Employers are showing renewed interest in claims audits as a tool to improve efficiency and pre- vent unnecessary costs related to group health care administration, experts say.

Particularly for companies that self-fund their medical plans-and that place fiduciary responsibility in the hands of third-party claims administrators-an independent audit offers an unbiased view on the accuracy of the claims payment process and verifies a TPA's self-reported results, they say.

While claims audits are not new, a mixture of rising health costs and more emphasis on compliance are increasing their popularity, the experts note.

"It used to be that employers only did audits if there was something majorly wrong...if their claims costs were spiking or employees were complaining," said Susan Johnson, senior consultant and leader of the administration performance review group at Watson Wyatt Worldwide in Chicago. In recent years, though, the number of employers engaging in regular audits of their health plan TPAs "has increased exponentially," Ms. Johnson said. "I had one vendor tell me they went from 70 audits to 200 within a year."

Tom Will, practice leader for the Somerset, N.J.-based medical claims audit practice of Aon Consulting, noted that while "there has always been a core group of employers" interested in conducting audits, "we're seeing some firms that maybe in the past have not thought about but are now thinking about it."

A joint survey of employers conducted by the National Business Group on Health and Watson Wyatt released last week showed that 60% either had health care claims audit programs in place in 2005 or were planning to implement them in 2006 (see chart).

One of the reasons why more employers are showing increased interest in audits is that "cost pressures, which have always been on health care, are really coming to a head now," said Mark A. Rucci, senior vp and national practice leader for the TPA performance evaluation practice at Princeton, N.J.-based Apex Management Group, a unit of Gallagher Benefits Services Inc.

"Before going out to ask the employees to contribute more in terms of higher premiums or increasing contributions or cutting benefits, an area where employers can look to make sure that their house is in order, and perhaps save money, is to make sure that the TPA is paying their claims properly," Mr. Rucci said.

Increased emphasis on compliance is also fueling employer interest in audits. Benefit managers and human resources departments are under pressure from senior executives within their organizations to check claims procedures as chief financial officers-who must now sign off on accounting procedures under the requirements of the Sarbanes-Oxley Act-are concerned about obtaining accurate financial information from vendors, said Dan Priga, principal in Pittsburgh for Mercer Health & Benefits L.L.C. and national practice leader of Mercer's performance management specialty group.

The audit process

A typical claims audit usually takes place over a one-week period during an onsite visit to a TPA's offices.

Audit consultants take a sample of around 150-200 different types of claims, going from a zero-paid claim to the highest-paid claim in a system. Each claim is then checked for financial and payment accuracy, proper categorization and turn-around time. In addition, a consultant will examine the claims system being audited to ensure that all employees listed are eligible to receive benefits.

Next, the consultant will meet with the employer and the TPA to discuss its findings, following which a status report with recommended improvements is submitted to the employer.

The entire process from the time the project is undertaken to the issuing of the recommendation report takes anywhere between 12 and 16 weeks, audit consultants say.

According Helen Darling, president of the National Business Group on Health, the two key things that should be checked in an audit are the eligibility of not only the workers themselves but also of their dependents. "It's amazing how many people forget to let the benefits officer know that they were divorced or that they have children that have aged out of the plan," Ms. Darling said.

In the interim, employers could be "paying for somebody who hasn't been a dependent for years, and that could cost up to millions of dollars," Ms. Darling said.

Payments to ineligible members are one of the most common errors found during claims audits, experts say, as employers are often late in informing their TPAs when employees or their dependents become ineligible for coverage.

One example of such a problem involves so-called "retroactive terminations," which occur when workers have been fired but that information has not been communicated to the TPA in a timely fashion.

"Since the TPA believes the person is still eligible, often claims show up and they pay them but later find out that those claims should not have been paid," said Apex's Mr. Rucci. "It is incumbent upon the employer to watch for those things or to make sure that their TPA is (watching). If an employer assumes that a TPA is handling that kind of an issue, they are likely to be wrong," he said.

Other common problems uncovered during claims audits are the improper assignment of provider discounts and the application ofincorrect fees to in-network doctors, experts say.

And although employers' moves to automated claims processes generally have helped prevent errors, the increased automation has contributed to problems in some cases. "With automation, you've got a much higher consistency rate, whether that's good or bad," said Watson Wyatt's Ms. Johnson. With the old-fashioned claims process, a mistake might happen only once, but if a mistake is made at the programming stage, that error will occur in all the claims processed.

There are no hard and fast rules as to the frequency with when claims audits should be conducted; it depends upon "your comfort level with the administrator" and "how hands on you want to be," said Aon's Mr. Will. Most experts agree that, provided previous audits have been satisfactory and no significant plan design changes have been made, once every three years is sufficient, he said.

If, though, "an audit has less-than-positive results, then the employer should certainly be engaging their health plan in discussions about reaudits," either full-blown audits or those that focuses more on problem areas, recommended Mercer's Mr. Priga.

Additionally, large multinational corporations with high staff turnover should conduct audits more frequently, said Ms. Darling, because it is more difficult in those circumstances to keep track of who should be covered by the plans.

Other factors that might trigger more-frequent audits are upgrades or changes to a TPA's technology, major changes in staffing or the location of a claims handling office, significant health plan design changes or the development of complaints or problems, experts say.

The cost of hiring an outside consultant to conduct a claims audit ranges from $10,000 to $65,000 for a standard audit and operations review. "It's not overly significant when viewed within the context of claims spent," Aon's Mr. Will said.

Still, the costs can be tough to justify for some employers.

James E. Crockett, manager of risk and benefits for Denver Water, last year sat down with staff to "discuss the merits" of conducting an independent claims audit of their health care claims administrator, CIGNA Corp. But in the end, they determined that "the internal audit practices used by CIGNA are sufficient...and the additional cost of doing the audit would not have justified us having it done."

"The audit process doesn't make for a good relationship with your (service) provider either," Mr. Crockett acknowledged.

"When you're on the receiving end of an audit, it's not the most pleasant thing in the world," agreed Aon's Mr. Will, but, "in the vast majority of cases, the working relationship is very constructive."

"It's not adversarial at all," a spokeswoman from Wausau, Wis.-based Wausau Benefits Inc. said of the outside claims auditing process. "Obviously, they're never fun to do because they are a distraction, but we don't try to discourage our clients from doing them," the spokeswoman said.

And claims auditors aren't necessarily always the bearers of bad news. "There are audits where we identify that things are going well," Mr. Will said. "That gives you the peace of mind that you've performed your due diligence and the assurance that you are working with an effective partner."