The economic conditions these past few years have compounded the pressure for companies and public entities to reduce costs in every possible way. While some signs suggest the economy may be improving, insurers recognize that cost control is here to stay and is vital to successful ongoing operations.

Many property and casualty (p&c) carriers have not yet examined how to enhance claims operations to reduce costs—this is likely because they're facing more pressing financial issues. Still many companies erroneously believe certain claims costs simply fall into the “cost of doing business,” thereby assuming little can be done to curb expenses. However, insurers can take a variety of measures to improve the cost-efficiency of their claims programs.

Claims audits are an efficient and cost-effective method for evaluating how well a program has been structured, developed, and maintained in this difficult environment. For instance, claims audits, which can be performed for any insurance line, may sometimes be necessary to document whether an insurer's or a third party administrator's (TPA) performance has fallen short of its duties—and possibly resulted in significant financial loss to the client. In the majority of cases, however, claims audits should not be viewed as a “gotcha.” Rather, they should be seen as a method for improving the full suite of claims management activities in order to achieve better outcomes.

The Current Climate

Insurance companies and other entities may take one of several routes for managing their claims. They can:

1. Rely on an insurance company for their coverage and claims administration.
2. Select a TPA to manage their claims if they are a qualified self-insurer or have a large-deductible program.
3. Administer their own claims, especially if the company is self-insured and regional as opposed to national in scope.
4. Become a risk pool member, in which case the risk pool may elect to administer the claims or may select a qualified TPA to administer the claims.

Many claims administration programs, regardless of how they are structured, have adopted best practices to manage claims. This is a good start toward more favorable outcomes; however, the program's emphasis may eventually shift to processing claims by following a checklist rather than managing claims through a combination of technical claims knowledge, appropriate procedural steps, effective time management, and action plans. The processes at work in managing claims lead to faster and more favorable results. This shift in perspective, when combined with more liberal awards and rulings and escalating medical costs, means claims costs and loss adjusting expenses (LAE) may increase in spite of the company's attempts to reduce exposures and mitigate costs.

Workers' Comp Claims Handling

In an effort to reduce costs, insurers, TPAs, and insurance vendors have also developed more sophisticated claims systems, best practices guidelines, and partnerships. These guides, activities and partnerships, while helpful, are not all that is needed for an effective claims management operation. This is especially true in the workers' compensation world, which may represent one of a company's highest costs. Workers' compensation claims generally require more frequent planning, coordination, communication, and teamwork when compared to other claims types. As a result, workers' compensation audit aptly illustrates the nuances of auditing.

Claims audits should start—not end—with comparing the program's claims management performance against best practices or so-called “leading industry standards,” which apply regardless of the industry or the claims program structure. After all, a claims program should strive to be the best it can be, regardless of ownership or form.

Some companies or public entities underestimate the value of a claims audit, considering it to be an expense that does not provide a direct benefit or cost savings, or a task that can be performed by the internal audit department. Others are resistant to claims auditing because it is incorrectly viewed as fault-finding and punitive rather than being a springboard to better claims outcomes. A claims audit, however, not only determines whether the claims administrator is managing claims as it should, but also provides information about the work of other corporate departments or divisions that can improve their participation to achieve better outcomes.

Why Conduct A Claims Audit?

Claims audits provide the following to an organization:

• Comfort or assurance that the program is operating as it should, if that is indeed the case.
• Identification and documentation of areas of improvement or functions that could be executed more efficiently.
• Confirmation to the insurer or TPA that its client is paying close attention to their performance and has high expectations, which should in turn yield better performance.
• Notification to corporate representatives—for example, supervisors, human resources, safety representatives—that their participation in the claims process is also being examined as part of the claims audit process. For example, the following questions may be answered as the result of a claims audit:
• Are corporate representatives properly handling their supervisory responsibilities and promptly reporting claims?
• Are the supervisors, medical providers, human resources professionals, and safety /ergonomics specialists working cooperatively to arrange modified duty when possible?
• Are the safety representatives investigating incidents and reporting findings and recommendations to the claims organization so objective input can be incorporated in the investigation and company's overall loss control process?

The findings and recommendations gleaned from a well-executed claims audit will ultimately lead to the greatest benefit to a company: a stronger and more complete program that will help reduce claims costs and loss adjustment expenses.

The Mechanics of An Audit

Claims audits should be viewed as a diagnostic evaluation of a company's entire claims program, not just an audit of a sample of claim files. The audit should not be limited to reviewing a sample of claims. Rather, it should aim to determine how well the overall claims program is managed. The claims auditor should perform these phases or components to arrive at his or her final findings and recommendations:

1. Interview the corporate representatives with primary responsibility for the insurance/claims program to gain an understanding of the program as it has been set up and how it should operate.
2. Review reference documents pertaining to the program, including (but not limited to) the following:

a.   Special account instructions between corporate risk management and the TPA or insurer on the company's key needs and service expectations.

b.   Claims procedures manuals or other documents that cover items such as the supervisors' responsibilities, return to work (RTW) programs, subrogation requirements, litigation management procedures, authority levels, authorized vendors, and other topics.