHIU, CPA DISTRICT AUDITOR ARTHUR C. JOHNSON, Ph.D. SUPERINTENDENT MEMORANDUM TO: FROM: Honorable Chair and Members of the School Board Arthur C. Johnson, Ph.D., Superintendent of Schools Chair and Members ofthe Audit Committee Lung Chiu, CPA, District Auditor DATE: March 5, 2004 SUBJECT: Audit ofthird Party Administration For Workers' Compensation PURPOSE AND AUTHORITY Pursuant to the District's Audit Plan of2003-2004, we have audited the District's Third Party Administration for Workers' Compensation. The objective of this review was to determine the effectiveness of the District's third party administrator (TPA) and to evaluate the adequacy of control in Workers' Compensation process, specifically, Whether TPA accurately maintained records for Workers' Compensation transactions. Whether Workers' Compensations payments were accurately computed. Whether procedures were in place to monitor accidents and Workers' Compensation expenses. Whether claims and settlements were properly approved and documented. SCOPE AND METHODOLOGY The audit was performed by Ellen Steinhoff, CISA, in accordance with Government Auditing Standards during September through October 2003. This audit included interviewing staff of the Employee Benefits & Risk Management Department, Accounting Services Department, and the Third Party Administrator, and reviewing the following records and documents for the period July 2002 through June 2003: 2 AN EQUAL OPPORTUNITY EMPLOYER

Applicable School Board Policies and Florida Statutes. Claims Settlement Procedures. Recovery Procedures, Payments and Credits. Retirement Reinstatement procedures after employees returning to work. Notice of Injury Forms and applicable procedures. Risk Management Workers' Compensation Policies and Procedures. Records for Wire Transfers to the District's Loss Fund Account for disbursements. General Ledgers for Workers' Compensation. Online TPA Claim Reports. TPA medical billings and payments for Workers' Compensation claims. 13-Week Wage Statement for Workers' Compensation Payments. Audit conclusions were brought to the attention of staff during the audit so that necessary corrective actions could be implemented immediately. The draft report was sent to Risk Management and Accounting Services for review and comments, and the response is included in the Appendix. We would like to thank staff for their cooperation and courtesy extended to us during the audit. The final draft report was presented to the Audit Committee at its March 5,2004 meeting. BACKGROUND The District is self-insured for its workers' compensation, automobile, and general liability. An excess loss insurance coverage for workers' compensation is maintained which limits the District's liability to $500,000 per accident. The District employs F.A. Richards & Associates, Inc. (FARA) as Third Party Administrator (TPA) to provide claims administration services for its self-insurance program since 1996. The TPA processes claims, reviews invoices, makes medical and indemnity payments, provides outside medical sources and investigators, prepares and files reports required by the State of Florida, provides monthly workers' compensation claim and settlement reports to the District, provides a web site for the District to check the status ofclaims, maintains records on each claim, and advises the District on claim settlements. The Claims Section ofthe Department ofemployee Benefits & Risk Management (Risk Management) is responsible for overseeing the Workers' Compensation Program. Four employees in this section are carrying out the following responsibilities: Reviewing Injury Reports from employees and monthly claim and settlement reports from the TPA. Approving monthly wires to replenish the bank account used by the TPA to make payments. Advising the School District about settlement and claim issues and selecting legal counsel to represent the District when necessary. Training District employees about procedures for reporting accidents and filing claims. 3

The Safety Section of Risk Management, which is comprised of five employees, provides safety awareness training, and investigates accidents at schools and departments. During July 1,2002, through June 30, 2003, approximately 2,700 Workers' Compensation accidents occurred within the District, incurring a total of$13,137,009 in Workers' Compensation expenditures. Workers' Compensation Settlements Total Settlements Disbursed $12,159,421 Less: Excess Loss Reimbursements Received (902,980) Net Settlements $11,256,441 Other Expenses TPAFees $591,030 Excess Insurance Premium 246,897 Florida Department ofinsurance Workers' Compensation Fees 1,037,641 Consultant Actuarial Fee 1,880,568 Total 2002-03 Workers' Compensation Expenditures $13,137,009 CONCLUSIONS (A) Management ofloss Fund Account 1. Posting Errors by TPA. The District maintains a bank account for the TP A to disburse payments incurred by the District's self-insurance programs for Workers' Compensation, Automobile and other liability. The TPA submits a monthly report, "Reconcile to Loss Run", to the District indicating the total payments made during the month. Based on the "Reconcile to Loss Run" report, Risk Management initiates wire transfer of funds to replenish the account Risk Management's review ofthe TPA's "Reconcile to Loss Run" Reports for July 1,2002, through June 30, 2003, identified the following exceptions: During September 2003, the Loss Fund Account was over replenished by $11,788.82. During May 2003, $70,000 was incorrectly posted to the Workers' Compensation general ledger account instead ofthe Automobile general ledger account. Several recoveries received from the District excess loss insurance were incorrectly posted to the Recovery general ledger account: $465 under-reported in February 2003, $980.70 under-reported in November 2002; and $161.90 over-reported in October 2002. Although the above exceptions did not result in financial losses to the District, it is a time consuming task for Accounting Services to follow-up and initiate adjustments to correct the general ledger records. 4

Pursuant to the related Request/or Proposal (RFP #OlC-017S) Section 8.8 C "The claims administrator is responsible for the monthly reconciliation ofthis account and will provide bank statement to the District monthly, along with a request for a deposit from the District to maintain the monthly balance in the loss fund, as determined by the District." Risk Management should ensure the TPA submits accurate monthly reports to the District pursuant to Contract and RFP requirements. Risk Management: Concur. The May 2003 and the September 2003 discrepancies were found and corrected by Risk Management/Accounting when we received the monthly bank statement. The other 3 issues were timing issues. (Please see page 10.) (B) 13-Week Wage Statement 2. 13-Week Wage Calculation Not Automated or Documented. The Accounting Services Department manually compiles the 13-Week Wage Statement which indicates the amount of monies employees receive when they are out of work for an extended time due to Workers' Compensation injury. This statement, which provides the necessary information for calculating the workers' compensation payments, is based on information obtained from various CHIPS computer screens. However, procedures for manually compiling these statements are not formalized in writing. Automating the procedures for compiling this statement would save Accounting Services an average of five hours per week and reduce the possibility ofposting errors. Accounting Services should determine ifthe calculation could be automated, with a report that displays the dollar amounts to be used on the statement. During the audit, Accounting Services agreed with our recommendation and will consider automating this process. Accounting Services: Concur. Concerning the 13-week wage statement documentation, we are assigning an employee to prepare a draft ofthe process followed to compile the report. The process will detail all steps utilized and will properly identify every screen utilized from CHIPS. Regarding the automation ofthese procedures, we have included our recommendations in the business process review currently ongoing, as part ofthe required reports. We understand it will help us save time and ensure the accuracy ofthe final reports on the 13 week's statement. (Please see page 10.) 5

(C) Closer Monitoring Needed for Those Involved in Repeated Accidents 3. 119 Employees had more than one Workers' Compensation Accident in a Single Year. During July 1,2002, through June 30, 2003, the District had a total of 1,625 Non-Reporting Purpose Only Accidents (i.e. the District incurred medical and/or indemnity benefits payments to injured employee) involving 1,493 employees. 119 (8%) ofthem were involved in more than one accident, with a total of248 accidents. Total medical and indemnity monies paid to these 119 employees through June 30, 2003, was $237,380. To monitor repeated claims more closely: (a) Risk Management should ensure timely submission ofthe "Workers' Compensation Accident Investigation Report" (Omni form PBSD 2005) by schools and departments. (b) Risk Management should inform principals and department heads ofrepeated accidents based on information from the "Notice of Injury Form" and the "Workers' Compensation Accident Investigation Report". (c) Risk Management should provide the needed safety training for employees to ensure a safe workplace. Risk Management: We concur and request cooperation from schools and departments. (Please see page 11.) 4. No Procedures to Deter Those With Possible False Representation of Disability. During July 1,2002, through June 30, 2003, approximately 2,700 Workers' Compensation accidents occurred within the District, incurring a total of$12,159,421 in Workers' Compensation settlements. The District does not have procedures to deter job applicants who may have misrepresented their Workers' Compensation claims. We recommend that the District verify prior Workers' Compensation claims for new job applicants. Currently, South Florida Water Management District is utilizing an independent company www.accuratebackgroundcheck.com to conduct the verification. As part ofthe measure, the District should inform the applicant in writing that the District will be performing this check, and obtain verification in writing from job applicants ifthey have ever received Workers' Compensation in the past. Florida Statute: 440.15 Compensation for Disability - section 5.Subsequent Injuries states "The fact that an employee has suffered previous disability, shall not preclude her or him from benefits... except that no benefits shall be payable ifthe employee, at the time of entering into the employment ofthe employer by whom the benefits would otherwise be payable, falsely represents herselfor himselfin writing as not having previously been 6

disabled or compensated because ofsuch previous disability, impairment, anomaly, or disease and the employer detrimentally relies on the misrepresentation... " Risk Management: Concur with the caveat that formal procedures are in place. The cost of the background check is $10.00 each. At an expected new hire rate of2,500 employees annually, the cost would approximate $25,000 per year plus processing timefor the Department ofpersonnel Services. Risk Management will support the testing ifguidelines or polices are established to use this information. For example, it would not be appropriate or legal to disqualify an applicant simply because he/she had a prior workers' compensation injury. However, ifan employee indicates that he hadno prior workers' compensation disability or compensation on an employment application, and the background check reveals a prior lost time incident, the prospective employee should be disqualified for misrepresentation. (Please see page 11.) (D) Settled Claims 5. Procedures for Follow-up of Settled Claims Need Enforcement. In accordance with Risk Management Workers' Compensation Procedures Manual Section 8 'Claim Settlement Procedures', "When a claim is settled, the IW (injured worker) waives any rights to reemployment with District. " The review of75 Workers' Compensation settlements for 2002 and 2003 indicated that three employees could have been inadvertently re-hired by the School District because their personnel records in the computer had not been updated as 'Not Eligible for Rehire'. In addition, Risk Management was still awaiting Release Forms for two ofthese three employees. These three claims were settled in November 2002, and May and April 2003. Personnel should ensure that the personnel records for injured workers are promptly updated after the Workers' Compensation claims are settled. Human Resources andrisk Management: Concur. Risk Management will input the "do not hire code" that will interface with the applicant screen and block the candidate from reapplying. (Please see page 12.) (E) Untimely Completion offorms andpayments ofinvoices 6. Untimely Completion of Notice of Injury Forms by Schools and Departments. The Notice ofinjury form is the initial document for the date, time, location, and how the accident occurred. As required by Florida Statute 440.185, Notice ofinjury Forms must be 7

completed by school and department supervisors within seven days after an employee reports an injury, or after the receipt of medical treatment for an injury. We reviewed 34 Notice ofinjury forms and found 17 (50%) of them were submitted more than 30 days after the accidents. School principals and department heads should be reminded ofthe mandatory requirement for timely completion of these forms. Also, the Notice of Injury Form is completed manually by staff based on information obtained from multiple computer screens. To eliminate potential human errors in copying information from the computer screens and expedite the filing process for the Notice of Injury Forms, Risk Management should consider automating this manual process. Risk Management: Concur. Risk Management publishes requirements in their Worker's Compensation/older (distributed to all Schools and Departments) and on its website; the payroll contacts are reminded o/the reporting requirement annually at the Payroll Contacts Meeting. Individual training is given upon request or when the need is evident. The Department is also moving toward online reporting 0/claims, which should improve timeliness. (Please see page 12.) 7. TPA Improper Record Keeping. The review of26 medical payments processed by the TPA during July 1,2002, through June 30, 2003, indicated that the documentation for four payments, totaling $378, could not be located; one payment to an employee was 103 days late; and five payments totaling $2,366 did not have any invoices. In accordance with TPA Contract Section 13.1 "TPA and its subcontractors, ifany, shall properly, accurately, and completely maintain all books, documents, papers, accounting records, and other evidence pertaining to this CONTRACT... " To ensure the validity and accuracy ofthe payments, original documents such as invoices should be maintained properly. All payments should be processed in a timely manner. Risk Management: Concur. The TP A has been reminded 0/the necessity to have back up invoicesfor each charge. The Sr. Claims Technician audits bills on a monthly basis as a result 0/a prior audit recommendation. (Please see page 12.) (F) Documentation 8. Recovery Documentation Needed. There were no written procedures for recovery payments, specifically, the TPA's responsibility to remit Recovery monies to the School 8

District, logging ofchecks received at the District, copying and forwarding payment checks to Accounting, which account recovery monies should be deposited, and the balancing of recoveries on the Loss Run statement. After discussion with Risk Management, written procedures were developed accordingly. jj,1anagement's Response: Risk Management: Concur with this finding and has written procedures. (Please see page 12.) 9. No Retirement Reinstatement Documentation. Pursuant to F.S. 112.125, employees who return to active employment for one calendar month after injury are eligible to receive full retirement credit for the period the Workers' Compensation payments were received; and the employer is required to make the required retirement contribution to the Florida Retirement System. The TP A submits to the Accounting Services Department a weekly file ofemployees who are currently receiving Workers' Compensation. From that list, Accounting Services determines the active employees, updates their FRS membership status, and adjusts the FRS contribution accordingly. However, the procedures were not formalized in writing. To ensure FRS contribution for injured employees are remitted accurately and timely, written procedures should be developed, documented, and implemented accordingly. Accounting Services: Concur. We are designating an employee to prepare a draft ofthe process currently followed in an effort to document this important function. The implementation is, in this case, an ongoing process. (Please see page 12.) 9

Appendix Management's Response Division of Financial Management MEMORANDUM ' Employei:;B~enefjtj :-:1 I and Risl(~Managem~nt-~ - Department", " DATE: February 20, 2004 TO: FROM: Lung Chiu CPA District A~ Dianne Howard, Director of Employee B Martin Arroyo, Dj[~.$>r of Accounting Barbara Porcher;'Oirector of Administra v DISTRICT AUDITOR ment SUBJECT: Audit of Third Party Administration For Worke ' Our responses to the Audit of Third Party Administration For Workers' Compensation, by item. follows: (A) Management of loss Fund Account 1. Posting Errors by TPA. The May 2003 and the September 2003 discrepancies were found and corrected by. Risk ManagementlAccpunting when we received the monthly bank statement. The other 3 issues were timing issues. For example, FARA may receive a recovery on Monday p.m., which is not reflected in their wire request on Tuesday a.m. When their bank statement is closed, the deposit is reflected and thus does not match with the wire request. The deposit is then reflected in the following months wire request. Our Process: We wire funds monthly and receive the bank statement a few days later. This is necessary to avoid having more than $1.5 million as a cash deposit with FARA. We have reviewed our deposit and payment history with Leeanne Evans, Treasurer, who is not interested in increasing our cash deposit due to the potential for lost interest. We believe this process, established in 1999, in conjunction with Accounting Services to be very effective and provides the necessary checks and balances. In addition to the above stated process, we randomly audit 6 payments every month (3 claim and 3 legal) to assure overall accuracy. With an average of over 5,000 entries monthly, finding 2 errors that were quickly corrected, is statistically insignificant. We agree to continue to require that the TPA provide accurate monthly reports, per our contract. (B) 13-Week Wage Statement 2. 13-Week Wage Calculation Not Automated or Documented Management Concurs. Concerning the 13-week wage statement documentation, we are assigning an employee (Heather Heying) to prepare a draft of the process followed to compile the report. The process will detail all steps utilized and will properly identify every screen utilized from CHIPS. PX48414-A103 10

Appendix Management's Response Audit of Third Party Administration For Workers' Compensation Februruy 20, 2004 Page 2 of 3 Regarding the automation of these procedures, we have included' our recommendations in the business process review currently ongoing, as part of the required reports. We understand it will help us save time and ensure the accuracy of the final reports on the 13-week's statement. (C) Closer Monitoring Needed for Those Involved in Repeated Accidents 3. 119 Employees had more than one Workers' Compensation Accidents in a Single Year. We concur and request cooperation from schools and departments. a. Bulletin #P-10973-FOIERBM covers the rules for the use of the Workers' Compensation Accident Investigation Report and states that the form is to be used as a tool for those in Supervisory positions to reduce the accidents in their respective areas. The use of the form is intended to help management identify unsafe acts or unsafe conditions and ensure corrective action is taken to prevent recurrence of accidents. It should be the responsibility of the AdministratorlDepartment Head/Manager to comply with the bulletin as an aid to reduce accidents. We tried sending out reminders, which did not result in any increase compliance. b. Principals and Departments Heads should be signing the "Notice of Injury Form, and the "Workers' Compensation Accident Investigative Report" which should be sufficient indication of repeated accidents. Additionally, Risk Management does inform the Principals/Department Heads of quarterly accident data, as wen as an annual report listing all claims from their location. c. The Safety Section within Employees Benefits and Risk Management believes it is our responsibility to and has always provided safety training to employees. The requirement for safety training is outlined in Board POlicy 2.382 and states annual training is required for general safety and that any job specific training may be requested. In addition to this training, we provide safety training during new employee orientation. Schools and Departments are reminded of the training requirements as the safety technicians or safety manager visit the individual sites. Additionally, at the beginning of each year, the Head Secretary is provided with a handout showing safety related requirements such as "Safety in the Workplace", fire and tornado drill, and blood borne pathogens. Safety training requirements are also discussed at District Safety Committee meetings, which are attended by representatives from elementary, middle and high schools. They disseminate this information during the Principal Association meetings. 4. No Procedures to Deter Those With Possible False Representation of Disability, Management concurs with the caveat that formal procedures are in place. The cost of the background check is $10.00 each. At an expected new hire rate of 2500 employees annually, the cost would approximate $25,000 per year plus processing time for the Department of Personnel Services. Risk Management will support the testing if guidelines or polices are established to use this information. For example it would not be appropriate nor legal to disqualify an applicant simply because he/she had a prior workers' compensation injury. However, if an employee indicates that he had no prior workers' compensation disability or compensation on an employment application, PX 48414 - A-103 11

Appendix Management's Response Audit of Third Party Administration For Workers' Compensation February 20,2004 Page 3 of 3 and the background check reveals a prior lost time incident, the prospective employee should be disqualified for misrepresentation. (D) Settled Claims 5. Procedures for Follow-up of Settled Claims Need Enforcement. Management concurs. Risk Management will input the "do not hire code" that will interface with the applicant screen and block the candidate from re-applying. ' (E) Untimely Completion of Forms and Payments of Invoices 6. Untimely Completion of Notice of Injury Forms by Schools and Departments Management concurs. Risk Management publishes requirements in their Worker's Compensation folder (distributed to all Schools and Departments) and on its website; they payroll contacts are reminded of the reporting requirement annually at the Payroll Contacts Meeting. Individual training is given upon request or when the need is evident. The Department is also moving toward online reporting of claims, which should improve timeliness. 7. TPA Improper Record Keeping Management concurs. The TPA has been reminded of the necessity to have back up invoices for each charge. The Sr. Claims Technician audits bills on a monthly basis as a result of a prior audit recommendation. 8. Recovery Documentation Needed Management concurs with finding and written procedures. (F) Documentation 9. No Retirement Reinstatement Documentation. Management concurs. We are designating an employee (Lianne Montalbano) to prepare a draft of the process currently followed in an effort to document this important function. The implementation is, in this case, an ongoing process. PX 48414 - A-I03 12