Visual Analytics • Analytical Monitoring • Information Management

Claim Audits: Are They Necessary?

claim-auditsI remember this story like it was yesterday.  After graduating from college, I accepted a job for an internal audit position for a major airline.  Not long after being hired, my boss told me they had recently conducted a claim audit for their previous medical carrier.  He took me to the storage room that contained our work papers, proceeded to pull several files from a stack and dropped them on a table (yes there were no electronic work papers back then).  After some choice words and an unfavorable description of the former medical carrier, he thumbed through the documents and said “Here, I want you to see this.”  I had no idea what I was looking at but it seemed to be some kind of payment remittance.  There was an entry on the remittance noted as a debit for $1.7 e6.  My boss said “Do you see this amount?” and after I replied “Yes” he said “Guess how many times we asked our medical carrier if the amount was $1.70 or $1.7 million?”  He looked inflamed as he stared at me patiently waiting for my reply.  I remember feeling like a deer in head lights but somehow I got the courage to respond during this tense moment and said something -to the effect of “I don’t know, maybe t-e-n times.” His response was a booming “No, try two dozen times and they refused each time to verify whether the claim paid amount was a dollar and seventy cents or one million seven hundred thousand dollars!”

As a result of this particular claim audit, my employer filed a pleading in Federal District Court, and we entered into discovery and depositions to recover the overpayments and mismanagement of funds from this carrier.  The amount we were demanding in the suit would have been enough to purchase a new Boeing 737-400 which would have been helpful since we were operating well over capacity (too many planes and not enough passengers) and losing about ~$50 million a month.  Settlement discussions started one week before the court date and just before the case was to be heard in a court of law the airline agreed to settle for seventy percent of the sought after amount.

The settlement from the medical carrier made a lot of sense.  If this lawsuit would have gone to trial, my company would have exposed to the public details of the audit and this medical carrier’s behavior, resulting in the carrier being inundated with audits and invariably more unfavorable actions against it.  I would be involved in other pre-trial or pre-arbitration settlement discussions which prevented public relation and reputational irreparable harm.

Because of the massive risks we encountered with this carrier, claim audits and other audits that involved transactions where we could examine data using computer assisted audit techniques became a staple in our audit plan for the 3+ years I worked as an internal auditor.  We even collaborated with competing airlines and shared our knowledge with them.

A few years later when I worked for a Big 4 public accounting firm, word had gotten around that I had previously performed several claim audits.  I was crowned by default as the subject matter expert.  We were working for clients who had conducted claim audits themselves and experienced similar legal matters regarding a healthcare claim payer’s negligence.  I recall having two distinct thoughts at the time I was pulled into expert witness duty: First, is this ever going to stop and second when is there going to be improved governance?

Since the mid-1990’s, claim audit engagements are pervasive and are considered a generally accepted activity that a plan sponsor conducts to determine whether the carrier is effectively managing the plan’s assets (if you don’t believe me just ask any carrier who has self-insured clients).

With the introduction of the PC and audit software, employers, benefit consultants and start-up audit firms were eager to request claim paid history data from carriers.  In many cases, these engagements exposed the unknown universe of overpayments, errors and lack of effective oversight.

Upon the onset of the claim audit surge the carriers all seemed to react differently.  Some carriers fully cooperated and provided access to their systems (and even part of their provider contracts) to verify pricing.  Other carriers established a front of full stiff arm resistance and argued over everything like the” Dream Team” of attorneys representing O.J. Simpson argued over law enforcement handling of each blood sample collection.  Some carriers chose to entertain auditors by having superfluous meetings, facility walk-throughs and meet-and-greets with anyone and everyone along the way, including ticket offers to professional sports games and/or extravagant meals.  This latter tactic was simple.  Distract the auditor for the week they were scheduled to be onsite so they wouldn’t have enough time to verify payment quality, accuracy and of course the overpayment losses.

Over time these behaviors changed but mostly seemed to get worse as medical carriers became fatigued at the sustained frequency of audits and more overpayments became exposed.  Some claim audit firms chose to disparage carriers when selling their services to prospects by telling the employer about all of the overpayments discovered from previous engagements.  As claim auditors became emboldened to speak against the carriers, the carriers really didn’t have many options but to fight back.  In the middle of this mudslinging was the employer client.

This was kind of a messy period employers and carriers had to endure.

From a different perspective, sometimes other consultants who had relationships with both the carrier and the employer conducted claim audits too.  In certain professional standards these relationships would not be classified as independent (emphasis added).  From my understanding these audits were great!  If there was a good operating relationship between the consultant and the carrier, things went much smoother.  The consultant auditor performed the statistical sampling audit and extrapolations, and if the limited audit procedures revealed only minor issues, then the client, consultant and carrier all walked away happy, arm in arm down the yellow brick road into the sunset.  If the audit was done and they did find major issues, the carrier would easily argue the extrapolation calculation wasn’t valid and that was that.  Same outcome.  The client, consultant and carrier all walked away happy since the audit was finished and nothing significant was “really” detected.  Many employers became wise to these relationships and made it a point to use audit firms who exhibited objective behaviors with their auditees.

After my stint at the public accounting firm, I joined another firm, and I continued to work with many of my clients.  I noticed some of the progressive carriers started to become better listeners and evolve in their thinking.  They were now wanting to collaborate and understand our scripts and detection capabilities.  They wanted to explore ways to work more productively for the mutual benefit of our client.  I only stayed with this firm for one year but during my time there it was refreshing to see the carrier acknowledge the challenges, dial down the resistance and openly explore the willingness to improve.

About twelve years ago I started a company that performed overpayment identification and recovery services for medical claim payers.  Our first clients were small claim payers, and then we worked our way into the larger organizations.

During this time, here is what we learned about the interworking of the overpayment identification and recovery services managed by carriers:

  • Some carriers have developed internal departments solely focused on identifying and recovering overpayments. These internal efforts are typically focused on very large overpayments.  They would share results with claims examiners as a tool to improve accuracy and prevent future errors.  On the downside it seems these departments are prone to turnover among the auditor and analyst ranks.
  • To offset the challenges associated with turnover they typically contract with 5 to 20 cost containment vendors to augment pre and post-payment audit efforts. These vendors employ nurses to conduct clinical audits and Certified Professional Coders® to analyze and identify suspect overpayments.
  • In most cases identification and recovery vendors have to “wait” anywhere between 30 to 120 days after the claims are paid before they can pursue the overpayment. There are some advantages to having the vendor “lag” one to four months.  First, some providers will voluntarily send overpayments back to the carrier and secondly, if the carrier identifies the overpayment before the lag then they don’t have to compensate the vendor once the refund is collected.

Please know the carrier has a responsibility to compensate providers who render services on patients consuming supplies, labs, durable medical equipment, diagnostic procedures, implantable devices and pharmaceuticals if a clean claim is submitted by the provider.  Many moving parts are happening during claim submission, claim inventory management as well as auto and manual adjudication as things don’t always go as drawn up in the play book.  The fifty or so audit firms like the company I founded to identify and recover overpayments for carriers are essential to mitigate claim overpayment risk.

As the carriers have evolved by recognizing the complexities of claim payment accuracy and have built cost containment programs, these improvements may also present an opportunity for plans.

Before you contemplate an audit of your medical claim payer, ask your carrier these questions to assess the carrier’s efforts to mitigate costly overpayments:

  • Describe the cost containment efforts your company uses prior and post-payment?
  • How many internal audit staff members and external vendors do you use?
  • For the external vendors, how long is their lag date?
  • On a post payment basis, how long does it take for an overpayment to be detected and recovered?
  • Can you provide any reports or analysis regarding the audit and recovery efforts?
  • If we do decide to conduct an audit, will you help us resolve any outstanding matters? Please let us know how you will help?

If your carrier has active cost containment efforts and you can see a consistent pattern of pre-payment and post-payment audit activities, I recommend you simply perform analytics and monitoring to verify performance.  You may have an opportunity to build a collaborative relationship with your carrier and have productive conversations if you identify any outliers or have other concerns.

If you decide to engage a claim audit firm, ask the prospective vendors these questions:

  • What types of overpayments do you typically detect?
  • What are your audit detection strengths?
  • Describe your operating relationship with our carrier?
  • Do you or a current/past client have any open disputes with our carrier? If so, explain.
  • Is your firm a registered broker with our carrier?
  • Has your firm been paid by our carrier to perform services in the past 2 years?
  • To minimize duplication of efforts, would you be willing to audit claims that have not been identified by the carrier (or vendor) and were paid after 150 days from the receipt of data?

If you were analyzing and monitoring your carrier’s payment activities, you will know where your concerns are and can select the audit firm who will best meet your needs.  It’s important to understand the operating and financial relationship the audit firm has with the carrier (and vice versa) and I encourage you to speak with someone at the carrier to find out if they have any open disputes with any audit firms.

You should really gauge the audit firm’s willingness to proceed when you ask them if they are prepared to provide any guarantees for identifying any erroneous claims paid past a certain number of days.  It should be extremely easy for the audit firm to find overpayments prior to the lag date, but as this date is extended, they know it could present a challenge as the carrier’s internal and external cost containment programs should be effectively managing this.

If you do elect to proceed with a claim audit because of your organization’s acceptable levels of risk tolerance or you feel it is the best option for you, you should expect basic cooperation and formal protocols allowed by your carrier.

Traditionally, plans have performed audits to evaluate the carrier’s efforts to manage financial risks.  Given the expansion of audit oversight at the carriers and the way they administer their cost containment programs you could be conducting a costly audit (time, energy and money) to detect errors that would have been detected and corrected anyway.  Most benefit administrators want to avoid wasteful spending on vendor programs that don’t benefit the plan or the stakeholders of the company.

While we shouldn’t forget the claim audit’s history, at the same time we can’t ignore how far the carriers have improved their programs.  Above all, plan fiduciaries need a mechanism to successfully discharge their duties and responsibilities.  To assist plan fiduciaries in gaining invaluable insights we have seen significant improvements in visual analytics that allow users to quickly absorb large amounts of data easily identifying potential transactional issues and outliers.  These visualizations improve data literacy, identify risks and monitor performance while helping benefit administrators in making informed decisions.  They also facilitate collaboration as well designed visual illustrations bring immediate context to the conversation at hand.  It’s valuable to listen to and understand how your carrier is working to manage your risks while leveraging technology to help visualize and monitor those activities.

In closing I have a few questions for plan administrator’s:

  • Would you agree it is important to understand and verify what your carrier is doing to correct errors and mitigate your financial risks?
  • Would you prefer to build a productive and constructive relationship with your carrier?
  • Would you like to monitor the effectiveness of your carrier’s cost containment program in a collaborative manner?
  • If you do detect a potential payment error would you prefer to inquire about the matter directly as opposed to engaging in a costly audit?

If you said yes to all of these questions, we encourage you to contact us and learn more about our Integrity Coordinator solution.